International Business

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Definition of international business
consists of all commercial transactions that take place between two or more countries.
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How IB differs from domestic business?
Larger scale, more complex organisations and operations.
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How IB differs from domestic business?
Greater oppotunity to strengthen and improve thier competitive advantages.
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How IB differs from domestic business?
Greater exposure to international sources of risk. Including financial, political, regulatory, foriegn exchange and tax related risk.
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How IB differs from domestic business?
Greater uncertainty arising from world events and greater oppotunity for confict.
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Why conduct Business internationally?: Proactive factors
Revenue related factors, ownership related factors
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Why conduct Business internationally?: Proactive factors
Revenue related factors, ownership related factors and location related factors.
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Proactive factors: What are the revenue reated factors?
To increase global market share, generate higher profits, greater econmies of scale and to spread risk.
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Practive factors: What are the ownership factors?
The firm has unique products, is technologically superior, has info and marketing knowledge and has a commercial management team.
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Proactive factors: What are the location related factors?
The firm can exploit location specific advantages in host country and is geograpphically close to the target country.
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Why conduct business internationally?: Reactive factors
Inccreasing competition in the domestic market, declining domestic sales and increasing costs in domestic market.
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How do firms go international?
Exporting, contractual modes and investment modes.
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Exporting
indirect exporting, direct exporting and company owned sales office.
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Contractual modes
Liciencing, franchising, management contracts, subcontracting, project operations and alliances.
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Investment modes
minority share, joint venture, majority share and 100 percent owned.
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What is foriegn direct investment (FDI)?
An investment made to acquire lasting interest in enterprises operating outside the economy of the investor.
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How does FDI occur?
Occurs when teh investors takes a controlling interest in a foriegn company.
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What does FDI represent?
Represents a financial flow between countries.
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What is a Multinational Enterprsie?
Applys to any company with operations in more than one country. A MNE takes a worldwide view of markets and production; its willing to consider marketand production locations anywhere in the world.
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What makes a firm a MNE?
It owns income generating assets in a number of countries.
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Define a 'Born Gloabl'?
Companies who export very soon after thier launch, without much long term preceding activity.
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Define the 'Global Factory'?
The transfer of value chain activities to foreign countries.
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What are the two components of global factory?
Outsourcing and offshoring.
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Define outsourcing?
The process of contracting work to other companies in order to focus on key activities (or what is done best).
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Define offshoring?
The process of shifting production to a foriegn country.
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Why has IB increased? (prior to 2008)
Reduction in trade and investment barriers, growth of regional trading arragements, rise of developing transition economies and more globallly dispersed value chains.
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What are regional trading agreements?
Reciprocal trade agreements between two or more partners.
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What are the RTA's?
Free trade areas, customs unions, common markets and economic unions.
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RTA's: what are free trade areas?
Member countries reduce or abolish restrictions on trade with each other while mentaining thier measures against non-members.
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RTA's: What are customer unions?
As well as freeing trade among members, a common external tariff is established to protect the group from imports from any non-members.
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RTA's: What are common markets?
Free movement of factors of production as well as products within the designated area.
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RTA's: What are economic unions?
National economic polocies are also harmonised among member states within the common market.
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What are the four classification schemes?
CIA world factbook, international monetary fund (IMF), The world bank and the organisational for economiccooperation and development (OECD).
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define the CIA World Factbook?
The US CIA produces a compendium of international economic and political data and info.
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Define the International Monetary Fund?
The IMF is a intergovernmental organisation of 189 countries that seek to promote financial stability, international trade, employment, economic growth and poverty reduction amongst its members.
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IMF: what are the two major groups?
Advanced economies and emerging and developing economies.
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How many advanced countries does the IMF recognise?
36 economies.
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How many emerging and developing countries does the IMF recognise?
153 economies.
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what are the emerging and developing countries?
Central + eastern Europe (CEE) 14 economies, Commonwealth 13 economies, Asia 27 economies, Latin America + Caribbean (LAC) 32 economies, Middle east + North Africa (MENA) 20 economies and Africa 44 economies.
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Define the World Bank?
The World Bank is an international financial institution which lends capital to less advanced countries, mainly to alleviate poverty.
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How many members does the world bank have>
187 members and recognises 215 economies.
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What is the World Bank's main criterion for classifying economies?
Gross national income (GNI) per capita.
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What is GNI?
it measures the income generated by total domestic production and the international production activities of domestic companies (such as rents, profits, royalties and fees generated form abroad).
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Define the organisation for economic co-operation and development?
is a international economic organisation of 34 countries to stimulate economic progress and world trade.
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What is a transition economy?
A country changing from a centrally-planned economy to a free market economy.
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Member countries?
BRIC, BRICSA, BRICM, BRICK, CIVETS and BEM
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What is a political system?
institutions, organisations, and interest groups along with the political norms and rules that govern the activities of political actors.
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Define the Democratic political system?
Governed by the people/
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Define the Totalitarian political system?
Absolute control exercised by one person or political party.
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Define the Theocratic political system?
governed according to religious principals.
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Define a Monarchy?
Government in which the office of head of state is usually held until death of abdication.
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Define Institutional theory?
The legal rules, laws and policies of enforcement, and norms of behaviour (customs and traditions) established by a society to constrain and shape human interactions.
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Why do institutions matter?
because they set out what an organisation and its stakeholders are permitted and prohibited to from doing and the type of punishment that will apply should rule violation occur.
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What are the two elements institutions comprise of?
Formal rules (regulative) and informal restraints (cognitive and normative)
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What are formal rules?
The rules and procedures that are created, communicated and enforced through channels (such as courts) widely accepted by society as being official.
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What are informal restrictions?
Socially shared codes, customs and traditions, usually unwritten, that are created, communicated and enforced outside of officially sanctioned channels. Informal institutions concern which behaviours are morally right and wrong .
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Define institutional transitions?
Refers to fundamental and comprehensive change introduced to the formal and informal rules of the game that affect organisations as players
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Define 'good institutions'?
Promote economic social progress by providing the incentive structure for an economy.
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Define 'Bad institutions'?
Hamper economic and social progress by reducing incentives in an economy.
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What role does politics play?
Politics plays a major role in determining the institutional regime.
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What re the two main ways globalisation has influenced the political landscape?
Through the centralisation and concentration of power and trends towards more open and free political systems. .
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What are the factors of centralisation and concentration of power?
The creation of Regional Trade Agreements, a rise in world regulatory bodies. Such as UN, OCED and IMF
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What are the factors of open and free political systems?
the decline of communist and totalitarian regimes, reduction of state controlled economies.
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What are the 4 factors of political risk?
Systematic, procedural, distributive and catastophic.
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Define systematic political risk?
The risk that affects all firms because of a change in government policy.
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Define procedural political risk?
The cost of getting things done arising from factors such as government corruption, labour distributes, or a partisan judical system.
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Define distributive political risk?
Reflects revisions in tax regimes, regulatory structure and monetary policy imposed b governments to capture greater benefit from the activities of foreign firms.
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Define catastrophic political risk?
Random political developments that adversely affect the operations of all firms in a country.
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Define Macro political risks?
These risks affect all firms in a country e.g war, civil unrest, and sudden changes in government.
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Define Micro political risk?
The risks that only affect certain firms or industries in a country, such as legalisation impacting on waste disposal.
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Impact of Expropriation (confiscation of assets)?
Loss of sales, assets or future profits.
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Impact on change in government?
Often leads to a change in the legal, fiscal (taxation), or commercial enviroment.
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Impact of heightened administrative barriers?
More bureaucracy and rep tape e.g investment approvals raises operating costs, discrimination against foreign firms (unequal treatment of foreign and local firms) can increase uncertainty and operating costs.
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Impact of campaigns against foreign goods and/or companies?
Loss of sales, increased cost of public relations companies to improve public image.
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Impact of mandatory labour related legislation?
Increased operating costs.
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Impact of increased taxation?
Lower after-tax profits.
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Impact of terrorism, wars, social unrest and social and ethical tension?
Disrupted production, increased security costs, lower productivity levels, lost sales, recruitment and secondment problems.
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impact of corruption and concentration of power in influential group?
National firms may be favoured, loss of sales and greater costs.
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what are the techniques for mitigating risk?
insurance, recruiting local partners, becoming fully integrated into the country where the operation is based and hedging.
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Define tax avoidance?
Illegal with respect to the formal aspects of the institutional framework.
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Define tax minimisation?
Legal with respect to the formal aspects of the institutional framework but increasingly viewed as unethical with respect to the informal aspect.
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what are the legal frameworks for MNEs e.g sources of law?
'Rule of man' v 'Rule of law', national laws and international laws an regulations.
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Define national laws?
Common law systems derived from the principal that it is unfair to treat similar facts differently on different occasions.
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Define international laws?
These are generally reflected in national law, examples such as inter nation treaties and international codes of practise.
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Define investor - state dispute settlements (ISDS)?
Is an instrument of public international law, that grants a foreign investor the right to initiate dispute settlement proceedings against a foreign government (the host state).
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define Economic Freedom?
People have the right to work, produce, consume, save and invest the way they prefer.
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What is the economic freedom index?
Based on 10 quantitative and qualitative factors grouped in to four broad categories, or pillars of economic freedom.
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What are the four pillars of economic freedom?
Rule of law (property right and freedom from corruption), Limited Government (fiscal freedom, government spending), Regulatory efficiency (business freedom, labour freedom and monetary freedom) and open markets (trade freedom, investment freedom)
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Economic freedom affects?
Productivity, growth rates, income levels, inflation, employment, life expectancy, literacy, political openness and environmental sustainability.
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what is an economic system?
Organises the production, distribution and consumption of goods and services in a country.
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What are the three different types of world economic systems?
State controlled, mixed and free market economies.
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What is a State Controlled economy?
The economy and resources are controlled by the state.
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What s a Free Market economy?
Is where individuals and private firms rather than governments make economic decisions (capitalism and laisezz-faire)
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What is a Mixed economy?
Some are state operated industries and some are in the private sector.
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Define Marketisation?
The act of entering into, participating in, or introducing a free market economy
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What are the three steps of marketisation?
Deregulation, privatisation and creation or strengthening of the legal system.
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What is Deregulation?
Removing legal restrictions to market forces and establishment of private enterprise and removing barriers to how private enterprises operate.
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What is Privatisation?
The transfer of ownership from state to private investors.
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What is the creation/strengthening of the legal system?
To safeguard property rights, enforce contracts and promote fair competition..
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What are the implications to MNEs?
A free market economy will have a regulatory framework to ensure firms can operate freely.
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what are the advantages of a free market economy?
Competition policies, restriction, reduced prices, increased quality and more consumer choice.
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Economic indicators: classes of countries include?
developing countries, largest number of countries and low per capita income.
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Define foreign exchange?
Money denominated in the currency of another nation or group of nations.
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Define the foreign exchange market?
Where foreign exchange transactions take place.
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Define exchange rate?
The price of currency expressed in terms of another.
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Define exchange rate risk?
Arises from exchange rate fluctuations, complicating international transactions.
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How do exchange rate fluctuations impact firm profitability?
Through currency exposure, asset valuation, foreign taxation and inflationary and transfer pricing.
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Hard currencies?
Most convertible currencies. Most transactions use these currencies and nations prefer to hold them as reserves because of their strength and stability.
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Define a fixed exchange rate system?
The exchange rate is either held constant or allowed to fluctuate only within very narrow boundaries.
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Define a flexible (floating) exchange rate systems?
The exchange rate is determined by market forces without intervention by the authorities.
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Define hard peg?
Value is locked onto something and does not change.
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Define a currency board?
An organisation generally separate from a countries central bank with the responsibility to issue domestic currency that us typically anchored to a foreign currency.
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Define soft peg?
More flexible than hard peg.
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Define Floating exchange rate?
floating or freely floating exchange.
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Exchange rate risk: Define spot rate?
A rate quoted for immediate transaction.
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Exchange rate risk: Define bid rate?
The rate at which trades buy foreign exchange.
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Exchange rate risk: Define offer rate?
The rate at which traders sell foreign exchange.
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Exchange rate risk: Define spread?
The difference between bid and offer rates.
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Exchange rate risk: Define forward rate?
A rate quoted today for the future delivery of a currency.
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Exchange rate risk: Define forward discounts?
When the forward rate is less than the spot rate.
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Exchange rate risk: Define forward premiums?
When the forward rate is greater than the spot rate.
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Foreign exchange instruments:
Spot Transactions
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Define outright forward transactions?
An instrument to buy and sell currency using forward market.
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Define FX swap?
A contact involving buying and selling the same currency simultaneously but delivery is made at two different points in time.
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Define Currency swap?
Deals more with interest bearing financial instruments like bonds, and involve the exchange of principal and interest payments.
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Define currency option?
An instrument that gives the holder the right, but not the obligation, to exchange currency for a determined amount, but for delivery within a specified amount of time
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Define currency future?
A future contract represents an agreement to buy or sell a currency in exchange for another at a pre-specified price and on a standard delivery date.
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Financial flows: Define speculation?
Buying or selling of a foreign currency that has an element of risk and a chance of great profits.
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Financial flows: Define Arbitrage?
The buying and selling of foreign currencies at a profit due to price discrepancies.
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Define Culture?
Refers to the learned norms based on values, attitudes, and beliefs of a group of people.
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What are the Cultural factors?
Cultural awareness, dynamics of cultures, behavioural practices affecting businesses and strategies dealing with cultural differences.
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Define Cultural Collision?
Can occur when a company implements practises that are less effective or when employee encounter distress because of difficulty in accepting or adjusting to foreign behaviours.
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Define Cross Culture Risk?
A situation or event in which a cultural misunderstanding puts some human value at stake.
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What are the Levels of Culture?
National Culture, Business Culture, Industry Culture and Organisational Culture.
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What are the elements of culture?
Language, communication, social structure, values and attitudes and religion.
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Define religion?
A system of shared beliefs and rituals that are concerned with the realm of the sacred.
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How does religion affect businesses?
Through religious festivals, daily and weekend routines and aEthical ctivities and objects with symbolic values.
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Define Ethical Systems?
A set of moral principals or values, that are used to guide or shape behaviour.
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Define Social Structure?
Refers to basic social organisation.
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What are the three dimensions of the social structure?
Social Orientation, Social Stratification and Social Mobility.
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Define Social Orientation?
The extent of society is group orientated (collectivism) or individually orientated (individualism).
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Define Social Stratification?
Categorisation based on birth, occupation and individual achievement.
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Define Social Mobility?
Ability to move from one stratum of society to another.
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Define Values?
Principals and standards accepted by the members.
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Define the masculinity and femininity index?
Measures the extent to which a society is inclined towards aggressive and materialistic behaviour.
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What is masculinity associated with?
Assertiveness, toughness and emphasis on money and material things.
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What is femininity associated with?
Sensitivity, caring and emphasis on quality of life.
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Define Power Distance?
Refers to the extent to which members of a society accept a hierarchial or unequal power structure.
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What does high power distance imply?
Superior subordinate interaction.
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What does low power distance imply?
Implies consultative style
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Define uncertainty avoidance?
How members of a society handle uncertainty.
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What is intellectual capital as a resource?
A capital asset consisting of intellectual material knowledge, info and intellectual property and experience that can be put to use to create wealth.
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What is intellectual capital as a capability?
The knowledge and knowing capability of a social collectivity, such as an organisation, intellectual community or professional practice.
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What is the importance of intellectual capitalism?
The economic and productivity power of the firm uses more in its intellectual and service capabilities than its hard assets.
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Define intellectual property?
Legally recognised exclusive rights to creations of the mind, these are protected in law which enable people to earn recognition or financial benefit.
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Why is IP so important?
Establishes ownership over creations in which the firm has invested and excludes competitors from exploiting the economic value of a firms inventions or artistic impressions.
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What does IP ensure?
Ensures that an organisation can generate value through their R+D and other create efforts.
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