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					    Student Workbook
       (Long Version)
     to accompany the
    PowerPoint slides of:

 International Business:
 Strategy Management &
    the New Realities

               by


Cavusgil, Knight and Riesenberger

                                1
                                      CHAPTER 1
                                   Introduction to
                               International Business

Learning Objectives
1. What is international business?
2. What are the key concepts in international trade and investment?
3. How does international business differs from domestic business?
4. Who participates in international business?
5. Why do firms pursue internationalization strategies?
6. Why should you study international business?



International Business – A Firm Level Activity

Performance of trade and investment activities by firms across national
borders.




The Internationalization of Business
● Companies conduct value-adding activities on a global scale, i.e. organize, source,
manufacture, market, etc.

● Firm‘s international expansion is made more compelling and easier due to market
and product globalization- for firms small and large.
● A ―level playing field‖ has made cross-border activities appealing to all types of firms-
large and small; manufacturing and service sectors (e.g. banking, transportation,
engineering and design, advertising, and retailing).



The Nature of International Business
● All value-adding activities including sourcing, manufacturing, and
marketing, can be performed in international locations
● The subject of cross-border trade can be products, services, capital,
technology, know how, and labor
● Firms internationalize through exporting, foreign direct investment,
licensing, franchising, and collaborative ventures

                                                                                          2
Globalization of Markets – a Macro Concept
● Ongoing economic integration and growing interdependency of countries
worldwide.

● Integration is central to globalization, which has resulted in the widespread diffusion
of products, technology, and knowledge worldwide, regardless of where they originate.



Dimensions of Globalization
● Greater integration and interdependency of national economies; leading to freer
movement of goods, services, capital, and knowledge
● Rise of regional economic integration blocs

● Growth of global investment and financial flows

● Convergence of consumer lifestyles and preferences

● Globalization of production




International Trade
Exchange of products and services across national borders; typically through exporting
and importing.




Exporting
Sale of products or services to customers located abroad, from a base in the home
country or a third country.




Importing or Global Sourcing
Procurement of products or services from suppliers located abroad for consumption in
the home country or a third country.




                                                                                            3
International investment
● International Portfolio investment (typically short-term): the passive ownership of
foreign securities such as stocks and bonds for the purpose of generating financial
returns.

● Foreign direct investment (FDI) (typically long-term): An internationalization
strategy in which the firm establishes a physical presence abroad through acquisition of
productive assets such as capital, technology, labor, land, plant, and equipment.




World trade is growing faster than GDP
● The exponential growth of cross-border trade relative to world GDP is due in part to
advanced economies such as Canada and Japan sourcing to low-cost locations, e.g.
China and Mexico.
● The rapid integration of world economies is fueled by factors such as the decline of
trade barriers, e.g. tariffs, liberalization of markets, privatization and the economic
vitality of emerging markets.
● GDP: Gross Domestic Product, the total value of products and services produced in a
country over the course of a year.



Comparing the Growth Rates of World GDP and World Exports




                                                                                          4
Leading Countries in International Merchandise Trade
● The U.S. is the leading country in terms of the absolute value of total merchandise
trade, yet, it only accounts for 19 percent of the U.S. GDP.
● For other economies, merchandise trade is a much larger component of economic
activity: e.g. Belgium (167 percent), Netherlands (117 percent), and Germany (59
percent).



Leading Countries in International Merchandise Trade




                                                                                        5
Leading Countries in International Merchandise Trade (2)




The Nature of FDI
● Foreign Direct Investment (FDI) - (asset ownership and long time frame)
      -- The ultimate commitment level of internationalization
      -- We focus primarily on FDI, as opposed to International Portfolio investment.
● Large, resourceful companies with substantial international operations leverage FDI
to:
      -- Manufacture/assemble products in low-cost countries, e.g., China, Mexico, E.
         Europe




                                                                                        6
Dramatic Growth of FDI Since the 1980s
● September 11, 2001 interrupted FDI inflows with the worldwide panic that ensued
following the terrorist attacks in the United States.
● Developed economies: Australia, Canada, Japan, the United States, and most
countries in Western Europe.
● Developing economies: Parts of Africa, Asia, and Latin America. Of particular
significance is the growth of FDI into developing economies despite widespread poverty
and less investment capital than advanced economies.
● The improved lives of billions are directly linked to world trade and investment.




Foreign Direct Investment (FDI) Inflows into World Regions
(in Billions of U.S. Dollars per Year)




                                                                                      7
International Services Trade
● Larger, developed economies account for the greatest proportion of services.
● EBay- the largest auction-based retailer on the Internet, earned $6 billion in 2006, 40
percent of which came from international sales.
● China has 1.3 billion people with an estimated 132 million Internet users.
● India has 1 billion people with an estimated 40 million Internet users.
● U.S. has an estimated 210 million Internet users.
● EBay expanded to India, China, Korea, and Europe in anticipation of most of its
future revenue growth coming from abroad.



Leading Countries in International Services Trade




                                                                                        8
Leading Countries in International Services Trade (2)




International Financial Services Sector
● Banking and financial services are the most active cross-border services.
● Explosive growth of global capital markets is due to:
      -- Money → internationally into portfolio investments and pension funds
      -- Banks/financial institutions internationalization → increased amount of cheap,
         local investment capital, stimulating local financial markets and encouraging
         savings.
● International banking is prospering- return on equity:
      -- Saudi Arabia exceeds 20 percent; U.S. it is 15 percent
● Citibank, Deutsche Bank, BNP Paribas, and other international banks are thriving
because of high oil prices, booming consumer banking, and low taxes.
● Banks bypass Islamic rules against paying interest by structuring loans as
partnerships.



                                                                                          9
Service Industry Sectors That Are Rapidly Internationalizing




The Four Risks of International Business:




                                                               10
Cross-Cultural Risk
● Differences in language, lifestyles, attitudes, customs, and religion, where a cultural
miscommunication jeopardizes a culturally-valued mindset or behavior.
● Cultural blunders- hinder the effectiveness of foreign managers.
● Language- critical dimension of culture- a window to people‘s values
● Language differences impede effective communication.
● Cultural differences may lead to suboptimal business strategies.



Country Risk (Political Risk)
● Differences in host country political, legal and economic regimes may adversely
impact firm profitability.
● Laws, regulations and indigenous factors e.g., property rights, intellectual-property
protection, product liability, taxation policies, inflation, national debt, and unbalanced
international trade, may encumber firm operations and performance.
● Government intervention: restricts market access; imposes bureaucratic procedures
hindering business transactions; and limits the amount of earned income that firms may
repatriate from foreign operations.



Currency Risk (Financial Risk)
● Risk of adverse exchange rate fluctuations, inflation and other harmful economic
conditions create uncertainty of returns.
● When currencies fluctuate significantly, the value of the firm‘s assets, liabilities and/or
operating income may be substantially reduced.



Commercial Risk
● Less than optimal formulation and/or implementation of strategies, tactics or
procedures, e.g. partnering selections, market entry timing, pricing, product features,
and promotional themes

● Failures in international markets are far more costly than domestic business
blunders.




                                                                                             11
Risks: always present but manageable
● Managers need to understand their implications, anticipate them, and take proactive
action to reduce adverse effects.
● Some risks are extremely challenging, e.g., the East Asian economic crisis of 1998
generated substantial commercial, currency, and country risks- several East Asian
countries lost currency values of between 35 and 70 percent, leading to the collapse of
national stock markets, deepening trade deficits, and suspension of normal business
activity.
● Political and social unrest surged to Indonesia, Malaysia, South Korea, Thailand, and
the Philippines.



Participants in International Business
● Multinational enterprise (MNE): A large company with substantial resources that
performs various business activities through a network of subsidiaries and affiliates
located in multiple countries.
● In addition to a home office, an MNE owns a worldwide network of subsidiaries.
● Examples- Caterpillar, Kodak, Nokia, Samsung, Unilever, Citibank, Vodafone,
Carrefour, Bechtel, Four Seasons Hotels, Disney, DHL, & Nippon Life Insurance.
● Examples of Fortune‘s Global 500- Exxon Mobil, Royal Dutch Shell, BP, General
Motors, DaimlerChrysler, Toyota, Ford, and Wal-Mart.

Qqq TOO HERE FOR THE LONG VERSION OF THE STUDENT
WORKBOOK, ON 4/28/08
Geographic locations of multinational enterprises:




                                                                                        12
Small and Medium-Sized Enterprise (SME)
● A company defined (in the U.S.) as having 500 or fewer employees
● Comprise 90 - 95 % of all firms in most countries.
● Increasingly more SMEs participate in international business
● Account for 1/3 of exports from Asia; 1/4 of the exports from the affluent countries in
Europe and North America
● Contribute more than 50 percent of total national exports in Italy, South Korea, and
China.




Born Global Firm
Born global firm: a young entrepreneurial company that initiates international business
activity very early in its evolution, moving rapidly into foreign markets.
‗Born Globals‘ and SMEs:
● Are often more innovative, adaptable, and have quicker response times;
● Are better able to serve niche markets;
● Leverage the Internet to do international business;
● Tend to minimize fixed costs and outsource, due to limited resources;
● Tend to flourish on private knowledge that they cultivate via their knowledge
networks.




                                                                                         13
Why do firms internationalize?
1. Seek opportunities for growth through market diversification


2. Earn higher margins and profits


3. Gain new ideas about products, services, and business methods


4. Better serve customers that have relocated abroad


5. Be closer to supply sources, benefit from global sourcing advantages, or gain
flexibility in the sourcing of products



6. Gain access to lower-cost or better-value factors of production


7. Develop economies of scale in sourcing, production, marketing, and R&D


8. Confront international competitors more effectively or thwart the growth of
competition in the home market


9. Invest in a potentially rewarding relationships with foreign partners




Why study international business?
● A facilitator of the global economy and interconnectedness
● A contributor to national economic well-being
● A competitive advantage for the firm
● An activity with societal implications
● A source of competitive advantage for you


                                                                                   14
15
Contributor to National Economic Well-Being
● International trade is a critical engine for job creation. It is estimated that every $1
billion increase in exports creates more than 20,000 new jobs.
● One of every seven dollars of U.S. sales is made abroad.
● International business is both a cause and a result of increasing national prosperity.
● Prosperity is accompanied by literacy rate gains, nutrition and health care
improvements, with some tendencies towards freedom and democracy.




A Competitive Advantage for the Firm
● Increase sales


● Maximize returns: Foreign markets often generate returns far superior to those in
domestic markets.


● Global scale economies: International players can maximize their efficiencies by
securing cost-effective factor inputs from around the world.


● Resource acquisition: Access to otherwise unavailable critical resources




An Activity with Societal Implications
● As firms increase their international activities, so does responsibility to society to be
a good corporate citizen.
● Large corporations like Wal-Mart, Unilever, and Sony have annual revenues larger
than the GDPs of many of the nations they operate.
● The internationalization of thousands of firms negatively impacts the natural
environment, e.g. pollution (Royal Dutch Shell‘s refining operations in Nigeria).
● Large banks and international investment brokers have disrupted the economies of
nations with aggressive currency trading or by manipulating stock markets.
● Some MNEs ignore human rights and basic labor standards by establishing factories
in countries that pay low wages with substandard working conditions, e.g. Nike in Asia.
● Building factories abroad often leads to job losses at home.

                                                                                             16
A Competitive Advantage for You
● Julie, the student in the opening vignette is touched everyday by a variety of global
business transactions.
● She is considering a career in international business because she is grasping its
importance and growing role in the world.
● Working across national cultures exposes managers to a diversity of experiences,
new knowledge, novel ways of seeing the world, and unusual challenges.
● Internationally-experienced managers are typically more self-confident, cosmopolitan,
and have positioned themselves for unique professional opportunities.




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                                                                                          17
                                  CHAPTER 2
                       Globalization of Markets and the
                        Internationalization of the Firm
Globalization of Markets: A Macro Concept
● Two mega trends have altered the international business landscape: the globalization
of markets or economies and technological advances.
● Market globalization




The most globalized countries are:




The most globally competitive countries are:




                                                                                   18
           Relationship Between Globalization
  and Growth in Per Capita Gross Domestic Product, 1990s




1st Phase: 1830, peaking around 1880
Aided by railroads, ocean transport; resulting in the rise of mass production and growing
trade



2nd Phase: 1900, peaking late 1920s
Fueled by electricity and emergent modern technologies; early MNEs



3rd Phase: 1948, peaking around 1970
End of WW II; Marshall Plan; Gradual reduction of trade barriers, especially under
General Agreement on Tariffs and Trade (GATT)




                                                                                      19
4th Phase: 1980, peaking around 1997
Fueled by information and communications technologies. Rapid liberalization in
Emerging Markets



The Death of Distance




Drivers of Market Globalization
   1. Worldwide reduction of barriers to trade and investment


   2. Transition to market-based economies and adoption of free trade in China,
      former Soviet Union countries, and elsewhere


   3. Industrialization, economic development, and modernization


   4. Integration of world financial markets


   5. Advances in technology




                                                                                  20
Dimensions of Market Globalization
   1. Integration and interdependence of national economies




   2. Rise of regional economic integration blocs




   3. Growth of global investment and financial flows




   4. Convergence of buyer lifestyles and preferences




   5. Globalization of firms‘ production activities




Firms are Compelled to Internationalize
● Firms implement internationalization proactively are more successful than those
reactively engaging.

● E.g., Vodafone has established production and marketing operations all around the
world. Has some 200 million customers in 30 countries.




                                                                                      21
Technological Advances as a Driver of Market Globalization
● Advances in technology provide the means for internationalization of firms
● Advances in technology:
      -- Reduce cost of doing international business;
      -- Enable even small firms to go international
      -- Help coordinate worldwide activities;
      -- Mitigate geographic distance




Information Technology
● Cost of computer processing fell by 30% per year since late 1980s, and continues to
fall.

● Increases productivity across the firm

● Impact of IT on our daily lives has been profound -- laptop, intelligent cell phones,
Internet, Google, etc.




                                                                                          22
             Declining Cost of Global
Communication and Growing Number of Internet Users




                                                     23
Communications Technology
● Especially important. Includes telecommunications, satellites, optical fiber, wireless
technology, and the Internet.

● The Internet, and Internet-dependent systems such as intranets, extranets, and e-
mail, connect millions of people across the globe.
● The Internet opens up the global marketplace to all firms, large and small




Manufacturing and Transportation Technologies
● Revolutionary developments now permit manufacturing that is both low-scale and low
cost, with the support of computer-aided-design of products (CAD), robotics, and
production lines managed and monitored by microprocessor-based controls.
● In the 1960s, technological advances have led to the development of fuel-efficient
jumbo jets, giant ocean-going freighters, and containerized shipping.
● Thus, the cost of transportation has declined substantially, spurring rapid growth in
international trade.




Societal Consequences of Market Globalization
Positive consequences
● More jobs
● Economic development and growing prosperity
● Technology and knowledge transfer


Negative consequences
● Natural environment
● Disruptive effects in national economies
● Human rights violations abroad (e.g., sweatshops)
● Job losses at home
                                                                                          24
Economic Freedom Enhances Income Growth
● In the long run, globalization generally leads to:
       -- higher living standards
       -- more efficient resource usage
       -- greater access to technology, products, and services

● In particular, liberalization of markets appears to enhance income levels


Enhancing economic freedom can lead to significant improvements in living standards.




                                                                                   25
Unintended Consequences of Market Globalization
● Loss of national sovereignty
     -- Power shifts to MNEs and larger countries

● Offshoring and the flight of jobs
      -- Dislocation of jobs

● Effect on the poor
      -- Benefits of globalization are not evenly distributed

● Effect on the natural environment


● Effect on national culture
       -- Loss of national cultural values and identity


                                                                26
Corporate Social Responsibility
● Over time, governments pass legislation that promotes improved environmental
conditions.

● In addition, many firms now consider the societal consequences of their actions --
Corporate Social Responsibility (CSR)
● Examples: Benetton in Italy (clothing), Alcan in Canada (aluminum), and Starbucks
have attempted to embrace practices that protect the environment, often at the expense
of profits.



Firm Level Consequences of Market Globalization:
● Countless new business opportunities for internationalizing firms
● New risks and intense rivalry from foreign competitors
● More demanding buyers who source from suppliers worldwide
● Greater emphasis on proactive internationalization
● Internationalization of firm‘s value chain



Examples of How Firms’ Value Chain Activities Can Be
Internationalized
Value Chain: Sequence of value adding activities performed in the course of
developing, producing, marketing, and servicing a product.




                                                                                       27
Implications for Management
● Global orchestration‘ of value-chain activities (e.g., in order to cut costs, access
resources, target new markets)
● Exploit knowledge acquired worldwide
● Increase productivity
● Collaborate with foreign partners




Implications for Managers: Acquiring Global Competence is a
Requirement
●   Open-mindedness
●   Tolerance for ambiguity
●   Perceptiveness
●   Premium on personal relationships
●   Flexibility, adaptability, and self-reliance
●   Good sense of humor
●   Warmth in human relationships
●   A curious mind




                                                                                         28
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                                    CHAPTER 3
                                  Participants in
                              International Business

Three Types of Participants in International Business:
1. The focal firm




2. Distribution channel intermediary




3. Facilitator




Participants Organized by Value Chain Activity




The MNE as a Focal Firm




                                                         29
The SME as a Focal Firm




The Born Global as a Focal Firm




Common Characteristics of Born Global Firms




                                              30
Foreign Market Entry Strategies of Focal Firms
Cross-border business transactions can be grouped into three categories:
1. Trade: buying and selling of products (mainly exporting and importing)


2. Contractual exchange of services or intangibles: (mainly licensing and
franchising)


3. Equity ownership in foreign operations: establishing foreign presence through
direct investment (foreign direct investment or ‗FDI‘)



Examples of Contractual Exchanges
Licensor: Focal firm grants the right to the foreign partner to use certain intellectual
property in exchange for royalties.




Franchisor: Focal firm grants the right to the foreign partner to use an entire business
system in exchange for fees and royalties.




Turnkey Contractor: Provide engineering, design, and architectural services in the
construction of airports, hospitals, oil refineries, and other types of infrastructure.




                                                                                           31
Build-own-transfer venture: An increasingly popular type of turnkey contract in the
developing economies where contractors acquire an ownership in the facility for a
period of time until it is turned over to the client.



International Collaborative Venture (ICV)
Arrangement in which partners pool their resources and share the cost and risks of the
new venture.
Through an ICV, a focal firm can exploit partner‘s complementary technologies and
expertise, avoid trade barriers, connect with customers abroad, and configure value
chains more effectively.
A middle ground strategy between exporting and FDI



Two Types of International Collaborative Ventures
Joint Venture: One firm creates and jointly owns a new legal entity together with
another firm. Advantages: share costs and risks; gain access to needed resources; gain
economies of scale; pursue long-term strategic goals.
Project-Based Collaborative Venture: Firm collaborates with foreign partners on a
project with a relatively narrow scope and a well-defined timetable, without creating a
new legal entity. Often used to share the cost and risks of knowledge-intensive R&D
projects.


Example from the Textbook: Project-Based Collaboration
Cisco Systems has expanded much of its operations through strategic alliances with
key foreign players.

      With Japan‘s Fujitsu to jointly develop routers and switches that enable clients to
       build Internet protocol networks for advanced telecommunications.

      In Italy, Cisco teamed with the telecommunications company Italtel to jointly
       develop network solutions for the convergence of voice, data, and video to meet
       growing global demands.




                                                                                          32
Distribution Channel Intermediary




Intermediaries Based in the Foreign Market
Distributor: Takes title to the exporter‘s goods and performs marketing functions such
as sales, promotion, and after sales service. Serves as an extension of the firm in the
foreign market, performing many downstream marketing functions
Agent: (also known as a ‗broker‘): Does not take title to the goods. Works on a
commission basis.
Manufacturer’s Representative: Works under contract to the exporter to represent
and sell its goods. Acts as a contracted salesperson in a designated territory.
Retailer: Stores that mainly serve regular consumers. Some, large firms sell directly to
retailers, bypassing distributors (wholesalers). Retailers provide direct access to retail
customers. Examples: Carrefour, IKEA, Royal Ahold, Seibu, Toys ―R‖ Us, Wal-Mart, and
Zara.
Trading Company: Based in the home country, a trading company is an intermediary
that engages in imports and exports of a variety of products. Large trading companies
such as Cargill are high-volume, low-margin resellers. Many trading companies deal
primarily in commodities such as grains, minerals, coal, and metals.
The Japanese Sogo Shosha
Large trading companies in Japan are known as sogo shosha. Each has an extensive
network of foreign offices and buyers including governments. Examples include
Mitsubishi, Mitsui, Marubeni, and Sumitomo. The sogo shosha historically handled
about half of Japanese external trade.




                                                                                       33
The Role of Trading Companies in International Business
● Trading companies work with remarkably low margins; they tend to be high-volume,
low-margin resellers.
● Five of the 10 largest trading companies are based in Japan. Trading companies
have historically played a very important role in Japan‘s external trade.
● Being an island economy and lacking most raw materials needed for industrialization,
Japan had to import them.
● Trading companies are also more common in South Korea, India, and Europe.
● In Japan, large trading companies are known as sogo shosha, and are usually
involved in both exporting and importing, and are specialists in low-margin high-volume
trading.
● Examples- Mitsui, Mitsubishi, Sumitomo, Itochu, and Marubeni, all firms on the
Fortune magazine Global 500.



Export Management Company (EMC)
Acts as an export agent on behalf of the focal firm. Based in home country. An EMC
finds export customers, negotiates terms of sale, and arranges for international
shipping, typically for smaller exporters. Most specialize in specific industries and
geographic areas.




Online Intermediaries
Examples include Amazon, Dell, eBay, and Alibaba – English-language portal based in
China that specializes in business-to-business exchanges. Traditional retailers such as
Wal-Mart and Tesco have also set up online presence. One negative aspect is the ease
with which unscrupulous marketers prey on unsuspecting customers with fake products
(e.g., fake pharmaceuticals).



Facilitators in International Business
Facilitators assist the focal firm with specialized services required in cross-border
transactions.

Other Examples of Facilitators
●   International trade lawyers
●   International business consultants
●   Tax accountants
●   Market research firms

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                                                                                        34
                                    CHAPTER 4
                              Theories of International
                               Trade and Investment
Comparative Advantage
Superior features of a country that provide it with unique benefits in global competition –
derived from either national endowments or deliberate national policies. Helps answer
the question of all nations can gain and sustain national economic superiority




Competitive Advantage
Distinctive assets or competencies of a firm – derived from cost, size, or innovation
strengths that are difficult for competitors to replicate or imitate. Helps explain how
individual firms can gain and sustain distinctive competence vis-à-vis competitors




Examples of National Comparative Advantage




Examples of Firm Competitive Advantage




                                                                                          35
Why Nations Trade: Classical Theories
Mercantilism:




Absolute advantage principle:




Comparative advantage principle:




Limitations of Early Trade Theories
● Do not take into account the cost of international transportation
● Tariffs and import restrictions can distort trade flows
● Scale economies can bring about additional efficiencies
● When governments selectively target certain industries for strategic investment, this
may cause trade patterns contrary to theoretical explanations
● Today, countries can access needed low-cost capital on global markets
● Some services do not lend themselves to cross-border trade



Factor Proportions Theory




                                                                                          36
International product cycle theory:
● International product cycle theory: each product and its associated manufacturing
technologies go through three stages of evolution: introduction, growth, and maturity
● In the introduction stage, the inventor country enjoys a monopoly both in
manufacturing and exports
● As the product‘s manufacturing becomes more standard, other countries will enter the
global marketplace
● When the product reaches maturity, the original innovator country will become a net
importer of the product
● Applicability to the contemporary global economy: Today, the cycle from innovation to
maturity is much shorter making it harder for the innovator country to sustain its lead in
a particular product


The contemporary view suggests that governments can proactively implement policies
to enhance a nation‘s competitive advantage, beyond the natural endowments the
country possesses
Governments can create national economic advantage by: stimulating innovation,
targeting industries for development, providing low-cost capital, minimizing taxes,
investing in IT, etc.




Michael Porter’s Diamond Model: Sources of National Competitive
Advantage
Firm strategy, structure, and rivalry –




Factor conditions –




Demand conditions at home –




Related and supporting industries –


                                                                                       37
Industrial Clusters




National Industrial Policy




Public sector initiatives can include: tax incentives, investment incentives, monetary and
fiscal policies, rigorous educational systems, investment in national infrastructure,
strong legal and regulatory systems. (Examples: Japan, Dubai, Ireland)



New Trade Theory
Economies of scale are an important factor in some industries for superior international
performance – even when the nation has no clear comparative advantage. Some
industries succeed best as their volume of production increases. Examples: commercial
aircraft, automobiles, pharmaceuticals all have very high fixed costs that require high-
volume sales to achieve profitability.




How Firms Internationalize
Internationalization is usually gradual and evolutionary (Internationalization Process
Model). Slow internationalization results from the uncertainty and uneasiness that
managers have about doing international business. A predictable pattern of
internationalization may include the following stages:
1. domestic focus
2. pre-export stage
3. experimental involvement
4. active involvement
5. committed involvement




                                                                                         38
Dominance of FDI-Based Explanations of the International Firm
Most IB theories about the firm emphasize the MNE, since it was long the major player
in international business. Foreign direct investment (FDI) is the main strategy used by
MNEs in international expansion; thus, earlier theories emphasized motives for, and
patterns of, FDI


FDI BASED EXPLANATIONS:
Monopolistic Advantage Theory
Suggests that FDI is preferred by MNEs because it provides the firm with control over
resources and capabilities in the foreign market, and a degree of monopoly power
relative to foreign competitors. Key sources of monopolistic advantage include
proprietary knowledge, patents, unique know-how, and sole ownership of other assets.



Internalization Theory
Explains the process by which firms acquire and retain one or more value-chain
activities inside the firm – retaining control over foreign operations and avoiding the
disadvantages of dealing with external partners. In contrast to arm‘s-length entry
strategies (such as exporting and licensing) which imply developing contractual
relationships with external business partners, FDI provides the firm with control and
ownership of resources




Dunning’s Eclectic Paradigm
Three conditions determine whether or not a company will internalize via FDI:
Ownership-specific advantages – knowledge, skills, capabilities, relationships, or
physical assets that form the basis for the firm‘s competitive advantage
Location-specific advantages – advantages associated with the country in which the
MNE is invested, including natural resources, skilled or low cost labor, and inexpensive
capital
Internalization advantages – control derived from internalizing foreign-based
manufacturing, distribution, or other value chain activities




                                                                                          39
NON-FDI BASED EXPLANATIONS
International Collaborative Ventures
● While FDI-based internationalization is still common, beginning in the 1980s firms
began to emphasize non-equity, flexible collaborative ventures to internationalize.
● Collaborative venture: a form of cooperation between two or more firms. Through
collaboration, a firm can gain access to foreign partner‘s know-how, capital, distribution
channels, and marketing assets, and overcome government imposed obstacles.
● Venture partners share the risk of their joint efforts and pool resources and
capabilities to create synergy.




Two Types of International Collaborative Ventures:
      Equity-based joint ventures result in the formation of a new legal entity. Here,
       the firm collaborates with local partner(s) to reduce risk and commitment of
       capital.

      Project-based alliances involve cooperation in R&D, manufacturing, design, or
       any other value-adding activity, a partnership aimed at a narrowly defined scope
       of activities and timeline




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                                                                                        40
                                   CHAPTER 5
                            The Cultural Environment
                            of International Business
Cross-Cultural Risk
A situation or event where a cultural miscommunication puts some human value at
stake




Manifestations of Cross-Cultural Risk
Ethnocentric orientation:




Polycentric orientation:




Geocentric orientation:




Managers should strive for a geocentric orientation




Definitions of Culture
● Incorporates both objective and subjective elements.
● Objective or tangible aspects of culture include tools, roads, television programming,
architecture, and other physical artifacts.
● Subjective or intangible aspects of culture include norms, values, ideas, customs, and
other meaningful symbols.
● Hofstede, a well-known Dutch organizational anthropologist, views culture as
‗collective mental programming‘ of people and the ‗software of the mind;‘ how we think
and reason.



                                                                                      41
What Culture Is not:
Not right or wrong.




Not about individual behavior.




Not inherited.




Culture is Learned
Socialization: The process of learning the rules and behavioral patterns appropriate to
one's given society, i.e. cultural learning.
Acculturation: The process of adjusting and adapting to a culture other than one's own,
commonly experienced by expatriate workers.




Cross-Cultural Proficiency is Paramount in Managerial Tasks
Examples
● Developing products and services
● Communicating and interacting with foreign business partners
● Negotiating and structuring international business ventures
● Interacting with current and potential customers from abroad
● Preparing advertising and promotional materials




                                                                                      42
Cross-Cultural Differences may Create Challenges
Teamwork. What should managers do if foreign and domestic nationals don‘t get
along?
Lifetime employment. Workers in Japan expect to work for the same firm throughout
their careers; how should a foreign firm handle this?
Pay for performance system. In China and Japan, a person‘s age is important in
promoting workers. Yet how do such workers perform when merit performance-based
measures are used? Organizational structure. Preferences for centralized,
bureaucratic structures may deter information sharing.
Union-management relationships. Workers in European firms enjoy a more equal
status with managers.
Attitudes toward ambiguity. If you are comfortable working with minimum guidance or
taking independent action, then you may have difficulty fitting into some cultures.




Three Approaches to Interpreting Culture
Metaphors




Stereotypes




Idioms




Examples of Metaphors
● American football is a metaphor for distinctive traditions in the U.S.
● The Swedish stuga (a cottage or summer home) is a cultural metaphor for Swedes‘
love of nature and a desire for individualism through self development.
● The Japanese garden (tranquility and harmony)
● The Turkish coffeehouse (social interaction)
● The Israeli kibbutz (community)
● The Spanish bullfight (ritual)



                                                                                    43
The Nature of Stereotypes
Stereotypes are often erroneous and lead to unjustified conclusions about others. Still,
most people employ stereotypes, either consciously or unconsciously, because they are
an easy means to judge situations and people. There are real differences among
groups and societies – we should examine descriptive behaviors rather than evaluative
stereotypes.
An example: Some Latin Americans procrastinate via the ―mañana syndrome‖. To
some Latin Americans, mañana means an indefinite future with many uncontrollable
events; thus, why fret over a promise?


Examples of Stereotypes
Some stereotypes about Americans:
▪ Argumentative and aggressive, compared to Japanese who tend to be reserved and
humble.
▪ Individualistic lovers of personal freedom, compared to Chinese who tend to be group
oriented.
▪ Informal and nonhierarchical, compared to Indians who believe titles should be
respected.
▪ Entrepreneurial and risk-seeking, compared to Saudi Arabians who tend to be
conservative, using time-honored methods to get things done.
▪ Direct and interested in immediate returns, compared to Latin Americans who usually
take time to be social and get to know their business partners.



Idioms
Idioms exist in virtually every culture and are used as a short way of saying something
else. Examples:
● "To roll out the red carpet" is to extravagantly welcome a guest; no red carpet is
actually used.
● In Spanish, the idiom "no está el horno para bolos‖ literally means "the oven isn't
ready for bread rolls," yet really means "the time isn't right."
● In Japanese, the phrase ―uma ga au‖ literally means ―our horses meet,‖ yet really
means ―we get along with each other.‖




                                                                                      44
E. T. Hall’s High- and Low-Context Cultures
● Low-context cultures rely on elaborate verbal explanations, putting much emphasis
on spoken words.
● Tend to be in northern Europe and North America, which place central importance on
the efficient delivery of verbal messages; speech should express one‘s ideas and
thoughts as clearly, logically, and convincingly as possible.
● Communication is direct and explicit, no ―beating around the bush.‖ Agreements are
concluded with specific, legal contracts.

High Context Cultures
● A high-context culture emphasizes nonverbal messages and use communication as
a means to promote smooth, harmonious relationships.
● Prefer an indirect, polite, ―face-saving‖ style that emphasizes a mutual sense of care
and respect for others; careful not to embarrass or offend others.
● It is difficult for Japanese people to say ―no‖ when expressing disagreement. Much
more likely to say ―it is different‖ -- an ambiguous response.
● In East Asian cultures, showing impatience, frustration, irritation, or anger disrupts
harmony and is considered rude and offensive.
● To succeed in Asian cultures, it is critical to notice nonverbal signs and body
language.



Hofstede’s Classifications of National Culture
1. Individualism versus collectivism




2. Power distance




3. Uncertainty avoidance




4. Masculinity versus femininity




                                                                                      45
Individualistic vs. Collective Societies
  Individualistic societies: Ties among people are relatively loose; each person
  tends to focus on his or her own self-interest; competition for resources is the norm;
  those who compete best are rewarded financially.
  Examples- Australia, Canada, the UK, and the U.S. tend to be strongly
  individualistic societies.
  Collectivist societies: ties among individuals are more important than individualism;
  business is conducted in the context of a group where everyone‘s views are strongly
  considered; group is all-important, as life is fundamentally a cooperative experience;
  conformity and compromise help maintain group harmony.
  Examples-China, Panama, and South Korea tend to be strongly collectivist societies.



High vs. Low Power Distance
  High power distance societies have substantial gaps between the powerful and
  the weak; are relatively indifferent to inequalities and allow them to grow.
  Examples- Guatemala, Malaysia, the Philippines and several Middle East countries
Low-power distance societies have minimal gaps between the powerful and weak.
  Examples- Denmark and Sweden, governments instituted tax and social welfare
  systems that ensure their nationals are relatively equal in terms of income and
  power. Social stratification affects power distance- in Japan almost everybody
  belongs to the middle class, while in India the upper stratum controls decision-
  making and buying power. In high-distance firms, autocratic management styles
  focus power at the top and grant little autonomy to lower-level employees.



High vs. Low Uncertainty Avoidance Societies
  High uncertainty avoidance societies create institutions that minimize risk and
  ensure financial security; companies emphasize stable careers and produce many
  rules to regulate worker actions and minimize ambiguity; decisions are made slowly.
  Examples - Belgium, France, and Japan
  Low uncertainty avoidance societies socialize their members to accept and
  become accustomed to uncertainty; managers are entrepreneurial and comfortable
  with taking risks; decisions are made quickly; people accept each day as it comes
  and take their jobs in stride.
  Examples -- India, Ireland, Jamaica, and the United States



                                                                                       46
Masculine vs. Feminine Cultures
   Masculine cultures value competitiveness, assertiveness, ambition, and the
   accumulation of wealth; both men and women are assertive, focused on career and
   earning money, and may care little for others.
   Examples- Australia, Japan. The U.S. is a moderately masculine society; as are
   Hispanic cultures that display a zest for action, daring, and competitiveness.
   In business, the masculinity dimension manifests as self-confidence, proactiveness
   and leadership.
   Feminine cultures emphasize nurturing roles, interdependence among people, and
   caring for less fortunate people- for both men and women.
   Examples-Scandinavian countries- welfare systems are highly developed, and
   education is subsidized.




Subjective Dimensions of Culture
Subjective dimensions- values and attitudes, manners and customs, deal versus
relationship orientation, perceptions of time, perceptions of space, and religion.
Values




Attitudes




Prejudices




                                                                                     47
Deal vs. Relationship Orientation
      Deal-oriented cultures-




      Relationship-oriented cultures-




Manners and Customs
Manners and customs are ways of behaving and conducting oneself in public and
business situations.
     Informal cultures -




      Formal cultures –




Religion
A system of common beliefs or attitudes concerning a being or system of thought
people consider to be sacred, divine, or highest truth, as well as the moral codes,
values, institutions, traditions, and rituals associated with this system.




                                                                                48
Language as a Key Dimension of Culture
The ―mirror‖ or expression of culture; essential for communications; provides insights
into culture. Linguistic proficiency is a great asset in international business. Language
has both verbal and nonverbal (unspoken, facial expressions and gestures). There are
nearly 7,000 active languages, including over 2,000 in each of Africa and Asia



Technology, the Internet, and Culture
Technological advances are a key determinant of culture and cultural change- more
leisure time, and computers, multimedia, and communications systems that encourage
convergence in global culture.
The ―death of distance‖ refers to the demise of the boundaries that once separated
people, due to modern communications, information, and transportation technologies -
more homogenized cultures are developing.
The Internet also promotes the diffusion of culture, with rapidly growing number of
Internet users.


Are Cultures Converging?
Critics charge that globalization is harmful to local cultures, their artistic expressions and
sensibilities, and their replacement by a homogeneous, often ‗Americanized‘, culture.
Others argue that increased global communications is positive because it permits the
flow of cultural ideas, beliefs, and values.
The homogenization (or the ‗banalization‘) of culture is demonstrated by the growing
tendency of people in much of the world to consume the same Big Macs and Coca-
Colas, watch the same movies, listen to the same music, drive the same cars, and stay
in the same hotels.




                                                                                           49
Managerial Guidelines for Cross-Cultural Success
Guideline 1: Acquire factual and interpretive knowledge about the other culture; and
try to speak their language.




Guideline 2: Avoid cultural bias.
   Self-reference criterion:




   Critical incident analysis:




Guideline 3: Develop cross-cultural skills, such as perceptiveness, interpersonal
skills, adaptability




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                                                                                    50
                              CHAPTER 6
                     Political and Legal Systems
                      in National Environments
Country Risk




What Gives Rise to Country Risk?




What are Political and Legal Systems?
Political system –




Legal system –




                                                   51
Three Major Types of Political Systems
Totalitarianism
Socialism
Democracy
These categories are not mutually exclusive. E.g., most democracies include some
elements of socialism.



Totalitarianism
● Government controls all economic and political matters.
● Either theocratic (religion-based) or secular
● A state party is led by a dictator. Membership is mandatory for those
  wanting to advance.
● Power sustained via secret police, propaganda, regulation of free
  discussion and criticism.
● Examples: China (1949–1980s), Germany (1933–1945), Soviet Union
   (1918–1991), and Spain (1939–1975).
● Today, some states in the Middle East and Africa employ totalitarianism.
● Many ex-totalitarian states have much government intervention, red tape,
  and bureaucracy



Socialism
● Capital and wealth vested in the state and used primarily as a means of production for
use rather than for profit.
● Group welfare outweighs individual welfare.
● Government‘s role is to control the basic means of production, distribution, and
commercial activity.
● Socialism occurs in much of the world as ‗social democracy‟ (e.g., Western Europe,
Brazil, India).
        * Frequent government intervention in the private sector.
        * Corporate income tax rates are higher.




                                                                                     52
Two Key Features of Democracy:
Private property rights: The ability to own property and assets and to increase one‘s
asset base by accumulating private wealth. Property includes land, buildings, stocks,
contracts, patents. Encourages initiative, ambition, innovation.

Limited government: The government performs only essential functions that serve all
citizens, such as national defense, maintaining law & order, foreign relations, and
providing basic infrastructure.


Democracy’s Link to Economic Freedom
Empirical evidence suggests that democracy -- greater economic freedom –leads to
higher economic living standards.
Economic freedom flourishes in systems characterized by:
● Free market economics
● Strong rule of law
● Minimal government intervention in business



Command (Centrally Planned) Economies
The state is responsible for making all decisions: what goods and services the country
produces; quantity of production; prices at which they are sold; and distribution
● The state owns all wealth, land, and capital, and allocates resources based on which
industries they want to develop.
● Command economies were common in the 20th century; they proved so inefficient
that most have gradually died out.
● Central planning is less efficient than market forces in synchronizing supply and
demand.
● Today many countries exhibit some characteristics of command economies-
examples- China, India, Russia, and certain countries in Central Asia, Eastern Europe,
and the Middle East.




                                                                                    53
Market and Mixed Economies
In market economies,




Mixed economies




Five Types of Legal Systems
The five legal systems are the foundation for laws and regulations:




Common (Case) Law
A legal system that originated in England and spread to Australia, Canada, USA, and
other former members of the British Commonwealth (also known as case law).

The basis of law is tradition, past practices, and legal precedents set by courts via
interpretation of statutes, legislation, and past rulings.

Judges have much power to interpret laws based on the circumstances of individual
cases. Thus, common law is relatively flexible.




                                                                                        54
Civil (Code) Law
Found in France, Germany, Italy, Japan, Turkey, and much of Latin America.

Based on an all-inclusive system of laws that have been ―codified‖, clearly written by
legislative bodies
Laws are more ‗cast in stone‘ and not strongly subject to interpretation by courts




Religious law
Strongly influenced by religious beliefs, ethical codes, and moral values, viewed as
mandated by a supreme being.
Most important religious legal systems are based on Hindu, Jewish, and Islamic law.
Islamic law spells out norms of behavior regarding politics, economics, banking,
contracts, marriage, and many other social and business issues.




Socialist law
Found mainly in China, former Soviet Union, and a few states in Africa
Based on Civil Law, with elements of socialist principles that emphasize state ownership
of property -- state rights take precedence over individuals‘
Tends toward loose treatment of property and intellectual property rights




Actors in Political and Legal Systems




                                                                                         55
Country Risk Produced by the Political System:
Government Takeover of Corporate Assets
 Confiscation


 Expropriation


 Nationalization



 Privatization




Country Risk Produced by Legal System
  Foreign Investment Laws




  Controls on Operating Forms and Practices




  Marketing and Distribution Laws




  Laws regarding Repatriation




  Environmental Laws



                                                 56
Country Risk Arising from the Home Country Legal Environment
Extraterritoriality: application of home-country laws to other countries. E.g., the
European Union has pursued Microsoft for perceived monopolistic practices.


Foreign Corrupt Practices Act (1977) made it illegal to offer bribes to foreign parties.
But, definition of a ―bribe‖ is unclear; Harms U.S. interests because foreign competitors
are not so constrained.



Accounting and Reporting Laws




Transparency in Financial Reporting
Transparency -- the degree to which firms regularly reveal substantial financial &
accounting information.




Ethical Values and Practices
Ethics refers to the moral behavior of people, firms, or governments- issues often arise,
or may be exacerbated, by deficiencies in legal systems.
Corruption is an extreme form of unethical behavior- involving the use of illegal or
unethical practices, especially bribery and fraud, to achieve business objectives- is
particularly common in developing economies.




                                                                                        57
Contract Laws
Five types of Contracts:
   1.


   2.


   3.


   4.


   5.




Protection through Legal Contracts
Three approaches for resolving contractual disputes:
1. Conciliation is the least adversarial method. It is a formal process of negotiation
whose objective is to resolve differences in a friendly manner. 2. Arbitration is a
process in which a neutral third party hears both sides of a case and decides in favor of
one party or the other, based on an objective assessment of the facts. Compared to
litigation, it saves time and expense. 3. Litigation is the most adversarial approach, and
occurs when one party files a lawsuit against another- it is most common in the U.S.




Losses from copyright piracy are substantial




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                                                                                       58
                               CHAPTER 7
                       Government Intervention in
                         International Business
The Nature of Government Intervention




Key Concepts
 Protectionism



 Tariff



 Nontariff trade barrier




 Investment barriers



 Quota




                                                    59
Example of Protectionism: U.S. Steel Industry
Bush administration imposed tariffs on imports of foreign steel to protect U.S. steel
manufacturers from foreign competition, aiming to give the U.S. steel industry time to
restructure and revive itself.
Resulting higher steel costs:
● increased production costs for firms that use steel, like Ford, Whirlpool and General
Electric
● reduced prospects for selling products in world markets
● made U.S. steel firms less competitive
The steel tariffs were removed within two years.




Example of Protectionism: Auto Industry
In the 1980s, the U.S. government imposed ‗voluntary‘ export restraints (quotas) on
imports of cars from Japan, to insulate U.S. auto industry.
Result 1: Detroit automakers had less of an incentive to improve quality, design, and
overall product appeal.
Result 2: Detroit‘s ability to compete in the global auto industry was weakened.




Consequences of Protectionism




Rationale for Government Intervention
1. Tariffs and other barriers can generate government revenue.
2. Safety, security, and welfare of citizens (e.g., FDA barriers on drug imports; barriers
intended to protect national security)
3. Broad-based economic, political, or social objectives (e.g., job creation)
4. Reduce foreign competition
5. Protect infant industries


                                                                                         60
6. Preserve national culture and identity

Special Interest Groups Trigger Protectionism
● In a trade dispute, the U.S. government imposed a $50 per ton duty on the import of
Mexican cement after U.S. cement makers lobbied the U.S. Congress.
● Mexican imports can reach 10 percent of U.S. domestic cement consumption.
● The U.S. is one of the world‘s largest cement consumers and, suffers from shortages,
which are exacerbated by import restrictions.
● Mexico proposed substituting import quotas instead of the high cement import tariffs.




Tariffs are Widespread
● Developing economies -- tariffs are common.
● Advanced economies -- tariffs still a factor mainly in textiles, clothing, and agricultural
products (e.g., the U.S. recently collected more tariff revenue on shoes than on cars;
$1.63 billion vs. $1.60 billion in 2001).
● The European Union applies tariffs of up to 236 percent on meat, 180 percent on
cereals, and 17 percent on tennis shoes.
● United Nations estimates that trade barriers in general cost developing economies
over $100 billion in lost trading opportunities with developed countries every year.



WTO: A Force for Reducing Tariffs
● Governments have tended to reduce tariffs over time.
● Tariff reduction was the primary goal of the General Agreement on Tariffs and Trade
(GATT)
● In 1995, the GATT became the World Trade Organization (WTO).
● Countries as diverse as Chile, Hungary, Turkey, and South Korea have liberalized
their previously protected markets, lowering trade barriers.




                                                                                           61
Nontariff Trade Barriers
Government policies that restrict trade without imposing a direct tax or duty.
● Quotas restrict the physical volume or value of products that firms can import into a
country.
● Voluntary export/import restraints are voluntary quotas imposed by governments
whereby firms agree to limit exports or imports of certain products.
● Import license – a formal permission to import, which restricts imports in a way that
is similar to quotas- a complicated, bureaucratic process in some countries
● Government regulations and technical standards – e.g., safety regulations for
motor vehicles, health regulations for hygienic food preparation, labeling requirements
identifying country of origin, etc.
● Administrative or bureaucratic procedures



Investment Barriers
FDI and ownership restrictions are common in industries such as broadcasting, utilities,
air transportation, military technology, and financial services, oil, fisheries, etc.
Examples
● Canada – government restricts foreign ownership of local movie studios and TV
shows to protect its indigenous film and TV industry from excessive foreign influence.
● Mexico – government restricts FDI by foreign investors to protect its oil industry.
● Services sector – FDI and ownership restrictions are burdensome because services
usually cannot be exported; must establish physical presence in the market


Currency Controls
● Restricts the outflow of hard currencies (such as the U.S. dollar, the euro, and the
yen), and occasionally the inflow of foreign currencies.
● Repatriation of profits – restrictions on revenue transfer from profitable operations
back to the home country.
● Used to conserve valuable hard currency, reduce capital flight; particularly common
in developing countries.




                                                                                          62
Subsidies




Example of Subsidies
● China- Firms such as China Minmetals ($12 b. annual sales) and Shanghai
Automotive ($12 b. annual sales), are in fact state enterprises partly owned by the
Chinese government, receiving huge financial resources.
● In Europe and the U.S., governments provide agricultural subsidies to supplement the
income of farmers and help manage the supply of agricultural commodities.
● In Europe, the Common Agricultural Policy (CAP) is a system of subsidies that
represents about 40 percent of the European Union's budget, amounting to billions of
euros annually.
● The U.S. government grants subsidies for such commodities as wheat, barley, cotton,
milk, rice, peanuts, sugar, tobacco, and soybeans.



Investment Incentives
Similar to subsidies, transfer payments or tax concessions made directly to individual
foreign firms to entice them to invest in the country.
Examples
● Hong Kong government put up most of the cash – $1.74 billion – to build Hong Kong
Disneyland.
● Austin, TX and Albany, NY competed to have Samsung Electronics build a
semiconductor plant in their regions. Austin won, offering $225m in tax relief and other
concessions to attract the $300m plant; employs 1,000 workers.




                                                                                         63
Market Liberalization in India
● Independence from Britain in 1947.
● Adopted quasi-socialist model of isolationism and strict government control.
● Poor economic performance due to high trade and investment barriers, state
intervention in labor and financial markets, a large public sector, heavy regulation of
business, and central planning.
● Early 1990s – markets opened to foreign trade and investment, free-trade reforms,
privatization of state enterprises.
● Protectionism has declined, but high tariffs (averaging 20%) and FDI limitations are
still in place.



Market Liberalization in China
● 1949 – Mao Tse Tung established a communist regime, featuring centralized
economic planning, agricultural sector, inefficient state-run industries, very limited
international trade.
● 1980s – began to liberalize economy.
● 1992 – joined Asia-Pacific Economic Cooperation (APEC) group, a free-trade
organization.
● 2001 – joined the WTO; committed to reducing trade barriers and protecting
intellectual property.
● 2004 – China‘s GDP was four times the level it was in 1978, and foreign trade
exceeded $1 trillion.




                                                                                          64
How Firms Should Respond to Government Intervention
1. Research to gather knowledge and intelligence. Understand the extent and nature of
trade and investment barriers, and government intervention in each target market.
2. Choose the most appropriate entry strategies. Most firms choose exporting as their
initial strategy. But, if high tariffs are present, FDI, joint ventures, or licensing may be
better alternatives.
3. Take advantage of foreign trade zones. Areas where imports receive preferential
tariff treatment. E.g., maquiladoras, assembly plants in northern Mexico that produce
components typically destined for the U.S. Maquiladoras enable firms from the U.S.,
Asia, and Europe to tap low-cost labor, favorable tariffs, and government incentives.
4. Seek favorable customs classifications for exported products. Reduce exposure to
trade barriers by appropriately classifying products according to the harmonized product
code.
5. Take advantage of investment incentives and other government support programs.
Government assistance in the form of subsidies and incentives helps reduce costs.

6. Lobby for freer trade and investment. For example,
● Mid-2000s – the Doha round of WTO negotiations sought to make trade more
equitable for developing countries.
● To increase lobbying effectiveness, foreign firms may hire former government
officials.
● In the long run, firms undertake negotiations with public-sector decision makers




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                                                                                               65
                                     CHAPTER 8
                         Regional Economic Integration
Regional economic integration refers to the growing economic interdependence that
results when countries within a geographic region form an alliance aimed at reducing
barriers to trade and investment.




Economic Bloc: A geographic area that consists of two or more countries that agree to
pursue economic integration by reducing tariffs and other restrictions to cross-border
flow of products, services, capital, and, in more advanced stages, labor.




Types of Regional Integration
1. Free Trade Area: Simplest, most common arrangement. Member countries agree to
gradually eliminate formal trade barriers within the bloc, while each member country
maintains an independent international trade policy with countries outside the bloc. E.g.,
NAFTA.
2. Customs Union: Similar to a free trade area except …




3. Common Market (single market) : Like a customs union, except…




                                                                                       66
4. Economic Union: Like a common market, but…




5. Political Union:




The EU: Features of a Full-Fledged Economic Union
   1. Market access. Tariffs and most nontariff barriers have been eliminated.


   2. Common market. Removed barriers to cross-national movement of production
      factors—labor, capital, and technology.


   3. Trade rules. Eliminated customs procedures and regulations, streamlining
      transportation and logistics within Europe.


   4. Standards harmonization. Harmonizing technical standards, regulations, and
      enforcement procedures on products, services, and commercial activities.


   5. Common fiscal, monetary, taxation, and social welfare policies, in the long
      run.




                                                                                   67
Four Institutions that Govern the EU
Council of the European Union. The main decision-making body. Makes decisions on
economic policy, budgets, and foreign policy, and admission of new member countries.


European Commission. Represents the interests of the EU as a whole. Proposes
legislation. Responsible for implementing decisions of the Parliament and the Council.


European Parliament. Up to 732 representatives. Hold joint sessions each month.
Three main functions:
1. Devise EU legislation,
2. Supervise EU institutions, and
3. Make decisions on the EU budget.


European Court of Justice. Interprets and enforces EU laws and settles legal disputes
between member states.




The European Union Today
● 27 members. Bulgaria, Romania joined in 2004.

● New members – e.g., Poland, Hungary, Czech Republic – are low-cost
manufacturing sites.
     -- Peugeot, Citroën (France) – factories in Czech Rep.
     -- Hyundai (South Korea) – Kia plant in Slovakia.
      -- Suzuki (Japan) – factory in Hungary.

● Most new EU entrants are one-time satellites of the Soviet Union, and have
economic growth rates far higher than the 15 Western European counterparts.
● Developing economies – e.g., Romania, Bulgaria – may take decades of foreign aid
to catch up




                                                                                     68
NAFTA (Canada, Mexico, the United States)




NAFTA Results
● Trade among the members more than tripled; now exceeds $1 trillion per year.
● In the early 1980s, Mexico‘s tariffs averaged 100% and gradually disappeared under
NAFTA.
● Both Canada and Mexico now have some 80% of their trade with, and 60% of their
FDI stocks in the United States.




How the Mexican Economy Benefited from NAFTA
● Mexican exports to the U.S. grew from $50 billion to over $160 billion per year.
● Access to Canada and the U.S. helped launch numerous Mexican firms in industries
such as electronics, automobiles, textiles, medical products, and services.
● Annual U.S. and Canadian investment in Mexico rose from $4 billion in 1993 to
nearly $20 billion by 2006.
● Mexico‘s per capita income rose to about $11,000 in 2007, making Mexico the
wealthiest country in Latin America.




                                                                                     69
El Mercado Comun del Sur (MERCOSUR)
● Launched in 1991.
● Strongest economic bloc in South America
● The four largest members alone (Argentina, Brazil, Paraguay, and Uruguay) account
for about 80% of South America‘s total GDP.
● Established free movement of products and services, common external tariff and
trade policy, coordinated monetary and fiscal policies.
● May be integrated with NAFTA and DR-CAFTA as part of the proposed Free Trade
Area of the Americas (FTAA), bringing free trade to all the western hemisphere.




Others
Caribbean Community and Common Market (CARICOM)

Comunidad Andina de Naciones (CAN)

Association of Southeast Asian Nations (ASEAN)

Asia Pacific Economic Cooperation (APEC)

Australia / New Zealand Closer Economic Relations Agreement (CER)




Why Nations Pursue Economic Integration
1. Expand market size




2. Achieve scale economies and enhanced productivity




                                                                                   70
Why Nations Pursue Economic Integration (cont’d)
3. Attract investment from outside the bloc




4. Acquire stronger defensive and political posture




What Factors Contribute to the Success of Regional Integration?
Economic similarity. The more similar the economies of the members, the more likely
the bloc will succeed (e.g., wage rates, economic stability). E.g., EU.


Political similarity. Similarity in political systems is key. Countries should share similar
aspirations and a willingness to surrender national autonomy. E.g., EU.


Similarity of culture and language. Helpful, but not absolutely necessary. E.g.,
MERCOSUR, Aus/NZ CER.


Geographic proximity. Facilitates transportation of products, labor, and other factors.
Neighboring countries tend to share a common history, culture and language. E.g.,
NAFTA, EU.




                                                                                               71
Consequences of Regional Integration
Regional integration gives rise to both trade creation and trade diversion:

● Trade creation




● Trade diversion




● Aggregate effect




● Loss of National Identity




● Homogenizing Effect




● Sacrifice of Autonomy




● Transfer of Power to Advantaged Firms




                                                                              72
Consequences of Regional Integration (cont’d)
● Failure of small or weak firms.




● Corporate restructuring and job loss.




Implications of Regional Integration for the Firm
Internationalization by firms inside the economic bloc. Internationalization gets easier
after regional integration


Rationalization of operations. Managers develop strategies and value-chain activities
suited to the region as a whole, not individual countries, by restructuring and
consolidating company operations. Goal is to reduce costs and redundancy; increase
efficiencies via scale economies. E.g., firms centralize distribution, instead of
decentralizing it to individual countries.


Mergers and acquisitions. Economic blocs lead to M&A, the tendency of one firm to buy
another, or of two or more firms to merge and form a larger firm.




                                                                                           73
Implications of Regional Integration for the Firm (cont’d)
Regional products and marketing strategy. Standardization of products and services
cuts costs. E.g., Case, a manufacturer of agricultural machinery once made 17 versions
of the Magnum tractor; EU integration allowed Case to greatly reduce this number.




Internationalization by firms from outside the bloc. The best way for a foreign firm to
enter a bloc is via FDI (because external trade barriers mainly affect exporting). E.g.,
with formation of the EU, Britain has become the largest recipient of FDI from the USA.




Increased collaborative ventures. Regional integration makes cross-border cooperation
easier. E.g., Airbus.




Regional Economic Integration: Future Prospects
● In 1990, there were about 50 regional economic integration agreements worldwide.
Today there are some 200, in various stages of development.
● Governments continue to liberalize trade policies, encourage imports, and restructure
regulatory regimes, largely via regional cooperation.
● Many nations belong to several free trade agreements.
● The evidence suggests that regional economic integration is gradually giving way to a
system of worldwide free trade.




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                                                                                      74
                                 CHAPTER 9
                            Understanding Emerging
                                    Markets
Classifying Countries based on Economic Development
Advanced Economies




Developing Economies




Emerging Market Economies




Advanced Economies
● Mature state of industrial development; transitioned from manufacturing economies
into service-based economies
● Home to 14% of the world‘s population, and account for half of world GDP, over half
of world trade in products, and three-quarters of world trade in services
● Very substantial purchasing power
● Political system typically democratic and multiparty
● Economic system typically based on capitalism
● Relatively little government intervention in business
● Few restrictions on international trade and investment
● Home to the world's largest MNEs



                                                                                      75
Developing Economies
● Low discretionary incomes; limited proportion of personal income spent on purchases
other than food, clothing, and housing.
● As a proportion of world population, 17% live on less than $1 per day; 40% live on
less than $2 per day
● Combination of low income and high birth rates tends to perpetuate poverty.
● Sometimes called underdeveloped countries or third-world countries, but these terms
are imprecise
● Hindered by high infant mortality, malnutrition, short life expectancy, illiteracy, and
poor education systems; correlates with vicious cycle of poverty.
● Productivity. Stagnant; living standards deteriorate, particular in countries with high
population growth rates
● Debt. Governments are often severely indebted. Countries in Africa, Latin America,
and South Asia have debt levels close to their annual GDP.
● Bureaucracy. Much of Africa‘s poverty is the result of government policies that
discourage entrepreneurship, trade, and investment.
● Example: starting a new business: In sub-Saharan countries in Africa, involves an
average of 11 different approvals, and takes 62 days to complete. In advanced
economies, takes an average of 6 approvals, and 17 days to complete.




Emerging Market Economies (‘Emerging Markets’)
● Most distinguishing characteristic: countries are enjoying rapidly improving living
standards and a growing middle class with rising economic aspirations. Evolving
towards wealthy nation status.
● Importance in the world economy is increasing as attractive destinations for exports,
FDI, and sourcing.
● Account for over 40% of world GDP, over 30% of exports, and receive over 20% of
FDI.
● In mid-2000s, collectively had average annual GDP growth rate of nearly 7%, much
faster than advanced economies
● Benefit from low-cost labor, knowledge workers, low-cost capital, government
support, and powerful conglomerates




                                                                                            76
The New Global Challengers
● Some 100 companies from Emerging Markets poised to become important 21st-
century MNEs.

● Examples:
     Brazil: Embraer, Sadia & Perdiago, Natura
     Mexico: America Movil, Groupo Modelo
     India: Ranbaxy, Infosys, Tata Tea, WIPRO
     China: Galanz, Haier, Chunlan Group Corp., Lenovo, Pearl River Piano
     Turkey: Koc Holding, Vestel & Sisecam


Transition Economies
● Special category of Emerging Market Economies
● Mainly former Soviet Union countries. E.g., Czech Republic, Hungary, Poland,
Romania, Russia
● Long characterized by excessive regulation and entrenched government bureaucracy
● Undertook large-scale privatization of state-owned enterprises
● Have made great strides in political and economic restructuring
● Introducing legal frameworks to protect business and consumer interests and ensure
intellectual property rights
● Initially, western companies had a hard time recruiting managers who understand
modern management practices

Opportunities for Foreign Firms in China
● Foreign firms can profit from China‘s (i) low-cost labor and (ii) growing affluence
● Many foreign companies set up manufacturing facilities and marketing subsidiaries,
but success is slow.
● Wal-Mart sourced over $30 billion of merchandise from China in 2007, providing
huge cost savings
● Large consumer segment: 250 million ‗middle-class‘ residents
● Success requires deep understanding of the market and long-term commitment:
Coca-Cola, General Motors, McDonald's, Motorola, Airbus, and Volkswagen are leading
examples.
Challenges: Disparate rates of development between coastal areas vs. west China;
poverty; environmental degradation

                                                                                        77
What Makes Emerging Markets Attractive?

1. Emerging Markets as Target Markets
● Growing middle class
● The largest emerging markets have doubled their share of world imports in the last
few years.
● Emerging markets are excellent targets for manufactured products, technology, and
sophisticated technology




2. Emerging markets as manufacturing bases
● Home to low-wage, high-quality labor for manufacturing and assembly operations.
● Large reserves of raw materials and natural resources.




3. Emerging markets as sourcing destinations




                                                                                       78
Market Potential Indicators
Three practical approaches firms employ in assessing market potential of individual
countries are:
● per-capita income
● growth rate of per-capita income
● size of middle-class, and
● a mix of market potential indicators



Purchasing Power Parity Adjustment to per capita GDP
● Compared to per-capita GDP adjusted for current exchange rates, purchasing
power parity adjustment provide a more realistic indicator of purchasing power of
consumers in emerging and developing economies.


● PPP adjusted per-capita GDP more accurately represents the amount of products
that consumers can buy in a given country, using their own currency and consistent with
their own standard of living.



Emerging Market Potential Index (EMPI)
The EMPI combines factors that provide firms with a realistic measure of export market
potential:
● Market Size: the country‘s population, especially urban population
● Market Growth Rate: the country‘s real GDP growth rate
● Market Intensity: private consumption and GNI represent discretionary expenditures
of citizens
● Market Consumption Capacity: The percentage share of income held by the
country‘s middle class
● Commercial Infrastructure: characteristics such as number of mobile phone
subscribers, density of telephone lines, number of PCs, density of paved roads, and
population per retail outlet
● Economic Freedom: the degree of government intervention
● Market Receptivity: the particular country‘s inclination to trade with the exporter‘s
country as estimated by the volume of imports
● Country Risk: the degree of political risk




                                                                                      79
Challenges of Doing Business in Emerging Markets:

Political Stability
● Absence of reliable government authorities increases business costs and risks, and
reduces ability to forecast business conditions.
● Corruption and weak legal frameworks




Weak Intellectual Property Protection
● Even if they exist, laws that safeguard intellectual property rights may not be
enforced, or the judicial process may be painfully slow.




                                                                                    80
Bureaucracy and Lack of Transparency
● Burdensome administrative rules, as well as excessive requirements for licenses,
approvals, and paperwork, delay business activities.
● Lack of transparency implies that legal and political systems are not open and
accountable. Lack of transparency is associated with corruption.




Partner Availability and Qualifications
● Alliances with local partners helps gain access to local markets, supplier and
distributor networks, and key government contacts. May be critical in complex markets.
● But qualified business partners are not readily available.




Dominance of Family Conglomerates
● Large, highly diversified, privately-owned firms that control much economic activity
and jobs in emerging markets. Enjoy government support, extensive networks, access
to capital, market knowledge.




Examples of Partnering with Family Conglomerates
● Ford partnered with Kia to introduce the Sable line of cars in South Korea, leveraging
Kia's strong distribution and after-service network.
● Digital Equipment Corporation (DEC) designated Tatung the main distributor of its
workstations and client-server products in Taiwan, leveraging Tatung's local experience
and distribution network.
● Danone (French producer of Dannon yogurt and Evian bottled water) entered a joint
venture with Sabanci in Turkey, leveraging Sabanci‘s distributors, retailers and
knowledge of the market.

                                                                                      81
Managerial Strategies: Marketing to Governments
● In Emerging Markets, government agencies and state-owned enterprises are
important, well-financed customers
● Governments buy enormous quantities of products (such as computers, furniture,
office supplies, and motor vehicles) and services (such as architectural, legal, and
consulting services).
● State enterprises operate in areas such as railways, airlines, banking, oil, chemicals
and steel, and buy from foreign suppliers.
● E.g., the Three Gorges Dam in China was built by firms such as ABB, Hitachi,
Kvaerner, Siemens, and GE.



Innovative Solutions to Local Economic Development
● MNEs are involved in fostering economic development, via profitable microfinance,
modernization projects, development of distribution channels and other infrastructure
projects, targeting the Bottom of the Pyramid.
● Unilever and P&G sell Sunsilk and Pantene shampoo in India for $0.02 per mini-
sachet.
● Narayana Hrudayalaya sells health insurance for less than $0.20 per person per
month in India.
● Amul, one of India‘s largest processed food companies, sells various food products to
millions of poor people.




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                                                                                        82
                                   CHAPTER 10
                          The International Monetary and
                              Financial Environment


Currencies and Exchange Rates
● There are some 175 currencies in use worldwide.
● Currency regimes are simplifying – many countries in Europe use the euro; several
countries have adopted the dollar.
● Exchange rate: the price of one currency expressed in terms of another.
● Exchange rate fluctuations impact company profitability in various ways



Currency Risk
● Currency risk arises from changes in the price of one currency relative to another,
complicating international transactions.
      ●   Currency exposure
      ●   Asset valuation
      ●   Foreign taxation
      ●   Inflationary and transfer pricing
For example,
● If a supplier‘s currency appreciates, you pay a larger amount of your currency for your
purchase.
● If a foreign buyer‘s currency depreciates, you receive a smaller payment amount in
your currency



Convertible and Nonconvertible Currencies
● Convertible currency can be readily exchanged for other currencies.
● Hard currencies are the most convertible currencies; e.g., U.S. dollar, Japanese
yen, Canadian dollar, British pound, and the European euro. Most transactions use
these currencies and nations prefer to hold them as reserves because of their strength
and stability.

● A nonconvertible currency is not acceptable for international transactions




                                                                                        83
Capital Flight




In 1979-1983, some $90 billion left Mexico when foreign lenders lost confidence in the
Mexican economy and investors withdrew their investments




Foreign Exchange Markets
Foreign exchange: all forms of internationally-traded monies including currency, bank
deposits, checks, and electronic transfers.
Foreign exchange market: the global marketplace for buying and selling national
currencies
Exchange rates fluctuate constantly. E.g., yen-dollar exchange rate:
     ● 1985 - 240 yen to the U.S. dollar.
      ● 1988 - 125 yen to the dollar (nearly 50% appreciation).
Result: Decrease in Japanese exports to U.S.; Increase in U.S. exports to Japan



How Exchange Rates are Determined
In a free market, the ―price‖ of any currency (rate of exchange) is determined by supply
and demand:
● The greater the supply of a currency, the lower its price
● The lower the supply of a currency, the higher its price
● The greater the demand for a currency, the higher its price
● The lower the demand for a currency, the lower its price



Appreciation and Depreciation: Example




                                                                                      84
Factors That Influence the Supply and Demand of a Currency
1. Economic Growth
The increase in value of the goods and services produced by an economy.




2. Interest Rates and Inflation
Inflation: a rise in the prices of goods and services.




3. Market Psychology
Herding: the tendency of investors to mimic each others‘ actions
Momentum trading: investors buy stocks whose prices have been rising and sell
stocks whose prices have been falling- usually done via computers set to do massive
buying/selling when asset prices reach certain levels.




4. Government Action




                                                                                      85
Valuation of Currency Affects Trade Surplus or Deficit
Trade surplus: country‘s exports exceed its imports; may result when currency is
undervalued.

Trade deficit: nation's imports exceed its exports, causing net outflow of foreign
exchange.
Balance of trade: difference between the value of a nation‘s exports and its imports.




The Bretton Woods Agreement
● Signed by 44 countries in 1944
● Pegged value of the dollar to an established value of gold, at $35 per ounce.
● U.S. government agreed to buy and sell gold to maintain the fixed rate.
● All other signatories pegged their currencies to the U.S. dollar, and agreed to
maintain this value via central bank intervention.
● System kept exchange rates stable for 25 years.
● Broke down in early 1970s




The Bretton Woods Legacy
● Instituted the concept of ‗international monetary cooperation‘ among central banks.
● Established the concept of fixing exchange rates to minimize currency risk.
Bretton Woods created the International Monetary Fund (IMF) and the World Bank.
IMF is an international agency that aims to stabilize currencies by monitoring the foreign
exchange systems of member countries, and lending money to developing economies.




                                                                                        86
The Exchange Rate System Today
Most advanced economies (e.g., Europe, Japan, U.S.) use the floating exchange rate
system. The value of a currency ‗floats‘ according to market forces, with little
government intervention.
Many developing economies and emerging markets use the fixed exchange rate
system. The value of a currency is set at a specified rate to the value of another
currency, or basket of currencies. E.g., China, African countries.




Monetary and Financial Systems
International monetary system:




Global financial system:




                                                                                     87
Globalization of Finance
Advantages:
● Reduces cost of capital for firms
● More financing alternatives for firms
● More investment opportunities for people
● More financing options for emerging markets and developing economies


Facilitating trends:
● Monetary and financial deregulation worldwide
● New technologies and the Internet
● Growing role of single-currency systems, e.g., euro




Risks in the Globalization of Finance
Contagion: tendency of a financial or monetary crisis in one country to spread rapidly to
others due to worldwide financial integration. E.g., SE Asia crisis in late 1990s
Capital flows are much more volatile than FDI-type investments
Financial instability is worsened due to underdeveloped regulatory frameworks, and
insufficient monitoring of banking and financial sectors.




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                                                                                      88
                                   CHAPTER 11
                                Global Strategy and
                                   Organization
What Is Strategy?
A plan of action that channels an organization‘s resources so that it can effectively
differentiate itself from competitors, accomplish distinctive goals, and achieve superior
performance.
● Managers develop strategies based on the organization‘s strengths and weaknesses,
and evaluation of opportunities and threats.

● Managers primarily make decisions about the firm‘s production and marketing
activities, and the development and allocation of resources devoted to these.



Strategy Should Pinpoint to Actions
● Formulate a strong international vision
● Allocate scarce resources on a worldwide basis
● Participate in major markets
● Implement global partnerships
● Engage in global competitive moves
● Configure value-adding activities on a global scale



Four Strategic Objectives




                                                                                        89
Multi-Domestic and Global Industries
Multidomestic industries. Firms apply a country-by-country approach to product
development and marketing, as dictated by specific needs, tastes, laws, and economic
situation. Competition is on a country-by-country basis. E.g., food and beverage,
consumer products, clothing and fashion industries.
Global industries. Firms devise products and marketing appropriate for an entire
region or for the world. Competition takes place on a regional or worldwide scale. E.g.,
aerospace, automobiles, telecommunications, computers, chemicals, and industrial
equipment industries.



Global Integration
● A characteristic of global industries in which firms coordinate their value-chain
activities across many countries in order to maximize efficiency, effectiveness,
flexibility, and learning.

● Global integration promotes learning and cross-fertilization, as well as reduction of
wasteful duplication (‗redundancy‘), across the firm‘s operations worldwide.




Pressures for Global Integration
● Economies of Scale.


● Capitalize on converging consumer trends and universal needs.



● Uniform service to global customers.



● Global sourcing of raw materials, components, energy, and labor.



● Global competitors.



● Availability of media that reaches customers in multiple markets.


                                                                                          90
Local Responsiveness
● A characteristic of multidomestic industries in which firms attempt to meet the specific
needs of buyers in individual countries, as well as adapt to the local competitive
environment and distribution structure.
● Although most firms prefer a global integration approach, some degree of local
responsiveness is necessary due to differences in individual markets.
● For example, given distinctive local conditions, Wal-Mart store managers in Mexico
had to adjust store hours, the merchandise mix, marketing approaches, and employee
training.



Pressures for Local Responsiveness
● Diversity of local customer needs.



● Differences in distribution channels.



● Local competition.



● Cultural differences.



● Host government requirements and regulations.




Four Strategies Emerging from the IR Framework
   1.               Home replication strategy
   2.               Multi-domestic strategy
   3.               Global strategy
   4.               Transnational strategy




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Home Replication Strategy
● The firm views international business as separate from, and secondary to, its
domestic business.
● International business typically pursued to generate additional sales for domestic
products
● Products are designed with domestic customers in mind; i.e., not adapted for foreign
markets.
● The firm expects little knowledge flows from foreign operations.
● Usually based on simple exporting




Multi-Domestic Strategy (Multi-Local Strategy)
● Headquarters delegates much autonomy to each country manager, allowing him/her
to operate independently and pursue local responsiveness.
● The managers substantially adapt products and practices to suit local conditions.
● The managers function independently, with little incentive to share knowledge with
managers elsewhere.
● The firm ends up with a collection of disconnected markets, with no coordination or
integration of national markets.



Global Strategy
● Headquarters pursues global integration, seeking to control country operations in
order to minimize duplication, and maximize efficiency, effectiveness, and learning
worldwide.
● Emphasizes centralized coordination and control of R&D, production, marketing, and
after-sales service
● Management views the world as one large marketplace.
● The firm offers standardized products, using standardized marketing
● Main advantages: lower costs; easier to manage




                                                                                        92
Transnational Strategy
● A tug of war – the firm attempts to strike some ideal balance between global and
multidomestic strategies.
● Combines the major advantages of multidomestic and global strategies, while
minimizing their disadvantages.
● Applies the model ‗standardize whenever possible; adapt when necessary‘.



IKEA Applies a Transnational Strategy
● Some 90% of the product line is identical across more than two dozen countries.
IKEA modifies some of its furniture to suit individual countries.

● IKEA‘s marketing is centrally developed at company headquarters, but implemented
with local adjustments (e.g., to suit language differences in catalogs).



Organizational Structure
● The reporting relationships inside the firm – ―the boxes and lines‖ that specify the
linkages among people, functions, and processes that allow the firm to carry out its
operations.
● In larger international firms, organizational structure includes subsidiaries, affiliates,
suppliers, and various other partners.
● A fundamental issue concerns the choice between centralization and decentralization
of decision-making and value-chain activities.




                                                                                           93
Alternative Organizational Arrangements
The export department, with the international division as a variant.
The decentralized structure involves geographic area division
The centralized structure involve either product or functional division
A global matrix structure blends the geographic, product and functional structures
although this is complex and difficult to achieve.




Global Matrix Structure
● An arrangement that blends the geographic area, product, and functional structures
in an attempt to leverage the benefits of a purely global strategy and maximize global
organizational learning, while remaining responsive to local needs.
● It is an attempt to capture the benefits of the geographic area, product, and functional
organization structures simultaneously, while minimizing their shortcomings.
● Closely associated with Transnational Strategy




                                                                                       94
Examples of Visionary Leaders
● Ratan N. Tata, the chairman of the Tata Group, transformed this Indian conglomerate
into a transnational organization. Tata oversees a $22 billion family conglomerate
whose companies market a range of products from automobiles to watches.
● Carlos Ghosn, the CEO of Nissan and Renault, has transformed a Japanese
automotive firm from bankruptcy to profitable operations.
● Toyota CEO Fujio Cho has led his firm to record sales in the intensely competitive
global automobile industry.



Organizational Culture
The pattern of shared values, norms of behavior, systems, policies, and procedures that
employees learn and adopt. The ‗personality‘ of the firm.
Leading MNEs attempt to instill a ‗global culture‘ in the firm‘s operations worldwide, by
emphasizing a ‗borderless mindset‘, developing internationally sophisticated managers,
and emphasizing the firm‘s global performance. E.g., Nestle, Nissan, Schlumberger,
Unilever



Organizational Processes
Managerial routines, mechanisms, and technologies that allow the firm to function as
intended.
Examples
● GE digitizes all key documents and uses intranets and the Internet to automate many
activities and reduce operating costs.
● Schlumberger keeps a huge database of skilled individuals within the firm available to
all subsidiaries on the corporate intranet.




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                                                                                       95
                                  CHAPTER 12
                                 Global Market
                             Opportunity Assessment
Global Market Opportunity
A favorable combination of circumstances, locations, or timing that offer prospects for
exporting, investing, sourcing, or partnering in foreign markets.


Opportunities include:
● Marketing products and services;
● Establishing factories or other production facilities to make offerings more
  competently or cost-effectively;
● Procuring raw materials or components, services of lower cost or superior quality;
● Entering into collaborative arrangements with foreign partners.




The Six Tasks of GMOA




Task 1. Organizational Readiness
Objective: To provide an objective assessment of the firm‘s preparedness to engage in
international business activity.
Outcomes: A list of firm strengths and weaknesses, in the context of international
business, and recommendations for resolving deficiencies that hinder achieving
company goals.
Criteria: Relevant financial and tangible resources; relevant skills and competencies;
senior management commitment and motivation


                                                                                          96
Issues to be Resolved in Organizational Readiness Analysis
● What does the firm hope to gain from international business? E.g., increasing sales
or profits, challenging competitors in their home markets, pursuing a global strategy,
etc.
● Is international business expansion consistent with other company goals, now or in
the future?
● What demands will internationalization place on company resources, such as
management, personnel, finance, production and marketing capacity? How will such
demands be met?



Task 2. Product Suitability
Objective: To conduct a systematic assessment of the suitability of the firm's products
and services for international customers; To evaluate the degree of the fit between the
product or service and customer needs.
Outcomes: Determination of factors that may hinder product or service market potential
in each target market; Identification of needs for the adaptations that may be required to
initial and ongoing market entry.
Criteria: Assess the firm‘s products and services with regard to:
● foreign customer characteristics and requirements
● government mandated regulations
● expectations of channel intermediaries
● characteristics of competitors‘ offerings



Product Suitability




                                                                                       97
Task 3. Country Screening
Objective: To reduce the number of countries that warrant in-depth investigation as
potential target markets to a manageable few.
Outcomes: Identification of 5 to 6 high potential country markets that are most
promising for the firm.
Criteria: market size and growth rate; market intensity (that is, buying power of the
residents in terms of income level); consumption capacity (that is, size and growth rate
of the country‘s middle class); country‘s receptivity to imports; infrastructure appropriate
for doing business; economic freedom; political risk.



Specific Considerations




Criteria Relevant to Country Screening for FDI




                                                                                          98
A.T. Kearney’s Offshore Location Attractiveness Index
Assists managers understand and compare the factors that make countries attractive as
potential locations for offshoring of service activities such as IT, business processes and
call centers. Evaluates countries on 39 criteria categorized into three dimensions:
● Financial structure accounts for cost of labor, infrastructure costs (for electricity and
telecom systems), and tax and regulatory costs.
● People skills and availability accounts for supplier‘s experience and skills, labor
force availability, education and linguistic proficiency, and employee attrition rates.
● Business environment assesses economic and political aspects of the country,
commercial infrastructure, cultural adaptability, and security of intellectual property.




Task 4. Industry Market Potential Analysis
Objective: To estimate the size of relevant industry sales within each target country; To
investigate and evaluate any potential barriers to market entry.
Outcomes: 3 to 5- year forecasts of industry sales for each target market. Delineation
of market entry barriers in industry
Criteria: Market size, growth rate, and trends in the industry; degree of competitive
intensity; tariff and non-tariff trade barriers; standards and regulations; availability and
sophistication of local distribution; unique customer requirements and preferences;
industry-specific market potential indicators.



Industry Market Potential
An estimate of the likely sales that can be expected for all firms in a particular industry
during a specific time period.
● Industry market potential is different from company sales potential, which refers to
the share of industry sales the firm itself expects during a specific period.
● Most companies forecast sales at least three years into the future, of both industry
market potential and company sales potential.




                                                                                           99
Indicators of Industry Market Potential
●   Market size, growth rate, and trends in the specific industry
●   Tariff and non-tariff trade barriers to enter the market
●   Standards and regulations that affect the industry
●   Availability and sophistication of local distribution
●   Unique customer requirements and preferences
●   Industry-specific market potential indicators



Examples of Industry-Specific Indicators
● Marketers of cameras: Examine climate-related factors such as the average number
of sunny days in a typical year.
● Laboratory equipment: Examine government expenditures on health care.
● Cooling equipment: Examine the number of institutional buyers, such as restaurants
and hotels.




Practical Methods for Estimating Industry Market Potential
● Simple Trend Analysis. Aggregate production for the industry as a whole, adding
imports from abroad and deducting exports.
● Monitoring Key Industry-Specific Indicators. Caterpillar, examines announced
construction projects, building permits, growth rate of households, and infrastructure
development.
● Monitoring Key Competitors. If Caterpillar is considering Chile as a potential market,
it investigates the current involvement in Chile of its number-one competitor, the
Japanese firm Komatsu.
● Following Key Customers. Automotive suppliers can anticipate where their services
will be needed next by monitoring the international expansion of their customers such
as Honda or Mercedes Benz.
● Tapping into Supplier Networks. Firms can gain valuable leads from current suppliers
by inquiring with them about competitor activities.
● Attending International Trade Fairs. Industry trade fairs and exhibitions are excellent
venues for obtaining valuable market information.




                                                                                         100
National Trade Data Bank
● Best Market Reports identify the top 10 country markets for specific industry sectors.
● Country Commercial Guides analyze economic and commercial environments of
countries.
● Industry Sector Analysis reports analyze market potential for sectors such as
telecommunications.
● International Market Insight reports cover country and product-specific topics, with
various ideas for approaching markets of interest.




Task 5. Foreign Partner Selection
Objectives: To decide on the type of foreign business partner; clarify ideal partner
qualifications; and plan mode of entry.
Outcomes: Determination of most suitable types of foreign business partners. List of
attributes desired of foreign business partners. Determination of value-adding activities
foreign business partner contribute.
Criteria: manufacturing and marketing expertise in the industry; commitment to the
international venture; access to distribution channels in the market; financial strength;
quality of staff; technical expertise; infrastructure & facilities.



Types of Foreign Business Partners
● Exporters tend to collaborate with foreign market intermediaries, such as
distributors and agents.
● Licensing partners are independent businesses that apply intellectual property to
produce products in their own country.
● Franchising partners are franchisees –independent businesses abroad that acquires
rights and skills from the focal firm to conduct local operations
● International collaborative venture, include joint venture and strategic alliance
partners.
● Others: global sourcing, contract manufacturing, and basic suppliers.




                                                                                      101
Ideal Qualifications of Foreign Distributors




Task 6. Estimate Company Sales Potential
Objective: To estimate the most likely share of industry sales the company can
achieve, over a period of time, for each target market.
Outcomes: 3 to 5-year forecast of company sales in each target market. Understanding
of factors that will influence company sales potential.
Criteria: Capabilities of partners; access to distribution; competitive intensity; pricing
and financing; market penetration timetable of the firm; risk tolerance of senior
managers.



Company Sales Potential
● An estimate of the share of annual industry sales that the firm expects to generate in
a particular target market during a given time period
● Requires obtaining highly refined information from the market.
● Researcher must project the firm‘s revenues and expenses for 3-5 years into the
future; very challenging.




                                                                                      102
Factors That Determine Company Sales Potential
● Partner capabilities. The competencies and resources of foreign partners determine
how quickly the firm can enter and generate sales in the target market.
● Access to distribution channels. The ability to establish and make best use of
channel intermediaries and distribution infrastructure in the target market.
● Intensity of the competitive environment. Local or third-country competitors are likely
to intensify their own marketing efforts when confronted by new entrants.
● Pricing and financing of sales. The degree to which pricing and financing are
attractive to both customers and channel members is critical to initial penetration.
● Human and financial resources. Such resources are a major factor in determining
the proficiency and speed with which success can be achieved.

● Market penetration timetable. Gradual entry gives the firm time to develop and
leverage appropriate resources and strategies, but may cede some advantages to
competitors in getting established in the market. Rapid entry may allow the firm to
surpass competitors and obtain first-mover advantages, but it can tax the firm‘s
resources and capabilities.
● Risk tolerance of senior managers. Management‘s tolerance for risk in the market.
● Special links, contacts, capabilities of the firm. The focal firm‘s network in the market
– its existing relationships with customers, channel members, and suppliers.
● Reputation. The firm can succeed faster in the market if target customers are
already familiar with its brand name and reputation.




                                                                                       103
Practical Approaches to Estimating Company Sales Potential
● Survey of end-users and intermediaries. The firm can survey a sample of customers
and distributors to identify a potential market.

● Trade audits. Managers visit retail outlets and question channel members to assess
relative price levels of competitors‘ offerings and perceptions of competitor strength.
The trade audit can indicate opportunities for new modes of distribution, identify types of
alternative outlets, and provide insights into relative competitive strength.

● Competitor assessment. The firm may benchmark itself against principal
competitor(s) in the market and estimate the level of sales it can potentially attract away
from them. What rival firms will have to be outperformed? Even in those countries
dominated by large firms research may reveal market segments that are underserved or
ignored altogether.

● Obtaining estimates from local partners. Collaborators such as distributors,
franchisees, or licensees already experienced in the market are often best positioned to
develop estimates of market share and sales potential.

● Limited marketing efforts to “test the waters.” Some companies may choose to
engage in a limited entry in the foreign market – a sort of ‗test market‘ – as a way of
gauging long-term sales potential or gaining a better understanding of the market. From
these early results, it is possible to forecast longer-term sales.



The Method of Analogy
● When using the analogy method, the researcher draws on known statistics from one
country to gain insights into the same phenomenon for a similar country.

● If the researcher knows the total consumption of citrus drinks in India then --
assuming that citrus drink consumption patterns do not vary much in the neighboring
Pakistan – a rough estimate of Pakistan‘s consumption can be made, making an
adjustment, of course, for the difference in population.

● If the marketer of antibiotics knows from experience that X number of bottles of
antibiotics are sold in a country with a Y number of physicians per thousand people,
then it can be assumed that the same ratio (of bottles per 1,000 physicians) will apply in
a ‗similar‘ country.



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                                  CHAPTER 13
                           Exporting and Countertrade
An Overview of Foreign Market Entry Strategies
● International transactions that involve the exchange of products: Home based
international trade activities such as global sourcing, exporting, and countertrade.
● Equity or ownership-based international business activities: Include FDI and
equity-based collaborative ventures.
● Contractual relationships: Include licensing and franchising.




1. Exchange of Products
● Global sourcing: Strategy of buying products and services from foreign sources.
Also known as ‗importing‘, ‗global procurement‘, or ‗global purchasing‘.
● Exporting: Strategy of producing products or services in one country (often the
producer‘s home country), and selling and distributing them to customers in another
country.
● Countertrade: Refers to a transaction in which all or part of the payment is received
in the form of products or commodities.




2. Equity or Ownership-Based IB Activities
● Typically involve foreign direct investment (FDI) and equity-based collaborative
ventures.
● In contrast to home-based international operations (e.g., exporting), the firm
establishes a presence in the foreign market by investing capital and securing
ownership of a factory, subsidiary, or other facility there.
● Collaborative ventures include joint ventures in which the firm makes similar equity
investments abroad, but in partnership with another company




                                                                                      105
3. Contractual Relationships
● Usually licensing or franchising
● The firm allows a foreign partner to use its intellectual property in return for royalties
or other compensation.
● Franchising is common in retailing. McDonalds, Dunkin‘ Donuts, Century 21 Real
Estate, and many others have used franchising to internationalize worldwide.




Factors Relevant to Choice of Foreign Market Entry Strategy
● The goals and objectives of the firm, such as desired profitability, market share, or
competitive positioning;
● The firm‘s financial, organizational, and technological resources and capabilities;
 ● Unique conditions in the target country, such as legal, cultural, and economic
circumstances, as well as distribution and transportation systems;
● Risks inherent in each proposed foreign venture;
● The nature and extent of competition from existing and potential rivals;
● The characteristics of the product or service to be offered to customers in the
market (e.g., glass, yogurt, tires, copy machines)




Exporting




                                                                                          106
Services Are Exported As Well
● Examples: architecture, education, banking, insurance, entertainment, information.
● However, many pure services cannot be exported because they cannot be
transported.
● Retailers offer their services by establishing retail stores abroad, that is, via FDI. This
is because retailing requires direct contact with customers.
● Overall, most services are delivered to foreign customers via entry strategies other
than exporting.



Advantages of Exporting




Disadvantages of Exporting




                                                                                         107
A Systematic Approach to Exporting
(1) Assess Global Market Opportunity.




(2) Organize for Exporting.




     Indirect Exporting: Contracting with intermediaries in the firm‘s home country to
     perform export functions, such as an Export Management Company (EMC) or a
     Trading Company. These intermediaries assume responsibility for finding foreign
     buyers, shipping products, and getting paid.


     Direct Exporting: Contracting with intermediaries located in the foreign market
     to perform export functions, such as distributors or agents. They perform
     downstream value-chain activities in the target market.
     Company-Owned Foreign Subsidiary: Handles downstream value-chain
     activities, such as marketing, physical distribution, promotion, and customer
     service activities, directly in the market.
     Preferred method if:
     ● target market is big
     ● target market is complex
     ● firm needs to closely control local operations
     ● firm needs to control its intellectual property




                                                                                     108
(3) Acquire Needed Skills and Competencies




(4) Implement Exporting Strategy




Export Documentation
The official forms and other paperwork that are required to transport exported goods
and clear customs.
● Quotation or pro forma invoice: issued on a request by potential customers to
inform a potential buyer about the price and description of the exporter‘s product or
service.
● Commercial invoice: actual demand for payment issued by the exporter when a sale
is concluded.
● Packing list: indicates the exact contents of a shipment, particularly when there are
many goods.
● Bill of lading: basic contract between exporter and shipper. Authorizes the shipping
company to transport the goods to the buyer‘s destination.
● Shipper's export declaration: lists the contact information of the exporter and the
buyer, full description, declared value, and destination of the products being shipped.
Used by governments to collect statistics.
● Certificate of origin: the "birth certificate" of the goods being shipped, indicating the
country where the product originated.
● Insurance certificate: protects the exported goods against damage, loss, pilferage
(theft) and, in some cases, delay.


                                                                                       109
Incoterms (International Commerce Terms)
● A system of universal, standard terms of sale and delivery.
● Commonly used in international sales contracts and price lists to specify how the
buyer and the seller share the cost of freight and insurance, and at which point the
buyer takes title to the goods.




Methods of Payment
Cash in Advance




Open Account




Letter of Credit




                                                                                       110
Sources of Export-Import Financing

● Commercial banks

● Distribution channel intermediaries


● Buyers


● Suppliers


● Government assistance programs (e.g., Export-Import Bank, Small Business
Administration)




Sources of Information to Identify Potential Intermediaries
● Country and regional business directories such as Kompass (Europe), Bottin
International (worldwide), Japanese Trade Directory, as well as Foreign Yellow Pages.
● Trade associations such as the National Furniture Manufacturers Association or the
National Association of Automotive Parts Manufacturers.
● Government ministries and agencies such as Austrade in Australia, Export
Development Canada, and the U.S. Department of Commerce.
● Commercial attachés in embassies and consulates abroad.
● Branch offices of government agencies located in the exporter‘s country, such as
JETRO, the Japan External Trade Organization.




                                                                                   111
Countertrade




Examples of Countertrade Transactions
● Caterpillar received caskets from Colombian customers and wine from Algerian
customers in return for selling them earthmoving equipment.
● Goodyear traded tires for minerals, textiles, and agricultural products.
● Coca-Cola received tomato paste from Turkey, oranges from Egypt, and beer from
Poland, in exchange for Coke.



Nature of Countertrade
● Accounts for between 10% and 1/3 of all world trade.
● Common in large-scale government procurement.
● Occurs mainly when a developing country cannot obtain sufficient hard currency.
● Enables developing-country firms to generate otherwise unobtainable sales.
● Risky (e.g., may involve inferior goods, hard-to-price goods; leads to price padding;
complex, cumbersome, and time-consuming)



Types of Countertrade
● Barter: Direct exchange of goods without any money.
● Compensation deals: Involve payment both in goods and cash.
● Counterpurchase: Seller sells its product at a set price for cash, but also agrees to
buy goods from the buyer.
● Buy-back agreement: Seller agrees to supply technology or equipment to construct
a facility and receives payment in the form of goods produced by the facility.
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                                CHAPTER 14
                        Foreign Direct Investment and
                           Collaborative Ventures
Foreign direct investment (FDI)




International collaborative venture




Joint venture (JV):




Examples of FDI
● Vodafone, a British firm, which acquired the Czech telecom Oskar Mobil;
● eBay, a U.S. firm, acquired Luxembourg‘s Skype Technologies, a prepackaged
software company;
● Japan Tobacco Inc. acquired the British cigarette maker Gallaher Group PLC for
almost $15 billion;
● Dubai International Capital Group acquired the British theme park operator Tussauds
Group for $1.5 billion;




                                                                                  113
Nature of FDI
● The most advanced, expensive, complex, and riskiest entry strategy, involving the
establishment of manufacturing plants, marketing subsidiaries, or other facilities abroad.
● Undertaken by firms from both the advanced economies and emerging markets.
● Target countries are both advanced economies and emerging markets.
● Occasionally raises patriotic sentiments among citizens (e.g., Haier and Maytag;
Dubai Ports).




Considerations Relevant to Choice of Foreign Market Entry Strategy
● Degree of control that the firm wants to maintain over decisions, operations, and
strategic assets involved in a venture;
● Degree of risk firm is willing to tolerate, and the timeframe in which it expects returns;
● Organizational and financial resources (e.g., capital, managers, technology) firm will
commit to the venture;
● Availability and capabilities of partners in the market;
● Value-adding activities firm wants to perform itself in the market, and what activities
it will leave to partners;
● Long-term strategic importance of the market.




                                                                                        114
115
What companies are most active in FDI?




Service Multinationals
● Firms that offer services – such as lodging, construction, and personal care – must
offer them when and where they are consumed.
● Service firms establish either a permanent presence through FDI (e.g., retailing), or a
temporary relocation of personnel (e.g., construction industry).
● Many support services – such as advertising, insurance, accounting, and package
delivery – are best provided at the customer‘s location.



Leading Destinations for FDI
● Advanced economies in Europe (especially Britain), Japan, and North America, are
popular FDI destinations, mainly as attractive markets
● In recent years, emerging markets and developing economies have gained appeal as
FDI destinations.
Examples:
     ● Firms target China to do low-cost manufacturing and as a huge target market
     ● Firms target Eastern Europe to do low-cost manufacturing, and to easily
        access the huge European Union
     ● Firms target Mexico to do low-cost manufacturing and to easily access the
       United States.




                                                                                     116
Factors to Consider in Selecting FDI Locations
● Market factors (e.g., size and growth rate of the market)
● Human resource factors (e.g., cost, availability, and productivity of labor)
● Infrastructure (e.g., availability of local manufacturing, physical distribution, utilities)
● Profit retention factors (e.g., taxes)
● Economic environment (e.g., cost of land, state of the economy, currency stability)
● Legal and regulatory environment (e.g., FDI regulations, tariffs)
● Political and governmental structure (e.g., political stability, bureaucracy, corruption)



Types of FDI
● Greenfield investment vs. mergers and acquisitions
● The nature of ownership: Wholly owned direct investment vs. equity joint venture
● Level of integration: Vertical vs. horizontal FDI



Greenfield Investment vs. M&As
Greenfield Investment:




Acquisition:




Merger:




                                                                                            117
Nature of Ownership
Equity participation:




Wholly owned direct investment:




Equity joint ventures:




Level of Integration
Vertical integration: The firm owns, or seeks to own, multiple stages of a value chain
for producing, selling, and delivering a product. E.g., Toyota owns some Toyota car
dealerships around the world. Ford once owned steel mills that produced steel used to
make Ford cars.
Horizontal integration: Arrangement whereby the firm owns, or seeks to own, the
activities involved in a single stage of its value chain. E.g., Microsoft acquired a
Montreal-based firm that makes software used to create movie animation.



International Collaborative Venture




                                                                                       118
Other Collaborative Ventures
Consortium: project-based, usually non-equity venture with multiple partners fulfilling a
large-scale project. E.g., commercial aircraft manufacturing (Boeing and Airbus).
Cross-licensing agreement: type of a project-based, non-equity venture where
partners agree to access licensed technology developed by the other, on preferential
terms. E.g., telecommunications industry for inventing new technologies.




Success Factors in Collaborative Ventures
Half of all global collaborative ventures fail within the first 5 years of operations due to
unresolved disagreements, confusion, and frustration. Therefore, partners should:
● Be aware of cultural differences;
● Emphasize communications and building trust;
● Pay attention to planning and management of the venture;
● Protect core competencies.




Retailers: A Special Case of Internationalization
Retailers internationalize substantially through FDI and collaborative ventures. Retailing
takes various forms:
● Department stores (e.g., Marks & Spencer, Macy's);
● Specialty retailers (Body Shop, Gap, Disney Store);
● Supermarkets (Sainsbury, Safeway, Sparr);
● Convenience stores (Circle K, 7-Eleven, Tom Thumb); discount stores (Zellers, Tati,
Target);
● ‗Big box stores‖ (Home Depot, IKEA, Toys "R" Us).
● Wal-Mart has over 100 stores and 50,000 employees in China, sourcing almost all its
merchandise locally and providing thousands of local jobs.




                                                                                          119
Barriers to Retailer Success Abroad
1. Cultural and language barriers.




2. Consumers tend to develop strong loyalty to indigenous retailers.




3. Legal and regulatory barriers.




4. Retailers often must develop local sources of supply.




                                                                       120
Corporate Social Responsibility (CSR)
● Refers to operating a business in a manner that meets or exceeds the ethical, legal,
commercial, and public expectations of stakeholders (customers, shareholders,
employees, and communities).
● Represents a set of core values that includes avoiding human rights abuses;
upholding the right to join or form labor unions; elimination of compulsory and child
labor; avoiding workplace discrimination; protecting the natural environment; and
guarding against corruption, including extortion and bribery.


Relativism vs. Normativism in CSR
● Some believe it is sufficient to simply follow the laws and regulations in each country.
However, many countries have weak legal and regulatory systems, and much
corruption.
● Relativism: A belief that ethical truths are relative to the groups that hold them. Akin
to the advice: ―When in Rome, do as the Romans do.‖ Accordingly, a Japanese MNE
that believes bribery is wrong might pay bribes in countries where the practice is
customary.
● Normativism: A belief in universal behavioral standards that firms and individuals
should uphold. Accordingly, the Japanese MNE that believes bribery is wrong will
enforce this standard everywhere in the world.
● The U.N. and other CSR proponents encourage companies to follow a normative
approach.




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                                  CHAPTER 15
                           Licensing, Franchising and
                           other Contractual Strategies
Foundation Concepts
Cross-border contractual relationships: Entering a formal agreement with a foreign
distributor, joint venture firm or other partner abroad. Often involves granting permission
to use intellectual property to a foreign partner.

Intellectual property: Ideas or works created by firms or individuals, such as patents,
trademarks, and copyrights. Includes such knowledge-based assets of the firm or
individuals as industrial designs, trade secrets, inventions, works of art, literature, and
other ‗creations of the mind‘.



Two Types of Contractual Relationships
Licensing:




Franchising:




Contractual Relationships are Fairly Common
● Pharmaceutical firms engage in cross-licensing practices in which they exchange
scientific knowledge about producing products and distribution rights.
● Service firms in retailing, fast food, car rentals, television programming, and
animation rely on licensing and franchising agreements.
● 7-Eleven is the world's largest chain of convenience stores, with about 26,000 stores
in 18 countries. While the parent firm in Japan owns most of the stores, several
thousand in Canada, Mexico, and the U.S. operate via licensing or franchising
agreements.

                                                                                         122
Unique Aspects of Contractual Relationships
● Governed by a contract that provides the focal firm moderate level of control over the
foreign partner. Control refers to the ability of the focal firm to influence the decisions,
operations, and strategic resources of a foreign venture.

● Typically involve exchange of intangibles (intellectual property) and services.
Examples include technical assistance and know-how.
● Can be pursued independently or in conjunction with other foreign market entry
strategies. Contractual relationships may accompany and support FDI and exporting.




Types of Intellectual Property
● A patent provides an inventor with the right to prevent others from using, selling or
importing an invention for a fixed period – typically, up to 20 years. Can cover any new
product, process, machine, or improvement.

● A trademark is a distinctive design, symbol, logo, word, or series of words placed on
a product label, which identifies a product or service as coming from a common source.
E.g., British Petroleum‘s ‗BP‘ acronym, McDonald's golden arches, Nike‘s swoosh
symbol.
● A copyright protects original works, giving the creator the exclusive right to
reproduce the work, display and perform it publicly, and to authorize others to do these
activities. Can cover works from music, art, literature, films, and software.
● An industrial design refers to the appearance or features of a product. The thin
Apple iPod with the company logo is a well-known example.
● A trade secret is confidential know-how or information that has commercial value.
Trade secrets include information such as production methods, business plans, and
customer lists. For example, the formula to produce Coca-Cola is a trade secret.
● A collective mark is a logo belonging to an association or group whose members
have given firms the right to use the mark to identify the origin of a product or service.
E.g., ILGWU is a collective mark for the members of International Ladies Garment
Workers Union.




                                                                                         123
Intellectual Property Rights




International Licensing is Fairly Common
● Peter Paul Mounds and Almond Joy are owned by the British food firm Cadbury
Schweppes and produced in the U.S. via a licensing agreement with Hershey Inc.
● Planters, Sunkist, and Budweiser are owned by U.S. firms and sold in Britain and
Japan via licensing agreements with local firms.
● Coca-Cola has a licensing agreement to distribute Evian bottled water in the U.S. on
behalf of the brand‘s owner, French company Danone.
● A review of 120 of the largest multinational food companies revealed that at least half
are involved in some form of international product licensing.



Main Advantages and Disadvantages of Licensing
Advantages for licensor
● Low investment
● Low involvement
● Low effort, once license is established
● Low-cost initial entry strategy
Disadvantages for licensor
● Performance depends on the licensee
● Licensor has limited control over its asset(s) abroad
● Risks creating a future competitor.




                                                                                     124
Franchising




The Role of the Franchisor and the Franchisee
Franchisor:
● provides vital assets
● has economies of scale, a wealth of intellectual property, and know-how about its
own industry


Franchisee:
● performs local functions in foreign markets, such as marketing and distribution, that
the franchisor usually cannot perform.
● has entrepreneurial drive, deep knowledge about the local market and how to run a
business there.




Other Contractual Arrangements
Turnkey contracting: arrangement where a firm plans, finances, organizes, manages,
and implements all phases of a project abroad, and hands it over to a foreign country
after training local personnel. Typical firms in the construction, engineering, and
architectural services industries.
Under a management contract, a contractor supplies managerial know-how to operate
a hotel, resort, hospital, airport, or other facility, in exchange for compensation.
With International leasing, the lessor rents out machinery or equipment to clients
abroad, often for several years at a time. E.g., airlines lease aircraft.


                                                                                      125
Safeguarding Intellectual Property
● Contractual arrangements provide only moderate control over foreign partners.
● Laws that govern contractual relations are often insufficient abroad.
Thus, it is critical to:
● Have a strong contract;
● Develop close, trusting relationships with foreign partners;
● Provide foreign partner with superior resources and strong support.




Counterfeiting
● Total value of counterfeit and pirated goods traded internationally exceeds U.S. $600
billion, which is roughly 5% of U.S. GDP.
● Typical knockoffs include clothing, fashion accessories, watches, medicines, and
appliances.
● While companies such as Rolex, Louis Vuitton and Tommy Hilfiger are well-known
victims, counterfeiting is widespread even in industrial products.
● Other examples: pharmaceutical products, medical devices car parts.




                                                                                     126
Guidelines for Protecting Intellectual Property
● Intellectual property laws are weak in many countries.
● Key international treaties include:
      ▪ Paris Convention for the Protection of IP
      ▪ Berne Convention for the Protection of Literary and Artistic Works
      ▪ Rome Convention for the Protection of Performers and Broadcasting
        Organizations
● The WTO created the Agreement on Trade Related Aspects of Intellectual Property
Rights (TRIPS).




It is critical for the firm to:
● Understand local IP laws and enforcement procedures;
● Avoid countries with weak IP laws;
● Register patents, trademarks, copyrights in each country where the firm does
business;
● Ensure that licensing and franchising agreements provide for IP oversight;
● Pursue IP infringers in court;
● Monitor franchisees, intermediaries and partners for asset infringements;
● Train employees to protect assets.




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                                                                                 127
                                   CHAPTER 16
                                  Global Sourcing


Global Sourcing: Shopping the World
● Along with competitors Reebok and Adidas, Nike contracts out nearly all of its athletic
shoe production to foreign suppliers. These firms are best described as brand owners
and marketers, not as manufacturers.
● Apple Computer sources some 70% of its production abroad while focusing its
internal resources on improving its operating system and other software platforms. This
approach allows Apple to use its resources optimally and focus on its core
competences.
● Boeing and Airbus rely extensively on global manufacturing networks, composed
largely of independent suppliers.



Global Sourcing




Drivers of Global Sourcing




                                                                                     128
Decision 1: Outsource or Not?
● Managers must decide between internalization and externalization -- whether each
value-adding activity should be conducted in-house or by an independent supplier.
● Known as the „make or buy‟ decision: ―Should we conduct a particular value-chain
activity ourselves, or should we source it from an outside contractor?‖
● Firms usually internalize those value-chain activities they consider a part of their core
competence, or which involve the use of proprietary knowledge and trade secrets they
want to control.




Business Process Outsourcing (BPO)
● The outsourcing of business functions to independent suppliers such as accounting,
payroll, and human resource functions, IT services, customer service, and technical
support.

● BPO includes:
       ▪ Back-office activities, which includes internal, upstream business functions such
         as payroll and billing, and
       ▪ Front-office activities, which includes downstream, customer-related services
         such as marketing or technical support.




Decision 2: Where Should Value-Adding Activities Be Located?
Configuration of value-adding activity: The pattern or geographic arrangement of
locations where the firm carries out value-chain activities.
● Instead of concentrating value-adding activities in the home country, many firms
configure these activities across the world to save money, reduce delivery time, access
factors of production, and extract maximal advantages relative to competitors.
● This helps explain the migration of traditional industries from Europe, Japan, and the
U.S. to emerging markets in Asia, Latin America, and Eastern Europe.




                                                                                       129
An Example of Worldwide Configuration of Value Chain
● The German automaker BMW employs 70,000 factory personnel at 23 sites in 13
countries to manufacture its vehicles.
● Workers at the Munich plant build the BMW 3 Series and supply engines and body
components to other BMW factories abroad.
● In the United States, BMW has a plant in South Carolina, which makes over 500
vehicles daily for the world market.
● In NE China, BMW makes cars in a joint venture with Brilliance China Automotive
Holdings Ltd.
● In India, BMW has a manufacturing presence to serve the needs of the rapidly
growing South Asia market.
● BMW must configure sourcing at the best locations worldwide, in order to minimize
costs (e.g., by producing in China), access skilled personnel (by producing in Germany),
remain close to key markets (by producing in China, India and the United States).




Contract Manufacturing: Global Sourcing from Independent Suppliers
An arrangement in which the focal firm contracts with an independent
supplier to manufacture products according to well-defined specifications.
Nike is a leading example.
● Examples
      ▪ Patheon, a leading contract manufacturers in the pharmaceutical
      industry, provides drug development and manufacturing for pharmaceutical and
      biotechnology firms worldwide. Patheon operates 11 factories in North America
      and Europe, producing over-the-counter drugs and several of the world's top-
      selling prescription drugs for most of the world's largest pharmaceutical firms.
      ▪ Benetton employs contract manufacturers to produce clothing.
      ▪ IKEA uses contract manufacturers to produce furniture.




                                                                                    130
Magnitude of Global Sourcing
● In 2005, India alone booked $22 billion worth of business in answering customer
phone calls, managing computer networks, processing invoices, and writing custom
software for MNEs from around the world.
● Global sourcing has created more than 1.3 million jobs during the past decade for
India.
● Meanwhile, between 2000 and 2004, some 100,000 service jobs were outsourced
each year from the United States to other countries.
● In 2006, IT and business-process outsourcing exceeded $150 billion worldwide.




                                                                                      131
Benefits of Global Sourcing




Challenges of Global Sourcing




                                132
Global Supply Chain Management




Features of Global Supply Chain Management
● Costs associated with physically delivering a product to an export market may
account for as much as 40% of total cost.
● Experienced firms use information and communications technologies (ICTs) to
streamline operations, reducing costs and increasing distribution efficiency.
● Logistics involves physically moving goods through the supply chain. Incorporates
information, transportation, inventory, warehousing, materials handling and similar
activities associated with the delivery of raw materials, parts, components, and finished
products.




Transportation Modes
● International logistics typically involves multiple transportation modes.
● Land transportation is handled via highways and railroads
● Ocean transportation is handled via large container ships.
● Air transportation involves commercial or cargo aircraft.
● Ocean and air transport are common in international business because of long
shipping distances. Ocean transport is the most common and cheapest transportation
mode.
● Ocean transport was revolutionized by the development of 20- and 40-foot shipping
containers.



                                                                                      133
Risks in Global Sourcing
1. Less-than-expected cost savings.




2. Environmental factors.




3. Weak legal environment.




4. Risk of creating competitors.




5. Inadequate or low-skilled workers.




6. Erosion of morale and commitment among home-country employees.




                                                                    134
Strategies for Minimizing Risk in Global Sourcing
1. Go offshore for the right reasons. The best rationale is strategic, such as enhancing
the quality of offerings, improving productivity, and freeing up core resources.
2. Get employees on board. Poorly planned sourcing projects creates unnecessary
tension with existing employees.
3. Choose carefully between a captive operation and a contract with outside specialists.
Strike the right balance between what to make, and what to buy.
4. Choose countries and suppliers carefully. There are many options to choose from; A
sourcing broker can help.
5. Invest in supplier development and collaboration
6. Proactively safeguard interests, such as key assets and the firm‘s reputation




Potential Harm and Ethical Issues
Global sourcing can lead to three major problems in the home country:
● Job losses


● Reduced national competitiveness


● Declining living standards


MNEs may be ineffective or indifferent about:
● protecting the environment


● promoting human rights


● labor practices and working conditions abroad




                                                                                      135
Public Policy Towards Global Sourcing
● It is impractical to adopt a unilateral policy against global sourcing.


● Rather, it is usually better to mitigate the harm that global sourcing can cause.


● Offshoring is a process of ‗creative destruction‘. It creates new advantages and
opportunities, while eliminating certain types of jobs and adversely impacting particular
economic sectors and segments of the economy.




Helpful Public Policy Initiatives
Guiding employment towards higher value-added jobs (e.g., by stimulating innovation)
● Keep the cost of doing business low (e.g., via appropriate economic and fiscal
policies, encouraging innovation, keeping cost of capital low)
● Ensure a strong educational system, including technical schools and well-funded
universities that supply engineers, scientists, and knowledge workers.
● Maximize worker flexibility to help those who lose jobs find other positions.




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                                                                                      136
                           CHAPTER 17
                    Marketing in the Global Firm




Global Marketing Strategy




                                                   137
Global Market Segments
Global market segment:




Global positioning strategy:




Standardization and Adaptation
● Adaptation: company efforts to modify elements of the international marketing
program to accommodate specific customer requirements in a particular market. E.g.,
publishing and software industries.
● Standardization: company efforts to make the marketing program elements uniform,
with a view to targeting entire regions of countries, or even the global marketplace, with
a similar product or service. However, ―one offering – one world‖ strategy is not usually
feasible.
● Management tries to strike some ideal balance between global integration and local
responsiveness




Advantages of Standardization
● Cost reduction.
● Improved planning and control.
● Ability to portray a consistent image and build global brands.




                                                                                      138
Advantages of Adaptation
● Meet needs of customers more precisely
● Enjoy unique appeal
● Comply with government regulations
● Achieve greater success in combating customer resistance




Firms Prefer Standardization
● Adaptation is costly. May require substantial changes to products, manufacturing
operations, (lower) pricing, distribution, and marketing communications.
● Costs add up across many national markets.
● Thus, managers usually err on the side of standardization, adapting marketing
program elements only when necessary.
● Or, firms pursue a regional strategy, where marketing program elements are
formulated to exploit commonalities across a geographic region, instead of across the
world.




Global Branding
● Well-known global brands include: Hollywood movies (e.g., Star Wars), pop stars
(Shakira), sports stars (David Beckham), personal care products (Gillette Sensor), toys
(Barbie), credit cards (Visa), food (Cadbury), beverages (Heineken), furniture (IKEA),
and electronics (Playstation).
● A strong global brand enhances the efficiency and effectiveness of marketing
programs, facilitates the ability to charge premium prices, increases the firm‘s leverage
with resellers, stimulates brand loyalty, and inspires trust and confidence in the product.




                                                                                       139
Designing Global Products with Global Teams
● Until 1990s, product development and design was a sequential process, usually
based in a single country.
● Today, many more firms develop global products intended for world markets from the
outset.
● Product designers work in virtual global teams, experts drawn from subsidiaries
across the globe.
● Leveraging information and communications technologies to create virtual teams is
key.
● For example, Boeing 777 was developed by design teams from Europe, Japan, and
the United States.




                                                                                    140
Factors Affecting International Pricing
● Nature of the product or industry.




● Location of the production facility.




● Type of distribution system.




● Foreign market considerations.




                                          141
Three Pricing Strategies
● Rigid cost-plus pricing. Set a fixed price for all export markets, by adding a flat
percentage to the domestic price to compensate for the added costs of doing business
abroad.
● Flexible cost-plus pricing. Set price to accommodate local market and competitive
conditions, such as customer purchasing power, demand, and competitor prices.
● Incremental pricing. Set price to cover only variable costs, not its fixed costs. Firm
assumes that fixed costs are already paid from sales in the firm‘s home country, or
other countries.




                                                                                    142
Strategies to Combat International Price Escalation
1. The exporter can shorten the distribution channel



2. The product can be redesigned


3. The firm can ship its products unassembled



4. Some firms attempt to have the product re-classified using a different tariff
classification



5. Move production or sourcing to another country




                                                                                   143
Transfer Pricing
The pricing of intermediate or finished products exchanged among the subsidiaries and
affiliates of the same corporate family located in different countries.
● May be used to repatriate profits from countries that restrict MNEs from taking their
earnings out of the country.
● May be used to shift profits out of a high corporate tax county into a low corporate tax
one, thereby increasing company-wide profits.




The Favored Subsidiary is Likely to be in a Country with:
●   Lower corporate income-tax rates
●   High tariffs for the product in question
●   Favorable accounting rules for calculating income
●   Political stability
●   Little or no restrictions on profit repatriation
●   Strategic importance to the MNE




Gray Marketing
Legal importation of genuine products into a country by other than authorized
intermediaries.
● Gray marketers buy the product at a low price in one country, import it into another
country, and sell it there at a higher price. Causes:
● Large difference in pricing of same product between two countries, often the result of
company strategy.
● Exchange rate differences of products priced in two different currencies.



Manufacturer Concerns over Gray Markets
● Risk of tarnished image when customers realize the product is available at a lower
price through alternative channels.
● Strained manufacturer-distributor relations as authorized distributors lose sales.
● May disrupt regional sales forecasting, pricing strategies, merchandising plans, and
other marketing efforts.


                                                                                       144
Strategies to Cope with Gray Markets
1. Standardize pricing across the firm‘s markets within the same region.
2. Pursue illicit intermediaries; Fire intermediaries who break the rules.
3. Reduce flow of products into markets where gray market brokers procure the product.
E.g., Pfizer could reduce the shipment of drugs to Canada.
4. Differentiate products in individual countries. Design products with exclusive features
in each market.
5. Publicize the limitations of products obtained from gray market channels.



Global Account Management
Servicing a key global customer in a consistent and standardized manner, regardless of
where in the world it operates.
● Wal-Mart is a key global account for P&G. Wal-Mart expects consistent service
including uniform prices for the same product from P&G regardless of where in the
world they are delivered.
● Emphasizes the use of cross-functional teams, specialized coordination activities for
specific accounts, and formalized structures and processes.
● Each customer is assigned a global account manager, or team, which provides a
coordinated marketing support and service worldwide.




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                                                                                       145
                               CHAPTER 18
                        Human Resource Management
                            in the Global Firm
Challenges of International Human Resource Management
● Recruiting, managing, and retaining human resources at a firm with extensive global
operations are especially challenging.
● For example, in 2005, German firm Siemens had 460,800 employees in some 190
countries: 290,500 throughout Europe, 100,600 in the Americas, 58,000 in the Asia-
Pacific region, and 11,900 in Africa, the Middle East, and Russia.
● Each of Volkswagen, Nestle, IBM, Unilever, Wal-Mart, McDonald‘s, and Matsushita
has more than 150,000 employees outside the home country.



International Human Resource Management




Three Employee Categories at an MNE
Host-country nationals (HCNs):




Parent-country nationals (PCNs):




Third-country nationals (TCNs) --


                                                                                  146
Differences between Domestic and International IHRM
1. New HR responsibilities.




2. The need for a broader, international perspective in compensation policy.




3. Greater involvement in the employees’ personal lives.




4. Managing the mix of expatriates versus locals.




                                                                               147
Differences between Domestic and International IHRM (cont’d)
5. Greater risk exposure.




6. External influences of the government and national culture.




Key Tasks of IHRM
1. Staffing




2. Training and developing




3. Performance appraisal




4. Compensation or remuneration




5. Management of labor unions and collective bargaining




6. Achieving diversity



                                                                 148
Searching for Talent
● Recruitment: searching for and locating potential job candidates to fill the firm‘s
needs.
● Selection: gathering information to evaluate and decide who to employ in particular
jobs.
● Managers must proactively identify potential candidates and groom them to become
corporate leaders, train personnel to meet evolving business needs, and ensure the
talent supply keeps pace with the growth of the firm.



Employee Characteristics That Facilitate International Effectiveness
● Technical Competence. Must have adequate managerial and technical capabilities.
● Self-Reliance. Entrepreneurial, proactive mindset; expatriate managers function with
considerable independence, and limited support from headquarters.
● Adaptability. Ability to adjust to foreign cultures, cultural empathy, flexibility,
diplomacy, and a positive attitude.
● Interpersonal Skills. Ability to build relationships is key.
● Leadership Ability. Must view change positively, and proactively manage threats
and opportunities.
● Physical and Emotional Health. Life abroad is stressful.
● Spouse / Dependents Prepared for Living Abroad



Expatriate
● An employee who goes to work abroad for an extended period, usually years
● Repatriation: return of the expatriate to the home country. Requires advance
preparation. Unless managed well, returning expatriate may encounter problems, such
as career disruptions and ‗reverse culture shock‘.
● Expatriate failure: the premature return of an expatriate, due to an inability to
perform well abroad. Costly to the firm (lost productivity and relocation costs) and to
expatriates themselves (family stress and career disruption).




                                                                                          149
Culture Shock
● The confusion and anxiety, often akin to mental depression, that can result from living
in a foreign culture for an extended period. Often affects family members most.
● A leading cause of expatriate failure.
● Especially a factor for those assigned to culturally dissimilar countries, such as
China, Yemen.
● Can be reduced via advance preparation, training, language skills, deep interest in
the new country.
● Regular exercise, relaxation techniques, or keeping a detailed journal of experiences
are helpful.




                                                                                       150
Three Components of Training Personnel for International
Assignments.
1. Area studies:




2. Practical information:




3. Cross-cultural awareness:




Training
● In order of increasing rigor, training methods include: videos, lectures, assigned
readings, case studies, books, Web-based instruction, critical incident analyses,
simulations, role-playing, language training, field experience, and long-term immersion.
● Role-playing and simulations involve the employee acting out typical encounters with
foreigners.
● Long-term immersion places the employee in the country for several months or more,
often for language and cultural training.




                                                                                     151
Cultivating a Global Mindset
● Ethnocentric views are common in some MNEs where headquarters staff often
believe their ways of doing business are superior and can be transferred to other
countries.
● The more progressive MNEs today subscribe to a geocentric orientation, staffing
HQ and subsidiaries with the most competent personnel, regardless of nationality.
● A geocentric orientation is synonymous with a global mindset where the employee is
able to understand a business/market or country boundaries. It is characterized by an
openness to, and articulation of, multiple cultural and strategic realities on both global
and local levels.
● Senior managers need to commit to hiring, developing, nurturing, and recognizing
employees who possess a global mindset and offer global leadership potential.


Performance Appraisal
● Performance appraisal:




● Helps identify problem areas where an employee needs to improve and additional
training is warranted.
● Determines compensation and company performance.
● MNEs devise procedures to assess the performance of individual employees;
ascertain if any problems are attributable to inadequate skill levels; provide additional
training and resources; and terminate employees who consistently fail to achieve goals.
● Often very challenging in international business.




Compensation of Personnel
● Compensation varies internationally due to differences in legally mandated benefits,
tax laws, cost of living, local tradition, and culture.
● Employees posted abroad expect to be compensated at a level that allows them to
maintain their usual standard of living, which can make compensating expatriates very
costly.
● Includes base remuneration, benefits (e.g., health care plans), allowance (e.g., for
housing, children‘s education, travel), incentives



                                                                                      152
Labor Unions and Collective Bargaining
● Management and workers determine the job relationships that will be in effect at the
workplace.
● Collective bargaining involves negotiations between management and workers
regarding wages and working conditions.
● Labor regulations vary substantially, with minimum regulations in Africa and India to
very detailed regulations in Northern Europe.
● Union membership has declined in most countries, but remains high in several
European countries.
● Strikes can disrupt international operations.




Trends in International Labor
● Mobility of labor across national borders has increased substantially. Reasons:
      ▪ Growing interconnectedness of national economies;
      ▪ Rapid expansion of multinational firms;
      ▪ Rise of international collaborative ventures; and
      ▪ Greater emphasis on global teams.
● Many countries are coping with an influx of immigrants, both legal and illegal, who
compete with established workers by providing low-cost labor. Trend is significant in
Europe, Persian Gulf countries, and the United States (but not in Japan).



                                                                                        153
Women in International Business
● Women currently occupy relatively few top management positions (in Europe, women
occupy only 15% of senior executive posts)
● Reasons for scarcity of women in international jobs:
      ▪ Senior managers often assume women do not make suitable leaders abroad
        (e.g., due to cultural challenges)
      ▪ Some female managers prefer to remain in the home country, to fulfill family
        obligations or avoid disrupting partner‘s career.
      ▪ Most companies do not accommodate child-rearing or other family
        responsibilities.
      ▪ There are fewer women with sufficient experience to be sent abroad for senior
        jobs.


Recent Positive Trends
● Many more women are obtaining university degrees in business.
● Female graduates account for some 50% of recruits joining European firms
● Businesswomen increasingly form their own networks, such as Women Directors on
Boards in the United Kingdom, and The Alliance of Business Women International in the
United States (www.abwi.org).
● Overall trend is positive (except in strongly Islamic countries)



Success Strategies for Women in IB
● In many countries, being a foreign woman can be an advantage. Women stand out
more, and competent women earn respect. Smart women leverage their gender to their
advantage.
● Women overcome biases abroad by acquiring managerial, language, and
international skills.
● Over time, managerial competence wins out over bias.
● Gaining substantial experience as a domestic manager or in short international
assignments can greatly improve prospects for working abroad.
● Once abroad, women report the reaction of surprise is often replaced by
professionalism and respect.



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                                                                                       154
                          CHAPTER 19
                    Financial Management and
                   Accounting in the Global Firm
International Financial Management




International Financial Management Tasks




                                                   155
Task One: Decide on the Capital Structure
● Capital structure: the mix of long-term equity financing and debt financing firms use
to support their international activities.
● Firm obtains equity financing by selling shares of stock to investors or by retaining
earnings.
● Shares of stock provide an investor with an ownership interest, that is, equity, in the
firm.
● Debt financing comes from either loans from banks and other financial
intermediaries or money raised from the sale of corporate bonds.




Task Two: Raising Funds
● Global money market: financial markets where firms and governments raise short-
term financing.
● Global capital market: financial markets where firms and governments raise
intermediate-term and long-term financing.
● Most funding is longer term. The global capital market is the meeting point of those
who want to invest money and those who want to raise funds.
● Main advantage of the global capital market: ability to access funds from a wider
range of sources at lower cost




The Global Capital Market is Huge and Growing (as of 2006)
● International issues of equity in world securities markets were about $380 billion, up
from $83b in 1996 and just $14b in 1986.
● Stock of cross-national bank loans and deposits was $18,916b, up from $7,205b ten
years earlier.
● There were $17,574b in outstanding international bonds and notes, up from $3,081b
in 1996.
● This is the ‗globalization of finance‟.
● Main facilitating factors: Deregulation of global finance; advanced ICTs; globalization
of business



                                                                                       156
Sources of Funding: 1. Equity Financing
● The firm obtains capital by selling shares of stock. In exchange, the shareholders
obtain a percentage of ownership in the firm and, often, a stream of dividends.
● Global equity market: the worldwide market for equity financing -- stock exchanges
worldwide where investors and firms meet to buy and sell shares of stock.




Sources of Funding: 2. Debt Financing
● In debt financing, a firm borrows money from a creditor in exchange for repayment of
principal and an agreed upon interest amount in the future.

● Debt financing is obtained from loans and bonds.
● International Loans. The firm may borrow money from banks in its home market or
abroad.
● Eurocurrency Market is money deposited in banks outside its country of origin,
mainly U.S. dollars, ―eurodollars‖. Other eurocurrencies include euros, yen, and
pounds, banked outside the home country




Bonds: A Major Source of Debt Financing
● A bond enables the issuer (borrower) to raise capital by promising to repay the
principal along with interest at a specified date.
● Global bond market is the international marketplace where bonds are bought and
sold, primarily via banks and stockbrokers.
 ● Foreign bonds are sold outside the bond issuer‘s country and denominated in the
currency of the country in which they are issued.
● Eurobonds are sold outside the bond issuer‘s home country and denominated in its
own currency (e.g., when Toyota sells yen-denominated bonds in Europe)




                                                                                       157
Sources of Funding: 3. Intra-Corporate Financing
● Intra-corporate financing refers to funds provided from sources inside the firm in
the form of equity, loans, and trade credits. Trade credit arises when a supplier of
goods and services grants the customer the option to pay later.
● Advantages: Often the lowest-cost capital; minimizes the transactions costs typical of
obtaining funds from other sources; has little effect on the parent firm‘s balance sheet;
avoids risk of debt financing; avoids ownership-diluting effects of equity financing.




Task Three: Working Capital and Cash Flow Management
● Working capital: the current assets of the firm.
● Working capital management aims to ensure cash is available where and when it is
needed.
● Cash flow needs arise from everyday business activities, such as paying for labor or
materials.
● Cash is generated from various sources and must be transferred from one part of the
MNE to another.
● International financial managers devise various strategies for transferring funds within
the firm‘s worldwide operations, to optimize global operations.




Methods for Transferring Funds within the MNE
● Through trade credit, a subsidiary defers payment for goods and services received
from the parent.
● Royalty payments: remuneration paid to the owners of intellectual property, as
parents often ‗license‘ the use of assets to subsidiaries.
● Fronting loan: a loan between the parent and its subsidiary, channeled through a
bank. The parent deposits a sum in a foreign bank, which then transfers the funds to the
subsidiary as a loan.
● Transfer pricing: the prices that subsidiaries and affiliates charge one another for
transferred goods and services within the same MNE.




                                                                                      158
Multilateral Netting
● Strategic reduction of cash transfers within the MNE family via elimination of
offsetting cash flows.
● Involves three or more subsidiaries that hold accounts payable or accounts
receivable with each other. MNEs with many subsidiaries may establish a netting
center.
● The center advises each subsidiary of the amounts to pay and receive from other
subsidiaries on a specified date.
● Firms like Philips saves millions each year in transaction costs due to multilateral
netting.



Task Four: Capital Budgeting
● Helps managers decide which international expansion projects are economically
desirable.
● The decision to accept or reject an investment project depends on the project‘s initial
investment requirement, its cost of capital, and the benefits the project is expected to
provide.
● Involves net present value analysis.
● Can be very complex, because there are many variables to consider.
● Facilitated by spreadsheet analysis




Task Five: Currency Risk Management
● Currency risk: the peril resulting from adverse unexpected fluctuations in exchange
rates.
● Exporters and licensors face currency risk because foreign buyers pay in their own
currencies.
● Foreign direct investors face currency risk because they receive both payments and
incur obligations in foreign currencies.
● Managers of foreign investment portfolios face currency risk as the value of stocks
fluctuate.




                                                                                         159
Three Types of Currency Risk
Transaction exposure. Arises when outstanding accounts receivable or payable are
denominated in foreign currencies.
Translation exposure. Results financial statements denominated in a foreign currency
are translated into the functional currency of the parent, as part of consolidating
international financial results.
Economic exposure. Results from exchange rate fluctuations affecting the pricing of
products, the cost of inputs, and the value of foreign investments.




Foreign Exchange Trading
● A small number of currencies facilitate international trade and investment. Some 2/3
of foreign reserves are in U.S. dollars, 25% in euros, 7% in yen and British pounds, and
only 2% in the world‘s 150 other currencies.
● Volume of currencies exchanged is huge. As of 2007, some $3 trillion worth of
currency was traded everyday, 10 times the value of daily stock and bond turnover, and
100 times the value of daily merchandise trade. One-third of all currency trading, about
$1 trillion per day, takes place in London.




Specialized Terminology for Currency Trading
● Spot rate: the exchange rate applicable to the trading of foreign currencies in which
the current rate of exchange is used and delivery is considered ‗immediate.‘

● Forward rate: the exchange rate applicable to the collection or delivery of foreign
currencies at some future date, but a rate specified at the time of the transaction.




                                                                                        160
Exchange Rate Forecasting and Hedging
● Firms attempt to forecast exchange rate fluctuations.
● Firms attempt to proactively manage exchange rate exposure via hedging.
● Forecasts are available from banks and business news sources.
● Online sources include the Bank for International Settlements (www.bis.org), the
World Bank (www.worldbank.org), and the European Central Bank (www.ecb.int).




                                                                                     161
Task Six: Manage the Diversity of International Accounting and Tax
Practices
● The firm‘s accounting systems must identify, measure, and communicate financial
information, often in complex multi-country operations, with much variation in national
accounting systems.
● For example, there are dozens of approaches for determining R&D expenditures,
cost of goods sold, asset valuation, net profits, etc.
● Financial statements prepared according to the rules of one country may be difficult
to compare with those prepared in another country.


Transparency in Financial Reporting
● Transparency is the degree to which firms regularly and comprehensively reveal
substantial information about their financial condition and accounting practices.
● In order to increase transparency in the United States, the federal government
passed the Sarbanes-Oxley Act in 2002, making CEOs and CFOs personally
responsible for the accuracy of annual reports and other financial data.
● In general, accounting standards are becoming more standardized worldwide.




Consolidating Financial Statements of Subsidiaries
● Involves ―translating‖ data denominated in foreign currencies into the firm‘s functional
currency on headquarters financial statements.
● Current rate method: all foreign currency balance-sheet and income statement
items are translated at the current exchange rate -- the spot exchange rate in effect on
the day the statements are prepared.
● Temporal method: the choice of exchange rate depends on the underlying method
of valuation. If assets and liabilities are normally valued at historical cost, then they are
translated at the historical rates. If assets and liabilities are normally valued at market
cost, they are translated at the current rate of exchange.




                                                                                          162
International Taxation
● A direct tax is imposed on income derived from the firm‘s business activities.
● An indirect tax applies to firms that license or franchise products and services, or
who charge interest. In effect, the local government withholds some percentage of
payments as tax.
● A sales tax is a flat percentage tax on the value of goods or services sold, and paid
by the ultimate user.
● A value-added tax (VAT) is payable at each stage of processing in the value chain
of a product or service. It is common in Canada, Europe, and Latin America.



Tax Havens
● A country hospitable to business and inward investment because of its low corporate
income tax.

● Examples: Bahamas, Luxembourg, Monaco, Singapore, Switzerland
● They exist partly because MNEs want to structure their global activities in ways that
minimize taxes.
● MNEs take advantage of tax havens either by establishing operations in them or by
funneling business transactions through them.




                                                                                         163

				
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