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1. Define international business. International business could be define as all commercial transaction between two more countries. Eg.

Transaction could happen in government sector, Private sector, sales, services etc. Aim of the private business is to make profit and government may or may not be motivated by profits. 2. Discuss why the study of international business is important to managers. International business comprises a large and growing potion of the world total business. Today global events and competition climate affect to the all companies whether they are large or small. Many companies ether are international or local compete with international companies. Modes of operations may differ from those used domestically. The best way of conducting business may differ by country to country. An understanding helps you make better carrier decision An understanding help you decide what government policies to support/applied. Regardless of industry managers need to approach their operating strategies from an international stand point. As a manager in almost any industry, we will need to consider where in the world you can obtain the quality of input you need at the best possible price and where you can best increase the sales. More Information You will need to understand that the best way of doing business abroad may not be the same as the best way in your own country. When your company operate internationally it will engage in modes of business such as export and Import that differ from those if uses domestically. The conditions within foreign countries like physical, societal and competitive affect the best way to conduct business there. The companies operating internationally have a more diverse and complex operating environment than those operating only at home country. Understanding some international business complexities companies international operations, and governmental regulation of international business effects company profits, emplacement security and wages, consumer prices and national security. For more informed decisions such and where you want to work and governmental policies you want to support. Eg. CD player is made by Matsushita Japan, Optical pick up unit made in China and ship to Thailand, And electronic components before transporting them to Mexico. 3. List and describe the three primary reasons companies engage in international business: There are three main operating objective of international business. To expand sales: the pursuing international sales usually increase the potential market and potential profits. The companies sales are depend on the following two factors. i. The consumers interesting their products ii. Services and the consumers willingness ability to buying them. Higher sales mean higher profits. Eg. Telecasting sport activities internationally will incur only marginal cost. But sponsors more to spend to more potential buyers which is only for a small segment. Therefore increase

sales are major motive for a companys expansion in to international business. Many of the worlds largest company derive more than half their sales from outside their home countries. Eg. Volks Wagon head quarters in Germany, Sony Ericson in Sweden, Sony Japan, Michelin in France, Nest lay in Switzerland To Acquire Recourses: Foreign sources may give companies lower cost, new or better products. Additional operating knowledge. Manufactures and distributors in seek out components produced in foreign countries for their products and services. They look for foreign capital, technologies and information that they can use their home countries. This will help to reduce their cost. Eg. Sporting goods companies such as Mass group, Healys garments. Acquiring recourses enable a company to improve its products, quality and differentiate itself from competitors. This increases market share and profits. Acquisition of foreign recourses such as capital or expertise improves domestic operation. Eg. Avon used know how from its Latin American marketing experience to help penetrate the US Hispanic market. Minimizing Risk: - international operations may reduce operation risk by i. smoothing sales and profits ii. preventing competitors from gaining advantages

To minimize fluctuation in sales and profit companies seek out foreign market to take advantage of business cycle differences among countries. Eg. Business losses due to an economic resection in a one country can be off set by growth in sale in another country. Eg. Nestle experience in slower growth in Western Europe and the US was offset by higher growth in Asia, Eastern Europe and Latin America. Obtaining supplies of the same products or component from different countries help reduce full impact of price fluctuation or shortages in any one country. Many countries enter in to international business for defensive reasons. Eg. Counter advantages competitors might gain in foreign market could hear them domestically. 4. List and describe the factors that have led to this increased growth in international business in resent decade Increase in an expansion of technology: i. Technology is expanding especially in transportation and communication. One reason is growth of population and another is economic and productivity growth has allowed a larger potion of the population to develop new products. Eg. E-marketing, Smart tiers containing sensors that measures magnetic feels, cellular phones with added features. ii. Tremendous strides in communication and transportation technology help to know about demand for products and services in another country. iii. Conducting business on an international level evolves greater distance than conducting domestic business Liberalization of cross-broader trade and recourse movements: i. Government is removing international restrictions (Tax, Tariffs etc.)Those restrictions are fellows

Their citizens have expressed the desire for easy access to grater verity of goods and services at lower prices. iii. Hope to induce other countries lower their barriers in turn iv. Fewer restrictions enable companies an individuals to take better advantage of international opportunities. Development of services that support international business: i. Companies and government have developed services that are the conduct of international business. Eg. Banks have developed efficient means for companies to received payment in their home country currencies. ii. Today most producers can be paid relatively easily for goods and services sold abroad because of bank credit agreements clearing arrangements that convert one countries currency in to another and insurance. That covers risks like damage enroot and non payment by the buyer. Eg. Letters and Packages sending via any of the international package service company. (UPD, DHL) iii. Institutions provide services to ease the conduct of international business. Growing consumer pressures: i. Consumers know about and want foreign goods and services. ii. Due to innovation in transportation and communications they know about product and services available in other countries. Eg. Wide spread demand for luxury goods. They want more new and better differentiated products. iii. Grater demand as per companies to spend heavily on research in development to search internet, industry journals, trade fairs, trips to foreign countries. iv. Consumers have become more proficient at consuming the globe for better prices, such as US consumers searching the internet to buy lower priced Increase global competition: i. Competition has become more global. As income grows globally more consumers satisfy their needs develop consumer wants that they hoe will become new needs. ii. Expansion of competition forces most companies to seek any means to gain competitive advantages including a global search for quality improvement or cost reduction advantages. iii. The pressures or potential pressures of increased foreign competition can persuade companies to expand their business in to international market. EG. Proctor & Gamble started with a global focus because of international experience and education of their founders. iv. Companies can respond rapidly to many foreign sales opportunities. Changing political situation: i. Political relationship have improved ii. Major reason for growth of international business has been the end of the schism (Division) most communist and non communist countries. Eg. Countries of the communist block strove to be self sufficient. Transformation of political and economic policies of the former Soviet union most of Easton union, China trade now flourishers these countries and rest of the world. iii. Government abilities to respond to pressures to enhance world trade. Eg. Governments spending to improve airport and sea port facilities, building efficient high ways that connect with those in neighboring countries, governments have created travel efficiencies. That speed and reduce the cost of delivering goods internationally. Government provides array of


services to help their companies sell more abroad such as information about foreign market contact with potential buyers. Insurance against non payment in the home country currency Expanded cross national cooperation: i. Countries cooperate more on transnational issues through treaties agreement consultation for the following reasons; To gain reciprocal advantages To attack problems jointly that one country acting along cannot solve To deal with areas of concern that lie outside the territory of all countries

5. List and describe the various modes of international business:

i. ii. iii. iv. v. vi. Modes of International business: Importing and exporting Tourism and transportation Licensing and franchising Turn key operations Management contracts Direct portfolio investments Importing and exporting Merchandise are the most common International economic transaction. Merchandise exports are tangible products goods send out to the country. Merchandise imports arte goods brought in to a country. These could call as visible imports and export. Major souses of international revenue of income and expenditure. Service exports are international non product sales purchases. Eg. Travel, Tourism, banking, Insurance, and the use of asset such as trade marks patents and copy rights. These are very important to some countries. They include many specialized international business operating modes.

Tourism and transportation This is important souses of airline and shipping companies, travel agenesis and hotels etc. Some countries economies depend heavily on revenue from these economic factors. Eg. Maldives. Earning from foreign tourism more important to Bahamian and Maldives.

Licensing and franchising On an international level companies pay fees for engineering services. That is often handling through turn kea operations such as constructions performed under contract of facilities that are transferred to the owner when their ready begging operating. Eg. Management contracts. Disney received managements fee from managing theme parks in France and Japan. Under use of assists licensing agreement when companies allow other to use their assets. Eg. Trade marks, patents. copy rights or expertise under contracts. And also received earnings called royalty. Eg. Sport ware use logos such as Nikey, Fuboo. Franchise is a mode of business in which one party allows to use trade mark that is essential for the franchisees business. This provides component, management services and technology. (Eg. McDonalds

Investments A direct investment involves controlling of a foreign company. (Also Direct foreign Investment FDI) This means ownership of

foreign property in exchange for a financial return such as interest and dividends. This takes two forms. (Direct and portfolio). FDI is one that gives the investor a controlling interest in a foreign company. Control need not be 100% or even 50% interest. Eg. Ymichis ownership of the Seattle marines baseball team is a Japanese FDI in the US. When Tow more companies share ownership of an FDI call as Joint ventures. Eg. Disney with Hong Kong government. FDI not the domain of only the large companies.

Portfolio Investment Key component of the portfolio investments are non contrail of a foreign operation and financial benefits (loans). A portfolio investment is a noncontrolling interest in a company or ownership odf a loan to another party. This could be in one or two forms. (Stock in a company or loan to a company or country in the form of bond, bills and notes. US investments in UK. Foreign Portfolio investments are investments are important for most companies that have extensive international operations. 6. Discuss a companys physical and societal environments. Why should companies understand them when engaging in international business? Mangers in international business must understand social science disciplines and how they affect all functional business fields. Companies effect and are effected by their operating environment. Physical and societal factors could be identified as follows: i. Political policies and legal practices Politics determines where and how international business can take place. Political leaders control the IB as well. Eg. US and China precedence. Political disrupt especially military countries disrupt trade and investments. Each country has its own laws regulating business. Agreements among countries set international law. Domestic and international lows determine largely what the managers of a company operating internationally can do. In that manner the companies should understand the treaties among countries and the la of each country in which they want to operate as well as how laws are enforced o operate profitably abroad. ii. Behavioral factors The interpersonal norms of a country may necessitate a companys alteration of operations. The related social science disciplines of anthropology, physiology and sociology describe in part peoples social and mental development, behavior and interpersonal activities. Managers can be better understanding societal values, attitudes, and believes concerning them self and others. Eg. Popularity of deference sports and how they are play in different countries. iii. Economic factors This explains country differences in costs, currency values and market size. Eg. Higher incomes in the US influence people to play golf in Japan. Manager should learn the analytical tools to determine the impact of an international company on the economys of the host and home countries and the effect of a countries economic policies and and commissions of the company. iv. Geographical Influence Natural condition affect what can be produced where. Managers who know geography can better determine the location, quantity, quality and availability of the world resources. Population distribution around d the world and the impact of human activity on the environment exert a strong influence in IB.

The competitive environment A companys situation may differ among countries by its competitive ranking and the competitors it face. The competitive environment varies by industry company country and international strategies. The companies within the same industry also differ in their competitive strategy. Eg. Honda Vs. BMW. The competitive environment also varies among countries. Eg. Domestic market in US is much larger than Sweden. And also weather companies face international or local competitors at home and in foreign market. Eg. Boeing and Airbus Company. As explain above in all international business managers should know the current situation of all above environmental factors in order to face for the challenging business environment. 7. To operate within a company's external environment, its managers should have, in addition to knowledge of business operations, a working knowledge of the basic social sciences. List and discuss the various social sciences that are discussed. Political Science This is the scientific study of state, government and politics. This is the process by which groups of people make decisions that effect others life. This generally applies to behavior within civil governments. But politics deal with all human group integrations including cooperate, academic and religious, institution. This further relates to social relating involving authority or power. International business managers should have an understanding of the Political environments especially political stability of a particular country before moving in to International business. Law A rule of conduct or procedure established by custom agreement or authority. The IB manager should be aware of international leangle environment of particular country effecting business. Anthropology this is the observation measurement and explanation of human variability in time and space. This includes both biological variability and the study of cultural or learns behavior among contemporarily human society. International business manger should be aware of generation variabilitys, attitudes and behaviors of the people of the country when they make business decision. Sociology Is the study of human social life groups and societies. It is the scientific study of the origin the behavior and the physical social and cultural development of humans and cultures. International business managers should aware of the differences between different groups, societies, cultures and social classes when making decision regarding international business. Economics is a social science that studies the production distribution and consumption of goods and services. This is the science which studied human behavior as a relationship between ends and scarce means which have alternative uses. This involve the study of choices as their effected by incentives and recourses. International business managers should study how economies work and how economic agents interact of a particular country before moving in to the business. Psychology This is an academic an applied discipline involving in the scientific study of mental processes and behaviors. This studies such phenomena as perception, cognition, personality, behavior and inters personal relationship. This refers to the application of such knowledge to


various skills of human activities including issues related to daily life. Eg. Family education and work and the treatment of mental health problems. International business mangers should attempt to understand the role of the function in individual and social behavior of business societies. Geography The study of physical and human landscapes the processors that affect them how and why they change over time and how and why they vary spatially. Geography considers to varying degrees both natural and human influences on the landscape, although a common division separates human and physical geography. IB managers should be aware of different geographic characteristics before launching product to the particular country.(

8. Define culture and discuss cultural differences and its effects on international business. Culture refers to the learn norms based on attitudes, values and believes of a group people.
People simultaneously belong to different groups and therefore they have different cutlers. Cultures differ based on, nationality, ethnicity, work organization, gender, religion, profession, age, political party membership and income levels. The major problems of cultural collision in International business are a company implements practices that work less well than intended. Companys employee encounters distress because of an inability to accept or adjust to foreign behavior. International business includes people from different cultures. Every business function managing a work force, marketing a output, purchasing supplies, dealing with regulators, securing funds are subject to potential cultural problems. An international company must be sensitive to these cultural differences to predict an control its relationships and operations. It should realize that accountant ways of doing business might not be the right or the best way. When doing business abroad company should first determine what business practices in a foreign country differ from its own country. Management must decide what adjustment is necessary to operate efficiently in the foreign country.

9. What are the advantages and shortcomings of using the nation as a proxy for culture Advantages Similarities among people is a cause and effect of national boundaries Laws happily primarily along national lines Witching a bounce of a nation people share common attributes. (Values, language and race) Feeling of we National identity through rights and symbol of the country. Non national cultures can link groups from different nations more closely than groups within a nation (Eg. People in urban areas differ in certain attitudes from people in rural areas. Managers have different work attitudes than production workers do. Shortcomings Existence of sub cultures within the nation Ethnic group, races and classes Variations within countries

Melding of different cultural memberships (gender, profession in to a national culture create inadequate representation of on their own identity. Nation as a mediator in different interest. Failure in mediation causes the nation to dissolve. 10. What features influence cultural stability and cultural change? Language Language is a factor that greatly affects cultural stability. When people from deferent areas speak the same language, culture spreads more easily. Eg. English and Spanish speaking countries. The language diversity also makes it difficult for companies to integrate their work forces and to market their products on a truly national level. National Boundaries A common language within countries is a unifying force. Geographical obstacle Some groups of people are isolated from the rest of the world than others due to their natural barriers (Eg. Terrain and remoteness) and human processors. (Eg. Unique language, transportation and communication connection to the outside and xenophobia/racial intolerance). The more isolated people are the less likely they will influence and be influence by other cultures. Natural conditions obviously differ globally and these conditions effect people preferred physical culture. Proximity also effect cultural diffusion. Religion Many strong values are the result of a dominant religion. Depending on religious believes of respective countries nature of the business will differ. Eg. Sale of certain products in certain countries is prohibited. Eg. Pork in Muslim countries, beef or pork sales in India, all the Israel national airline will not fly on Saturday, Muslims are close their business premises on Friday afternoon. And also in areas where rival religions fight for political control the unrest resulting can disrupt business through property damage, difficulty in getting supplies, inability to reach their customers. 11. Describe the various affiliations a person's ranking can be based on and discuss how social stratification affects such business functions as marketing and employment practices. Affiliations determine by birth known as ascribe group membership include those based on gender family, age, cast and ethnic racial or national origin. Affiliations not determine by birth known as acquired group membership which includes those based on religion, political affiliation and professional association. Social stratification means what determine a persons ranking in the society. That is partly determined by individual factors and a persons affiliations or group membership. Further stratification affects emplacement practices in the business world. Studies have shown that companies hiring promotion compensation and staff reduction functions were differed by nationalities. Eg. When banks needed staff reductions British banks discharge on the basis of performance to salary to save cost. Eg. A middle age manager with high salary and average performance. In addition to the above social stratification affects the emplacement practices through the following: Performance orientation: Businesses reward competence highly in some societies. Some nations base a persons eligibility for jobs and promotions primarily on competence creating a work environment driven more by competition than by cooperation. Eg. US on competence

orientation. Japan cooperation orientation. Egalitarian (open) society place less importance on ascribed group membership. Eg. USA Laws requiring racial or ethnic quotas usually aim to counter discrimination. Eg. Malaysia emplacement quotas or Malays, Chinese and India Gender Base group: Country by country attitudes vary toward male and female roles, respect for age and family types. Eg. China and India extreme degree of male preference. Differences among countries toward women in the workface. Eg. Saudi Arabia less women employed (13 men to one woman). US equality in emplacement (1.2 to one women). In Afghanistan womens are not employed. (1 to zero). Barriers to emplacement base on gender will be another factor and this will be easing in many parts of the world. Eg. Male nurses. Age base group: Cultures usually have a seniority base system of advancement. Eg. US products that are design to make people look younger. There is no mandatory retirement age. This deference in attitude toward age between business and government illustrate the issues complexity. Family base group: In some societies the family ifs the most important group membership and individuals acceptance in society largely depends on the familys social states or respectability rather than on the individual achievement. Eg. China and Southern Italy Low trust outside the family small family run companies are quite successful. But have difficulties in growing due to their reluctance to share responsibility with professional managers. Occupation: People perceive certain occupations as having grater economic and social prestige than others. Eg. This perception determines the numbers and qualifications of people who will seek emplacement in a given occupation. Higher prestige occupations are better paid. National differences in whether people prefer to be self employed Vs working for an organization. Eg. Americans prefer to be self employed and worry less about the risk of failure than Europeans. 12. Explain the difference between ascribed and acquired group memberships, and give examples of each. (Page 56) A group affiliation can be ascribing or acquired or reflection of class and status. Ascribe group membership: Affiliation determine by birth include those based on gender (Male female), family, age (Young old, middle age, and child), cast (low high) and ethnic (American, Spanish), racial (Black, white) or national origin (Chinese, British) Acquired group membership: Affiliation not determine by birth. They include those base on religion (Catholic, Muslims, Hindus), Political affiliation (Socialist, democratic), Professional (Doctor, Engineers), and other associations (Lions, Rotary)

13. Discuss the values of power distance, individualism and collectivism in

international cultures. (Page 62) There are national variations in preference autocratic and consultation management. Therefore companies need to align their management styles those preferences. Power distances: This is the relationship between superiors and subordinate. Where power distance is high people prefer little consultation between superiors and

subordinated. Usually wanting and having an autocratic or paternalistic management style in their organization. When power distance or low people prefer and usually have consultative styles. Eg: if an international company transfers typical Dutch managers (typically low power distance) to Morocco (typically high power distance) these managers might consult with their subordinates in an attempt to improve their work. However these efforts might make subordinates feel so unconformable that their performance deteriorate rather than improves. Those employees preferring an autocratic style or superior subordinate relationship are also willing to accept decision making by a majority of subordinate. What they dont accept is the interaction between superiors and subordinates in decision making. Clearly it may be easier for organizations to initiate certain types of worker participation methods in some countries than in others. Individualism: Safe work environment motivate collectivist. Challenge motivate individualist. Attributes of individualism are low dependence on the organization and desire for personal time, freedom and challenge. Attributes of collectivism are dependence on the organization and desires for training, good physical conditions and benefits. In those countries with high individualism, self actualization will be a prime motivator because employee wants challenges. How ever in countries with high collectivism the provision on safe physical and emotional environment (security need) will be a prime motivator. The degree of individualism and collectivism also influence how employees interact with their colleagues. Eg. Japan collectivist culture and USA Individualistic. Measuring country differences in terms of individualism vs collectivism is complex and contravening. As a result people may vary their individualism depending on circumstances. Eg: China and Mexico are characterize as collectivist cultures and they includes the nuclear family (husband, wife miner children and vertically. extended family- (several generation). Horizontally extended family (aunts, uncles and cosines). This different affect business in several ways. Material rewards from an individuals work will be less rewarding as these revolves are divided among several people. Geographical motilities reduce because re location means other members of a family also have to find new jobs people prefer to remain near relatives. Purchasing decisions may be complicated because of the interrelated roles of family members. Security and social needs may be met extensively at home than in the work place.

14. List and discuss the three aspects of risk-taking behavior as described in the
text. (62 -63) Nationalities differ in is of hindering uncertainties degree of trust among people, future orientation and attitudes of self determination and fatalism. There are here aspects of risk taking behavior. Uncertainty avoidance: Studies on uncertainty avoidance shoe that in countries with the highest scores on this employees prefer said rules that are not to be broken a even if breaking them is some time in he companies best interest. Further these employees plan to work for the company a long time preferring the certainty of their present positions over the uncertainty of better advancement, opportunities else ware. When uncertainty is high superiors should be more precise and assured in the direction they give to subordinates. In countries

where here is high uncertainty avoidance few consumers are prepare to take a social risk of trying a new product first. This is of importance when a new product is introduced to the market. Eg. 40% of Gillette sales come from the product introduced in the last five years. It is advantages for Gillette to enter market such as Denmark UK (with low uncertainty avoidance) before enter in to Belgium and Portugal with high certainty avoidance. Trust: Where trust is high there will be a lower cost of doing business because managers do not have to spend time for seen every possible contingency and monitoring every action for compliance in business relationships. Eg. Norwegian business person going o Brazil may act to naively where as a Brazilian going to Norway may act to cautiously. Future orientation: Countries differ in the extent to which individuals live for the present rather than the future because they see risk in delaying gratification and investment for the future. Eg. Future orientation is higher in Switzerland, The Netherlands and Canada than in Russia, Poland and Italy. Where future orientation is higher, companies will be able to better motivate workers through delayed compensation, such as retirement programmes. Fatalism / across nation: If people believe strongly in self determination, they will be willing to work heard to achieve goals and take responsibility for performance. But believe in fatalism, that every event is inevitable. May prevent people from accepting this basic cause and effect relationship. The effect on business in countries with a high degree of fatalism is that people plan less for contingences. Eg. People may be reluctant to by insurance. Eg. Religious differences conservative or fundamentalist Christian, Muslims and Hindus view occurrences as, the will of goad. Highly fatalistic people are less influenced by bosss persuasive logic than by relationship.

15. Contrast monochromic versus polychromic cultures. (Page 64)

Information processing includes ordering task. Cultures in Northern Europe are called monochromic. In such cultures people prefer to work sequentially (people will finish with one customer before dealing with another. Cultures in Southern Europe are called polychromic cultures where people work simultaneously on all the task they face. Eg. They feel uncomfortable when not dealing immediately with all customers who need services. Northern European business people might erroneously believe their Southern European counterparts are not interested in doing business when they do not get full attention.

16. Discuss the three attitudes or orientations that affect how a company and its
managers adapt to foreign cultures. (Page No. 70) Whether and how much a company and its managers adopt to foreign cultures depends on the conditions within the foreign culture and the attitudes of the companies and their managers. The three attitudes or orientation are: Polycentrism In a polycentric organization the company believe that the business units in deferent countries should act very much like local companies. International business focus on the unique problems that companies have experienced abroad and so, many companies develop a polycentric orientation. A company that is to polycentric may shy away from certain countries or may avoid transferring home country practices or resources that actually may work well abroad. To compete effectively with local companies, international companies should perfume certain function in

a distinct way such as introduce a new products or ways to produce and sell them. Ethnocentrism This is the believe, that once home culture is superior to the others. Ethnocentrism management overlooks national differences and ignores important factors since they have become constant to certain cause and effect relationship in the home country. Believes home country objective should prevail. Thinks change is easy. Geocentrism Geocentric management often uses business practices that are hybrid of home and foreign norms. Eg. Toyota has purposely blended Japanese culture in it French plant. Geocentrism exists when a company bases is operations on an informed knowledge of its organization culture with home and hot country need capabilities and constant. This is the preferred approach to business dealings with another culture as it increases the introduction of innovations and reduces failures.

17. List and discuss the various approaches international managers seek to understand when instituting change in the international arena. (Page no. 73)
Value system - Companies may need to transfer new product or operating methods from one country to another to have competitive advantages. The various approaches when instituting change in the international arena are value system. The more a change upsets important value, the more resistance it will generate/create. Eg. Religious taboos about eating shrimp and crayfish. The cost benefit of change The cost of change may exceed it benefit. Resistance to too much change This may be lower if the number of changes is not too great. Participation Employees are more willing to implement change when they take part in the decision to change. Eg. Inform propose changes to all stake holders well in advance to avoided resistance. Reward sharing Employees are more apt to support change when they expect personnel or group rewards. Eg. Issuing a bonus shares. Opinion Leaders: Manager seeks to introduce change should first convince those who influence others. Eg. Fords sends Mexican operative from its plants in Mexico to US to observe operative methods. Timing Companies should time change to occur when resistance is lightly to be low. Eg. Family members dominate business organizations in Turkey. Learning Abroad International companies should learn things abroad that they can apply at home. Eg. Companies such as Fuji and Kodak created technology for while you wait photo development in Saudi Arabia as customers wanted to retrieve photos without any one else seen them. 18. Discuss the individualistic and communitarian paradigms on the roles of governments. Individualism refers to the primacy of the rights and role of the individuals. Collectivism or communitarian refers to the primacy of the right and role of the company. This evolves around the issue of whether society is better served by guaranteed individual freedom and self expression in search of economic self interest or by developing political needs and methods to subordinate both individuals and the community. Political officials and agencies have a limited role in an individualistic society. Eg. Political system with an individualistic orientation is best

exemplified the US. Individualistic countries typically apply commercial regulations to correct market inefficiencies such as insufficient consumer knowledge or excessive producer power. Individualistic countries encourage businesses to support the good where competition is considered constrains or absent. Government can then pass laws to regulate the market to ensure there is fare competition. Political officials and agencies have an extensive role in collectivist society such as china, advocates the position that government officials should intervene in the structure of the industry. Conduct of companies, actions of managers to ensure that they benefits society. Eg. Governments in collectivist society such as Sweden are more ink line to take forceful actions that aggressively promote labor, social equality and work place democracy. Government in a collectivist society is highly connected to an interdependent with business such as the relationship between the two sectors is cooperative. Eg. Asian countries keen to emulate Japan and China have engage collectivist principles and practices. 19. What does the idea of political ideology refer to? How does it affect international business? Political ideology is the collection of ideas that expresses the goals theories and aims that constitute a socio political programme. Managers from the US where there are two primary political parties may question the political environment in those countries where there is several competing ideology. The main challenge is determine how to best articulate there interest to which political leaders. Political spectrum of the various forms of political ideologies provides a way to profile there similarities and differences. The ultimate test of any political system is its ability to hold a society together despite pressures from different ideologies. 20. Discuss the differences between democratic and totalitarian political systems. Two extremes on the political spectrum are democracy and totalitarianism. Democratic Totalitarian This involves wide participation by citizens Where decision making is in the decision making process. restricted to a few individuals Representative democracy majority rule is In the extreme situations personal achieve through periodic elections survival is link to the regimes survival Te defining feature of democracy is the Totalitarian states fall under the freedom. not free classification Factors for evaluating freedom are This is not a dictatorship or police political rights civil liberties state rather political ideology that involves constant indoctrination by agents of the government to eliminate any decent by anyone any where within the system In terms of political freedom a country is The state relies on violence rated as ether free in that it has a high persecution propaganda and degree of political rights and civil liberties censorship to feasibly suppress opposition Partly free in that it has tolerable degrees of political rights and civil liberties. Not free low degrees political rights and

civil liberties

21. contrast common law, civil law, customary law, theocratic law.? common law- based on precedent civil law - based upon a set of laws that comprise a code. Theocratic law - based upon religious percepts customary law anchors itself in the wisdom of daily experience or important traditions. a mixed legal system emerges when two or more legal systems are used with in a single country. Comprehensive sense: Common law system: Is based on tradition, judge made precedent and usage in which the courts assign preeminent position to existing case law to guide dispute resolution. Countries engaged in these legal system used statutory codes and legislations but only after first looking to the rule of the courts, customs, judicial reasoning, prior court decision and principles of equity. Canada, the United States, England, New Zealand and Australia are common law system countries. A civil law system: Is based on a systematic and extensive codification of law. Countries that engage in this legal system charge political officials, state employed judges, with the duty specify an accessible wrote collection of laws that apply to all citizens. Judgers, rather than create law, apply existing legal procedural courts to resolve disputes. More than 70 countries including Germany, France and Japan are civil law system countries. A theocratic law system: relies on religious and spiritual principals to define the legal environment. This sort of legal system confers ultimate legal authority on religious leaders who use religious law to govern the society. A customary law system: anchors itself in the wisdom of daily experience or more intellectually, great spiritual or philosophical tradition. 22. discuss the multinational agreements of intellectual property rights citing specific developments in each area of property rights.? intellectual property rights- (ownership rights to intangible assets) generally, less developed countries provide less protection for ipr than do industralized nations. those countries with a more individualistic orientation view

ipr as intrinsically legitimate ,but those with a more collectivist out look extol the virtues of shared ownership. 23. define gni and it effects on intrenational business? gross national income- the market valuve of all final goods and servicess produced by a country domestically owned firms in a given year. the world wealth can be measured by through per capita gni. if contry has a high per capita income it reflect that it has a potentiality to the internatinal business.if a contry has a low per capita income it reflect that low potentiality of intyernational business. 24.an economic factor that management needs to be c onsider is inflation.define inflation and discuss the effects of inflation on international business.? Inflation means increase in the general price level.When the inflation is high when setting prices in international business it is high. When the inflation is low, when setting prices in international business is low. Inflation is affect to the exchange rates as well. 25. a useful way to classify countries is by economic system. Describe and discuss the three ways economies can be categorized. Types of economic systems Market economy- a free market economy built upon the private ownership and control of the factors of production. Command economy- a centrally planned economy built ownership and control of the factors of production. upon govtment

Mixed economy- an economy in which economic decisions are largely market driven and ownership is largely private, but significant govtment intervention is still evident. 26. business freedom, trade freedom, fiscal freedom, government size, monetary freedom, investment freedom, financial freedom, property rights, freedom from corruption, lab our freedom.

Count ry Year Over all Scor e 2008 2008 Busine ss Freedo m 90.25 87.38 Trade Freed om 88.18 97.79 Fiscal Freed om 95.0 90.0 Governm ent Size 92.8 90.3 Monet ary Freedo m 93.07 93.87 Investm ent Freedo m 87.21 88.86 Financ ial Freedo m 90 80 Proper ty Rights 90 50 Freedo m from Corrupti on 90 90 Labou r Freed om 83 94 93. 3 99

Hong Kong Singapor

e Ireland Australia United States New Zealand Canada Chile Switzerla nd United Kingdom 2008 2008 2008 2008 2008 2008 2008 2008 82.35 82 80.56 80.25 80.18 79.79 79.72 79.55 92.22 89.32 91.69 99.9 96.74 67.48 83.89 90.79 86.0 83.8 86.8 80.8 87.0 82.2 87.2 86.0 71.5 59.2 68.3 60.5 75.5 78.1 68.0 61.2 64.5 62.83 59.81 55.99 53.67 88.24 61.55 40.06 84.91 83.68 83.67 83.67 80.98 78.82 83.57 80.75 90 80 80 70 70 80 70 90 90 90 80 80 80 70 80 90 90 90 90 90 90 90 90 90 74 87 73 96 85 73 91 86 80. 4 94. 2 92. 3 85. 5 82. 9 90 82 80. 7

27. economic transition - the shift from a command or mixed economy to a free market economy largely depends on a governments ability to dismantle features such as central planning create features such as consumer sovereignty

the success of the transition process depends upon the governments ability to liberise economic activity ,to reform business practices , and to establish legal and institutional frame works.

What factors make it difficult to evaluate whether the overall effects of FDI are sufficiently positive?

29. relativism - a theory stating that ethical truths depend on the groups holding them, making intervention by outsiders unethical. Normative - a theory stating that universal standards of behavior (based on peoples own values) exist that all cultures should follow, making non intervention unethical. 30. the law is slow to develop in emerging areas of concern.laws take time to be legislated and tested in courts .further they cannot anticipate all future ethical diliemas ,basically they are a reaction to issues that have already surfaced. Countries with civil law systems rely on specificity in the law , and there may not be enough laws passed that deal with ethical issues. The law often is based on separated from legal concepts .moral concepts must be considered along with legal ones.
30. Explain why the argument that "anything that is legal is ethical" is insufficient.

Some people argue that the legal justification for ethical behavior is the only important one. By this standard a person or company can do anything that is not illegal. However there are reasons why this legal argument of "anything that is legal is ethical" is insufficient. The law is not appropriate for regulating all business activity because not everything that is unethical is illegal. This would be true of many dimensions of interpersonal behavior. The law is slow to develop in emerging areas of concern. Law takes time to be legislated and tested in courts. Further they cannot anticipate all future ethical dilemmas; basically they are a reaction to issues that have already surfaced. The law often based on moral concepts that are precisely defined and that cannot be separated from legal concepts. Moral concepts must be considered along with legal ones. The law is often needed of testing by the courts. Eg:- case law in which the courts establish precedent. The law is not very efficient. It would be difficult to solve every ethical behavioral problem with a law.

31. Discuss the ethical dimensions and pressures related to labor issues that MNEs face. Many labor issues that MNEs must deal with include fair wages, child labor, working conditions, working hours, and freedom of association. These issues are especially critical in retail, clothing, footwear, and agriculture where MNE s outsource production to independent companies abroad, usually in the developing countries of Asia. Latin America and Africa. Multiple pressures on MNEs from external stakeholders to adopt responsible employment in their overseas operations could be illustrated as follows. Consumers Individual Investors Corporate Investors Pressure for ethical behavior with respect to workers Media Trade Unions Governments NGOs

A most specific listing of worker issues is found in the Ethical Trading Initiative Base Code, which is a British based organization, that focuses on ethical employment practices of MNEs . The objective of ETI is to get companies to adopt ethical employment policies and then monitor compliance with overseas suppliers. All the issues identified in the base code are important but a few tend to get more attention than others such as issues relating to, Use of Child labor, Fair Wages Working conditions Working Hours Freedom of Association. When it comes to use of child labor , MNEs cannot solve all the problems relating to use of child labor especially when it is estimated 5% of child labor is employed in export industries supported by MNEs. Most under aged children who work do so in the informal sectors of the economy, especially in agriculture, and it is difficult to protect them. Use of child labor differs from country to country The challenge that MNEs are facing that they work in an environment with different cultural, legal, and political rules than what they are used to in their home countries. Eg In India use of child labor is somewhat ethical because if the children were not employed they would be worse off. Often there is pressure on MNEs operating in countries where labour policies are not the same as in their home countries to simply leave the market. Eg Nike and other foreign investors have invested heavily on improving the working conditions of workers in their plants in developing countries. Another major challenge in enforcing high standards is local law. Eg In Thailand it is permitted for people to work 84 hours a week in seven 12 hours shifts. But some MNEs such as Nike when they entered into Thai market they were hesitated to allow workers to work 84 hours and lowered it to 60 hours a week. Even though this seem to be a benefit to workers it was hard for MNEs to retain them since they want to work the maximum possible hours. 32. What motivations do companies have to act responsibly? There are four strong motivations for acting responsibly. 1. Unethical and irresponsible behavior could result in legal sanctions, especially in the areas of bribery and product safety. 2. Such unethical and irresponsible behaviors also could result in consumer boycotts, although there is very little evidence for this reason. Eg Nike has been subject to intense scrutiny by the media over the employment practices of its subcontractors in developing countries but a survey has showed that its sales never dropped because of the bad publicity. 3. Unethical behavior can affect employee morale. Good behavior can positively influence both workers in developing countries as well as corporate head quarters back in home countries. Eg XanGo LLc , charity called Operation Kids

4. Companies never know how much the bad publicity would cost them. Eg This may be the reason why Nike and other apparel and clothing manufacturing companies responded quickly to criticism about unfair employment practices in developing countries. 33. Discuss why the understanding of international trade theory is useful to managers in international business. Trade Theory help mangers and governments policy makers to focus on what products should they export or import? How much should be traded? and with whom they trade? These questions are entangled with consideration of what they can produce efficiently and if and how they can improve their competitiveness by improving their bases of production factors. Once countries make decisions officials enact policies to achieve the desired result. These policies have an impact on business because they affect which countries can produce given products more efficiently and whether countries will permit imports to compete against their own produced goods and services. In turn countrys policies influence which products companies might export to given countries as well as what and where companies can produce in order to sell in the given countries. Therefore countries and economies relies on trade theories to guide policy development in relation to International Trade which is very useful in International Business. 34. What is the difference between absolute advantage and comparative advantage? Absolute Advantage is the ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that good or service. Entities with absolute advantages can produce something using a smaller number of inputs than another party producing the same product. As such, absolute advantage can reduce costs and boost profits Comparative Advantage is a situation in which a country, individual, company or region can produce a good at a lower opportunity cost than a competitor. Let's break this down into a simple example. Suppose that two firms both produce two main products: ice cream and bicycles. The first firm, the Danish Ice Cream and Bicycle Co., is located in Denmark, where dairy milk is abundant; the second firm, the Gobi Ice Cream and Bicycle Co., is smack in the middle of the Gobi Desert. The Gobi Ice Cream and Bicycle Co. must spend a lot of money to make ice cream, whereas the Danish Ice Cream and Bicycle Co. spends way less to produce the same amount. The two firms are dead even in their production costs for bicycles. Because the Danish Ice Cream and Bicycle Co. has a comparative advantage with ice cream production, it should probably consider turning exclusively to ice cream. Along the same vein, the Gobi Ice Cream and Bicycle Co. should probably give up the ice cream and focus on the product in which it is the least disadvantaged (bicycles).

35. Discuss the theory of acquired advantage ion and provide examples that support your answer Most of the worlds trade is of services and manufactured goods rather than agriculture goods and natural resources. Countries that produce manufactured goods and services competitively have an acquired advantage, usually in either product or process technology. An advantage of product technology is that it enables a county to produce a unique product or one that is easily distinguished from those of competitors. For example, Denmark exports silver tableware, not because there are rich Danish silver mines but because Danish companies have developed distinctive products. An advantage in process technology is a countrys a ability to produce a homogenous product (one not easily distinguished from that of competitors) efficiently. For example, Japan has explored steel in spite of having to import iron and coal, the two main ingredients for steel production. Primary reason for Japans success is that its steel mills encompass new labor-saving and material saving process. Thus countries that develop distinctive or less expensive products have acquired advantages, at least until producers in another country emulate them successfully. 36. What assumptions underlie the theories of specialization in international trade? What are the limitations of these assumptions? The theories argues that country output will increase though specialization and that countries will best off by trading the output from their own specialization for the output from other countries specialization. However, these theories make assumptions, some of which are not always valid. o Full employment The physician-secretary analogy assume that the physician could stay busy full time practicing medicine. If we relax this assumption, then the advantage of specialization are less compelling. The physician might, if unable to stay busy full time with medical duties, perform secretarial work without having to forgo a physicians higher income. The theories of absolute and comparative advantage both assume that resources are fully employed. When countries have many unemployed or unused resources, they may seek to restrict imports to employ or use idle resources. Economic Efficiency Objective - The physician-secretary analogy assumed that the physician who can do both medical and office work is interested primarily in maximization of profit, or maximum economic efficiency. Countries also often pursue objectives other that output efficiency. They may avoid overspecialization because of the vulnerability created by changes in technology and by price fluctuations. Divisions of Gains Although specialization brings potential benefits to all countries that trade, its not clear how countries will divide increased output. Many people including government policy makers are concerned with relative

and absolute economic growth. If they perceive that a trading partner is gaining too large share of benefits, they may forgo absolute gains for themselves so as to prevent relative losses. o o o It is assumed a simple world compose two countries and two commodities. If it costs more to transport the goods than is saved through specialization, then the advantages of trade are negated. The theories of absolute and comparative advantage address countries advantages by looking at them at one point in time. One should not assume that future absolute or comparative advantages will remain constant. The theories of absolute and comparative advantage deal with commodities rather than services. However, an increasing portion of world trade is in services. This fact doesnt render the theories obsolete, because resources must go into producing services too. The theories of absolute and comparative advantage assume that resources can move domestically from the production of one good to another and at no cost. But this assumption is not completely valid.

37. Discuss the factors that contribute to the effects of the Heckscher-Ohlin theory. Heckscher-Ohlin developed Factor-Proportion Theory, which is based on countries production factors: land, labor, and capital. The theory said that differences in countries endowments of labor compared to their endowments of land or capital explained differences in the cost of production factors Land In countries in which there are many people relative to the amount of land for example, Hong Kong and the Netherlands land price is very high because its in demand. Therefore, these countries engage in businesses that require less land compared to countries such as Australia and Canada that has abundant land compared to the population and they engage in businesses and industries requires larger extent of lands such as agriculture. Labor and Capital In countries where there is little capital available for investment and where the amount of investment per worker is low, managers might expect to find cheap labor rates and export competitiveness in products that require large amounts of labor relative to capital. For example, Iran, where labor is abundant in comparison to capital excels in the production of hand made carpets that differ in appearance as well as in production method from carpets produced in industrial countries by machines purchased with cheap capital. 38. Discuss the theory of country size, citing the factors that differentiate this theory. The theory of country size holds that large countries usually depend less on trade than small countries. Countries with large land areas are apt to have varied climates and an

assortment of natural resources, making them more self-sufficient than smaller countries. Most large countries, such as Brazil, China, India, the U.S. and Russia, import much less of their consumption needs and export much less of their production output than do small countries, such Uruguay, the Netherlands, and Iceland. Transportation cost in trade affect large and small countries differentially. Normally, the far the distance, the higher the transport costs. Among countries that border each other, the smaller country tends to depend more on trade than the larger country because of transportation costs. Although land area is the most obvious way of measuring a countrys size, countries also can be compared on the basis of economic size. Although percentage output and consumption are ways of comparing countries, so is the absolute amount of their trade. The following table shows that of the worlds top 10 exporters and importers, all are high income large earned countries. All these countries are so dominant in the worlds exports and imports. These countrys economies are also large, so that they produce more and there is more to sell. Since the income is also high, people buy both domestic and international products. At the same time, little of the trade with low income countries is with low-income countries. So, the above differs from the theory of country size. 39. How do technological complexities complicate managers' use of factor proportions theory to determine where to locate their production? The factor proportions analysis becomes more complicated when the same product can be produced by different methods, such as with labor or capital. The production technology helps to explain where products are made. For example, countries where abundance of low-cost capital is available relative to labor, use capital intensive method for production. In comparison, countries where cheap labor is available relative to capital uses labor intensive method for production. Bigger countries depend more on products requiring longer production runs. Therefore, the managers in this situation will face the question of where to locate their production facilities to optimize the factors of production. The optimum location of production will depend on comparing the cost in each locale based on the type of production that will minimize the costs. 40. Discuss in detail the various stages of the international product life cycle. The international product life cycle (PLC) theory of trade states that the location of production of certain kinds of products shifts as they go through their life cycles, which consist of four stages introduction, growth, maturity, and decline. Companies develop new products because there is an observed need and market for them nearby. Once a company has created a new product, theoretically it can manufacture that product anywhere in the world. In practice, however, the early production (introductory stage) generally occurs in a domestic location so that the company can obtain rapid market feedback as well as save on transport costs. At this stage, companies may sell a small part of their production to customers in foreign markets, mainly in other high-income countries, because those customers have income to spend on newer products.

Stage 2: Growth Stage As sales of new products grow, competitors enter the market and demand grows substantially in foreign markets, particularly in other high-income countries. The demand may justify producing in some foreign countries to reduce or eliminate transport charges, by the sales at this stage are likely to stay almost entirely in the countries producing the product. Because sales are growing rapidly both at home and abroad, there are incentives for companies to develop process technology. The production process will still be labor intensive as the technology is not developed at this stage in the face of the different competitive products. The producing country will increase its exports in this stage but lose certain key export markets in which local production commence. Stage 3: Maturity Stage The demand begins to level off, although it may be growing in some countries and declining in others. There often a is a shakeout of producers such that product models become highly standardized, making cost an important competitive weapon. Longer production runs become possible for foreign plants which in turn, reduce per unit cost, thus creating more demand in emerging markets. Producers have incentive to shift production to emerging economies where they have inexpensive factors of production to standardized production. Exports decrease from the innovating countries as foreign production displaces it. Stage 4: Decline Stage Those factors of occurring during the mature stage continue to evolve. The markets in high-income countries declines more rapidly than those in lowincome economies as affluent customers demand ever-newer products. By this time, market and cost factors have dictated that almost all production is in emerging economies, which export to the declining or small niche markets in high income countries. In other words, the country in which the innovation first emerged and exported from then becomes the importer.

41.) Discuss the country similarity theory, citing factors that lead similar countries to trade with each other. International trade takes place because of the differences among countries in terms of natural resources and factor endowment proportions. Most trade takes place among high income countries. Country Similarity Theory -says that a producer having developed a new product in response to observed market conditions in the home market will turn to markets that are most similar to those at home. Markets in high income countries can support the development and sale of both new products and variations of existing products than the markets in low income countries. Eg; Germany is traditionally strong in Machinery & Equipment Switzerland for Pharmaceutical products Denmark for Dairy products Trade in new products occurs because countries specialize to gain acquired advantage by apportioning their research costs more strongly to some sectors

than to others. Trade in differentiated products occur because companies in different countries differentiate existing products, they may gain some markets abroad thus creating two way trade in similar products. Eg; USA is both a major exporter and importer of tourist services, vehicles and passenger aircrafts because different companies from different countries have developed product variations that appeal to different consumers. Boeing from US and Airbus Industries from Europe produce passenger aircrafts, but US and European airlines buy both Boeings and Airbus Industries aircrafts because their models differ in features like capacity, flying range, fuel consumption and perceived reliability. These two companies sell the aircrafts primarily with in their country and there after each others markets because these markets have higher economic purchasing power. Factors that lead similar countries to trade with each other Culture similarity also helps much of the direction of trade Importers and exporters find it easier to do business in a country they perceive as culturally similar to their home countries because they speak a similar language. Historic colonial relationships explain much of the trade between specific high income and low income economies. Eg; Colonial history in France in Africa has given a edge to Air-France in serving those former colonies international air passenger markets. Political relationships and economic agreements among countries may discourage or encourage trade between them or their companies. Political animosity between Us & Cuba has caused mutual trade to be almost non existent for last four decades. As a result Us replaced Cuban sugar imports with imports from Mexico and Dominican Republic. Countries with in the same Territory Trade encouragement is the agreement among many European countries to remove all trade barriers with each other. This agreement has caused a greater share of companies total trade to be conducted with in the EU Group. High income countries primarily trade with each other because they -produce and consume more -emphasize technical breakthroughs in different industrial sectors -produce differentiated products and services Therefore according to the Country Similarity theory trade partners are affected by -Distance, Cultural similarity -relations between countries

-political affinity among countries. -historic Colonial relationships Geographical distance between 2 countries accounts to a larger extent, transport costs and time. Eg; Finland is a major exporter to Russia because its transport costs are cheap and fast. Acer, a Taiwanese computer maker built a plant in Finland to store in Russia because of savings by shipping from Finland and more secure storage and easy in operations in Finland than Russia. 42.) In a short essay, discuss the two basic approaches to government policy that support strategic trade policy. 1.Government Policy of Influencing is Seldom or Neutral The importance of acquired advantage in world trade, is that a country must develop and maintain industries that will not only be competitive but also earn enough revenues so that its domestic economy will perform as well as the economies in other countries. Government influence is seldom neutral or countries compete in supporting their own production. Even if governments can identify future growth Industries which can likely succeed it does not follow that companies in those industries should receive government assistance. Let entrepreneurs take risks. The successful once will survive, be competitive internationally, and reap the benefits for having chosen industries correctly. Countries should try to become competitive in industries that will yield more returns emerging growth industries, because they offer the possibility of adding value with in the country where the industry operates. Institution in that area are a way of life that will not go away. These institutions not targeted industries might be more effective by developing means to protect the law. Stabilize the population support entrepreneurial activity in a informal sector of the economies and deal with economic and gender inequities. Such actions will improve the investment environment for all industries without the need for government officials to pick industries to support. 2.Government Policy of Direct Intervention The other approach to government policy is to alter conditions that will affect the attractiveness to specific targeted industries rather than in general or seldom interference. Eg. Brazilian and Canadian government support for production of regional jets.

Even if a country successfully targets an industry, conditions change. Once many people are employed in a distressed industry, there are pressures to continue to support it, which is costly to the supporting economy. There are limited circumstances when targeting will work, especially for small countries. Eg: Costa Rica a small country with 2003 GNP of $35.3 bn was only about 15% of the value of Wal-marts sales for the year. A small economy is in a situation where the scale of decision making is manageable and where most people affected know each other and can reach a mutual agreement. In a large economy this is impossible. Eg: Government may alter conditions that affect factor proportions, efficiency and innovation. It may upgrade production factors by improving human skills through education, provide infrastructure promote a highly competitive environment and induce consumers to demand an ever higher quality of products and services. Eg: Sub-Saharan African example. Short Term Policies have usually resulted in small payoffs, largely because government find difficulty in identifying and targeting the right ones. Country may target an industry for which global demand never reaches expectations. Eg: British and French joint support for supersonic passenger aircraft but the Cos in the targeted industry do not become competitive. Eg: Thailands support of the steel cos which have had high costs due to poorly trained managers and rising labour costs in relation to other nearby countries. Tendency of too may countries to identify the same industries excessive competition and inadequate returns. These are the two major policies adopted by any government for promoting its strategic trade policy. 43.) What are the four conditions in the Porter Diamond? What are the limitations of the Porter Diamond in explaining countries' competitive advantage? Porters Diamond theory shows 4 conditions as important for competitive superiority. Companys development of internationally competitive products depends on their domestic Demand Conditions Factor Conditions Related and Support Industries Firm Strategy, Structure and Rivalry The frame work of the theory is a useful tool for understanding how and where globally competitive companies develop and sustain themselves. Usually but not

always all 4 conditions need to be favorable for an industry with in a country to attain global supremacy. Demand Conditions- companies start up production near the observed market. Eg; Italian Ceramic tile Industry. After world war two there was a post war housing boom. Consumers wanted cool floors because of the hot Italian climate. Factor Conditions -influenced both the choice of tile to meet the consumer demand and choice of Italy as the production location. Wood was less available and more expensive than tile, and most production factors (skilled labor, capital, technology, and equipment) were available with in Italy on favorable terms. Related and Support Industries - enamels and glazes was also favorable. Transport costs and the country size. The combination of these three conditions demand, factor conditions, and related and support industries influenced companies decision to initiate production of ceramic tiles in postwar Italy. The ability of these companys to develop and sustain a competitive advantage required favorable circumstances for the fourth condition. Firm Strategy Structure and Rivalry- Barriers to market entry was low in the tile industry and lot of companys initiated production. Rivalry became intense as companies tried to serve increasingly sophisticated Italian consumers. These circumstances force break through in both process and product technologies. This gave the Italian producers advantages over foreign producers and enabled them to gain the largest global share of tile exports. Limitations of the Porters Diamond 1.The existence of the 4 favorable conditions does not guarantee that an industry will develop in a given locale. Entrepreneurs may face favorable conditions for many different lines of business. Competitive advantage theory holds that resource limitations may cause companys in a country to avoid competing in some industries even though an absolute advantage may exist. Eg; conditions in Switzerland would have favored success if companies in that country had become players in the personal computer industry. However Swiss companies preferred to protect their global positions in watches and scientific instruments rather than to downsize these industries by moving their highly skilled people in to a new industry. 2, Increased ability of companys to attain market information ,production factors, and suppliers from abroad. They face more competition from foreign production and foreign companies. The absence of any of the 4 conditions from the diamond domestically therefore may not inhibit companys and industries from becoming globally competitive. Take the existence of demand conditions. Foreign rather than domestic demand conditions have spurred much of the recent growth in

Asian exports. Japanese companies as Uniden and Fujitech target their sales almost entirely in foreign markets. Domestic factor conditions can change Eg; capital and managers are now internationally mobile. 3.If related and supporting industries are not available locally materials and components are now more easily brought in from abroad because of advancement in transportation and the relaxation of import restrictions. Many MNEs now assemble products with parts supplied from a variety of countries. Finally companys react not only to domestic rivals but also to foreign based rivals with which then compete at home and abroad. 44.) From an economic standpoint, why do production factors move from one country to another? Factor conditions in any country can change in quality and quantity, there by the relative capabilities of countries also change. This change may occur because of internal circumstances. If savings rates in a country increases countries will have more capital relative to their factor of land and labor. If they spend more on education the quality of labor will improve. The biggest change at present is the population change. 33 countries are projected to have smaller populations in 2050 than today primarily because of low fertility rates. Eg. 14% decrease in Japan and 22% decrease in Italy. 8 countries are expected to account for half of the world's population increase, with India, Pakistan and Nigeria leading the pack. These changes will have an impact on future export production and import market locations. Mobility of capital, technology and people affect trade and relative competitive positions. Production factors and finished goods are only partially mobile. Short term capital is the most internationally mobile production factor. Investors primarily transfer capital because of differences in expected return (accounting for risk) Short-term capital is more mobile than long-term capital especially direct investment, because there is more likely to be .an active market through which investors can quickly buy foreign holdings and sell them if they want to transfer them back home or to another country. Investor feel more certain about short term. Political and economic conditions in a foreign country than long-term ones. Political and economic conditions will have a perception of risk and where they prefer to put their capital. Long-term investments abroad can be because they want to tap markets and lower operating costs. But not all capital movements occur because of risk to and expected return on capital. Governments give foreign aid and loans. Not for profit organizations offer donate money aboard to relieve worrisome economic and social conditions. Individuals remit funds to help their families in foreign countries. People are also internationally mobile. If people move legally as immigrants they have to learn another language and adjust to a different culture. Such immigrants lose their families and friends who serve as their customary support groups. About 2% of the world population has migrated to another country. Of

the people who go abroad to work some move permanently and some move temporarily. Some people emigrate to another country, become citizens. Some MNEs assign mangers to work abroad for a smaller period or for several years. Eg;US gives 10 months permits to Mexico. Some move legally and some illegally as workers leaving their families behind with one hope of returning home after saving enough money while working in a foreign country. People move mostly for economic reasons. Indonesian laborers work in Malaysia because they can make 10 times as much per day as they can earn at home. People move for political reasons Eg. because of persecution or war dangers in which case they are known as refugees and become part of the labor pool where they live. Some times it is difficult to distinguish between economic and political motives for international mobility because poor economic conditions often paralleled poor political conditions. 45.) Why might import restrictions not create more domestic employment? Restricting imports to vacate jobs is that other countries normally retaliate with their own restrictions. That is trade restrictions designed to support domestic industries typically trigger a drop in production in some foreign country. Eg. When US restricted steel imports the EU, Brazil and Japan threatened to restrict purchases of US products like oranges. The US then rescinded its steel protection. 2 factors can ease the effects of retaliation. Small trading countries are less important in the retaliation powers. 2nd retaliation that decreases employment in a capital intensive industry may not effect employment as much as the value of the trade loss. Even if no country retaliates the restricting country may gain jobs in one sector only to lose jobs elsewhere. Eg. lower imports of a product means fewer import handling jobs. Import restrictions to create domestic employment may lead to - retaliation by other countries - are less likely retaliated effectively by small economies - are less likely to be met with retaliation if implemented by small economies. - may decrease import jobs because of price increases for components. - may decrease import jobs because of lower incomes abroad Imports may help create jobs in another industries and these industries may champion free trade. Eg. When US imposed import restrictions on steel, the

US company Delphi, the world's largest auto parts manufacturers had reasonable competing because steel prices increased so much. Imports also stimulates exports although indirectly by increasing foreign income and foreign exchange earnings, which are then spent on new imports by foreign consumers. If import restrictions increases the domestic employment fellow citizens will have to bear the costs of higher prices or higher taxes. If managers believe trade protection is a long term policy they may see no competitive urgency to invest in technological innovations, depriving consumers of higher quality products at lower prices. Govt. should compare the costs of higher prices with the costs of unemployment and displaced production that would result from free trade. They must also consider the costs of policies to ease the plight of displaced employees. Such as unemployment benefit and retraining. Persistent unemployment pushes many groups to call for protectionism. Efforts to reduce unemployment through import restrictions are ineffective. 46.) Explain the rationale for and problems of making the infant industry argument work as intended. The infant industry argument holds that a government should shield an emerging industry from foreign competition by guaranteeing it a large share of the domestic market until it is able to complete on its own. Many emerging economies use this argument to validate their protectionist policies. The infant industry argument presumes that the initial output costs for a small scale industry in a given country may be so high as to make its output noncompetitive in world markets. Eventual competitiveness is not the reward for endurance but the result of the efficiency gains from achieving the economies of large scale production and of learning from experience. Therefore the host. government needs to protect an infant industry long enough for its fledging companies to gain economies of scale and their employees to translate experience into higher productivity. These achievements will enable a company to manufacture efficiently, thereby positioning it to compete internationally. The govt. can then recoup the costs of trade protection through benefits like higher domestic employment, lower social costs and higher tax revenues. Production costs will decrease overtime, they may never fall enough to create internationally competitive products. This risk poses 2 problems for protect an infant industry. 1.Governments must identify the industries that have a high probability of success. Some industries become competitive because of govt. protection. Automobile production in Brazil and South Korea are good examples. Otherwise

automobile production in Malaysia and Australia - the protected remain inefficient even after years of govt. aid.


If infant industry protection goes to an industry that fails to reduce costs enough to compete against imports, chances are its owners, workers and suppliers will formidable pressure group that may prevent the importation of competing lower priced products. The security of govt. protection against import competition may deter managers from adopting the innovations needed to compete globally. Even if policy makers can determine those infant industries likely to succeed, it does not necessarily follow that companies in those industry should receive govt. assistance. Entrepreneurs who endured early losses to achieve future benefits without any public help. Policy makers regularly entered that govts should assist new companies facing high entry barriers and efficient foreign rivals because local entrepreneurs may lack the means to become competitive without assistance. Infant industry protection requires some segment of the economy to incur the higher cost of inefficient local production. Consumers end up paying higher prices for the protected companies products. A govt. can subsidize companies so that consumer prices do not increase, in which case taxpayers pay this subsidy. Too production subsidies reduce the amount that govt's can spend elsewhere, e.g. education and infrastructure, a serious consideration in emerging economies. The validity of the Infant Industry argument rests on the expectation that the future benefits of an internationally competitive industry will exceed the costs of the associated protectionism. 47.) Why do developing countries sometimes impose import restrictions to increase their levels of industrialization? Countries with a large manufacturing base have higher per capita income than those that do not have large manufacturing bases. Countries like US and Japan have developed an industrial base while largely regulating imports from foreign producers. Some emerging economies try to emulate this strategy using trade protection to improve local industrialization. These companies believe surplus workers can more easily increase manufacturing output than agricultural output. Inflows of FDI in the industrial area promote sustainable growth. Prices and sales of agricultural products and raw materials fluctuate very much which is a detriment to economies that depend on few of them. Markets for Industrial products grow faster than markets for agricultural products. Local industry reduces imports and promote exports

Industrial activity helps the nation-building process.

Use of surplus workers A large portion of the population in may emerging markets live and farm in rural areas usually agricultural output per person is low. Many people can migrate from the agriculture to industrial sector without significantly reducing total agricultural output. Industrialization argument presumes that the unregulated importation of lower priced products prevents the development of a domestic industry. Industrialization rationale asserts that Industrial output will increase even if domestic prices do not become globally competitive, because local consumers must buy goods from local produces. Shifting people out of agriculture can create problems workers high expectations of industrial jobs may be unfulfilled, leading to increasing demand for social services. Migration to urban areas of people who then cannot find suitable jobs. Housing and social services Eg: Chinas move towards industrialization has moved millions of people to cities. Most have prospered but many have not. Rapid migration from rural to urban areas may reduce agricultural output. Jeopardizing countrys self sufficiency. Most of the words agricultural production and exports are from high income countries because of their capital intensive agricultural sectors enables the transfer of resources into the manufacturing sector without decreasing agricultural output. Promoting Investment flows- Import restriction, applied to spur industrialization may increase FDI. Attractive foreign markets by trade restrictions, foreign companies may transfer manufacturing to that country in order to gain the advantages of a lucrative or potential market. Eg: Thailands automobile import restrictions promoted foreign automakers like, GM, Ford and BMW to invest in Thailand. FDI inflows may add to local employment which is attractive to policy makers Diversification Prices of primary products fluctuate markedly . Price variations due to uncontrollable factors such as whether affecting supply or business cycles abroad affecting demand can play havoc on economies that depend on export of primary products. Greater growth for manufactured products. It takes more low priced primary products to buy the same amount of high priced manufactured goods. 48.) Compare import substitution policies with export-led development policies.

Industrialization emphasizes either products to sell domestically or products to export. Emerging economies promotes Industrialization by restricting imports in order to boost local production for local consumption. Eg; Costa Ricas import substitution policies from 1960 to 80s. But these countries now believe that import substitution is not the best approach to develop new industries. If protected industries does not function efficiently local consumers will have to pay higher prices or higher taxes. Taiwan and South Korea have achieved rapid economic growth by promoting the development of industries that export their output. i.e export led development. In reality it is difficult to distinguish between import substitution and export promotion. Industrialization initially results import substitution, but export development of the same products may be feasible later. Eg; India restricts importation of automobiles and parts. Local industries capture the sales. But India will eventually promote the export of cars. A country may concentrate its industrialization activities on products for which it would seems to have a comparative advantage does not guarantee that those products become competitive exports. There are trade barriers ,which interfere with export of manufacturing goods from emerging economies. 49.) Explain the optimum tariff theory. Optimum Tariff Theory- one price argument for government influence on trade is the optimum tariff theory says that a foreign producer will lower its prices if the importing country places a tax on its products. If this happens benefits shifts to the importing country because the foreign producer lower its profits on the export sales. Eg; Exporters cost price US$ 500 per unit. Exporters selling price US$ 700 per unit 10% tax is imposed on the domestic price. Exporter lowers the price to US$ 636..36 per unit. Tax US$ 63.64 Importers price is still US$ 700. Profit is now US$ 136.36 instead of US$ 200 per unit. This is better than a no profit at all situation. Previous US $ 63.64 per unit has shifted to the importing country. Exporter lower its price by any amount .revenue goes to the importing country and the tariff is deemed an optimum one Many Egs of products whose prices did not rise as much as the amount of the imposed tariff. However it is difficult to predict when ,where and which exporters will voluntarily reduce profit more. 50.) Define dumping and discuss its effects on a country's economy. P182 Companies some times export below the cost or below their home country prices and this practice is called dumping. Most countries prohibit imports of dumped products but enforcement usually occurs only if the imported product disrupts

domestic production. If there is no domestic production then host country consumers get the benefit of lower prices. Companies may dumped products because they cannot otherwise built a market abroad. Lower price encourages consumers to sample the foreign brand. Companies can afford to dump products if they can charge high prices in their home market or if their home country government subsidizes them. They may also opt to incur short term losses abroad presuming that they can recoup those losses after they eliminates their rivals or gain brand loyalty and they can then raise their prices. Home country consumers or taxpayers will realize that paying high prices locally results in lower prices for foreign consumers. An industry that believes it is competing against dumped products may appeal to its government to restrict the imports. US industries such as shrimps, candles, and furniture have done so in recent years. It is difficult to determine a foreign companies cost or domestic price because of limited access to the foreign producers accounting statements, fluctuations in exchange rates and the passage of products through layers of distribution before reaching the end consumer. The result is that government allegedly restrict imports arbitrarily through anti-dumping provisions of their trade legislations and are slow to dispose of the restrictions if pricing situation change. Companies sometimes export below cost or below their home-country price. This practice is called dumping. Most countries prohibit imports of dumped products, but enforcement usually occurs only if the imported product disrupts domestic production. If there is no domestic production, then host country consumers get the benefit of lower prices. Companies may dump products because they cannot otherwise build a market abroad essentially, a low price encourages consumers to sample the foreign brand. Companies can afford to dump products if they can charge high prices in their home market or if their home-country government subsidizes them. They may also opt to incur shortterm losses abroad, presuming that they can then raise their prices. Ironically, home-country consumers or taxpayers seldom realize that paying high prices locally often results in lower prices for foreign consumers. A company that believes it is competing against dumped products may appeal to its government to restrict those imports. However, determining a foreign companys cost or domestic price is difficult because of limited access to the foreign producers accounting statements, fluctuations in exchange rates, and the passage of products through layers of distribution before reaching the end-consumer. The result is that governments allegedly restrict imports arbitrarily through the antidumping provisions of their trade legislation and are slow to dispose of the restrictions if pricing situations change. Companies caught in this situation often lose the export market they had labored to build. 51. Many companies and industries argue that they should have the same access to foreign markets as foreign industries and companies have

to their markets. Discuss this issue of "comparable access" or "fairness." P181 Companies and industries often argue that they are entitled to the same access to foreign markets as foreign industries and companies have to their markets. Economic theory supports this idea, since it assumes that producers that operate in industries in which increased production leads to steep cost declines but that lack equal access to a competitors market will struggle to gain enough sales to be cost-competitive. The comparable-access argument has been used in the semiconductor, chemicals, aircrafts, softwood lumber, energy, and telecommunications industries. The argument for equal access is also presented as one of fairness. For example, the U.S. government permits foreign financial service companies to operate in the United States, but only if their home governments allow U.S. financial service companies equivalent market access. However, some reject using the idea of fairness to justify comparable market access. First, tit - for - tat market access can lead to restrictions that may deny ones own consumers lower prices. Second, countries imposition of additional import restrictions to coerce other countries to reduce their entry barriers may escalate trade frictions. For example, France prohibited the entry of U.S. hormone-treated beef. The United States countered by placing additional taxes on such French products ad Roquefort cheese and foie gras in an effort to prod France to rescind its restrictions. Not only did the French government maintain the restrictions, but French farmers also protested at McDonalds restaurants by dumping manure at entryways and throwing potatoes at its customers. Third, governments would find it impractical to negotiate and monitor separate agreements for each of the thousands of different products and services that might be traded. 52. Define and explain the different types of tariffs (duties). P185

A common distinction is between tariff barriers and nontariff barriers. Tariff barriers affect prices; nontariff barriers may affect either price or quantity directly. A tariff is the most common type of trade control and is a tax that government levy on a good shipped internationally. That is, governments charge a tariff on a good when it crosses an official boundary-whether it be that of country, say Mexico, or a group of countries, like the EU, that have agreed to impose a common tariff on goods entering their bloc. Tariffs collected by the exporting country are called an export tariff; if collected by a country through which the goods have passed, it is a transit tariff; if collected by the importing country, it is an import tariff. The import tariff is by far the most common. 53. List and define the types of nontariff barriers that limit the quantity of goods traded. P187

Nontariff Barriers: Quantity Controls Quotas The quota is the most common type of quantitative import or export restriction. An import quota prohibits or limits the quantity of a product that can be imported in a given year. Quotas raise prices just as tariffs do but, being defined in physical terms, they directly affect the amount of imports by putting an absolute ceiling on supply-says, for example, three million DVD players from a particular country in a given year. Therefore, quotas usually increase the consumer price because there is little incentive to use price competition to increase sales. A notable difference between tariffs and quotas is their direct effect on revenues. Tariffs generate revenue for the government. Quotas generate revenues for those companies that are able to obtain a portion of the intentionally limited supply of the product that they can then sell to local customers. A country may establish export quotas to assure domestic consumers of a sufficient supply of goods at a low price, to prevent depletion of natural resources, or to attempt to raise export prices by restricting supply in foreign markets. To restrict supply, some countries band together in various commodity agreements, such as those for coffee and petroleum, which then restrict and regulate exports from the member countries. The typical goal of an export quota is to raise prices to importing countries. A specific type of quota that prohibits all forms of trade is an embargo, which works or exports, on whole categories of products regardless of destination, on specific products to specific countries, or on all products to given countries. Governments impose embargo in an attempt to use economic means to achieve political goals. Buy Local Legislation. Government purchases are a large part of total expenditures in many countries; typically, governments favor domestic producers. In the United States, for example, buy American legislation requires government procurement agencies to favor domestic goods. Sometimes governments specify a domestic content restriction-that is, a certain percentage of the product must be of local origin. Sometimes they favor domestic producers by establishing price mechanisms. For example, a government agency may buy a foreign-made product only if the price is at some predetermined margin below that of a domestic competitor. Many countries prescribe a minimum percentage of domestic content that a given product must have for it to be sold legally in their country. In addition, they may prod foreign producers to add local content with the threat of import restrictions. Such programs have proven successful. For example, U.S. trade pressures against Japan-based auto parts exporters spurred Japanese automakers in the United States to purchase more parts from U.S.

based suppliers; some Japanese branded cars now have the same level of domestic content as vehicles made by General Motors and Ford. Standards Countries can devise classification, labeling, and testing standards to allow the sale of domestic products but obstruct that of foreign-made ones. Take product labels, for instance. The requirement that companies indicate on a product where it is made provides information to consumers who may prefer to buy products from certain countries. This technicality adds to a firms production costs, particularly if the label must be translated for each export market. Further, raw materials, components, design, and labor increasingly come from many countries, so most products today are of mixed origin. For example, the United States stipulated that any cloth substantially altered (woven, for instance) in another country must identify that country on its label. Consequently, designers like Ferragamo, Gucci, and Versace must declare Made in China on the label of garments that contain silk from China. The professed purpose of testing standards is to protect the safety or health of the domestic population. However, some foreign companies argue that testing standards are just another means to protect domestic producers. For example, EU standards keep some United States and Canadian products out of the European market completely. This is the case with genetically engineered corn and canola oil even though the worldwide scientific community reports that the genetic engineering poses no human health risk and France grows and sells a small amount of genetically engineered corn itself. Specific Permission Requirements Some countries require that potential importers or exporters secure permission from government authorities before conducting trade transactions. This requirement is known as an import license. A company may have to submit samples to government authorities to obtain an import license. This procedure can restrict imports or exports directly by denying permission or indirectly because of the cost, time, and uncertainty involved in the process. A foreign-exchange control is a similar type of control. It requires an importer of a given product to apply to a government agency to secure the foreign currency to pay for the product. As with an import license, failure to grant the exchange, not to mention the time and expense of completing forms and awaiting replies obstructs foreign trade. Administrative Delays Closely akin to specific permission requirements are intentional administrative delays, which create uncertainly and raise the cost of carrying inventory. For example, United Parcel Service (UPS) provisionally suspended its ground service between the United States and Mexico because of burdensome Mexican customs delays. Competitive pressure, however, moves countries to improve their administrative systems. Chinese trade authorities, for example, cut the time taken for goods manufactured by Hong Kong firms in Guangdong to pass through internal customs checks from one week to one day.

Reciprocal Requirements Governments sometimes require exporters to take actual merchandise in lieu of money or to promise to buy merchandise or services in place of cash payment in the country to which they export. This requirements is common in the aerospace and defense industries-sometimes because the importer does not have enough foreign currency. For example, Russians commercial airline, Aeroflot, has exchanged Russian crude oil for Airbus aircraft. Most frequently, however, reciprocal requirements are made between countries with ample access to foreign currency that want to secure jobs or technology as part of the transaction. For example, McDonnell Douglas sold helicopters to the British government but had to equip them with Rolls-Royce engines (made in the United Kingdom) as well as transfer much of the technology and production work to the United Kingdom. These sorts of barter transactions are called counter trade or offsets. 54. What are the main arguments for limiting trade in services? P191 Restriction on Services Many countries depend on revenue from the foreign sale of such services as transportation, insurance, consulting, and banking. Services like these account for about 20 percent of the value of all international trade but are growing much faster than the trade of goods. Countries restrict trade in services for three reasons: 1. Essentiality. Countries judge certain service industries to be essential because they serve strategic purposes or because they provide social assistance to their citizens. These countries sometimes prohibit private companies, foreign or domestic, in some sectors because they believe the services should not be sold for profit. In other cases, they set price controls for private competitors or subsidize government-owned service organizations, creating disincentives for foreign private participation. Postal, education, and hospital health services are not-forprofit sectors in which few foreign firms compete. When a government privatizes these industries, its customary preference for local ownership and control of essential services precludes foreign firms. For example, most countries, including the United States, restrict foreign airline companies from transporting cargo and passengers over their domestic routes. Other essential services in which foreign firms are sometimes excluded are media, communications, banking, and utilities. Service companies sometimes pressure their home governments to negotiate deregulation abroad when they believe they have competitive advantages. For example, the American International Group, the largest industrial insurer in the world, and other insurance corporations pressured and relied on the U.S. government to open the India insurance sector to foreign insurance companies, which had been restricted to governmentowned companies

2. Standards. Government limit foreign entry into many service professions to ensure practice by qualified personnel. The licensing standards of these personnel varies by country and includes such professionals as accountants, actuaries, architects, electricians, engineers, gemologist, hairstylists, lawyers, physicians, real estate brokers, and teachers. At present, there is little reciprocal recognition in licensing from one country to another because occupational standards and requirements differ substantially. This means, for example, that an accounting or legal firm from one country cannot easily do business in another country, not even to service the local needs of its home-country clients. The company must hire professionals within each foreign country or else try to earn certification where required. The latter option can be difficult because examinations will be in a foreign language and likely emphasize materials different from those in the home country. Further, there may be lengthy prerequisites for taking an examination, such as internships and course work at a local university. 3. Immigration. Satisfying the standards of a particular country does not guarantee that a foreigner can then work there. Countries protect the job opportunities and security of their citizens. In addition, government regulations often require that an organization-domestic or foreign-search extensively for qualified personnel locally before it can apply for work permits for personnel it would like to bring in from abroad. Even if no one from domestic sources of labor is available, hiring a foreign is still difficult. 55. When a company faces import competition that threatens its market position, what alternatives might it follow? P195 Government intervention in trade affects the flow of import and exports of products between countries. Companies have several options for dealing with this situation. Four stand out: (1) Move operations to a lower-cost country, (2) Concentrate on market niches that attract less international competition, (3) Adopt internal innovations (i.e., greater efficiency or superior products), (4) Try to get government protection. There are costs and risks with each option. Nevertheless, the record of many companies shows that success is possible. For example, competition from Japanese imports spurred the U.S. automobile industry to move some production abroad, develop the ideas of the minivan and suburban utility vehicle, subcontract with foreign companies to supply cheaper parts, and adopt lean-production techniques to improve efficiency and product quality.

56. Describe the different types of regional economic integration and give an example of each type. P206 1. Free trade area (FTA). The goal of an FTA is to abolish all tariffs between member countries. Free trade agreements usually begin modestly by eliminating tariffs on goods that already have low tariffs, and there is usually an implementation period during which all tariffs are eliminated on all products. At the same time tariffs are being eliminated, the members of the FTA might explore other forms of cooperation, such as the reduction of nontariff barriers or trade in services and investment, but the focus is clearly on tariffs. In addition, each member country maintains its own external tariff clearly on tariffs. In addition, each member country maintains its own external tariff against non-FTA countries. 2. Customs union. In addition to eliminating internal tariffs, member countries levy a common external tariff on goods being imported from nonmembers. For example, the North American Free Trade Agreement between Canada, the United States, and Mexico has eliminated tariffs on trade among the three countries, but each country maintains a separate tariff with the outside world. If a British company exports a product to the United States, it likely will enter the country at a different tariff rate than if the product were exported to Canada or Mexico because each NAFTA country can set its own external rate. But if a U.S. company were to export a product to the United Kingdom and France, two members of the EU, which is also a customs union, the product would enter both countries at the same tariff rate. There would be no tariff advantage to the U.S. company to enter the EU by exporting to the United Kingdom versus France. 3. Common market. A common market, such as European Union, has all the elements of a customs union but it also allows free mobility of production factors such as labour and capital. This means that labour, for example, is free to work in any country in the common market without restriction. In the absence of the common market arrangement, workers would have to apply to immigration for a visa, and that might be difficult to come by. 4. Economic integration. Countries create even greater social and economical harmonization by adopting common economic policies. Such as fiscal or monetary policies. For example, the EU has established a common currency complete with a common Central Bank, This level of cooperation creates a degree of political integration among member countries, which means they lose a bit of their sovereignty. No region has attained complete economic integration, although the EU which well read about shortly-comes the closest.

57. Explain the static effects and dynamic effects of economic integration. What is the difference between trade creation and trade diversion resulting from economic integration? P 207 1. Static Effects of integration - The shifting of resources from inefficient to efficient companies as trade barriers fall 2. Dynamic Effects of integration - The over all growth in the market and the impact on a company caused by expanding production and by the companys ability to achieve greater economies of scale. 3. Trade creation production shifts to more efficient producers for reasons of comparative advantage, allowing consumers access to more goods at a lower price than would have been possible without integration. Companies that are protected in their domestic markets face real problems when the barriers are eliminated and they then attempt to compete with more efficient producers. The strategic implication is that companies that might not have been able to export to another countryeven though they might be more efficient that producers in that countryare now able to export when the barriers come down. Thus, there will be more demand for their products, and the demand for the protected, less efficient products will fall. 4. Trade diversion trade shifts to countries in the group at the expense of trade with countries not in the group, even though the nonmember companies might be more efficient in the absence of trade barriers. 58. What are the functions of the European Commission, the European Parliament, the Council of Ministers, and the European Court of Justice? P 208 European Commission The Commission provides the EUs political leadership and direction. The original intent was for the Commission to act as a supranational government for Europe. There are three distinct functions of the Commission: 1. 2. 3. Initiating proposals for legislation. Guardian of the treaties. Manager and executor of Union policies and of international trade relationships. The Commission manages the annual budget of the EU, managers the EU, and negotiates trade agreements. The Commission has always had a significant amount of power in the EU. However, in 1999, the Commission came under severe criticism, and its power was seriously curtailed. The power is now

shifting to the Council, which more clearly represents the interests of the governments and is more likely to consider the interest of individuals in the EU. European Council. The Council is also known as the Council of Ministers, which is composed of different ministers of the member countries. However, this doesnt mean that there is just one member of the Council for each EU member country. There are more than 25 different councils, such as Foreign Affairs, Economy and Finance, and Agriculture. For example, the Agriculture Council of Ministers is comprised of the Ministers of Agriculture of all member countries. This specific council, whose members represent their member governments, decides issues dealing with agriculture. In many respects, the Council is much more democratic than the Commission because its members are elected officials in their home countries. The Council of Ministers is presided over by a presidency, which rotates between the member states ever six months. The European Parliament The Parliament is composed of 626 members who are elected every five years, and its membership is based on country population. The three major responsibilities of the Parliament are legislative power, control over the budget, and supervision of executive decisions. The Commission presents community legislation to the Parliament. Parliament must approve the legislation before submitting it to the Council for adaptation. The European Court of Justice The Court of Justice ensures consistent interpretation and application of EU treaties. Member states, EC institutions, or individuals and companies may bring cases to the Court. The Court of Justice is an appeals court for individuals, firms, and organizations fined by the Commission for infringing Treaty Law? The Court of Justice is relevant to MNCs because it deals mostly with economic matters. The Court is required to hear every case referred to it, even minor disputes over trade regulation and export issues. In recent cases, for example, the Court of Justice has taken up a high-profile case involving aviation agreements between the United States and Europe; it is deciding whether it is lawful for the EU to force a U.S. based pharmaceutical company to share its data-collection process with its German competitors; and it is hearing an appeal by General Electric-regarding the European Commissions refusal to allow GE to acquire Honeywell.


What was the rationale for NAFTA? P 215 NAFTA has a logical rationale, in terms of both geographic location and trading importance. Although Canadian Mexican trade was not significant when the agreement was signed, U.S. Mexican and U.S. Canadian trade were. The two-way trading relationship between the United States and Canada is the largest in the world. NAFTA is a powerful trading bloc with a combined population and total GNI greater than the 15member EU. What is significant, especially when compared with the EU, is the tremendous size of the U.S. economy in comparison to those of Canada and Mexico. In addition, Canada has a much richer economy than that of Mexico, even though its population is about one-third that of Mexico.

60. What are the major regional trading groups in Africa, Latin America, and Asia? P220

Latin America
Southern common market (MERCOSUR) Andean community (CAN) Latin American integration association (LAIA) South American community of nations (CSN)

Association of south East Asian nations (ASEAN) Asia pacific economic cooperation (APEC)

African union Southern African development community (SADC) Common market for eastern and southern Africa (COMESA) Economic and monetary community of central Africa West African economic and monetary unit (WAEMU) Two of the original examples of regional economic integration in Latin America, the Latin American Free Trade Association (LAFTA) and the Caribbean Free Trade Association (CARIFTA), changed their names to the Latin American Integration Association (ALADI) and the Caribbean Community and Common Market (CARICOM). The Association of South East Asian Nations (ASEAN), organized in 1967, comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. SAARC

61. What is the purpose of commodity agreements? It is designed to stabilize commodity price and supply. It takes the form of a producers alliance or a commodity control agreement. 80 % of exports of developing countries are primary commodities. Many developing countries derive the bulk of their export earnings from one or two commodities. There are two basic types of commodity control agreements 1. Producers alliances E.g. OPEC 2. International commodity control agreements(ICCAs) ICCAs are agreements between producing and consuming countries. ICCAs attempt to control prices through buffer stocks or quotas, or they simply provide services for member countries without engaging in price stabilization mechanism. In a buffer stock system, a commodity organization or country stockpiles a commodity and buys or sells the commodity to try to minimize price fluctuations. Quota system determines how producing and consuming countries divide total output and sales. E.g. oil by OPEC countries/wool controlled by Australia/ Diamonds by DeBeers Company South Africa. The major reason for invasion of Kuwait was because it was producing more than its quota. The effectiveness of commodity agreement depends on the type of commodity. The commodities that doesnt has a ready substitute have more control over price than the commodities with substitutes. 62. What are foreign exchange and the exchange rate? 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. FX can be in the form of cash, funds available on credit and debit cards, travelers checks, bank deposits, or other short term claims. Exchange rate is the price of a currency. It is the number of units of one currency that buys one unit of another currency, and this number can change daily. Exchange rates makes international price and cost comparisons possible. There are many players in the FX market. Some players buy and sell foreign exchange because they are exporters and importers of goods and services. Others buy and sell FX because of FDI. Others are portfolio investors they buy foreign stocks, bonds, and mutual funds hoping to sell them at a more profitable exchange rate later. 63.Discuss the characteristics of the spot market, forward market and futures market.

Spot transactions involve the exchange of currency the second day after the
date on which the two FX traders agree to the transaction. The rate at which the transaction is settled is the spot rate.

There traders always quote a bid and offer rate. That is the price they willing to sell and willing buy. The spread is the different between the bid and offer rates, and it is the traders profit market.

Forward transactions involve the exchange of currency three or more days

after the date on which the traders agree to the transaction. It is the single purchase or sale of a currency for future delivery. The rate at which the transaction is settled is the forward rate and is a contract rate between the two parties. The forward transaction will be settled at the forward rate no matter what the actual spot rate is at the time of settlement. Many currencies do not have a forward market due to the small size and volume of transactions in that currency. Different between the spot and forward rates is either forward discount or the forward premium.

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

particular currency at a particular price on a particular future date, as specified in a standardized contract to all participants in that currency futures exchange. Future is traded on an exchange, not over the counter. Instead of working with a banker, companies work with exchange brokers when purchasing future contracts. A forward contract is tailored to the amount and time frame that the company needs, whereas a future contract is for a specific amount and a specific maturity date. The FC is less valuable for a company than a forward contract. How ever it may be useful to speculators and small companies that do not have a good enough relationship with a bank to enter in to a forward contract or that need a contract for an amount that is too small for the forward market. 64. Discuss the issues of foreign exchange convertibility. A key aspect of exchanging one currency to another is its convertibility. Fully convertibles currencies are those that the government allows both residence and non residents to purchase in unlimited amounts. Hard currencies-fully convertible currencies- US dollar, Euro, British Pound Soft currencies- not fully convertible currencies Most countries today have nonresident or external, convertibility, meaning that foreigners can convert their currency in to local currency and can convert back to their currency. To conserve scare foreign resources, some governments impose exchange restrictions on companies or individuals who want to exchange money. The

devices they use include import licensing, multiple exchange rates, import deposit requirements and quantity controls. (2002 by Argentina) Licensing occurs when a government requires that all FX transactions be regulated and controlled by it. In a multiple exchange rate system government sets different exchange rates for different types of transactions. Normally high rates for luxury goods and low rates for essential commodities. Advance import deposit- a government needs deposit of money prior to the release of FX to pay for imports. It varies to as long as a year in advance. Quantity controls- government limits the amount of foreign currency that can be used in a specific transaction. In the past they have resulted in overall reduction of trade, but with the liberalization of trade recently effect has become minimum. 65.Discuss how companies use foreign exchange. Most of the FX transactions happen through the commercial banks, which perform three functions, 1. Buy & sell FX 2. collect and pay money in foreign transactions with forign buyers and sellers 3. lend money in foreign currency Reasons to use FX 1. import and export transactions 2. company personnel traveling abroad 3. financial transactions like FDI 4. to gain profits like arbitrage 66.What is arbitrage and what is currency speculation? Arbitrage is a profit seeking activity, where the buying and selling of foreign currencies at a profit due to price discrepancies. Interest arbitrage is the investing in debt instruments, such as bonds in different countries to earn a profit due to interest rate differentials. Speculation is the buying or selling of a commodity (foreign exchange) that has both an element of risk and the chance of great profit. Speculators are important In the FX market because they spot the trends and try to take advantage of them. They can create a demand for a currency by purchasing it in the market, or they can create a supply of the currency by selling it in the market.

67.What is the International Monetary Fund (IMF)? What are its objectives? IMF is formed by the major allied governments in bretton Wood , Hampshire after the world war, to bring economic stability and growth to the world. Official existence- December 27,1945 Financial operations- march 1, 1947 No of countries- 29 by beginning, 184 by 2005 The Bretton wood agreement established a par value, or benchmark value, for each currency initially quoted in terms of gold and the US$. A country has to contribute a sum of money, called a quota, depend in national income, monetary reserves, trade balance and other economic indicators. The quota is a pool of money that the IMF can draw on to lend to countries. Highest authority- board of governors- one representative from each country Day-to-day authority- 24 person board of executive directors Major objectives of IMF; To promote international monetary cooperation To facilitate the expansion & balanced growth of international trade To promote exchange rate stability To establish a multilateral system of payments To make its resources available to its members who are experiencing balance of payments difficulties.

68.What is a Special Drawing Right (SDR)? How is it used? The SDR is an international reserve asset created to supplement members existing reserve assets (official holding of gold, foreign exchange, and reserve positions in the IMF). SDR serves as the IMFs unit of account and are used for imf transactions and operations. It is the unit in which IMF keeps its records. The value of SDR is based on the weighted average of five currencies. (By 2004 it was USD, euro, yen, and pound). These weights were chosen because they broadly reflected the importance of each currency in international trade. Unless the executive board decides otherwise, the weight of each currency changes for every five years. Although the SDR was intended to serve as a substitute for gold, it has not taken over the role of gold or the dollar as primary reserve assets. However several countries base their value of currency on the value of SDR. 69.List and define the categories of exchange rate regimes.

Exchange arrangements with no separate legal tender- the currency of another country circulate as the sole legal tender, or the member belongs to a monetary or currency union in which the members of the union share the same legal tender. E.g. countries in euro area Currency board arrangements- a monetary regime based on an implicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combine with restrictions on the issuing authority to ensure the fulfillment of its legal obligation. E.g. Bosnia & Hong Kong. Other conventional peg arrangements the country pegs its currency at a fixed rate to a major currency or a basket of currencies in which the exchange rate fluctuates within a narrow margin of at most 1/21 percent around a central rate. E.g. china pegs its currency to the US$. Pegs exchange rates within horizontal bands- the value of the currency is maintained within margins of fluctuation around a formal or defacto fixed peg that are wider than 1/21 percent around a central rate. Many countries that used to be considered managed floating are in this category because they basically peg their currency to something else. E.g. Denmark in the new ER mechanism in Europe, a country that was not part of the euro group in 2002, yet was still linking itself to the euro as much as possible but at a wider degree of flexibility. Crawling pegs- the currency is adjusted periodically in small amounts at a fixed, preannounced rate or in response to changes in selective quantitative indicators. E.g. Costa Rica & Bolivia. Exchange rates within crawling bands- the currency is maintained within certain fluctuation margins around a central rate that is adjusted periodically at affixed preannounced rate or in response to changes in selective quantitative indicators. E.g. Romania, Israel and Uruguay. Managed floating with no pronounced path for the exchange rate- the monetary authority influences the movements of the exchange rate by actively intervening in the FX market without specifying, or recommitting to, a preannounced path for the ER. E.g. India & Azerbaijan Independent floating- the ER is market determined, with any FX intervention aimed at moderating the rate of change and preventing undue fluctuations in the ER rather than at establishing a level for it. E.g. Canada, US and Mexico. 80. What does a transnational strategy imply? It implies how the business should simultaneously exploit location economies; leverages core competencies and pays attention to local

responsiveness. It is the most direct response to the growing globalization of business. It holds that todays environment of interconnected consumers, industries 7 markets requires that an MNE find ways to configure a value chain that exploits location economies coordinate value activities to effectively leverage. Transactional strategy simply says that flexible value chain enables local responsiveness and complex coordination mechanisms enable global integration. 81. What is the relationship between companys international market and production location decisions? International market opportunities are differs with the geographical location. Country to country it is different. When a marketer going to the international market place/location should be consider. That means need to consider which location we should locate to do our international marketing. Most of the time companies pay more attention to where their business makes more feasible & more profitable. That means companies continuously scrutinize where it makes the most sense to locate particular activities of their value chain. Location decision is more important when considering the cost structures. Needs and wants of the people who are living in different territories are differs to each and every countries. E.g.: Japanese people needs different with the USA citizens. In addition to that feasibility and different cost structures depend on different geographical locations. So product location decisions cause to the companies international market. 82.) When deciding where to locate production and sales efforts, how and why might companies use scanning techniques? Why? Companies use scanning techniques to compare countries in deciding where to locate production and sales efforts. Without scanning, a Company may overlook opportunities and risks or may examine too many or too few possibilities. Scanning allows managers to examine most or all countries broadly so that they can then take a more detailed look at a reasonable number of most promising opportunities in much greater deal. How? Scanning techniques are based on broad variables that indicate opportunities and risks. In scanning, Managers compare country information that is readily available, inexpensive and fairly comparable such as information found on the Internet and communicating with people familiar with the foreign

counties. Generally in scanning, countries are compared on a few conditions that could significantly affect the success or failure of the business such as average incomes, economic growth, cultural compatibility with the companys product, labour rates, unemployment and infrastructure development etc. Managers can usually complete the scanning process without having to incur the expense of visiting foreign countries. {Reference: chapter 12 Part 5 Pg. 388/389 of Text Book} 83.) What are the major indicators / variables that most companies consider when deciding where to operate abroad? There are two types of indicators / variables that most companies consider when deciding where to operate abroad i.e. Opportunities & Risks A) Opportunities i. Market Size Expectation of a large market and sales growth is probably a potential locations major attraction. This depends on the economic variables. Some of the main things to consider when examining economic variables are : a) Obsolescence and leapfrogging of products b) Prices c) Income elasticity d) Substitution e) Income inequality f) Cultural factors and taste g) Existing of trading blocs ii. Ease and Compatibility of Operations: Companies are highly attracted to countries that Are located nearby Share the same language Have market conditions similar to those in their home countries Companies often pare down proposals to those countries that Offer size, technology and other advantages familiar to company personnel. Allow an acceptable percentage of ownership. Have resources they need.

iii. Costs and Resource availability : Cost especially labour costs are an important factor in companies production location decisions. Ease and cost of transporting goods depends on Infrastructure Absence of trade restrictions

Companies should consider different ways to produce the same product. iv. Red Tapes and Corruptions Red tape and corruption add to operating costs. B) Risks i. Risk and Uncertainty Most investors prefer certainty to uncertainty. ii. Liability of Foreigners Companies may reduce risks from the liability of foreignness by Going first to countries with characteristics similar to their home counties. Having experience intermediaries handle operations for them. Operating with forms requiring commitment of fewer resources abroad. Moving initially to one or a few, rather than many, foreign countries. iii. Competitive Risk In terms of competition, some different strategies are to be go First where local firms are most apt to enter the market as competitors. Into markets that competitors have not entered Where there are clusters of competitors iv Monetary Risk Companies may accept a lower return in order to move their financial resources more easily. Political Risk Political risk may come from wars and insurrections, takeover of property, and/or changes in rules. Management can make predictions based on past patterns Companies should - Examine views of government decision makers - Get a cross section of opinions - Use expert analysis {Ref. Chapter 12 - Part 5 - Pg. 390 400: Text Book}


Discuss the main reason that simply multiplying the country's expected per capita consumption by its population doesn't necessarily lead to a good estimate for potential demand. Management must make projections about what will happen to future sales. Data such as GDP, per capita income, growth rate and population are also good indicators of market size and future sales. For an example take Aluminum. It is possible to make a reasonable projection of aluminum sales simply by examining different countries aluminum consumption in relation to their GDP per capita.

Thus, as countries GDP per capita increases, management may estimate that aluminum demand will increase along the trend line. Similarly Korean demand for apparel, cosmetic and automobile has grown with increased per capita income a trend that closely parallels experience of industrial countries in earlier years. In fact companies expand heavily into growth markets because they expect that the demand for their products will increase as economies grow. Managers should examine attributes of particular niche markets if they are not trying to hit the mass market. For example, the per capita GDP of India is less than $2500 per year, which on first glance would indicate a lack of market for luxury products. However there are about 61000 millionaires in India in 2003, a number of large enough to support luxury products in the market. Some of the main things to consider when examining economic variables are Obsolescence and leapfrogging of products: consumers in emerging economies do not necessarily follow the same patterns as those in higher income countries. Prices: if prices of essential products are high, consumers may spend more on these products than what one would expect based on per capita income, thus having less to spend on discretionary purchases. Income elasticity: a common tool for predicting total market potential is to divide the percentage of change in product demand by the percentage of change in income in a given country. The more that demand increase, the more elastic is the demand in response to income change. This varies by product and by income level. Substitution: consumers in a given country may more conveniently substitute products or services than consumers in some other countries. Income inequality: where income inequality is high, the per capita income figures are usually low because many people have little income. Cultural factors and taste: countries with similar per capita income may have different preferences for products and services because of values or tastes. Existence of trading blocs: although the country may have a small population and per capita income, its presence in a regional trading block gives its output a much larger market.

Given all of the above factors, managers cannot project potential demand perfectly. However, by considering all the factors that may influence the sales of their products they can make workable estimates that help them to narrow detailed studies to a reasonable number.

Therefore, companies must consider variables other than income and population when estimating potential demand for their products in different countries, because simply multiplying countries expected per capita consumption by its population doesnt necessarily lead to a good estimate for potential demand. (Refer recommended text book page 391 for more details) 85.) How do companies' international involvements (commitments) typically evolve over time?

Although companies may prefer operations in countries more similar to their home countries, there are alternative risk minimization expansion patterns they can undertake. Refer figure 12.5 in recommended text book (page 397) When the company moves from the center on any axis, the deeper its international commitment becomes. However, a company doesnt necessarily move at the same speed along each axis. In fact companies may jump over some of the steps on any axis. A slow movement along one axis may free up resources that allow faster expansion along another. A axis shows that companies generally move gradually from a purely domestic focus to one that eventually encompasses operations in multiple countries. Some of which are quite dissimilar from ones own country. An alternative to move slowly along A axis is to move slowly along the B axis, specially for dissimilar countries. B axis shows that a company may use intermediaries to handle foreign operations during early stages of international expansion because it minimizes risks. A company can then commit fewer resources to international endeavors, instead relying on intermediaries that already know how to operate in a foreign market. But is the business grows successfully the company may want to handle the operations with its own staff. This is because it has learned more about foreign operations and the countries where the intermediaries have secured business, considers them less risky than at the onset, and realizes that the volume of business may justify the development of internal capabilities such as hiring trained personal to maintain a department for foreign sales or purchases. Axis C shows that importing or exporting is usually the first mode a company undertakes in becoming international. At an early stage of international involvement, importing and exporting require the least formal commitment and pose the least risk to the companys resources, such as capital, personnel, equipment and production facilities. A company could use excess production capacity to produce more goods, which it would then export. Moving slowly along the C axis is a means to minimize the risk of the liability of foreignness, especially when moving to dissimilar countries. By doing this a company initially would limit its need to invest more capital in such additional production facilities as plants and machinery and in such functions as managing a foreign workforce. Later, the company might, in addition to exporting, make an even higher commitment through foreign direct investments to produce abroad. Its infusion of capital, personnel and technology are highest for these operations.

Axis D shows that companies can move internationally one country at a time, thus not having to become overwhelmed by learning about many countries at the same time. Therefore, it is possible to say that companies international involvement (commitments) typically over time. (Refer recommended text book page 396 for more details) 86.) What is meant by liability of foreignness? How might this influence location decisions for foreign operation? When a company operates aboard it usually has higher uncertainty than at home because the foreign operation is in environments with which it is less familiar. This help to explain why companies gain experience in operation in petitor, and government actions thereby reducing its uncertainty in fact, foreign companies have lower survival rate than local companies for many years after they begin operation, a situation known as liability of foreignness . How might this influence location decisions for foreign operation? Liability of foreignness highly affects on location decision for foreign operation, when a company operates aboard it usually has higher uncertainty than at home because the foreign operation is in environments with which it is less familiar. Because of that they have to operate there business in risky way compare to local companies operations. This is the affect of liability of foreignness, when taken location decision of foreign operation. To avoid or minimize this situation company normally select countries more similar to there home country and having experienced intermediaries handle operation for them Also companys operating with forms requiring commitment of fewer resources abroad. 87.) Compare the advantage of locating foreign operation to avoid where competitors have gone versus locating where competitors are. When we compare the advantage of locating foreign operation to avoid where competitors have gone versus locating where competitors are, we can clearly identify When locating where competitors are has the advantages of free rider it means, the competitors may have performed the costly task of evaluating locations, so a follower may get the free ride. But in the case of avoid competitors we cant get these types of advantages. Moreover there are clusters of competitors (some time called agglomeration) in various locations. As a example think of all the computer firms in Californias Silican valley, more recently hundred of high-tech computer companies from all over the world have located in Dubai. These clusters attract multiple suppliers and personnel with specialized skills. they also attract buyers who want to compare potential suppliers but dont want to travel great distance between them. Companies operating in the cluster

area may also gain better access to information about new development because they frequently come in contract with personal from the other companies. In the other hand the strategy where avoiding competitors can gain the advantage of first mover. I.e. by being the first major competitor in a market, companies can more easily gain the best partners, best location and best supplies. Also company can take the advantage of reduce the risk of overcrowded market. This strategy is useful when a situation where large companies(competitors) already capture the market and new small type of company want to enter in to market and company can avoid the big companies(competitors) by changing the location. Comparing these two situations we can understand both strategy have different types of advantages, but those advantages depend on the situation. 88). DISCUSS LIQUIDITY PREFERENCE AS IT RELATES TO MONITORY RISK. Any company which involves with foreign direct investment always expect reasonable return for its investment. The other concern of investors is Monitory Risk. In other words risk involved with the investment. Exchange rates, access to the invested capital and earning are key considerations which involves with monitory risk. While ensuring reasonable return to their investment, investors are also willing to hold some of their assets as high liquid assets, with the objective of convert it to the necessary funds within very short time. For such investments investors are even willing to accept lower return. This phenomenon is explained by the theory known as Liquidity Preference Theory. It explain the proportion of their assets that firms and individuals chose to hold varying degree of liquidity. Liquid Preference Theory can be directly linked to the FD investment decisions, as even with the FDIs , the investor is willing to keep certain portion of its investment in high liquid form. Investors prefer this, because there may be urgent need to sell all or part of their business for urgent fund need. However, possibility of urgent liquidation of assets is mainly depend on factors such as ability to find local buyers, strength of local capital market etc. Ability to find local buyers varies among countries and among the industries. Other important factors are currency convertibility and cost of conversion. If currency convertibility is law and cost of convertibility is high, then the funds can not be easily transferred to another country. If all the above factors are not favored, it may be difficult to convert assets into urgent funds. Then it is considered that particular country is having high monitory risk and investors prefer to avoid such countries, though it offers high return. However, investors prefer to invest in countries which is having low monitory risk, though return is low.

This scenario could be better explained by taking Sri Lanka and Singapore as examples. For an investor, Singapore is having better currency convertibility and well established capital market. Possible buyers for most of the industries are also concentrated in Singapore. Government policies towards FDI are favorable and earning can be taken away from the country without much restrictions. Therefore, if someone compare Sri Lanka & Singapore for investment decision, Singapore is more favorable for FDI. However in Sri Lanka, percentage return on investment can be higher than in Singapore, as there are many incentives offered by Government to attract more foreign investments. For example, recent opening of Treasury bills for foreign investors can be considered. Further Sri Lankan Government is ready to offer high interest compare to other borrowing organizations. However, with all these incentives, still investors are prefer to invest in Singapore even under low returns. This can be explained by using monitory risk and liquidity preference theory as in Singapore Liquid preference is high and hence monitory risk is lower. Hence still Singapore is more favorable investment destination than Sri Lanka. (89). WHAT PROBLEMS



Most of the companies in the world undertake business research to reduce uncertainties in their decision process. Further most of the companies are doing business research by using the already published and available data. However lack of information, obsolescence and inaccuracy of available and published data are the most common problems encountered by managers when comparing and examining published data on different countries. Inaccuracy of available data mainly results from the inability of many governments to collect the needed information. If a government is economically weak, providing accurate and timely information is not its top priority. Further cultural factors of the country also affect the availability of accurate and timely data. Some cultures are inherited with the characteristic of vital information/data. Some organizations provide inaccurate information purposely to mislead the government and competitors. For Example, it was found that many Chinese organizations purposely provide inaccurate information. Further, different countries used different standards to collect data and uses different definitions for analyzing purposes. Hence it is difficult to generalize the outcome of the data. For example, different countries may have different definitions for component family income. Further, figures on national income and per capita income are particularly difficult to compare, because of difference in activity taking place outside the market economy. Another compatibility issue is arisen with exchange rates. The common practice is to convert financial data into some common currency. For example if Japanese

Yen is converted to US $ , then there is general appreciation by 10%, which will result 10% increase in the per capita income of Japanese residents which will not be the true situation as Japanese are not becoming 10% reach as shown in the data. Due to above problems, it creates some difficulty for managers , when examining and comparing published data on different countries. 90) Discuss how grids and metrics are used as country comparison tools. Companies going for international business due to following reasons: To expand sales To acquire resources To minimize risk When selecting a foreign country in which to do the business first you have to consider selecting countrys environment, opportunities and risk. Opportunities means: Market size Ease & compatibility of operations Costs & resource availability Red tape (bureaucratic/unofficial hurdles) Risk as follows: Political Economic Legal Monetary Competitive Tools for comparison: Grid with Variables & Weights Can be used to depict acceptable or unacceptable conditions (e.g.: Ownership rights) and rank countries according to selected, weighted variables (e.g.: return or risk) Probability table Opportunity-Risk Matrix Country attractiveness-company strength matrix In general terms, matrices can be used to incorporate weighted indicators of a firms risks & opportunities in specific countries and also plot the scores to more clearly reveal respective positions for comparative purpose. Then the question rose: how grids and metrics are used as country comparison tools? It is useful to develop both present and future scores for countries: a significant shift in a future score could have serious implications with respect to the country selection process.

Country Comparison Grid for Market Penetration

VARIABLE WEIGHT I 1. Acceptable (A), Unacceptable (U) factors -a. Allows 100% ownership -U b. Allows licensing to majority-owned subsidiary -A 2. Return (higher number = preferred rating) a. Size of investment needed b. Direct costs c. Tax rate d. Market size, present e. Market size, 310 years f. Market share, immediate potential (02 years) g. Market share, 310 years





0-5 0-3 0-2 0-4 0-3 0-2 0-2



4 3 2 3 2 2 2

3 1 1 2 1 1 1

3 2 2 4 3 2 2

3 2 2 1 1 1 0

3. Risk (lower number = preferred rating) a. Market loss, 310 years b. Exchange problems c. Political-unrest potential d. Business laws, present e. Business laws, 310 years





0-4 0-3 0-3 0-4 0-2


2 0 0 1 0

1 0 1 0 1

3 3 2 4 2

2 3 3 3 2




Opportunity Risk Matrix

Country Attractiveness Company Strength Matrix

(91) Why do companies engage in international harvesting or divestment? Generally you'd just say that you are selling an asset. 1) A change in corporate strategy - a firm might say that they are divesting a particular subsidiary to focus on their core business. 2) Social goals - there are many political reasons why investors might reduce investments. A notable example was the withdrawal of American firms from South Africa during apartheid. Divestment follows this: i.e., the closure or sell-off of units in foreign locations, or conversely units owned by foreign firms. Based on the integrationresponsiveness framework of international business strategy, it is argued that the divestment tendency of foreign subsidiaries depend on the type of strategy pursued by the corporation. Subsidiaries of transnational corporations are in general likely to display the highest divestment rates. Whereas subsidiaries forming part of international and multi-domestic strategies may have the lowest divestment likelihood initially, subsidiaries established as part of a global strategy are expected to be the least probable to be divested in the longer run.

Harvesting: the reduction in the amount of an investment, either by simply harvesting earnings or by divesting assets as well. If an operation no longer fits a firms overall strategy, or if better opportunities exist elsewhere, a firm must determine how to exit that operation. 92) Compare the differences between diversification versus concentration and provide examples of situations in which each would be used. Diversification is strategy to penetrate foreign market in which companies penetrate fast into a large number markets and gradually increasing its commitments within each one whereas in concentration strategy the company will move to only one or few foreign countries until it develops a very strong involvement and competitive position there.

Examples of situations in which each would be used Prefer Diversification If 1) Growth rate of each market Low 2) Sales stability in each market low 3) Competitive lead time Short 4) Spillover effects High 5) Need for product adaptation Low 6) Need for communication & distribution adaptation Low 7) Program control requirements Low 8) Extend of constraints Low

Prefer Concentration If High High Long Low High High High High

93) What are some key characteristics of exporters and discuss the potential pitfalls of exporting. Characteristics of Exporters 1) The probability of being an exporter increases with company size, as defined by sales revenues. 2) Export intensity, percentage of total revenues coming from export sales, is not positively correlated with company size. The greater the percentage of exports to total revenues, the greater the intensity. Pitfalls of Exporting 1) Failure to obtain qualified export counseling in developing a plan to guide export expansion 2) Insufficient commitment by top management to overcome the initial difficulties and financial requirements of exporting 3) Misestimating the complexity & costs of ocean shipping and customs clearance to export transactions 4) Poor selection of overseas agents & distributors 5) Chasing orders from around the instead of establishment a base of profitable operations and manageable growth 6) Neglecting export markets and customers when the domestic market booms 7) Failure to treat international distributors on an equal basis with their domestic counterparts 8) Unwillingness to modify products to meet other countries regulations or cultural preferences 9) Failure to print service, sales, and warranty messages in locally understood languages 10)Failure to consider use of an export management company or other marketing intermediary when the company does not have the personnel to direct specialized export functions

94. Discuss the various steps management must take to establish a successful export strategy Anyone with a product or service can export, or at least attempt to export. But success is far from guaranteed. At the best of times exporting can be a complex and challenging process. Yet, when it is approached with careful deliberation, exporting can be a rewarding growth strategy for any business. Here are nine key steps to take export efforts from start to success: 1. Make a commitment to exporting. Whether we own a sole proprietorship offering consulting services or manage a 1500-person manufacturing facility, exporting offers our opportunities for growth, increased sales and diversified markets. But a marketable product or service is only the beginning. Exporting takes time and effort. It also takes resources and a strong commitment to compete beyond our current borders. If we are focused and have assessed our readiness to enter the global marketplace, we are ready for the next step. 2. Plan The secret to export success is preparation and a carefully researched export plan. This is our source of direction as we embark on our journey into foreign markets. An export plan helps us to act rather than react to the challenges and risks encountered in international business. And in addition to helping we implement our export strategy, it can help we obtain financial assistance, investors or other strategic partners required to make our export venture a success. An export plan comprises many elements a description of our company, its market and industry, and our business objectives; information on our products or services; an analysis of the target market and industry, including trends and forecasts; an examination of the competition and their strengths and weaknesses in contrast to our own; international marketing strategies, including customer profiling and the development of sales and distribution channels; employment and training issues; financial requirements and forecasts; and much more. 3. Conduct research to find the right market. Thorough market research helps we make sound export marketing decisions by giving our clear picture of the economic, political and cultural factors that affect our ability to sell our product or service. Ultimately, market research saves our time, money and effort by reducing our exposure to unknowns. There are two main types of market research. Secondary market research consists of information collection from published sources and the Internet. For example, Export Source is one of the best sources of secondary information for exporters. Researchers will find trade statistics, market and industry information, even potential partners and trade leads. Secondary research helps you fine-tune our information needs. Primary market research helps you fill in the critical gaps through direct contact with key experts, customers or other sources of information. Primary research frequently involves personal contact techniques such as interviews and

consultations and is best attempted after we have familiarized ourself with the potential market through our secondary research efforts. 4. Devise marketing strategies for our target market. International marketing is not the same as domestic marketing. Those who ignore this fact do so at their own peril. As successful as you may be at reaching our customers or clients, we must be aware that our international audience will frequently have different tastes, needs and customs. Good marketing strategies help the exporter understand and address these potential differences. These strategies are captured in the international marketing plan, a flexible document that will likely be reviewed, revised and modified throughout our exporting activities. Marketing is a continuous activity and so is marketing planning because we can never know enough about our customers and how to meet their needs. The basic marketing formula the four Ps of product, price, promotion and place is just the beginning when it comes to international marketing. our plan will need to address many other factors, such as payment (international transactions and currency exchanges), paperwork (increased documentation), practices (different cultural, social and business styles), partnerships (strategic alliances to strengthen our market presence) and protection (increased risks relating to payment, intellectual property or travel) and many more. Understanding all these facets of international business will transform our marketing plan into marketing action. 5. Enter the market. The research is complete and the export and marketing plans have been devised. we feel ready to enter the market and are seeking the best strategy to reach potential customers. There are as many market entry strategies as there are markets; however, these strategies can be loosely grouped into three categories. Direct exports, as the name implies, involve direct marketing and selling to the client. In a reasonably accessible market such as the United States, direct exporting of products or services may be a viable option. But in less familiar markets, with different legal and regulatory environments, business practices, customs and preferences, direct exporting may not be an option. A local partner, for example, may be better able to manage these complexities and serve our potential clients better. Indirect exporting is frequently used to enter new markets. Businesses selling products enter into an agreement with an agent, distributor or a trading house for the purpose of selling (or marketing and selling) the products in the target market. The third market entry strategy involves strategic partnerships with other companies or individuals with complementary skills and capabilities. A partner can often provide the insight, contacts and expertise that fills the gap in our export readiness. A strategic alliance with a company selling a complementary product or service can provide more effective market access, resulting in more foreign sales in less time. As with indirect exporting relationships, contractual agreements with partners must be stated in clear terms and, whenever possible, refer to Canadian laws for the protection of the company. 6. Get your product or service to market.

Every market has its own set of rules and regulations covering safety, health, security, packaging and labeling, customs and duties among other things. Additionally, these rules and regulations may vary depending on the product or service we are exporting. It is critical that we understand the rules and regulations that apply to us before our ship our goods or open our foreign business location. Product-based businesses with shipping requirements will benefit from developing a relationship with a freight forwarding company and a customs broker. Whether we are shipping by truck, rail, sea or air, the documentation will likely be extensive and potentially confusing. The services provided by these businesses will assist we in determining the most efficient and least risky options for shipping our goods across borders. 7. Explore financing options. While there are overnight export success stories, most companies must be prepared to invest both time and financial resources to see the return on their investment and the subsequent success. Consequently, financial stability and a secure cash flow are important during this period. In some cases, businesses can rely on their domestic sales to sustain their early export efforts. If this is not possible, it is a good idea to know what financing options are available. Exporters must develop a financial plan to understand and address the diverse costs associated with exporting, complete with a two- to three-year cash budget to cover expenses and a capital budget. A capital budget is a cost-benefit assessment of our export objectives and serves as our operating plan for measuring expenditures and revenues. 8. Understand the legal and regulatory issues. Exporting exposes businesses to unfamiliar laws and regulations. There are numerous international conventions, treaties and national, regional and municipal rules that can affect our ability to operate successfully in foreign markets. Exporters may also encounter disputes with agents or distributors, clients or creditors. It is important to understand our rights and obligations when resolving disputes, selling goods or services and protecting intellectual property. 9. Put it into practice. We have committed our-self to exporting. We have the skills and the resources to undertake the challenge. We have researched the market and prepared our export plan, international marketing plan and financial plan. our market entry strategy is clear and the support system (i.e. freight forwarder, customs broker, financial lenders, legal advisors) is in place. We have gone through the export process step-by-step and feel confident that we have covered all the bases. Now, it is time to put all this skill and knowledge to use. The world is waiting for our product or service 95.) What are the major types of importers The entry of all imported goods is required to be classified for Customs purposes. There are several import entry types: 1. Standard import entry 2. Temporary import entry

3. 4. 5. 6.

Simplified import entry Permit entry Sight entry Write-offs

96.) What role does the customs agency of a government play? Customs are the countrys import and export procedures and restrictions. Customs agencies assess and collect duties and ensure that import regulations are adhered to. When importing goods into any country, a company must be familiar with the customs operations of the importing country because once cargo reaches a port of entry, customs officials take control of the product and process. The assessment and collection of all duties, taxes and fees on imported merchandise, the enforcement of customs and related laws, the administration of certain navigation laws and treaties are some primary duties of Customs Agencies. It also deals with smuggling operations. An importer needs to know how to clear goods, what duties to pay and what special laws exist regarding the importation of products. When merchandise reaches the port of entry, the importer must file documents with customs official, who assign a provisional value and tariff classification to the merchandise. Then customs officials examine the goods to determine whether they are any restrictions on their importation. If so, the goods may be rejected and prohibited from entering the country. If the goods are allowed to enter, the importer pays the duty and the goods are then released. 97). Discuss the various ways a broker or other important consultant can help an importer minimize import duties. Valuing products in such a way that they qualify for more favourable duty treatment Different product categories have different duties. Qualifying for duty refunds through drawback provisions. Some exporters use in their manufacturing process imported parts and components on which they paid a duty. Deferring duties by using bonded warehouses and foreign trade zones. Companies do not have to pay duties on imports stored in bounded warehouses and foreign trade zones until the goods are removed for sale or used in a manufacturing process. Limiting liability by property marking an imports country of origin. Because governments assess duties on imports based in part on the country of origin, a mistake in marking the country of origin could result in a higher import duty.

98)What are export management companies, and how do they help potential exporters?

An export management firm is an independent entity which acts as the exclusive export sales department for a manufacturer. Their representation may apply to entire line of products or a select set. Their representation may include an entire region, like Asia or may apply to single country. Their representation is of the US manufacturer and they work hard to develop a successful export business for the company they represent. In most cases, an EMC company will act as a distributor on a buy-sell basis. The EMC buys from the manufacturers at a set price and resells the goods or service to the foreign customer at their established price. EMC is responsible for all invoicing and bears the risk of non payments. The EMC pays the manufacturer on agreed terms, usually in line with the terms offered to their best US customer. EMC act as the export arm of one or more US manufacturers, they are the export intermediaries to market the product and service on behalf of manufacturer, farm groups and distributors. EMC may take title to the goods they sell, making profit on the markup, they may charge a commission depending on the type of products they are handling, the overseas market and the manufacturer clients needs Ex: International trade and marketing Corp. a Washigton D.C based EMC, Overseas Operation Inc a Redondo Beach, Calif 01. EMC helping to establish an overseas market for the companys product usually on an exclusive basis. 02. They maintain close contact with its clients and are supply driven therefore exporters no need spent their time for searching the customer. 03. They have relationship with manufacturers and close ties with overseas distributors therefore potential exporter no need to give much ore effort on distributing their product, seeking their customers. 04. They already familiar with marketing and distribution so they may develop better market for exporters. They reduce the business risk, uncertainty, financial risk on business operation 05. Potential exporters may not have distribution problem and debt collection because EMC have already created well distribution net work and take all the responsibility on business on behalf of manufacture and exports. 06. Often EMCs use manufacturers own letterhead. Visit the factory regularly to learn the details of new products, and develop marketing strategies for each targeted country in close cooperation with the producers. 07. Some EMCs also work on a retainer basis especially if they are providing significant training and advice to their client or undertaking considerable up front marketing. Dealing with EMC allows access to their existing network and resources to appoint distributors and dealers in select markets 08 EMC have the ability to handle all of the details of an export transaction. This includes the know-how to handle inquiries, prepare quotations, enter orders, handle shipping details, assist with country specific obstacles and handle the international banking and payment details

09. EMC helps to identify new opportunities in select foreign markets where distribution may be lacking; traveling abroad for the first hand experience allows them to asses market conditions and sales opportunities. 10. they have the experience to select agents and distributors and they also manage their foreign distribution network through visit to the markets they distribute into.

Discuss offset trade. Offset trade is an exchange of goods or services for cash that includes a reciprocal commitment to find opportunities for the importers to earn hard currency. In offset trade, the exporter sells the product for cash, but then undertakes the promotion of exports from the importing country in order to help it earn foreign exchange. Offset arrangement are usually one of two types Direct offsets: include generated business that directly relates to the export product Indirect offsets: include generated business unrelated to the exported product Monitoring bank that credit and debit payment Monitoring bank that credit and debit payment

Exporters product division Canada Good Importer in US Importer in 3rd country




Payment Good Payment Good

Exporter in Canada Exporter in canada

Let us inspect some examples of prevailing definitions. 1. Offsets, coproduction, barter, and countertrade are compensatory trade agreements agreements that incorporate some method of reducing the amount of foreign exchange needed to buy a military item or some means of creating revenue to help pay for it 2. ... an offset is a contract imposing performance conditions on the seller of a good or service so that the purchasing government can recoup, or offset, some of its investment. In some way, reciprocity beyond that associated with normal

market exchange of goods and services is involved (Udis and Maskus, 1991, p. 152). 3. ... an offset occurs when the supplier places work to an agreed value with firms in the buying country, over and above what it would have bought in the absence of the offset (Martin and Hartley, 1995, p. 125) and offsets ... are usually designed to achieve a relocation of economic activity from the country of the equipment supplier to the purchasing nation (p. 127). 4. Offsets are simply goods and services which form elements of complex voluntary transactions negotiated between governments as purchasers and foreign suppliers... they are those goods and services on which a government chooses to place the label offsets ... (Hall and Markowski, 1994, p. 179). The arms trade offset players: who wants offsets, and who is opposed? who are the interested parties, the players, in the offset game, and what are the benefits they might derive or the costs they might bear? Here is one list. 1.The exporting firm (i.e., its management and shareholders). The firm wishes to maximize profits. If deals without offsets maximize profits, those deals will be agreed to. If deals with offsets maximize profits, they will be agreed to. 2. The exporting firms employees, and its union (if any), and the communities in which the workers live. Employees, especially unionized ones, can always be counted on to oppose competition in the output market. If there were no competition, they themselves would hold effective monopoly power, as the seller of labor services, and thereby possess the ability to extract rent from their employer. 3. The exporting firms subcontractors, and their workers and communities. In many instances, arms manufacturers structure offsets such that component production undertaken by subcontractors is outsourced to the buying country. In this case, the prime contractor and its employees are held harmless (or even gain), but the employers, employees, and communities of the subcontractors will be opposed. 4. The exporting countrys non-military firms. In a famous case that continues to traverse the literature, Northrop Corporation sold 64 F-18 aircraft to Finland. Part of the deal involved selling Finnish paper-making machinery in the US, an offset. 5. The government of the exporting firms country. If arms trade offsets assist manufacturers of military goods to stay in business and maintain a certain level of employment and if, simultaneously, subcontractors and non-military business lose 6. The importing countrys government and people. For the arms importing country, many benefits are claimed for arms trade offsets. Preservation of foreign exchange, employment creation, and technology transfers are among those most often mentioned. I already suggested that these claims may not hold up to factual scrutiny and refer to a later section of this paper for more detail. 7. The importing countrys firms (and their managers, shareholders, employees, unions, and communities) receiving direct or indirect offset contracts. These would gain, inasmuch as their respective counterparts in the arms-exporting country lose.Component production, coproduction, or licensed production

obviously create benefits, narrowly construed. The question is at whose cost these 8. The people of various third-party countries who may be affected by arms trade offsets. If a $3 billion dollar offset requires me to undertake What, if anything, should be done about arms trade offsets? *the underlying issue is economic development and growth, the developed countries would do best simply to open up protected markets *each country needs an arms trade offset audit team whose task it would be to measure the full economic cost of each proposed deal. This is based on the notion that where public funds are expended, costs and benefits should be publicly accounted for. Just as private companies need to account to their shareholders and have their accounts audited and certified to fairly represent the companys affairs, so public accounts likewise need auditing. The offset audit team should certify that the full economic costs and benefits have been accounted and publish the details for public inspection. *Economists are global public servants. An economic valuation of arms trade offsets must therefore ultimately ask what the contract contributes to the lives of the people that finance it. itself have been agreed, and yet public funds are expended. 100.) Discuss how transportation, trade restrictions, domestic capacity, and country-of-origin effects affect companies' sales. 101.) Define Direct Investment An investment which is sufficiently large to affect a company's subsequent decisions. This is sometimes a majority ownership, but sometimes it's just a significant minority ownership. For direct investment to take place, control must follow the investment. Ownership of a minimum of 10% or 25% of the voting stock in a foreign enterprise allows the investment to be considered direct. However, government interference, and lack of control over inputs may exert influence on the company. 102.) According to the appropriability theory and the internalization theory, why would companies want to control their foreign operations? The appropriability theory of the multinational corporation emphasizes the conflict between innovators and emulators of new technologies. Appropriability is "high," and innovators can protect their profits more easily for sophisticated technologies and on breakthroughs that can be transmitted worldwide through the innovator's own subsidiaries. Conversely, appropriability is "low," and multinationals find it less profitable to create simple technologies and ideas that require market transfer. This theory explains the limited role multinationals have played in the development of simple products and simple production technologies, both of which are important to the developing countries. The appropriability theory also

predicts that products in Vernon's product cycle will move to stage II when developed countries start successful emulation of the product and to stage III when developing countries start successful emulation. The profit-maximizing price strategy an innovating multinational should follow is to sell new products at below the monopoly price and slowly cut the price of the product as appropriability mechanisms erode. In the long run, the multinational will be forced to sell at the perfectly competitive price. If the multinational has no long-run profit advantage over other producers, its long-run market shares should approach zero as the perfectly competitive price is approached. Internalization Theory refers to Control through self-handling of operations (internal to the organization), rather than through contracts with other companies. 103.) There are two ways companies can invest in a foreign country. They can either acquire an interest in an existing operation or construct new facilities. Describe the advantages and disadvantages of each alternative. Advantages 1. Existing facilities, an existing labor force and knowledgeable local management 2. existing goodwill and brand identification 3. an immediate cash flow 4. Access to local financing 5. The avoidance of excess capacity 6. Quick startup 7. No new capacity in the market Disadvantages 1. Acquisition company often dont succeed 2. The acquired companies might have substantial problems 3. personal and labor relations may be both poor and difficult to change, ill will may have accrued to existing brands or facilities may be inefficient and poorly located 4. The manages in the acquiring and acquired companies may not work well together, particularly if the to companies are accustomed to different management styles and practices or if the acquiring company tries to institute many changes 5. Assume all liabilities of acquired firm 6. Huge sum of money up-front Construct new facilities Advantages 1. The existence of first mover advantages due to a lack of viable competitors and available acquisitions


3. 4. 5. 6. 7. 8.

the opportunity to establish new (more efficient) facilities, to escape punitive labor contracts, to hire and train fresh labor forces, and to implement compatible managerial styles and practices, that is , the avoidance of carry over problems The existence of government incentives The availability of development capital The creation of additional capacity Can select best site Economic development incentives Clean Slate

Disadvantages 1. 2. 3. 4. 5. Longer time for implementation Land unavail or expensive Registration in factory construction Recruiting local workforce Perceived as foreign

104.) Describe the general motives and international motives for collaborative arrangements. Collaborative arrangements may serve companies goals, regardless of whether they operate internationally. In addition, there are gains from collaborative arrangements that are specific to companies international operations. General motives for collaborative arrangements General motives are the reasons that companies collaborate with other companies in either domestic or foreign operations to spread and reduce costs, to allow them to specialize in their competencies, to avoid competition, to secure vertical and horizontal links, and to gain knowledge. To spread and reduce costs Potential volume is relatively low; excess capacity exists To specialize in core competencies Licensing may yield returns on products that lie outside of a firms strategic priority To avoid or counter competition Markets are too small to support many competitors; firms combine to challenge a market leader To secure vertical and horizontal links savings and supply assurances exist across the value chain; horizontal economies

of scope exist in distribution To gain knowledge Learn about a partners technology; operating methods and / or home markets International motives for collaborative arrangements The reasons why companies enter into collaborative arrangements, covering those reasons that apply only to international operations. Specifically, these reasons are to gain location specific assets, overcome legal constraints, diversify geographically, and minimize exposure in risky environments. To gain location specific assets Desire to overcome cultural, political / legal, competitive and / or economic Barriers To overcome legal constraints Prohibition of foreign ownership in particular sectors; regulations affecting operations and profitability; effective protection of intellectual property rights To diversify geographically Greater and faster spread of assets across countries; smoothing of sales and earnings cycles To minimize exposure in risky environments Secure the safety of foreign assets and earnings; smooth risk across countries. 105.) How/why might companies have to accept a trade-off among their objectives when choosing their form of operations abroad? A trade-off is a situation that involves losing one quality or aspect of something in return for gaining another quality or aspect. It implies a decision to be made with full comprehension of both the upside and downside of a particular choice. Companies often see exporting as different and far more difficult from selling goods and services in their home market. Typically, potential exporters have a sense of the likely need to adjust heir operations for different languages, cultures and market demands. Many companies especially struggle with the fact that export transactions may require that they help foreign customers obtain financing to buy the products. 106.) How do companies desire for control and their international experience influence their choice of operating from abroad? Control is necessary because once an MNE adopts a strategy; it must ensure that employees implement its various elements as planned.

A companys choice of entry mode to a foreign market depends on different factors, such as the ownership advantages of the company, the location advantages of the market, and the internalization advantages that result from integrating transactions within the companys value chain. Ownership advantages are the firms specific assets, international experience, and the ability to develop either low-cost or differentiated products within the context of its value chain. Companies that have lower levels of ownership advantages either do not enter foreign markets or use low-risk strategies such as exporting. Exporting allows managers to exercise operational control but does not provide them the option to exercise as much marketing control. An exporter usually resides far from the final consumer and often enlists various intermediaries to manage marketing and service value activities. The choice of exporting as an entry mode is not just a function of ownership, location, and internalization advantages. It also must fit the companys strategy. Companies typically consider these questions in evaluating the export option. What do we want to gain from exporting? Is exporting consistent with our other goals? What demands will export place on our key resources- management and personnel, production capacity, and financing and how will we meet these demands? Does export help us leverage our core competency without undue risk of diffusion? Does export fit into the current configuration of our value chain? Can our existing coordination methods also deal with the managerial demands created by export transactions? Are the projected benefits of export worth the costs, or would our resources be better used for developing new domestic business?

These questions require managers to take into account issues such as global concentration, synergies, and strategic motivations. Global concentration, for instance, means that many global industries have only a few major players, and a companys strategy for penetrating a particular market might depend on the competition. If the competition is servicing markets by exporting, the company might also do well following the same strategy. However, if the competition has found ways to create superior values by servicing the local market through foreign direct investment, the company might not be successful in the future if it only exports to the market.

107-Define licensing and cross-licensing and explain why are there international licensing agreements between a parent company and a company abroad in which it owns in whole or in part? Licensing A company(the Licensor)grants rights to intangible property to another company(the License)to use in a specified geogaphic area for a specified period.in exchange ,the licensee ordinarily pays a royalty to the licensor.The rights may be exclusive(the licensor can give rights to no other company) or nonexclusive(it can give away rights) Cross-Licensing For industries in which technological changes are frequent and affect many products. Companies in various countries often exchange technology rather than compete with each other on every product in every market. Such an arrangement is known as cross-licensing. Why international licensing -Frequently, a new product or process may affect only part of a companys total output and then only for a limited time. -The sales volume may not be large enough to warrant establishing overseas manufacturing and sales facilities. -A company that is already operating abroad may be able to produce and sell at a lower cost and with a shorter start-up time, thus preventing competitors from entering the market. -For the licensor, the risk of operating facilities and holding inventories lessens. -The licensee may find that the cost of the arrangement is less than if it developed the new product or process on its own. 108.) Explain how franchising agreements differ from licensing agreements? What is the major dilemma that franchisors face in their international operations? Franchising is a specialized form of licensing in which the franchisor not only sells an independent franchisee the use of the intangible property (usually a trade mark) essential to the franchisees business but also operationally assists the business on a continuing basis. in many cases, the franchisor provides supplies. a franchiser and a franchisee act almost like a vertically integrated company because the parties are interdependent and each produces part of the product or service that ultimately reaches the consumer. But the Licensing arrangement is a company(the Licensor)grants rights to intangible property to another company(the Licensee)to use in a specified geogaphic area for a specified period.in exchange, the licensee ordinarily pays a

royalty to the licensor.The rights may be exclusive(the licensor can give rights to no other company) or nonexclusive(it can give away rights). Major Dilemma that Franchisors face in their international operations. Franchisors once depended on trade shows a few times a year and costly visits to foreign countries to promote their expansion. however, because of the internet, they now receive emailed request for the information around the clock, seven days a week. nevetheless, the acceptance of the franchising concept depends very much on the existence of high levels of income, education, mass media, and an entrepreneurial spirit. for example. China has been slow to accept franchises. 109) What is a management contract, and what are the possible advantages to both parties in the contract? Management contract. A company may transfer their management talent by using part of its management personnel to assist a foreign company for a specified period for a fee. Advantages to the company. May gain income with little capital outlay. Able to obtain efficient operations. Advantages to the management company. Receives income without having to make a capital outlay.

110) What is a turnkey operation? What features generally make turnkey operations different from other collaborative arrangement? Turnkey operation. A type of collaborative arrangement in which one company contracts with another to build complete, ready-to-operate Facilities. Features which differ from others. Size of the contract is very big (million to billions) Payment for a turnkey operation usually occurs in stages as a project develops. Many turnkey contracts are for construction in remote areas, necessitating massive housing construction and importation of personnel.

111. What type of ownership sharing can exist in joint ventures?

Consortiums: - i.e., the joining together of several entities to resources and perhaps peruse a major undertaking. Two firms from the same country joining together in a foreign market. Firms from two or more countries establishing an operation in a third country A private firm and a local government. A private firm joining a government own firm in a third country.

112. What are equity alliances, why would companies form them? Equity alliance is a collaborative arrangement in which one of the collaborating companies takes an ownership position in the other(s). in some cases, each party takes an ownership, such as by buying part of each others or by swapping some shares with each other. Companies form equity ownerships to solidify a collaborating contract , such as supplier buyer contract , so that it is more difficult to break 113.) Main reason is, one or all partners become dissatisfied with the ventures. Alternative Ways Partners have different objectives for the joint ventures. Partners view the joint ventures impotence differently. Partners disagree on control issues or fail to provide sufficient directions. Partners perceive they contribute more than their counterpart do. Partners have incompatible operating culture. Eg:- Alternative dissolution of joint ventures. There is considerable variation in both way that joint ventures dissolve and that outcome of the operation after the dissolution. Divorce Scenario Planned Vs Unplanned Friendly Vs Unfriendly (Canada) Both agree Vs Example General Motors (US) & Toyota (Japan) AT & T (US) & Olivetti (Italy) Vitro (Mexico) & Corning (US) Coors Brewing Co (US) & Molson Breweries

Ralston Purina (US) & Taiyo Fishery (Japan)

One partner refuses to agree (China)






114.) The major strains on collaborative arrangements are due to five factors. The importance of the collaborative arrangement to the partners. Differing objectives Control problems Comparative contributions & appropriations Difference in culture The importance of the collaborative arrangement to the partners. One partner may give more management attention to a collaborative arrangement than the other does. If things go wrong, the active partner blames the less active partner for its lack of attention & the less active partner blames the more active partner for making poor decision. Differing objectives For instance, one partner may want to reinvest earnings for growth and the other may want to receive dividends. One partner may want to expand the product line & sales territory & the other may see this as competition with its wholly owned operation. A partner may wish to sell or buy from the venture & the other partners may disagree with the prices. Control problems By sharing the assets with another company, one company may loose some control on the extent or quality of the asset use. Some companies have well-known trademarked names that they license abroad for the production of some products that they have never produced or had experts with. Comparative contributions & appropriations One partners capability of contributing technology, capital or some other assets may diminish compared to its partners capability over time. Further, One partner may be suspicious that, the other is taking more from the operation (particularly knowledge based assets) than it is. In almost all collaborative arrangements, there is a dangers that one partner will use the other partners contributed assets, enabling to become a competition. Difference in culture One company may be accustomed to promoting managers from within the organization, while the other opens its searches to outsiders. One may use participatory management style & other an authoritarian style. One may be entrepreneurial & the other risk averse. For this reason many companies will develop joint ventures only often they have had long term positive experience

with the other company through distributorship, licensing or other contractual arrangement. 115.) Explain how companies can manage international collaborative arrangements effectively. 116.) How might centralization of decision-making adversely affect local managers (those managers in foreign branches or subsidiaries)? 117.) What are some of the trade-offs that companies need to consider when deciding where to locate decision making in international business. 1. Control problems Company loses some control over assets shared with others in collaborative arrangement may lose control of the extent or quality of use of assets Even though control is ceded to one of the partners, both may be held responsible for problems Not clear who controls employees in joint ventures Without control residing with one of the partners, joint operation may lack direction 2. Differences in culture Companies differ by nationality in how they evaluate the success of their operations differences can mean that one partner is satisfied while the other is not Some companies prefer not to collaborate with companies of very different cultures joint ventures from culturally distant countries survive at least as well as those between partners from similar cultures Differences in corporate cultures may also create problems within joint ventures compatibility of corporate cultures is important in cementing relationships 3. Many arrangements develop problems that lead partners to renegotiate their relationship In spite of renegotiated relationships, many agreements break down or are not renewed 4. Collaborations importance to partners One partner may devote more managerial attention to the collaboration due to differences in size of the partners 5. Differing objectives

partners objectives may evolve differently over time. 6. Partners contributions and appropriations Partners capabilities to contribute may change weak link may cause drag on the relationship Suspicions may arise about what other partner(s) is taking from the operation 118.) Explain the major types of traditional organizational structures and the advantages and disadvantages of each for international business. Centralization: the degree to which high-level managers (usually above the country level) make decisions and then pass them down to lower levels for implementation. Decentralization: the degree to which lower-level managers (at or below the country level) make and implement important decisions. CENTRALIZATION Advantages Coordination of the value chain facilitated. Decisions are consistent with objectives. Duplicate activities are motivated to perform better. The risk of costly, wrong, lowerdecisions are reduced. Consistent dealing with stakeensured more accountable. DECENTRALIZATION Advantages Decisions are made by those who are directly involved. Lower-level managers are corporate allowed to exercise initiative. Lower-level employees are preempted. Flexible responses to rapid level Changes are enabled. Subsidiary managers are held holders is

CENTRALIZATION Disadvantages Initiative among lower-level employees is discouraged. Demoralized lower-level workers instructions. Information flows from the top thus, bottom-up preempted. is

DECENTRALIZATION Disadvantages The organization is put at risk if bad, lower-level decisions are made. Cross-unit coordination and wait for strategic fit are impeded. Subsidiaries likely favor their down; own projects at the expense innovation of global performance.

119. Describe some of the general features of contemporary Structures. Contemporary structures take a range of names such as learning organization, vertical organization, or modular structure. However the features are same. The structure should not be defined by or limited to the horizontal, vertical or external boundaries that block the development of knowledge generating and decision making relationships in the company. Further it eliminates vertical and horizontal boundaries within the company as well as breakdown barriers within the company and its customers, suppliers and other stakeholders. With the contemporary structure a world wide company can divide and parcel out work to the most efficient locations. Back office functions can be moved to low cost locations. And let managers send work digitally across the internet to where it could be done more efficiently. Further in this structure particularly the front line employees who deal directly with resource and markets have greater authority. And enable companies to make them more locally responsive without sacrificing the potentials of global integration. 120. Describe using reports as a control mechanism. MNEs use a range of control mechanisms to direct the activities of individuals toward the achievement of organizational goals. Reports are a one of powerful control mechanism. Reports are intended first to evaluate operating units and second to evaluate management in those units. Headquarters needs timely reports to allocate resources, monitor performance and reward personnel. Decisions on how to use capital, personnel and

technology continue without interruption so reports must be frequent, accurate and up to date. Geographical distances often lead managers to standardize coordination methods. Similarly head offices often has less frequent contact with people in the foreign operations, which move them to rely on extensive reports for control. Further MNEs use reports to identify deviations from plans that could indicate problem areas. The focus of the report may be to monitor short term performance or longer term indicators that match the company strategy. Information technology makes reports an attractive control mechanism