INTERNATIONAL BUSINESS (IB)

KEYUR D VASAVA..

Module 1

1. GLOBALIZATION AND INTERNATIONAL BUSINESS

Definition of Globalization

The broadening set of interdependent relationships among people from different

parts of a world that happens to be divided into nations

Definition of International Business

All commercial transactions—including sales, investments, and transportation—

that take place between two or more countries

Factors in Increased Globalization

• Increase in and expansion of technology

• Liberalization of cross-border trade and resource movements

• Development of services that support international business

• Growing consumer pressures

• Increased global competition

 • Changing political situations

• Expanded cross-national cooperation

The Criticisms of Globalization

• Threats to national sovereignty

• Growth and environmental stress

• Growing income inequality

Reasons That Firms Engage in International Business

• Expanding sales

• Acquiring resources

• Minimizing risk

WHAT IS THE NATURE OF INTERNATIONAL BUSINESS?

 Globalization creates international business opportunities.

 International business is done by global sourcing, import/export, licensing, and

franchising.

 International business is done by joint ventures and wholly owned subsidiaries.

 International business is complicated by different legal and political systems.

Global Economy

 Resources, markets and competition are worldwide in scope.

Globalization

 The process of growing interdependence among elements of the global

economy.

Global Sourcing

 Firms purchase products and services from around the world for local
use.

International Business

 Conducting commercial transactions across national boundaries

Five Reasons to Pursue International Business

1. Expanded profit potential

2. More customers

3. More capital

4. Lower cost suppliers

5. Lower costs of labor

Exporting
 Local products are sold abroad

Importing
 The process of acquiring products abroad and selling them in domestic
markets.

Licensing
 one firm pays a fee for rights to make or sell another company’s products.

Franchising
 a firm pays a fee for rights to use another company’s name and operating
methods.

Joint Venture

 A firm operates in a foreign country through co-ownership with local

parties.

Strategic Alliance

 Each partner hopes to achieve through cooperation things they couldn’t

do alone.
Foreign Subsidiary

 A local operation completely owned by a foreign firm.

FOREIGN MARKET ENTRY MODES

The decision of how to enter a foreign market can have a significant impact on the
results. Expansion into foreign markets can be achieved via the following four
mechanisms:

• Exporting
• Licensing
• Joint Venture
• Direct Investment

Exporting

Exporting is the marketing and direct sale of domestically-produced goods in another

country. Exporting is a traditional and well-established method of reaching foreign
markets. Since exporting does not require that the goods be produced in the target
country, no investment in foreign production facilities is required. Most of the costs
associated with exporting take the form of marketing expenses.

Exporting commonly requires coordination among four players:

• Exporter
• Importer
• Transport provider
• Government

Licensing

Licensing essentially permits a company in the target country to use the property of the
licensor. Such property usually is intangible, such as trademarks, patents, and
production techniques. The licensee pays a fee in exchange for the rights to use the
intangible property and possibly for technical assistance.

Because little investment on the part of the licensor is required, licensing has the
potential to provide a very large ROI. However, because the licensee produces and
markets the product, potential returns from manufacturing and marketing activities may
be lost.
Joint Venture

There are five common objectives in a joint venture: market entry, risk/reward sharing,
technology sharing and joint product development, and conforming to government
regulations. Other benefits include political connections and distribution channel
access that may depend on relationships.

Such alliances often are favorable when:

• the partners' strategic goals converge while their competitive goals diverge;
• the partners' size, market power, and resources are small compared to the
industry leaders; and
• Partners' are able to learn from one another while limiting access to their own
proprietary skills.

The key issues to consider in a joint venture are ownership, control, length of
agreement, pricing, technology transfer, local firm capabilities and resources, and
government intentions.

Potential problems include:

• conflict over asymmetric new investments

• mistrust over proprietary knowledge
• performance ambiguity - how to split the pie
• lack of parent firm support
• cultural clashes
• if, how, and when to terminate the relationship

Joint ventures have conflicting pressures to cooperate and compete:

• Strategic imperative: the partners want to maximize the advantage gained for
the joint venture, but they also want to maximize their own competitive position.
• The joint venture attempts to develop shared resources, but each firm wants to
develop and protect its own proprietary resources.
• The joint venture is controlled through negotiations and coordination processes,
while each firm would like to have hierarchical control.

Foreign Direct Investment

Foreign direct investment (FDI) is the direct ownership of facilities in the target country.
It involves the transfer of resources including capital, technology, and personnel. Direct
foreign investment may be made through the acquisition of an existing entity or the
establishment of a new enterprise.

Direct ownership provides a high degree of control in the operations and the ability to
better know the consumers and competitive environment. However, it requires a high
level of resources and a high degree of commitment.

Comparison of Foreign Market Entry Modes

Conditions Favoring
Mode Advantages Disadvantages
this Mode

Limited sales potential

in target country; little Trade barriers &
product adaptation tariffs add to
required Minimizes risk and costs.
investment.
Distribution channels close to Transport costs
Exporting plants
Speed of entry
Limits access to local
High target country Maximizes scale; uses information
production costs existing facilities.
Company viewed as an
Liberal import policies outsider
High political risk
Import and investment
barriers Lack of control
Minimizes risk and
over use of assets.
Legal protection possible in investment.
target environment.
Licensee may become
Speed of entry
Licensing competitor.
Low sales potential in target
country. Able to circumvent
Knowledge spillovers
trade barriers
Large cultural distance
License period is
High ROI
limited
Licensee lacks ability to
become a competitor.
Joint Import barriers Overcomes Difficult to manage
Ventures ownership
Large cultural distance restrictions and Dilution of control
cultural distance
Greater risk than
 Assets cannot be fairly priced
Combines resources of
High sales potential
2 companies.
exporting a & licensing
Some political risk
Potential for learning
Knowledge spillovers
Government restrictions on
Viewed as insider
foreign ownership Partner may become a
competitor.
Less investment
Local company can provide
required
skills, resources, distribution
network, brand name, etc.
Greater
knowledge of local Higher risk than
Import barriers
market other modes

Direct Small cultural distance Can better apply Requires more

Investme resources and
Assets cannot be fairly priced specialized skills
nt commitment
High sales potential Minimizes knowledge
spillover May be difficult to
manage the local
Low political risk
Can be viewed as an resources.
insider

WHICH ARE THE FORCES DRIVING GLOBALIZATION.?

a)Global Market Forces

b) Technological Forces

c) Global Cost Forces

d) Political and Macroeconomic Forces

 WORLD TRADE ORGANIZATION

 A global institution to promote free trade and open markets around the
world.

Location: Geneva, Switzerland

Established: 1 January 1995
Created by: Uruguay Round negotiations (1986-94)
 Membership: 149 countries (on 11 December 2005)
Budget: 175 million Swiss francs for 2006
Secretariat staff: 635
Head: Pascal Lamy (Director-General)

MULTINATIONAL CORPORATIONS

 Multinational corporations do substantial business in several countries.

 Multinational corporations can be controversial at home and abroad.

 Multinational corporations face a variety of ethical challenges.

 Planning and Controlling are complicated in multinational corporations.

 Organizing is complicated in multinational corporations.

 Leading is complicated in multinational corporations.

 Multinational Corporation (MNC)

 A business with extensive foreign operations in more than one county.

 Transnational Corporation

 A MNC that operates worldwide on a borderless basis.

“Fortune’s” Top 10 Multinational Corporations

1. Wal-Mart Stores 6. DaimlerChrysler

2. BP 7. Toyota Motor

3. Exxon Mobil 8. General Electric

4. Royal Dutch Shell Group 9. Total

5. General Motors 10. Chevron

MNC ISSUES

Protectionism

 A call for tariffs and special treatment to protect domestic firms from
foreign competition.

Corruption

 Illegal practices to further one’s business interests.

Transparency International gives these countries its poorest corruption scores:

• Indonesia • Nigeria

• Tajikistan • Bangladesh

• Haiti • Paraguay

• Myanmar

Currency Risk

 The possible loss of profits because of fluctuating exchange rates.

EFFECTS OF GLOBALIZATION

Industrial

– Emergence of worldwide production markets and broader access to a

range of foreign products for consumers and companies. Particularly
movement of material and goods between and within national
boundaries.

Financial
 – Emergence of worldwide financial markets and better access to external
financing for borrowers.

Economic

– Global common market, based on the freedom of exchange of goods and

capital.

– Interconnectedness of markets means that an economic collapse in any

one given country cannot be contained.

Informational

– Increase in information flows between geographically remote locations.

– Technological change with advent of fibre optic communications,

satellites, and increased availability of telephone and Internet.

Competition

– Survival in the new global business market calls for improved productivity
and increased competition. Due to the market becoming worldwide,
companies in various industries have to upgrade their products and use
technology skillfully in order to face increased competition.

Political

– WTO, EU, NATO, APEC, G8

Ecological

– Global environmental challenges that might be solved with international

cooperation, such as climate change, cross-boundary water and air
pollution, depletion of vital resources.

Language

- the most popular language is English.

 – About 35% of the world's mail, telexes, and cables are in English.

– Approximately 40% of the world's radio programs are in English.

– About 50% of all Internet traffic uses English.

Cultural (Soft power)

– world culture, growth of cross-cultural contacts, cultural diffusion, cultural

diversity, multiculturalism

– desire to increase one's standard of living and enjoy foreign products and
ideas

– adopt new technology and practices

– loss of languages

– Greater immigration, including illegal immigration

– Greater international travel and tourism

– Consumerism - Spread of local consumer products (e.g. food) to other

countries (often adapted to their culture).

Social
– UN, Red Cross, Greenpeace, non-governmental organisations as main
agents of global public policy, including humanitarian aid and
developmental efforts

Legal/Ethical

– Increase in the number of standards applied globally; e.g. copyright laws,

patents and world trade agreements.

– The creation of the international criminal court and international justice

movements.

ADVANTAGES AND CHALLENGES OF GLOBALIZATION

Productivity:
  Globalization allows the benefits of productivity developments in one
nation to move more quickly to other nations

 A downside to this transfer is that individuals and companies must adjust

to compete

Consumers

 Consumers benefit from globalization through their ability to choose from

a greater variety of products and services and to buy from cheaper
production locations

 A potential problem is the consumers’ weaker control over supplies from

foreign countries

Employment

 Critics of globalization contend that the quality, as well as the quantity, of

jobs should be considered

The Environment

 Many of the most desired resources are in the poorest areas of the world
where people can benefit economically from exploiting these resources

 On the other hand, concern is high over the depletion of finite resources,
potential climatic changes, and destruction of the environment

Monetary and fiscal conditions

 An advantage of globalization is that money, if allowed to move freely,

should go where it will be most needed and have the highest productivity

 Monetary, fiscal, and regulatory differences remain

Sovereignty

 Globalization may undermine sovereignty in two ways:

  Contact with other countries creates more cultural borrowing

 Countries are concerned that important decisions may be made

abroad that will undermine their national well-being

VIEWS ON FUTURE OF INTERNATIONAL BUSINESS AND GLOBALIZATION

• Further globalization is inevitable.

• International business will grow primarily along regional rather than global lines.

• Forces working against further globalization and international business will slow
down both trends.

2. THE CULTURAL ENVIRONMENTS FACING BUSINESS .

The Cultural Environments facing business

 Defined Culture: the specific learned norms of a society that reflect attitudes,
values, and beliefs Major problems of cultural collision are likely to occur if: -a firm
implements practices that do not reflect local customs and values and/or -employees are
unable to accept or adjust to foreign customs.

Culture has several important characteristics

(1)Culture is comprehensive. This means that all parts must fit together in some logical
fashion. For example, bowing and a strong desire to avoid the loss of face are unified in their
manifestation of the importance of respect.

(2)Culture is learned rather than being something we are born with. We will consider the
mechanics of learning later in the course.

(3)Culture is manifested within boundaries of acceptable behavior. For example, in American

society, one cannot show up to class naked, but wearing anything from a suit and tie to shorts
and a T-shirt would usually be acceptable. Failure to behave within the prescribed norms may
lead to sanctions, ranging from being hauled off by the police for indecent exposure to being
laughed at by others for wearing a suit at the beach.

(4)Conscious awareness of cultural standards is limited. One American spy was intercepted by
the Germans during World War II simply because of the way he held his knife and fork while
eating.

(5)Cultures fall somewhere on a continuum between static and dynamic depending on how
quickly they accept change. For example, American culture has changed a great deal since the
1950s, while the culture of Saudi Arabia has changed much less

Cultural Influences on International Business

Cultural Dynamics Cultures consist of societies, i.e., relatively homogeneous groups of

people, who share attitudes, values, beliefs, and customs. Cultures are dynamic; they
evolve over time. Cultural value systems are set early in life, but may change because of:
-choice or imposition -contact with other cultures.

The Nation as a Point of Reference The basic similarity amongst people within
countries is both a cause and an effect of national boundaries. National identity is
perpetuated through the rites and symbols of a country and a common perception of
history. Subcultures may link groups from different nations more closely than certain
groups within nations.

Cultural Formation and Change Societal values and customs constantly evolve in
response to changing realities. Cultural imperialism is brought about by the imposition
of one culture upon that of another. Certain elements introduced from outside a culture
may be known as creolization, indigenization, or cultural diffusion.
Language as a Cultural Stabilizer Isolation from other groups, especially because of
language, tends to stabilize cultures. Some countries see language as being so important
that they regulate the inclusion of foreign words and/or mandate the use of the country’s
official language for business purposes.

OR

• When people from different areas speak the same language, culture spreads more easily
• Among nations that share a same language, commerce is easier
• Isolation from other groups, especially because of language, tends to stabilize cultures.
 • Some countries see language as being so important that they regulate the inclusion of
foreign words and/or mandate the use of the country’s official language for business
purposes.

Religion as a Cultural Stabilizer Religion is a major source of both cultural imperatives

and cultural taboos. Major religions include: -Buddhism -Christianity -Hinduism -Islam
–Judaism

OR

• Centuries of profound religious influence continue to play a major role in shaping

cultural values

• Many religions influence specific beliefs that may affect business

Social Stratification Systems Ascribed group memberships are defined at birth; they
may include gender, family, age, caste, and ethnic or national origin. Acquired group
memberships are based on one’s choice of affiliation, such as political party, religion,
and social and professional organizations. Social stratification affects both business
strategy and operational practices.

Factors Affecting Work Ethics The desire for material wealth vs. the desire for leisure
(Protestant Ethic) The expectation of success and reward Assertiveness (Hofstede’s
masculinity vs. femininity index) Needs satisfaction (Maslow’s Hierarchy) Motivated
employees are normally more productive, and higher productivity leads to lower costs.

Implications/Conclusions Culture is dynamic and evolves over time. Economic

development and globalization are two engines of cultural change. In addition to being
part of a national culture, people are simultaneously part of other cultures, such as social
and professional associations and business and government organizations.

Host cultures do not always expect firms and individuals to conform to their norms; in
some instances they may choose to accommodate differences in traditions. International
firms should make a concerted effort to identify ideas and behaviors in host countries
and foreign cultures that can be usefully applied across the whole of their organizations.

DEALING WITH CULTURAL DIFFERENCES

• Accommodation
 • Cultural distance

• Culture shock

• Company and Management orientations

 polycentric

 ethnocentric

 geocentric

Factors Affecting Strategies for Instituting Cultural Change

• Value systems

• Cost/benefits of change

• Resistance to too much change

• Participation

• Reward sharing

• Opinion leadership

• Timing

• Learning abroad
Cultural factors affecting international marketing

1.POPULATION- When the population is higher, the bigger is

the market. However, it is necessary to look into the
following.
(a) Age groups and Sex- Different age groups of
people, their taste & interests, preferences along with
sexual differences, the trend of outlook and attitude
people focus and prefer to adopt matters a lot.

(b) Social class or groups- This refers to the economic

class of living and groups which they belong in the
living environment, which also has an impact for
product selling.

(c) Educational background-This refers to the

background of the corresponding person who is
actually involved in international markets, it doesn't
specify anything in the form of an individual acquiring
management degree, it specifies something more in
the form of his/her family and circle of friends
including peers with many people who give support for
him to flourish well in international markets.

(d) Number of households- This gives information about

the total number of
households, the type of household ,nature of household
and the kind of work which is performed in major by the
household which can be identified and used if needed for
marketing tool in international levels.
 (e) Geographical concentration and differences- This
specifies the concentration of each and every place on
selected products in major amounts which is favorable for
its market condition and clearly indicates the differences
in choice of product chosen by each and every country
depending on the demand condition.

(f) The rate of changes in the above mentioned

characteristics-specifies changes involved in each of the
above mentioned qualities.

2. GROSS NATIONAL PRODUCT(GNP)

(a) Rate of growth of the economy- This must be positive

and favorable for growth of the economy.
(b) Standard of living-specifies the quality of living of
people which must improve and give rising standards which
will be the real benefit of international marketing if
adopted properly efficiently and effectively.
(c) Percapita income

3. THE POLITICAL AND LEGAL ENVIRONMENTS FACING BUSINESS

Definition of a Political System

• The complete set of institutions, political organizations, and interest groups,

• The relationships among institutions, and the political norms and rules that
govern their functions

Individualism vs. Collectivism

• Individualism: primacy of the rights and role of the individual

 • Collectivism: primacy of the rights and role of the community

Political Ideology

• The system of ideas that expresses the goals, theories, and aims of a
sociopolitical program

• Most modern societies are pluralistic—different groups champion competing

political ideologies

Democracy

• Wide participation by citizens in the decision-making process

• Five types:

 Parliamentary

 Liberal

 Multiparty

 Representative

 Social

Totalitarianism

• Restricts decision making to a few individuals

• Types:

 Authoritarianism

 Fascism

 Secular totalitarianism
  Theocratic totalitarianism

Trends in Political Systems

• Engines of democracy:

 Failure of totalitarian systems to deliver economic progress

 Improved communication technology

 Belief that democracy leads to improved standards of living

Definition of Political Risk

• The risk that political decisions or events in a country negatively affect the
profitability or sustainability of an investment

• Types:

 Procedural

 Distributive

 Catastrophic

How to Minimize Political Risk

• Stimulation of the Local Economy

– Link business interests with national economic interests

– Purchase local products & RM for production

– Subcontract

– Assist local firms

• Employment of Nationals
 – Intermediate technology accompanied by additional labor

– Promotes goodwill

• Shared ownership

– JV, partnership

– Make a separate local company

– Reduction of risk exposure

• Being Civic minded

– Be a good corporate citizen

– Sponsor civic projects – schools, hospitals, roads, water systems

• Political neutrality

• Behind the scenes lobbying

– Develop local allies who can provide political contacts

 DEFINITION OF A LEGAL SYSTEM

• The mechanism for creating, interpreting, and enforcing the laws in a specified
jurisdiction

Types:
 Common law

 Civil law

 Theocratic law

 Customary law

Mixed systems

Legal / Regulatory Environment

 • Code laws

– Codified legal system

– Commercial, civil, criminal

– How the law is applied to facts

• Common law

– Tradition, past practices,

– legal precedents through interpretation of statutes, legislations, and

past rulings

• Theocratic law

– Based on religion. E.g. Islamic countries

Trends in Legal Systems

• The preference for stability

• The influence of national legacies

Intellectual property

• Intangible property rights that are a result of intellectual effort

• Intellectual property rights refer to the right to control and derive the benefits
from writing, inventions, processes and identifiers

• Local attitudes play a large role in piracy

Legal issues In IB

Different business cultures, legal environments and languages increase the risk of confusion
when you trade internationally. It's important to have a clear contract.

With trade in goods, attention often focuses on responsibilities for delivery, set out using
internationally recognized Incoterms. Other issues, such as what is being supplied, are usually
relatively straightforward.
 For trade in services, it's almost the opposite. It can be difficult to
specify exactly what services are to be provided, to what standards. It
can be helpful to focus on what the desired outcomes are - i.e. what
the service should achieve. This can be part of a service level
agreement in the contract

• There are other important legal issues to consider:

• The location of supplier and customer can vary, affecting which
country's regulations apply. See the page in this guide on delivering
services internationally.
• You need to sort out payment issues such as choice of currency and
protection against the risk of non-payment. See the page in this guide
on payment for international trade in services.
• You may need to take action to protect your intellectual property in
other countries..

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Module 2
1. THE ECONOMIC ENVIRONMENTS FACING BUSINESS

Economics environment refers all economics surroundings that influence

organization activities. It consists of economic parameters. It is concerned
with the nature and direction of economy in which the organizations
operate.

Totality of economic factors, such as employment, income, inflation,

interest rates, productivity, and wealth, that influence the buying
behavior of consumers and firms.

Important elements of economic development are:

1. Economic systems: Economic system determines the scope of private

sec tore ownership of the factors of production and market forces. The
model of economic system are:

A) Free market economic :This system is based on private ownership of

the factors of production. Profit serves as the driver of economic engine. The
competitive market mechanism guides business decisions. There is freedom
of choice. Individual initiative is encouraged.

B) Centrally planned economy: This system is based on police

ownership of the factors of production. The economy is centrally planned.
Controlled and regulated by the government. There is no consumer
sovereignty. Police enterprises play a dominant role.

C) Mixed economy: This system is a mix of free market and centrally

planned economics. Both public and private sectors coexist. The public
sector ha ownership and control of basic industries including utilities. The
sector owns agriculture and other industries but is regulated by the state.

2. Economic policies: Policies are guidelines for decision making and

action. Economic policies of the government significantly influence and
guide organizations.

Key economic policies influencing organization are :

A) Monetary policy-It is concerned with money supply, inflation rates,

interest rates and credit availability. It influences the level of spending
through interest rates. Cheap money reduces cost, dear money increase
cost. Interest rates cost of capital. Foreign exchange rates affect imports
and exports.

B) Fiscal policy: It is concerned with the use of taxation and government

expenditure to regulate economic activity. Tax on income, expenditure and
capital influence business decisions.

C) Industrial policy: It is concerned with industrial licensing location,

incentives, facilities, foreign investment, technology transfer and
nationalization.

3. Economic conditions: They indicate the health of the economy in

which the organization operates. The factors affecting economic conditions
are:
 • State of economic development: An economy can be least developed
developing and developed. Organizational activities are influence by
the stage of economic development.
• Income: The level of employment affect expenditure, saving and
investment. They together influence the economic conditions of
organization.
• Employment: The level of employment affects organization. It
determines availability and of labor.
• Business cycle: The stages of business cycle can prosperity; rescission
and recovery .They affects the health organization.
• Influence: It is rise in price level. Influences costs, price and profit of
organization.

4. Regional economic groups: They promote cooperation and free

trade among members by removing tariff and other restrictions. They
provide opportunities to member countries and threats to non-member
counties. Examples are:

• SA ARC: South Asian Association for Regional Cooperation.

• ASIAN: Association of South East Asian Nations.
• EU: European Union.

Economic…..

• Nature of the Economy

– Level of development

– Sectoral composition of output

– Inter-sectoral linkages

• Economic Conditions

– Income levels

– Distribution of income

– GDP, GMP trends

– Sectoral growth trends

– Demand and supply trends

– Price trends

– Trade and BOP trends

 – Foreign exchange reserves position

– Global economic trends

• Economic Policies

– Industrial policy

– Trade policy

– Monetary policy

– Fiscal policy

– Foreign exchange policy

– Foreign investment and technology policy

• Global linkages

– Magnitude and nature of cross-border trade flows, financial

flows

– Membership of WTO, IMF, World bank, trade blocs

• Developed economies

– High levels of income, consumption and business competition

– Markets may be saturated due to population trends

– Replacement demand

• Developing economies

– Steady increase in population

– Increase in income

– Creation of primary demand

OR

Objectives
 • To understand the importance of economic analysis of foreign markets

• To identify the major dimensions of international economic analysis

• To compare and contrast macroeconomic indicators

• To profile the characteristics of the types of economic systems

• To discuss the idea of economic freedom

• To profile the idea, drivers, and constraints of economic transition

 Importance of Economic Environments

• Company managers study economic environments to estimate how

trends affect their performance

• A country’s economic policies are a leading indicator of government’s

goals and its planned use of economic tools and market reforms.

• Economic development directly impacts citizens, managers,

policymakers, and institutions.

 Elements of the Economic Environment

• Gross national income (GNI): the income generated both by total

domestic production as well as the international production activities
of national companies

Gross domestic product (GDP): the total value of all goods and services
produced within a nation’s borders over one year, no matter whether
domestic or foreign-owned companies make the product.

Adjustments to GNI

• Number of people in a country

• Growth rate

• Local cost of living

• Economic sustainability
Other features of an economy

• Inflation

• Unemployment

• Debt

• Income distribution

• Poverty

• Labor costs

• Productivity

• Balance of payments

Definition of Economic System

• A mechanism that deals with the production, distribution, and

consumption of goods and services

• Types:

 Market economy

 Command economy

 Mixed economy

The Economic Freedom Index

• Approximates the extent to which a government intervenes in the

areas of free choice, free enterprise, and market-driven prices for
reasons that go beyond the basic need to protect property, liberty,
citizen safety, and market efficiency

• Countries with the freest economies have had the highest annual
growth and a greater degree of wealth creation.

Dimensions of the Economic Freedom Index

 • Business freedom

• Trade freedom

• Monetary freedom

• Freedom from government

• Fiscal freedom

• Property rights

• Investment freedom

• Financial freedom

• Freedom from corruption

• Labor freedom

Transition to a Market Economy

• Liberalizing economic activity

• Reforming business activity

• Establishing legal and institutional frameworks

• Success is linked to how well the government deals with:

 Privatization

 Deregulation

 Property right protection

 Fiscal and monetary reform

 Antitrust legislation

2. GLOBALIZATION AND SOCIETY.

Learning Objectives

• To identify problems in evaluating the activities of multinational enterprises (MNEs)

 • To evaluate the major economic effects of MNEs on home and host countries
• To understand the foundations of responsible corporate behavior in the international
sphere
• To discuss some key issues in the social activities and consequences of globalized
business
• To examine corporate responses to globalization

Evaluating the Impact of FDI

• FDI is Foreign Direct Investment

• The large size of some MNEs causes concern for some countries
• MNEs and countries need to understand the impact of FDI in home and host countries

Considering the Logic of FDI

• Need to consider relationship between those who make foreign investments (MNEs) and
possible effects on receiving countries
• Areas to consider:
 Stakeholder trade-offs
 Cause-and-effect relationships
 Individual and aggregate effects

The Economic Impact of the MNE

• Balance-of-Payments effects:
 Net import effect
 Net capital flow

• Growth and Employment effects:

 Home-country losses
 Host-country gains
 Host-country losses

Why Companies Care About Ethical Behavior

• Instrumental in achieving two objectives:

 To develop competitive advantage
 To avoid being perceived as irresponsible
The Cultural Foundations of Ethical Behavior

• Relativism vs. Normativism: do truths depend on the values of the groups or are there
universal standards
• Negotiating between evils
• Respecting cultural identity

The Legal Foundations of Ethical Behavior

• Legal justification for ethical behavior may not be sufficient because not everything that
is unethical is illegal
• The law is a good basis because it embodies local cultural values
• Laws will become similar in different countries

Ethics and Bribery

• Bribes are payments or promises to pay cash or anything of value

• Bribes used to get government contracts or to get officials to do what they should be
doing anyway
• Problems with bribery:
 Affects performance of company & country
 Erodes government authority
 Damage reputations when disclosed
 Increases cost of doing business

What’s being Done About Corruption?

• Cross-National Accords: The OECD, the ICC and the UN

• The U.S. Foreign Corrupt Properties Act
• Industry Initiatives
• Relativism, the Rule of Law, and Responsibility

Ethics and the Environment

• Sustainability
• Global Warming and The Kyoto Protocol
 National and Regional Initiatives
 Company-Specific Initiatives
 ETHICAL DILEMMAS

Ethical dilemma is a complex situation that will often involve an

apparent mental conflict between moral imperatives, in which to obey
one would result in transgressing another. This is also called an
ethical paradox since in moral philosophy, paradox often plays a
central role in ethics debates.

OR

Ethical dilemmas, also known as moral dilemmas, have been a problem for ethical
theorists as far back as Plato. An ethical dilemma is a situation wherein moral precepts or
ethical obligations conflict in such a way that any possible resolution to the dilemma is morally
intolerable. In other words, an ethical dilemma is any situation in which guiding moral
principles cannot determine which course of action is right or wrong.

Ethical Dilemmas and the Pharmaceutical Industry

• Tiered pricing and other price-related issues

• WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)
• R&D and the Bottom Line

Ethical Dimensions of Labor Conditions

• Ethical Trading Initiative

• The Problem of Child Labor
• What MNEs Can and Can’t Do

Corporate Codes of Ethics

• Motivations for Corporate Responsibility

• Developing a good Code of Conduct

CHALLENGE OF ETHICAL BEHAVIOR

*Personal self-interest
 * Company profit

* Operating efficiency

* Individual friendships

* Team interests

* Social responsibility

* Personal morality

* Rules and standard procedures

* Laws and professional codes

OR

Globalization is not new, but the present era has distinctive features.
Shrinking space, shrinking time and disappearing borders are linking
people's lives more deeply, more intensely, more immediately than ever
before. Globalization is a complex process which changes as well as has the
potential to change the various events in the world at multiple levels. And
globalization is a process of integrating not just the economy but culture,
technology and governance. This era of globalization is opening many
opportunities for millions of people around the world. Global markets, global
technology, global ideas and global solidarity can enrich the lives of people
everywhere, greatly expanding their choices. The growing interdependence
of people's lives calls for shared values and a shared commitment to the
human development of all people.

Globalization, although often described as the cause of much turbulence

and change, is in fact the umbrella term for the collective effect, the change
itself. The challenge of globalization in the new century is not to stop the
expansion of global markets. The challenge is to find the rules and
institutions for stronger governance—local, national, regional and global—to
preserve the advantages of global markets and competition, but also to
provide enough space for human, community and environmental people—
not just for profits. Globalization is thus related with:

• Ethics — less violation of human rights, not more.

• Equity — less disparity within and between nations, not more.
• Inclusion — less marginalization of people and countries, not more.
• Human security — less instability of societies and less vulnerability of
people, not more.
• Sustainability — less environmental destruction, not more.
• Development — less poverty and deprivation, not more.

Indeed, there is a need for a recommitment to bring together of all the

world's peoples around an agenda that does not seek to stifle the very
productive and revolutionary innovations. However, it is essential that in so
doing we do not forget basic and fundamental obligations that have been
recognized and honored for decades as essential to a wholesome human
existence.

……………………………………………………………………………………………………

Module 3
1. INTERNATIONAL TRADE AND FACTOR-MOBILITY THEORY.

Chapter Objectives

• To understand theories of international trade

• To explain how global efficiency can be improved through free trade

• To identify factors affecting national trade patterns

• To explain why a country’s export capabilities are dynamic

• To understand why production factors

• To explain the relationship between foreign trade and international factor

mobility
Theories of Trade Patterns

• Explaining trade patterns:

 Country size

 Factor proportions

 Country similarity

• Trade competitiveness:

 Product life cycle theory

Porter diamond

• INTL. TRADE THEORY –

1)Mercantilism

• countries should export more than they import - balance of trade

• surplus – result in more gold & silver for governments trade
• conducted by governments Led consolidation of power trade with
colonies

•  import less-valued raw materials export more-valued manufactured

goods
• views trade as zero-sum game

2)Absolute Advantage

• proposed by Adam Smith

• countries differed in their ability to produce different goods efficiently

and should specialize in the production of goods they can produce more
efficiently

• views trade as a positive sum game countries will benefit from trade if
they have an absolute advantage in one product

3)Comparative Advantage
 • even if a country has an absolute advantage in both products it should
Specialize in production of that good in which it has a comparative
advantage

• proposed by Ricardo

4)Assumptions Comparative Advantage

• Full employment

• 2 products and 2 countries only

• Ignores role of technology and marketing

• Perfect competition

• Mobility of resources

• Transportation costs ignored

• Max efficiency - countries produce goods for other reasons

Theories of Specialization

• Both absolute and comparative advantage theories are based on specialization

• Assumptions policymakers question:

 full employment

 economic efficiency

 division of gains

 transport costs

 statics and dynamics

 services
  production networks

 mobility

Trade Pattern Theories

• How much a country will depend on trade if it follows a free trade policy

• What types of products countries will export and import

• With which partners countries will primarily trade

Theory of Country Size

• Countries with large land areas are apt to have varied climates and natural
resources

• They are generally more self-sufficient than smaller countries are

• Large countries’ production and market centers are more likely to be located at
a greater distance from other countries, raising the transport costs of foreign
trade

Factor-Proportions Theory

• A country’s relative endowments of land, labor, and capital will determine the
relative costs of these factors

• Factor costs will determine which goods the country can produce most efficiently

Country-similarity Theory

• Most trade today occurs among high-income countries because they share
similar market segments and because they produce and consume so much
more than emerging economies

• Much of the pattern of two-way trading partners may be explained by cultural

similarity between the countries, political and economic agreements, and by the
distance between them
Product Life Cycle (PLC) Theory

• Companies will manufacture products first in the countries in which they were
researched and developed, almost always developed countries

• Over the product’s life cycle, production will shift to foreign locations, especially
to developing economies as the product reaches the stages of maturity and
decline

The Porter Diamond

• Four conditions as important for competitive superiority:

 demand conditions

 factor conditions

 related and supporting industries

 firm strategy, structure, and rivalry

Limitations of the Porter Diamond Theory

• Production factors and finished goods are only partially mobile internationally

• The cost and feasibility of transferring production factors rather than exporting
finished goods internationally will determine which alternative is better

The Relationship between Trade and Factor Mobility

• Capital and labor move internationally to gain more income and flee adverse
political situations

• Although international mobility of production factors may be a substitute for

trade, the mobility may stimulate trade through sales of components, equipment,
and complementary products

2. GOVERNMENT INFLUENCE ON TRADE.

Chapter Objectives

• To explain the rationales for governmental policies that enhance and restrict
trade

• To show the effects of pressure groups on trade policies

• To describe the potential and actual effects of governmental intervention on the

free flow of trade

• To illustrate the major means by which trade is restricted and regulated

• To demonstrate the business uncertainties and business opportunities created

by governmental trade policies

Possible impacts of import restrictions designed to create

domestic employment

• May lead to retaliation by other countries.

• Are less likely retaliated against effectively by small economies.

• Are less likely to be met with retaliation if implemented by small economies.

• May decrease export jobs because of price increases for components.

• May decrease export jobs because of lower incomes abroad.

Protecting “Infant-Industries”

• The infant-industry argument for protection holds that governmental prevention

of import competition is necessary to help certain industries move from high-cost
to low-cost production

Developing an Industrial Base

• Countries seek protection to promote industrialization because that type of

production:

 Brings faster growth than agriculture.

  Brings in investment funds.

 Diversifies the economy.

 Brings more income than primary products do.

 Reduces imports and promotes exports.

 Helps the nation-building process.

Economic Relationships with Other Countries

• Trade controls are used to improve economic relations with other countries

• Their objectives include improving the balance of:

 payments

 raising prices to foreign consumers

 gaining fair access to foreign markets

 preventing foreign monopoly prices

 assuring that domestic consumers get low prices

 lowering profit margins for foreign producers

Maintaining essential industries

• In protecting essential industries, countries must:

 Determine which ones are essential.

 Consider costs and alternatives.

 Consider political consequences.

Preventing Shipments to “Unfriendly” Countries

• Considerable governmental interference in international trade is motivated by:

 political rather than economic concerns

  maintaining domestic supplies of essential goods

 preventing potential enemies from gaining goods that would help them
achieve their objectives

Maintaining or extending spheres of influence

• Governments give aid and credits to, and encourage imports from, countries
that join a political alliance or vote a preferred way within international bodies.

• A country’s trade restrictions may coerce governments to follow certain political

actions or punish companies whose governments do not.

Preserving national identity

• To sustain this collective identity that sets their citizens apart from those in other
nations, countries limit foreign products and services in certain sectors.

Instruments of Trade Control

• Trade controls that directly affect price and indirectly affect quantity include:

 tariffs

 subsidies

 customs-valuation methods

 special fees

NONTARIFF BARRIERS: QUANTITY CONTROLS

• Trade controls that directly affect quantity and indirectly affect price include:

 quotas

 voluntary export restraint (VERs)

 “buy local” legislation

 standards and labels

  licensing arrangements

 specific permission requirements

 administrative delays

 reciprocal requirements

 restrictions on services

Dealing With Governmental Trade Influences

• When facing import competition, companies can:

 Move abroad

 Seek other market niches

 Make domestic output competitive

 Try to get protection

4. C ROSS-NATIONAL COOPERATION AND AGREEMENTS.

Chapter Objectives

• To identify the major characteristics and challenges of the World Trade

Organization

• To discuss the pros and cons of global, bilateral, and regional integration

• To describe the static and dynamic impact of trade agreements on trade and
investment flows

• To define different forms of regional economic integration

 • To compare and contrast different regional trading groups, including but not
exclusively the European Union (EU), the North American Free Trade
Agreement (NAFTA), the Southern Common Market (MERCOSUR), and the
Association of South East Asian Nations (ASEAN)

• To describe other forms of global cooperation, such as the United Nations and
the Organization of Petroleum Exporting Countries (OPEC)

GATT

• The General Agreement on Tariffs and Trade (GATT), begun in 1947, created a
continuing means for countries to negotiate the reduction and elimination of
trade barriers and to agree on simplified mechanisms for the conduct of
international trade

WTO

• The World Trade Organization (WTO) replaced GATT in 1995 as a continuing

means of trade negotiations that aspires to foster the principle of trade without
discrimination and to provide a better means of mediating trade disputes and of
enforcing agreements

REGIONAL ECONOMIC INTEGRATION

• Efforts at regional economic integration began to emerge after World War II as

countries saw benefits of cooperation and larger market sizes

• The major types of economic integration are:

 the free trade area

 the customs union

 the common market

The Effects of Integration

• Once protection is eliminated among member countries, trade creation allows
MNEs to specialize and trade based on comparative advantage
 • Trade diversion occurs when the supply of products shifts from countries that
are not members of an economic bloc to those that are

EUROPEAN UNION

• Regional, as opposed to global, economic integration occurs because of the

greater ease of promoting cooperation on a smaller scale

• The European Union (EU) is an effective common market that has abolished
most restrictions on factor mobility and is harmonizing national political,
economic, and social policies

• The EU is comprised of 27 countries, including 12 countries from mostly Central

and Eastern Europe that joined since 2004

• The EU has abolished trade barriers on:

 intrazonal trade

 instituted a common external tariff

 created a common currency, the euro

Implications of the EU for corporate strategy

• Companies need to determine where to produce products.

• Companies need to determine what their entry strategy will be.

• Companies need to balance the commonness of the EU with national

differences.

THE NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA)

• The North American Free Trade Agreement (NAFTA) is designed to eliminate

tariff barriers and liberalize investment opportunities and trade in services

• Key provisions in NAFTA are labor and environmental agreements

Regional economic integration in the Americas

• Caribbean Community (CARICOM)

• Central American Common Market (CACM)

• Central American Free Trade Agreement (CAFTA-DR)

• Andean Community (CAN)

• The Southern Common Market (MERCOSUR)

• The proposed South American Community of Nations.

Regional economic integration in Asia & Africa

• Association of Southeast Asian Nations (ASEAN)

• Asia Pacific Economic Cooperation (APEC)

• The African Union

Forms of International Cooperation

• The United Nations is comprised of representatives of most of the countries in

the world and international trade and development in a number of significant
ways

Commodity Agreements

• Many developing countries rely on commodity exports to supply the hard

currency they need for economic development

• Instability in commodity prices has resulted in fluctuations in export earnings

 • OPEC is an effective commodity agreement in terms of attempting to stabilize
supply and price

4. GLOBAL FOREIGN- EXCHANGE MARKETS.

Chapter’s Objectives

• To learn the fundamentals of foreign exchange

• To identify the major characteristics of the foreign exchange market and

how

• governments control the flow of currencies across national borders

• To describe how the foreign exchange market works

• To examine the different institutions that deal in foreign exchange

• To understand why companies deal in foreign exchange

Foreign Exchange

• Foreign exchange is money denominated in the currency of another nation or

group of nations
• The market in which these transactions take place is the foreign-exchange
market.
• The exchange rate is the price of a currency

The Foreign Exchange

• The Bank for International Settlements divides the foreign exchange market into
reporting dealers (also known as dealer banks or money center banks), other
financial institutions, and nonfinancial institutions.
• Dealers can trade currency by telephone or electronically, especially through
Reuters, EBS, or Bloomberg
• The foreign exchange market is divided into the over-the-counter market (OTC)
and the exchange-traded market
Some Traditional Foreign Exchange Instruments

• Spot transactions involve the exchange of currency on the second day after the
date on which the two dealers agree to the transaction
• Outright forward transactions involve the exchange of currency three or more
days after the date on which the dealers agree to the transaction
• An FX swap is a simultaneous spot and forward transaction

Foreign Exchange Derivatives

• Currency swaps deal more with interest-bearing financial instruments (such as a

bond), and they involve the exchange of principal and interest payments.

• Options are the right but not the obligation to trade foreign currency in the future.

A futures contract is an agreement between two parties to buy or sell a

particular currency at a particular price on a particular future date.

Some Aspects of The Foreign Exchange Market

• Approximately $3.2 trillion in foreign exchange is traded every day.

• The US dollar is the most widely traded currency in the world (on one side of
86% of all transactions)

• London is the main foreign exchange market in the world

Why the US dollar is the most widely traded currency

• An investment currency in many capital markets.

• A reserve currency held by many central banks.

• A transaction currency in many international commodity markets.

 • An invoice currency in many contracts.

• An intervention currency employed by monetary authorities in market operations

to influence their own exchange rates.

The Spot Market

• Foreign exchange dealers quote bid (buy) and offer (sell) rates on foreign
exchange

• If the quote is in American terms, the dealer quotes the foreign currency as the
number of dollars and cents per unit of the foreign currency

• If the quote is in European terms, the dealer quotes the number of units of the
foreign currency per dollar

• The numerator is called the “terms currency” and the denominator the “base
currency.”

The Forward Market

• If the foreign currency in a forward contract is expected to strengthen in the

future (the dollar equivalent of the foreign currency is higher in the forward
market than in the spot market), the currency is selling at a premium. If the
opposite is true, it is selling at a discount

• An option is the right, but not the obligation, to trade foreign currency in the
future

Options can be traded OTC or on an exchange

Futures

• A foreign currency future is an exchange-traded instrument that guarantees a

future price for the trading of foreign exchange, but the contracts are for a
specific amount and specific maturity date

The Foreign Exchange Trading Process

 • Companies work with foreign exchange dealers to trade currency

• Dealers also work with each other and can trade currency through:

 voice brokers

 electronic brokerage services

 directly with other bank dealers

• Internet trades of foreign exchange are becoming more significant

How Companies Use Foreign Exchange

• The major institutions that trade foreign exchange are the large commercial and
investment banks and securities exchanges

• Commercial and investment banks deal in a variety of different currencies all

over the world

• The CME Group and the Philadelphia Stock Exchange trade currency futures
and options

How Companies Use Foreign Exchange

• Companies use foreign exchange to settle transactions involving the imports

and exports of goods and services, for foreign investments, and to earn money
through arbitrage or speculation

5. THE DETERMINATION OF EXCHANGE RATES.

Chapter Objectives

• To describe the International Monetary Fund and its role in the determination of
exchange rates
 • To discuss the major exchange-rate arrangements that countries use

• To explain how the European Monetary System works and how the euro came
into being as the currency of the euro zone

• To identify the major determinants of exchange rates

• To show how managers try to forecast exchange-rate movements

• To explain how exchange-rate movements influence business decisions

THE INTERNATIONAL MONETARY FUND

• Originally organized in 1945

• Objectives:

 To promote international monetary cooperation, exchange stability, and

orderly exchange arrangements

 To foster economic growth and high levels of employment

 To provide temporary financial assistance to countries to help ease

balance-of-payments adjustment

IMF History

• The Bretton Woods Agreement set a fixed exchange rate against gold & the US
dollar

• The Jamaica Agreement (1976) eliminated par values against gold and the US
dollar and permitted greater flexibility.

• Voting is through the Quota system

Special Drawing Right

• The Special Drawing Right (SDR) is a special asset the IMF created to increase
international reserves

• The value of the SDR is based upon the weighted average of a basket of four
currencies: the U.S. dollar, the euro, the Japanese yen, and the British pound.

EXCHANGE RATES

• The world can be divided into:

 Countries that basically let their currencies float according to market

forces with minimal or no Central Bank intervention

 Countries that do not but rely on heavy Central Bank intervention and
control

• Anyone involved in international business needs to understand how the

exchange rates of countries with which they do business are determined

The Euro

• European Monetary System (EMS): established by the EU (then the EC) in

1979 as a means of creating exchange rate stability within the bloc

• European Central Bank: established by the EU on July 1, 1998, to set monetary

policy and to administer the euro

• Euro: the common European currency established on Jan. 1, 1999 as part of

the EU’s move toward monetary union as called for by the Treaty of Maastricht
of 1992
 • European Monetary Union (EMU): a formal arrangement linking many but not
all of the currencies of the EU

Africa

• African countries are committed to establishing a common currency by 2021, but

there are many obstacles to accomplishing this objective

THE DETERMINATION OF EXCHANGE RATES

• Currencies that float freely respond to supply and demand conditions free from
government intervention

• The demand for a country’s currency is a function of the demand for its goods
and services and the demand for financial assets denominated in its currency

• Fixed exchange rates do not automatically change in value due to supply and
demand conditions but are regulated by their Central Banks

Central Banks

• Central banks are the key institutions in countries that intervene in foreign-
exchange markets to influence currency values

• The Bank for International Settlements (BIS) in Switzerland acts as a central

banker’s bank.

• It facilitates communication and transactions among the world’s central banks

• A central bank intervenes in money markets by increasing a supply of its

country’s currency when it wants to push the value of the currency down and by
stimulating demand for the currency when it wants the currency’s value to rise
Black Markets – The Result of Fixed Exchange Rates

• Many countries that strictly control and regulate the convertibility of their
currency have a black market that maintains an exchange rate that is more
indicative of supply and demand than is the official rate

Foreign-Exchange Convertibility

• Fully convertible currencies, often called hard currencies, are those that the
government allows both residents and nonresidents to purchase in unlimited
amounts

• Currencies that are not fully convertible are often called soft currencies, or weak
currencies

• They tend to be the currencies of developing countries

Exchange Controls

• To conserve scarce foreign exchange, some governments impose exchange

restrictions on companies or individuals who want to exchange money, such as

 import licensing

 multiple exchange rates

 import deposit requirements

 quantity controls

FACTORS THAT DETERMINE EXCHANGE RATES

• purchasing-power parity
 • differences in real interest rates

• confidence in the government’s ability to manage the political and economic

environment

• certain technical factors that result from trading

Forecasting Exchange-Rate Movements

• Fundamental forecasting uses trends in economic variables to predict future

rates. The data can be plugged into an econometric model or evaluated on a
more subjective basis.

• Technical forecasting uses past trends in exchange rates themselves to spot

future trends in rates.

Factors to Monitor

• Major factors that managers should monitor when trying to predict the timing,
magnitude, and direction of an exchange-rate change include

 the institutional setting

 fundamental analysis

 confidence factors

 events

 technical analysis

Business Implications of Exchange-Rate Changes

• Exchange rates can affect business decisions in three major areas:

 Marketing
  Production

 Finance

……………………………………………………………………………………………

Module 4
1.THE STRATEGY OF INTERNATIONAL BUSINESS

Chapter Objectives

• To examine the idea of industry structure, firm strategy, and value creation

• To profile the features and functions of the value chain framework

• To appreciate how managers configure and coordinate a value chain

• To identify the dimensions that shape how managers develop strategy

• To profile the types of strategies firms use in international business

Industry, Strategy, and Firm Performance

• Managers, as agents of their firms, devise strategies to engage international

markets in ways that sustain the company’s boost its profitability and growth

• Strategy is defined as the efforts of managers to build and strengthen the

company’s competitive position within its industry in order to create superior
value
 • Firm performance is influenced by both the structure of the company’s industry
and the insight of managers’ strategic decision making

• Estimates vary on the degree of influence for both factors

• Managers need to be familiar with industry- and firm-level conditions in making

strategy

The Five Forces Model

• Managers typically anchor analysis of industry structure by modeling the

strength and importance of the so-called “five fundamental forces.”:

 the moves of rivals battling for market share

 the entry of new rivals seeking market share

 the efforts of other companies outside the industry to convince buyers to

switch to their own substitute products

 the push by input suppliers to charge more for their inputs

 the push by output buyers to pay less for products

Events that can change industry structure

• Competitors’ moves.

• Government policies.

• Changes in economics.

• Shifting buyer preferences.

• Technological developments.

• Rate of market growth.

Strategy and Value

• Strategy is defined as the efforts of managers to build and strengthen the

company’s competitive position within its industry in order to create superior
value

• Value is the measure of a firm’s ability to sell what it makes for more than the
cost it incurred to make it

Creating Value

• Firms create value either through a low-cost leadership strategy or a

differentiation strategy

The Firm as Value Chain

• Interpreting the firm within the context of the value chain provides a strong tool
to improve the accuracy of strategic analyses and decisions

WHAT IS A VALUE CHAIN?

• The value chain lets managers deconstruct the general idea of “create value”
into a series of discrete activities

• The function of the value chain is shaped by how managers opt to configure and
then coordinate discrete value activities

Dimensions of the Value Chain

• Primary activities that create and deliver the product.

• Support activities that aid the individuals and groups engaged in primary
activities.

• Profit margin reports the difference between the total revenue generated by
sales and the total cost of the activities that led to those sales.
 Orientation—namely, whether the particular activity takes place upstream or
downstream.

Using the Value Chain

• Configuration is the way that managers arrange the activities of the value chain.

• Coordination is the way that managers connect the activities of the value chain.

• Firms pay close attention to location economics when configuring their value
chain

• Devising a way to coordinate value chain activities must be in ways that

leverage a firm’s core competencies

Pressures for Global Integration

• Companies that operate internationally face the asymmetric pressures of global

integration versus local responsiveness

• Change, whether in managers, competencies, industries, or environments, often

spurs companies to rethink and reset their value activities

Types of Strategy

• The firm entering and competing in foreign markets can adopt either an:

 international

 multidomestic

 global

 transnational strategy

• Often, firms use a mix of these four types due to company, industry, and
environmental situations

2. COUNTRY EVALUATION AND SELECTION.

Chapter Objectives

• To grasp company strategies for sequencing the penetration of countries

• To see how scanning techniques can help managers both limit geographic
alternatives and consider otherwise overlooked areas
• To discern the major opportunity and risk variables a company should consider
when deciding whether and where to expand abroad
• To know the methods and problems when collecting and comparing information
internationally
• To understand some simplifying tools for helping to decide where to operate
• To consider how companies allocate emphasis among the countries where they
operate
• To comprehend why location decisions do not necessarily compare different
countries’ possibilities

Location

• Companies lack resources to take advantage of all international opportunities.

• Companies need to:
 Determine the order of country entry.
 Set the rates of resource allocation among countries.
• In choosing geographic sites, a company must decide:
 Where to sell.
Where to produce

Scanning

• Scanning techniques aid managers in considering alternatives that might

otherwise be overlooked
• They also help limit the final detailed feasibility studies to a manageable number
of those that appear most promising

Information that is important in Scanning

• Opportunities:
 Sales expansion - Economic and Demographic Variables
 Resource acquisition - Cost Considerations
Factors to Consider in Analyzing Risk

• Four broad categories of risk that companies may consider are:

 political
 monetary
 competitive
 natural disaster

Some Problems with Research Results and Data

• The amount, accuracy, and timeliness of published data vary substantially

among countries
• Managers should be particularly aware of different definitions of terms, different
collection methods, and different base years for reports, as well as misleading
responses

Country Comparison Tools

• Companies frequently use several tools to compare opportunities and risk in

various countries, such as grids that rate country projects according to a number
of separate dimensions and matrices, such as one on which companies plot
opportunity on one axis and risk on another
• When allocating resources among countries, companies need to consider how
to treat reinvestments and divestments, the interdependence of operations in
different countries, and whether they should follow diversification versus
concentration strategies

Allocating Among Locations

• Companies may reduce the risk of liability of foreignness by moving first to

countries more similar to their home countries
• Companies may contract with experienced companies to handle operations for
them, limit the resources they commit to foreign operations, and delay entry to
many countries until they are operating successfully in one or a few

Geographic Diversification versus Concentration

 • Strategies for ultimately reaching a high level of commitment in many countries
are:
 Diversification—goes to many fast and then builds up slowly in each.
 Concentrations—go to one or a few and build up fast before going to
others.
 A hybrid of the two.

Reinvestment versus Harvesting

• A company may have to make new commitments to maintain competitiveness

abroad.
• Companies must decide how to get out of operations if:
 They no longer fit the overall strategy.
 There are better alternative opportunities.

Non-comparative Decision Making

• Companies often evaluate entry to a country without comparing that country with
other countries
• This is because they may need to react quickly to proposals, to respond to
competitive threats, and because multiple feasibility studies seldom are finished
simultaneously

3. EXPORT AND IMPORT STRATEGIES.

Chapter Objectives

• To introduce the ideas of export and import

• To identify the elements of export and exporting strategies
• To compare direct and indirect selling of exporting
• To identify the elements of import and importing strategies
• To discuss the types and roles of third-party intermediaries in exporting
• To discuss the role of countertrade in international business

Exports & Imports

• Exporting refers to the sale of goods or services produced by a company based

in one country to customers that reside in a different country
 • Importing is the purchase of goods or services by a company based in one
country from sellers that reside in another

Advantages of Exporting

• Lower investment way to enter foreign markets

• Lower risk way to enter foreign markets
• Expands sales
• Achieves scale economies
• Diversifies sales

Characteristics of Exporters

• The probability of a company’s becoming an exporter increases with company

size, but the extent of exporting does not directly correlate with size
• Companies export to increase sales revenues, use excess capacity, and
diversify markets

Pitfalls of Exporting

• Companies new to exporting (and also some experienced exporters) often make
many mistakes
• One way to avoid mistakes is to develop a comprehensive export strategy that
includes an analysis of the company’s resources as well as its export potential
• Companies can also improve the odds of export success by working with an
experienced export intermediary

Designing an Export Strategy

• As a company establishes its export business plan, it must:

 assess export potential
 obtain expert counseling
 select a country or countries where it will focus its exports
 formulate its strategy
 determine how to get its goods to market
Types of importers

• Those looking for any product around the world to import and sell.
• Those looking for foreign sourcing to get their products at the cheapest price.
• Those using foreign sourcing as part of their global supply chain.

Types of imports

• Industrial and consumer goods to independent individuals and companies.

• Intermediate goods and services that are part of the firm’s global supply chain.

Strategic Advantages of Imports

• Specialization of Labor
• Global Rivalry
• Local Unavailability
• Diversification of Operating Risks

Customs Agencies

• Customs agencies assess and collect duties, as well as ensure that import
regulations are adhered to
• A custom broker helps by valuing products to qualify for:
 more favorable duty treatment
 qualifying products for duty refunds through drawback provisions
 deferring duties by using bonded warehouses and foreign trade zones
 limiting liability by properly marking an import’s country of origin

Principal types of exporting

• Direct: goods and services are sold to an independent party outside of the
exporter’s home country.
• Indirect exports: goods and services are sold to an intermediary in the domestic
market, which then sells the goods in the export market.

Indirect Selling
 • Exporters may deal directly with:
 agents or distributors in a foreign country
 indirectly through third-party intermediaries, such as export management
companies
 other types of trading companies

Direct Selling

• Through distributors who usually deal with retailers instead of end users
• To retailers and end users
• Internet marketing is a new form of direct exporting that is allowing many small-
and medium-sized companies to access export markets as never before

Export Documentation

• Key export documents are:

 pro forma invoice
 commercial invoice
 bill of lading
 consular invoice
 certificate of origin
 shipper’s export declaration
 export packing list

Export Assistance

• Trading companies can perform many of the functions for which manufacturers
lack the expertise
• Exporters can use the services of other specialists, such as freight forwarders,
to facilitate exporting
• These specialists can help an exporter with the complex documentation that
accompanies exports
• Government agencies in some countries, such as the Ex-Im Bank in the United
States, provide assistance in:
 terms of direct loans to importers
 bank guarantees to fund an exporter’s working capital needs
 insurance against commercial and political risk
Countertrade

• Countertrade is when goods and services are traded for each other. It is used
when a firm exports to a country whose currency creates barriers to efficient
trade
• Common types are: barter, buyback, offset, switch trading, and counter
purchase

4. DIRECT INVESTMENT AND COLLABORATIVE STRATEGIES.

Chapter Objectives

• To clarify why companies may need to use modes other than exporting to
operate effectively in international business
• To comprehend why and how companies make foreign direct investments
• To understand the major motives that guide managers when choosing a
collaborative arrangement for international business
• To define the major types of collaborative arrangements
• To describe what companies should consider when entering into arrangements
with other companies
• To grasp what makes collaborative arrangements succeed or fail
• To see how companies can manage diverse collaborative arrangements

Why Exporting May Not Be Feasible

1. When production abroad is cheaper than at home

2. When transportation costs to move goods or services internationally are too
expensive
3. When companies lack domestic capacity
4. When products and services need to be altered substantially to gain sufficient
consumer demand abroad
5. When governments inhibit the import of foreign products
6. When buyers prefer products originating from a particular country

Foreign Direct Investment

• Control accompanies investment

• Three primary reasons that spur companies to want a controlling interest:
 internalization theory
  appropriability theory
 freedom to pursue global objectives

Foreign Direct Investment (FDI) approaches

• Internalization theory holds that it is sometimes cheaper to handle operations

oneself than to contract with another company
• The idea of denying rivals access to resources (capital, patents, trademarks,
and management know-how) is called the appropriability theory
• When a company has a wholly owned foreign operation, it may more easily
have that operation participate in a global strategy.

Methods for Making FDI

• The advantages of acquiring an existing operation include:

 adding no further capacity to the market
 avoiding start-up problems
 easier financing
• Companies may choose to build if:
 no desired company is available for acquisition
 acquisition will lead to carry-over problems
 acquisition is harder to finance

General Motives for Collaborative Arrangements

• To Spread and Reduce Costs

• To Specialize in Competencies
• To Avoid or Counter Competition
• To Secure Vertical and Horizontal Links
• To Gain Knowledge

International Motives for Collaborative Arrangements

• Gain location-specific assets

• Overcome legal constraints
• Diversify geographically
• Minimize exposure in risky environments
Types of Collaborative Arrangements

• Companies have a wider choice of operating form when there is less likelihood
of competition
• Internal handling of foreign operations usually means more control and no
sharing of profits
• MNEs want returns from their intangible assets

Licensing

• Licensing agreements may be:

 exclusive or nonexclusive
 used for patents, copyrights, trademarks, and other intangible property
• Licensing often has an economic motive, such as the desire for faster start-up,
lower costs, or access to additional resources

Franchising

• Franchising includes providing an intangible asset (usually a trademark) and

continually infusing necessary assets
• Many types of products and many countries participate in franchising
• Franchisors face a dilemma:
 the more standardization, the less acceptance in the foreign country
 the more adjustment to the foreign country, the less the franchisor is
needed

Management Contracts

• Management contracts are used primarily when the foreign company can
manage better than the owners

Turnkey Operations

• Turnkey operations are:

 Most commonly performed by construction companies
 Often performed for a governmental agency
Joint Ventures

• Joint ventures may have various combinations of ownership

• The type of legal organization may be a partnership, a corporation, or some
other form permitted in the country of operation
• When more than two organizations participate, the joint venture is sometimes
called a consortium

Equity Alliances

• An equity alliance is a collaborative arrangement in which at least one of the

collaborating companies takes an ownership position (almost always minority) in
the other(s).
• Equity alliances help solidify collaboration

Problems of Collaborative Arrangements

• The major strains on collaborative arrangements are due to five factors:

 Relative importance to partners
 Divergent objectives
 Control problems
 Comparative contributions and appropriations
 Differences in culture

Managing Foreign Arrangements

• The evolution to a different operating mode may:

 be the result of experience
 necessitate costly termination fees
 create organizational tensions

Negotiating Process

• In technology agreements:
 seller does not want to give information without assurance of payment
  buyer does not want to pay without evaluating information

Performance Assessment

• When collaborating with another company, managers must:

 continue to monitor performance
 assess whether to take over operations

5. THE ORGANIZATION OF INTERNATIONAL BUSINESS

Chapter Objectives

• Profile the evolving understanding of the organization of international business

• Describe traditional and contemporary structures

• Study the systems used to coordinate and control operations

• Profile the role of organization culture

• Examine special situations in the organization of international business

Organization in the International Business

• The organization of international business is challenging due to:

 the geographic and cultural distances that separate countries

 the need to operate differently among countries

 the large number of uncontrollable factors

 the high uncertainty resulting from rapid change in the international

environment

 problems in gathering reliable data in many places

• Organization in the MNE is an integrated function of its formal structure,

coordination and control systems, and the shared values that make up its
culture

• Prevailing environmental and workplace trends pressure managers to question

their customary approaches to organizing their companies
Vertical Differentiation

• Vertical differentiation is the matter of how the company balances centralization

versus decentralization of decision making

• Centralization is the degree to which high-level managers, usually above the

country level, make strategic decisions and pass them to lower levels for
implementation.

• Decentralization is the degree to which lower-level managers, usually at or

below the country level, make and implement strategic decisions.

• Decision making should occur at the level of the people who are most directly
affected and have the most intimate knowledge about the problem.

Horizontal Differentiation

• Horizontal differentiation describes how the company designs its formal

structure to perform three functions:

 Specify the total set of organizational tasks

 Divide those tasks into jobs, departments, subsidiaries, and divisions so

the work gets done

 Assign authority and authority relationships to make sure work gets done
in ways that support the company’s strategy

Contemporary structures

• Contemporary structures, like the network or virtual formats, arrange work roles,
responsibilities, and relationships in ways that eliminate the horizontal, vertical,
or external boundaries that block the development of knowledge-generating and
decision-making relationships

Coordination and Control Systems

 • No matter what sort of structure the MNE uses, it needs to develop coordination
and control mechanisms to prevent duplication of efforts, to ensure that
headquarters managers do not withhold the best resources from the
international operations, and to include insights from anywhere in the
organization

Coordination Systems

• Coordination can take place via standardization, plans, and mutual adjustment

• Standardization relies on specifying standard operating procedures:

 planning relies on general goals and detailed objectives

 mutual adjustment relies on frequent interaction among related parties

Approaches to Coordination

• Coordination by standardization:

 Sets universal rules and procedures that apply to units worldwide.

 Enforces consistency in performance of activities in geographically

dispersed units.

• Coordination by plan requires interdependent units to meet common deadlines

and objectives.

• Coordination by mutual adjustment requires managers to interact personally

with counterparts.

Control Methods

• Companies exercise control through:

 Market control uses external market mechanisms to establish objective

standards.
  Bureaucratic control emphasizes organizational authority and relies on
rules and regulations.

 Clan control uses shared values and ideals to moderate employee

behavior.

Control Mechanisms

• Reports

• Visits to Subsidiaries

• Management Performance Evaluations

• Cost and Accounting Comparisons

• Evaluative Measurements

• Information Systems

Organization Culture

• The set of fundamental assumptions about the organization and its goals and
practices that members of the company share

A system of shared values about what is important and beliefs about how the
world works.

Importance of Culture

• Key features of a company’s organization culture include:

 Values and principles of management.

 Work climate and atmosphere.

 Patterns of “how we do things around here.”

 Traditions.

 Ethical standards.
 An organization’s culture often shapes the strategic moves it considers.

Challenges and Pitfalls

• Managers from different countries often have values that differ from those
endorsed by the company

• People in an MNE often have slight exposure to the values held by senior
managers

• Evidence suggests that mixing national cultures on teams does not necessarily
improve performance

……………………………………………………………………………………………

Module 5
1. MARKETING GLOBALLY.

Chapter Objectives

• To understand a range of product policies and the circumstances in

which they are appropriate internationally

• To grasp the reasons for product alterations when deciding between

standardized versus differentiated marketing programs among
countries

• To appreciate the pricing complexities when selling in foreign markets

• To interpret country differences that may necessitate alterations in

promotional practices

• To comprehend the different branding strategies companies may

employ internationally

• To discern complications of international distribution and practices of

effective distribution
 • To perceive why and how emphasis in the marketing mix may vary
among countries

Marketing Orientations

• International marketing strategies depend on companies’ orientations

that include:

 Production

 Sales

 Customer

 Strategic marketing

 Societal marketing

Production Orientation

• Companies focus primarily on production - either efficiency or high quality - with

little emphasis on marketing.

• Used internationally for certain cases:

 Commodity sales

 Passive exports

 Foreign-market segments or niches

Other Orientations

• Sales orientation: a company tries to sell abroad what it can sell domestically
and in the same manner on the assumption that consumers are sufficiently
similar globally.

• Customer orientation: the product and method of marketing it are varied

• Strategic Marketing orientation: combines production, sales, and customer

orientations
 • Social Marketing orientation: Companies consider effects on all stakeholders
when selling or making their products.

Segmenting and Targeting Markets

• The most common way of segmenting markets is through demographics and

psychographics

• Three basic approaches to international segmentation:

 By country

 By global segment

 By multiple criteria

Why Firms Alter Products

• Legal factors are usually related to safety or health protection.

• Examination of cultural differences may pinpoint possible problem areas.

• Personal incomes and infrastructures affect product demand.

• Although some standardization of products would eliminate wasteful alterations,

there is resistance because:

 A changeover would be costly.

 People are familiar with the “old.”

Potential obstacles in International pricing

• Government intervention

• Market diversity

• Export price escalation

• Fluctuations in currency value

• Fixed versus variable pricing

• Relations with suppliers

The Push-Pull Mix

• Promotion may be categorized as push, which uses direct selling techniques, or

pull, which relies on mass media.

• For each product in each country, a company must determine its promotional
budget as well as the mix between push and pull

• Factors in Push-Pull Decisions:

 Type of distribution system

 Cost and availability of media to reach target markets

 Consumer attitudes toward sources of information

 Price of the product compared to incomes

Standardization of Advertising Programs

• Advantages of standardized advertising include:

 Some cost savings.

 Better quality at local level.

 Rapid entry into different countries.

• Major problems for standardizing advertising among countries are:

 Translation

 Legality

 Message needs

Branding Strategies

• A brand is an identifying mark for products or services.

• Global branding is hampered by:

  language differences

 expansion by acquisition

 nationality images

 laws concerning generic names

• Global brands do help develop a global image

Distribution Strategies

• Distribution is the course - physical path or legal title - that goods take between
production and consumption.

• Distribution reflects different country environments:

 It may vary substantially among countries.

It is difficult to change.

Choosing Distributors and Channels

• Distribution may be handled internally:

 When volume is high.

 When companies have sufficient resources.

 When there is a need to deal directly with the customer because of the
nature of the product.

 When the customer is global.

 To gain a competitive advantage.

• Some evaluation criteria for distributors include their:

 Financial capability.

 Connections with customers.

 Fit with a company’s product.

 Other resources.
  Trustworthiness.

 Compatibility with product image.

The Challenge Of Getting Distribution

• Distributors choose which companies and products to handle. Companies:

 May need to give incentives.

 May use successful products as bait for new ones.

 Must convince distributors that product and company are viable.

• Five factors that often contribute to cost differences in distribution are

infrastructure conditions, the number of levels in the distribution system, retail
inefficiencies, size and operating-hour restrictions, and inventory stock-outs.

The Internet and Electronic Commerce

• Although the Internet offers new opportunities to sell internationally, using the
Internet does not negate companies’ needs to develop sound programs within
their marketing mix

Managing the Marketing Mix

• The difference between total market potential and companies’ sales is due to
gaps:

 Usage - less product sold by all competitors than potential.

 Product line - company lacks some product variations.

 Distribution - company misses geographic or intensity

 Coverage.

Competitive - competitors’ sales not explained by product line and distribution

gaps.

2. GLOBAL MANUFACTURING AND SUPPLY CHAIN MANAGEMENT.

Chapter Objectives

• To describe different dimensions of global manufacturing strategy

• To examine the elements of global supply chain management
• To show how quality affects the global supply chain
• To illustrate how supplier networks function
• To explain how inventory management is a key dimension of the global supply
chain
• To present different alternatives for transporting products along the supply chain
from suppliers to customers

Supply Chain Management

• Supply chain - the coordination of materials, information, and funds from the
initial raw material supplier to the ultimate customer.

Logistics

• Logistics, or materials management, is that part of the supply chain process that
plans, implements, and controls the efficient, effective flow and storage of
goods, services, and related information from the point of origin to the point of
consumption in order to meet customers’ requirements

Global Manufacturing Strategies

• The success of a global manufacturing strategy depends on four key factors:

 compatibility
 configuration
 coordination
 control

Compatibility

• The degree of consistency between FDI decisions and a company’s competitive

strategy.
• Some company strategies that managers must consider:
 Efficiency/cost
 Dependability
 Quality
  Innovation
 Flexibility

Manufacturing Configuration

• Three broad categories of manufacturing configuration are:

 centralized facility
 regional facilities
 multidomestic facilities

Coordination and Control

• Coordinating is the linking or integrating of activities into a unified system.

• Control can be the measuring of performance so companies can respond
appropriately to changing conditions.

Information Technology

• EDI (electronic data interchange)

• ERP (enterprise resource planning)
• MRP (material requirements planning)
• RFID (radio frequency ID)
• E-commerce
• Private technology exchange (PTX)

Quality

• Quality is defined as meeting or exceeding the expectations of customers.

• Quality standards can be:
 general (ISO 9000)
 industry-specific
 company-specific (AQL, zero defects, TQM, and Six Sigma)

Total Quality Management

• Total quality management (TQM) is a process that stresses:

 customer satisfaction
  employee involvement
 continuous improvements
The goal of TQM is to eliminate all defects.

Supplier Networks

• Sourcing: the process of a firm having inputs supplied to it from outside

suppliers (both domestic and foreign) for the production process.
• Domestic sourcing allows the company to avoid problems related to:
 language
 culture
 currency
 tariffs, and so forth
• Foreign sourcing allows the company to reduce costs and improve quality,
among other things

Outsourcing

• Major outsourcing configurations:

 Vertical integration.
 Outsourcing through industrial clusters.
 Other outsourcing.

Make or Buy Decision

• Under the make or buy decision, companies have to decide if they will make
their own parts or buy them from an independent company
• Companies go through different purchasing phases as they become more
committed to global sourcing

Supplier Relations

• When a company sources parts from suppliers around the world, distance, time,
and the uncertainty of the international political and economic environment can
make it difficult for managers to manage inventory flows accurately
The Purchasing Function

• Global progression in the purchasing function:

 Domestic purchasing only.
 Foreign buying based on need.
 Foreign buying as part of a procurement strategy.
 Integration of global procurement strategy.

Major Sourcing Strategies

• Assign domestic buyers for foreign purchasing.

• Use foreign subsidiaries or business agents.
• Establish international purchasing offices.
• Assign the responsibility for global sourcing to a specific business unit or units.
• Integrate and coordinate worldwide sourcing.

Lean Manufacturing and Just-in-Time Systems

• Lean manufacturing - a productive system whose focus is on optimizing

processes through the philosophy of continual improvement.
• JIT - sourcing raw materials and parts just as they are needed in the
manufacturing process.

Transportation Networks

• The transportation system links together suppliers, companies and customers

• Foreign trade zones (FTZs) - special locations for storing domestic and imported
inventory in order to avoid paying duties until the inventory is used in production
or sold.

3. INTERNATIONAL ACCOUNTING ISSUES.

Chapter Objectives

• To examine the major factors influencing the development of accounting

practices in different countries
• To examine the global convergence of accounting standards
• To explain how companies account for foreign-currency transactions and
translate foreign-currency financial statements
 • To discuss different forms of performance evaluation of foreign operations and
how foreign exchange can complicate the budget process
• To explain how arbitrary transfer pricing can complicate performance evaluation
and control
• To introduce the balanced scorecard as an approach to evaluating performance

Accounting for International Differences

• Accounting standards and practices vary around the world

• Both the form and the content of financial statements are different in different
countries

Accounting Objectives

• The accounting process identifies, records, and interprets economic events.

• The Financial Accounting Standards Board (FASB) sets accounting standards in
the United States.
• The International Accounting Standards Board (IASB) is an international private-
sector organization that sets accounting standards.

Cultural Differences in Accounting

• Culture can have a strong influence on the accounting dimensions of

measurement and disclosure
• The cultural values of secrecy and transparency refer to the degree of
disclosure of information
• The cultural values of optimism and conservatism refer to the valuation of assets
and the recognition of income

Financial Statements

• Financial statements differ in terms of:

 language
 currency
 type of statements (income statement, balance sheet, etc.)
 financial statement format
 extent of footnote disclosures
 the underlying GAAP on which the financial statements are based
• Major approaches to dealing with accounting and reporting differences:
  Mutual recognition.
 Reconciliation to local GAAP.
Recasting of financial statements in terms of local GAAP.

International Accounting Standards and Global Convergence

• Convergence is the process of bringing different national Generally Accepted

Accounting Principles (GAAP) into line with International Financial Reporting
Standards (IFRS) issued by the IASB.

Major forces leading to convergence

• Investor orientation.
• Global integration of capital markets.
• MNEs’ need for foreign capital.
• Regional political and economic harmonization.
• MNEs’ desire to reduce accounting and reporting costs.
• Convergence efforts of standards-setting bodies.

International Financial Reporting Standards (IFRS)

• The IASB is attempting to harmonize accounting standards through issuing

International Financial Reporting Standards (IFRS).
• The EU and other countries have agreed to require IFRS for publicly listed
companies.
• FASB and IASB are trying to converge their standards through a variety of
different activities.
• Enforcement of IFRS is a major concern.
• The SEC may soon allow U.S.-listed firms to report financial results using IFRS.

Recording Foreign Currency Transactions

• Foreign-currency receivables and payables give rise to gains and losses

whenever the exchange rate changes. Transaction gains and losses must be
included in the income statement in the accounting period in which they arise.
• The FASB requires that U.S. companies report foreign currency transactions at
the original spot exchange rate and that subsequent gains and losses on
 foreign-currency receivables or payables be put on the income statement. The
same procedure must be followed according to IFRS.

Translating Foreign-Currency Financial Statements

• Translation: the process of restating foreign-currency financial statements.

• Consolidation: the process of combining the translated financial statements of a
parent and its subsidiaries into one set of financial statements.

Translation Methods

• The functional currency is the currency of the primary economic environment in

which the entity operates.
• The current-rate method applies when the local currency is the functional
currency.
• The temporal method applies when the parent’s reporting currency is the
functional currency.

Disclosing Foreign-Exchange Gains and Losses

• With the current-rate method, the translation gain or loss is recognized in

comprehensive income rather than net income, and therefore it goes to owners’
equity.
• With the temporal method, the translation gain or loss is recognized in the
income statement.

Management Accounting Issues

• Performance evaluation and control

• The impact of transfer pricing on performance evaluation
• The use of the balanced scorecard

Performance Evaluation And Control

• Different measures are used to evaluate performance of foreign operations,

including ROI, sales, cost reduction, quality targets, market share, profitability,
and budget to actual.
 • When using a budget, management must select a currency to set the budget
and a currency to evaluate performance.
• The most widely used approaches to translate budgets and compare with
performance use forecasts of the exchange rate.

Transfer Pricing And Performance Evaluation

• Transfer pricing refers to prices on intracompany transfers of goods, services,

and capital.
• There are conflicting reasons for setting transfer prices that make it difficult for
top management to select the correct price.

The Balanced Scorecard

• The balanced scorecard is an approach to performance measurement that

closely links the strategic and financial perspectives of a business.
• Using the balanced scorecard helps management avoid using only one measure
of performance.

Corporate Governance

• The external and internal factors designed to safeguard the assets of a

company and protect the rights of shareholders.
• Corporate governance practices worldwide are partly a function of the legal
environment in the countries where companies operate.
• The Sarbanes-Oxley Act of 2002 was passed in the United States to improve
financial reporting and strengthen internal controls.

4. THE MULTINATIONAL FINANCE FUNCTION.

Chapter Objectives
 • To describe the multinational finance function and how it fits in the MNE’s
organizational structure

• To show how companies can acquire outside funds for normal operations and
expansion, including offshore debt and equity funds

• To explore how offshore financial centers are used to raise funds and manage
cash flows

• To explain how companies include international factors in the capital budgeting

process

• To discuss the major internal sources of funds available to the MNE and to show
how these funds are managed globally

• To describe how companies protect against the major financial risks of inflation
and exchange-rate movements

The Finance Function

• The corporate finance function acquires and allocates financial resources

among the company’s activities and projects. Four key functions are:

 Capital structure.

 Long-term financing.

 Capital budgeting.

 Working capital management.

• The CFO acquires financial resources and allocates them among the company’s
activities and projects.

• Capital structure of the company is the mix between long-term debt and equity

• Leverage is the degree to which a firm funds the growth of business by debt.

• The amount of leverage used varies from country to country.

Factors that Influence the Choice of Capital Structure

• Choice of capital structure depends on:

  tax rates

 degree of development of local equity markets

 creditor rights

• Companies can use local and international debt markets to raise funds.

Global Capital Markets

• Two major sources of funds external to the MNE’s normal operations are debt
markets and equity markets.

Eurocurrencies

• A Eurocurrency is any currency banked outside its country of origin, but it is

primarily dollars banked outside the United States

• Four major sources of Eurocurrencies:

 Foreign governments or individuals who want to hold dollars outside the

United States

 Multinational enterprises that have cash in excess of current needs

 European banks with foreign currency in excess of current needs

 Countries such as Germany, Japan, and Taiwan that have large balance-
of-trade surpluses held as reserves

International Bonds

• A foreign bond is one sold outside the country of the borrower but denominated
in the currency of the country of issue

• A Eurobond, also called a global bond, is a bond issue sold in a currency other
than that of the country of issue
Equity Securities and the Euro equity Market

• The three largest stock markets in the world are in New York, Tokyo, and
London, with the U.S. markets controlling nearly half of the world’s stock market
capitalization.

• Euro equities are shares listed on stock exchanges in countries other than the
home country of the issuing company

American Depositary Receipts (ADRs)

• Most foreign companies that list on the U.S. stock exchanges do so through
American Depositary Receipts, which are financial documents that represent a
share or part of a share of stock in the foreign company

• ADRs are easier to trade on the U.S. exchanges than are foreign shares

Offshore Financial Centers

• Offshore financing is the provision of financial services by banks and other

agents to nonresidents.

• Offshore financial centers are cities or countries that provide large amounts of
funds in currencies other than their own.

• OFCs offer low or zero taxation, moderate or light financial regulation, and
banking secrecy and anonymity.

• The OECD is trying to eliminate the harmful tax practices in tax-haven countries.

Capital Budgeting in a Global Context

• Capital budgeting is the process whereby MNEs determine which projects and
countries will receive capital investment funds.

Methods of Capital Budgeting

 • Capital budgeting techniques:

 Payback period.

 Net present value of a project.

 Internal rate of return.

• MNEs need to determine free cash flows based on cash flow estimates and tax
rates in different countries and an appropriate required rate of return adjusted
for risk.

• Two ways to deal with the variations in future cash flows: determine several
different scenarios or adjust the hurdle rate

Internal Sources of Funds

• Funds are working capital, or current assets minus current liabilities.

• Sources of internal funds are:

 Loans.

 Investments through equity capital.

 Intercompany receivables and payables.

 Dividends.

Global Cash Management

• Cash budgets and forecasts are essential in assessing a company’s cash

needs.

• Dividends are a good source of intercompany transfers, but governments often

restrict their free movement.

• Multilateral netting is the process of coordinating cash inflows and outflows

among subsidiaries so that only net cash is transferred, reducing transaction
costs.
 • Netting requires sophisticated software and good banking relationships in
different countries.

Foreign-Exchange Risk Management

• Translation exposure arises because the dollar value of the exposed asset or
liability changes as the exchange rate changes.

• Transaction exposure arises because the receivable or payable changes in

value as the exchange rate changes.

• Economic, or operating, exposure arises from effects of exchange-rate changes

on:

 Future cash flows.

 The sourcing of parts and components.

 The location of investments.

 The competitive position of the company in different markets.

Exposure-Management Strategy

• To protect assets from exchange-rate risk, management needs to:

 Define and measure exposure.

 Establish a reporting system.

 Adopt an overall policy on exposure management.

 Formulate hedging strategies.

Formulating Hedging Strategies

• Hedging strategies can be operational or financial.

• Operational strategies include:

 Using local debt to balance local assets.

  Taking advantage of leads and lags for intercompany payments.

• Forward contracts can establish a fixed exchange rate for future transactions.

• Currency options can ensure access to foreign currency at a fixed exchange

rate for a specific period of time.

Taxation of Foreign Source Income

• Tax planning influences profitability and cash flow.

• Taxation has a strong impact on several choices:

 Location of operations

 Choice of operating form, such as export or import, licensing agreement,

overseas investment

 Legal form of the new enterprise, such as branch or subsidiary

 Possible facilities in tax-haven countries to raise capital and manage

cash

 Method of financing, such as internal or external sourcing and debt or

equity

 Capital budgeting decisions

 Method of setting transfer prices

International Tax Practices

• Problems with different countries’ tax practices arise from:

 Lack of familiarity with laws.

 Loose enforcement.

• With a value-added tax, each company pays a percentage of the value added to
a product at each stage of the business process.

• Corporate tax rates vary from country to country.

Approaches to Corporate Taxation

• In the separate entity approach, governments tax each taxable entity when it
earns income.

An integrated system tries to avoid double taxation of corporate income through

split tax rates or tax credits.

Taxing Branches and Subsidiaries

• Foreign branch income (or loss) is directly included in the parent’s taxable
income.

• Tax deferral means that income from a subsidiary is not taxed until it is remitted
to the parent company as a dividend.

• In a CFC, U.S. shareholders hold more than 50 percent of the voting stock.

• Active income is derived from the direct conduct of a trade or business. Passive
income (also called Subpart F income) usually is derived from operations in a
tax-haven country.

Transfer Prices

• A transfer price is a price on goods and services one member of a corporate

family sells to another.

• The OECD has set transfer pricing guidelines to eliminate the manipulation of
prices and, therefore, taxes for MNEs.

Double Taxation and Tax Credit

• The IRS allows a tax credit for corporate income tax U.S. companies pay to
another country. A tax credit is a dollar-for-dollar reduction of tax liability and
must coincide with the recognition of income.

• The purpose of tax treaties is to prevent double taxation or to provide remedies

when it occurs.
 5. HUMAN RESOURCE MANAGEMENT.

Chapter Objectives

• To discuss the importance of human resource management in international

business

• To profile principal types of staffing policies used by international companies

• To explain the qualifications of international managers

• To examine how MNEs select, prepare, compensate, and retain managers

• To profile MNEs’ relations with organized labor

Human Resource Management (HRM)

• Human resource management refers to activities necessary to staff the

organization.

• HRM is more difficult for the international company than its domestic counterpart
due to:

 Environmental differences.

 Organizational challenges.

The Strategic Function of International HRM

• Research and anecdotes show that the MNE whose HRM policies support its
chosen strategy creates superior value

• Many MNEs struggle to develop effective HRM policies

• An expatriate is an employee who leaves her or his native country to live and
work in another.
 • A third-country national is an employee who is a citizen of neither the home nor
the host country.

Staffing Policies

• Three perspectives describe how companies set about staffing their

international operations, namely the:

 ethnocentric - fills management positions with home-country nationals

 polycentric - uses host-country nationals to manage local subsidiaries

 geocentric approaches - seeks the best people for key jobs throughout
the organization, regardless of their nationality

• Companies may use elements of each staffing policy but one type normally
predominates

• While executive transferred from headquarters to local operations are more

likely to best understand the company’s core competencies, an ethnocentric
staffing can result in a narrow perspective in foreign markets

Selecting Expatriates

• Technical competence often is the strongest determinant of who is selected for

an international assignment.

• Adaptiveness refers to a person’s potential for

 Self-maintenance and personal resourcefulness.

 Developing satisfactory relationships.

 Interpreting the immediate environment.

• Top managers in subsidiaries usually assume a greater range of leadership

roles and broader duties than do managers of similar-size home-country
operations.
Expatriate Failure

• Expatriate failure is operationally costly and professionally detrimental.

• The improving sophistication of MNE selection procedures has reduced the rate
of expatriate failure.

• A leading cause of expatriate failure is the inability of a spouse to adapt to the

host country.

Training Expatriates

• Training and predeparture preparations can lower the probability of expatriate

failure. Increasingly, preparation activities include the spouse.

• Training and predeparture preparations often includes:

 general country orientation

 cultural sensitivity

 practical skills

• MNEs usually anchor training programs to transfer specific information about the
host country as well as improve the executive's cultural sensitivity.

Compensating Expatriates

• Compensation must neither overly reward nor unduly punish a person for
accepting a foreign assignment.

• The most common approach to expatriate pay is the balance sheet approach.

• MNEs often provide additional compensation or more fringe benefits to

employees who work in remote or dangerous areas.

• Companies struggle to determine the proper degree to which they should

equalize pay for the same job done in different countries.

Repatriating Expatriates
 • Repatriation, the act of returning home from a foreign assignment, has many
difficulties

• Repatriation tends to cause dissonance in many areas, most notably

 Financial.

 Work.

 Social.

• The principal cause of repatriation frustrations is finding the right job for
someone to return to

International Labor Relations

• A labor union is association of workers who have united to represent their

collective views for wages, hours, and working conditions.

• Collective bargaining refers to negotiations between labor union representatives

and employers to reach agreement on a work contract.

How Labor Looks At the MNE

• Labor claims it is disadvantaged in dealing with MNEs because:

 It is hard to get full data on MNEs’ global operations.

 MNEs can manipulate investment incentives.

 They can easily move value activities to other countries.

 Ultimate decision making occurs in another country.

How Labor Responds To the MNE

• Labor tries to strengthen its bargaining power through cross-national

cooperation.
 • Labor may be at a disadvantage in MNE negotiations because the

 Country bargaining unit is only a small part of MNE activities.

 MNE may continue serving customers with foreign production or

resources.

• Falling union membership in many countries foreshadows lower bargaining

power for labor, whereas the effort of MNEs to develop integrated labor relations
across countries increases their bargaining power.

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