MGCR 382 - International Business (Midterm)
Terms
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- flight capital
- money sent out from politically or economically unstable countries to a country viewed as a safe haven
- key market aspects of USA
-
largest economy
24% of world's GDP
politically stable
prime export market
invoicing currency
long term FDI
- invoicing currency
- currency in which sales are denominated
- key market aspects of Canada
-
depends on exports
trade with USA
pros
proximity to US market
political and legal stability
good infrastructure and education
lots of natural resources
cons
conflict between french and english
quebec wanting to separate - federal government
- union of partially self government states united by a central (federal) government
- open market system
-
market which is accessible to all economic factors
all economic actors have an equal opportunity of entry in that market - international trade
- exchange of capital, goods, services across international borders
- mexico's list of international trade with foreign countries
-
european union
neighbouring countries
japan
uruguay - NAFTA
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north american free trade agreement
between canada, USA, mexico
reduced trade barriers
good for economy and job opportunities - key market aspects of the central american and the caribbean
-
economic challenges
political instability
US military interventions
bad education systems
limitation imposed by USA
cheap labor for lots of goods - key market aspects of western europe
-
2 groups: european union and others
free market oriented
parliamentary democracy
27 member countries
euro currency - free market
-
prices are determined by unrestricted competition or supply and demand
unhindered by external regulation or control by government or monopolies - parliamentary democracy
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executive and legislative branches are interconnected
ie. head of state is normally different from the head of government
contrast to a presidential system - influential members of western europe
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germany
france
great britain - germany as an influential member
-
4th largest economy
major player in IB
strict anti-inflation policies
- france as an influential member
-
strong leadership
common eurpean defence
foreign policies
strengthening human rights
- france as an influential member criticized for:
-
promoting economic nationalism
defending french corporations from other european takeovers
protecting french farmers under the EU - great britain as an influencial member
-
resisted initiatives to broaden EU's powers
supports free trade, counterpart to french nationalism
major exporter and importer - list of former communist countries in EU
- Estonia, Latvia, Lithuania, Slovakia, Slovenia, Czech republic, Hungary, Poland, Bulgaria, Romania
- communist countries after soviet union was broken:
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adjusted to loss of guaranteed export markets
restructured economies from central planned communist systems
implemented political, legal and institutional reforms
beneficial to just join EU - high income countries not in the EU:
-
free market
Iceland
Norway
Switzerland - banking
Andorra - investment firms, banking
Monaco - tax haven (low income tax)
Croatia
Liechtenstein - tax haven, many headquarters
- middle income countries not in the EU:
-
Albania
Bosnia
Serbia
economies suffered from wars over control of Bosnia
discouraged MNCs to invest in these countries - marketplace of eastern europe and central asia - economics and politics
-
union of soviet socialist republics
newly independent states
commonwealth of independent states - key market aspects of russia
-
dominant republic in soviet union
lots of natural resources
solid GDP growth
cash reserves
- financial crisis of russia's market
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inability to collect taxes
looting corporate assets
private-own companies > state-owned
low interest - key market aspects of central asian republics
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individual countries with common heritage
Kazakhstan → Russian influence
Uzbekistan → language and religion
Tajikistan → scarce arable land
Turkmenistan → low per capita income
Kyrgyzstan → fossil fuel reserves
- marketplace of asia
-
destination for foreign investments
major supplier of capital to others
aggressive and efficient entrepreneurs
competitive pressure on others - MITI - Japan
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ministry of economy, trade and industry
used powers to guide production and investment strategies of corporate elite
WWII - encouraged to focus on basic industries (ex. steel and shipbuilding)
Now - ex. cars, electronics, machinery - NIS
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newly independent states
Gorbachev's economic and political reforms led to soviet union's collapse and subsequent declaration of independence by 15 soviet republics - CIS
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commonwealth of independent states
forum to discuss issues of mutual concerns - examples of russia's natural resources
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gold
oil
natural gas
minerals
diamonds
fertile farmland - keiretsu
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large families or interrelated companies
- key aspects of keiretsu
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typically centered on a major japanese bank
stable entity that cannot be overthrown
all companies independent in operations
al suppliers are part of one keiretsu and a central bank
helped the MITI
members share companies to prevent takeovers - challenges of japan's marketplace
-
slow GDP growth
trade issues - unfair trading to export markets, nontariff barriers to restrict imports
demographic crisis - aging and shrinking of population, no immigration to come fill population gaps - key market aspects of australia
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main cities - sydney and melbourne
rich natural resources
small workforce
- key market aspects of new zealand
-
main islands - north and south island
reliance on market-based policies
exports - ex. dairy, meat, wool
importance of merchandise trade
USA purchases about half of exports and imports - four tigers
- newly industrialized economies with high income
- key market aspects of korea
-
tight cooperation between government and private firms (ex. samsung, LG)
followed the japanese - discouraged imports, relied on economic combines (keiretsu)
asian currency crisis - chaebol
- privately owned, family centered conglomerates that dominate the korean economy
- examples of chaebols
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samsung
hyundai
daewoo group
LG - key market aspects of taiwan
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reliance on family-owned businesses
export-oriented trade policies
fast developing economic - can focus on high-value-added industries (ex. electronics and cars)
business investments in china - get low wage workers - key market aspects for singapore
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lots of entry for chinese markets
labor intensive industries (ex. textiles)
if successful, shifted to higher-value-added activities (ex. chemical processing, high tech industries) - provides sophisticated communications and financial services
suffers from labor shortage - can't compete for price-sensitve/labor-intensive goods
relies on re-exporting - excellent port facilities to import/export, largest harbour - singapore's commodity harbor
-
singapore wants to be THE asian commodity harbour
largest harbor
geographic advantages
lures big companies in with low taxes
close to many other exporters (ex. china, india, indo, australia)
major competitors - hong kong, shanghai - key market aspects of hong kong
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controlled by china but has some autonomy
after opium wars - back as their own country
ie. own legislature, economic freedom, free-port status, separate taxation system
harbor attracts international business
re-exporter - hong kong's harbor
-
can also enter mainland china
entrepot for china
entrepreneurs act like intermediaries to mainland china - entrepot
- receives goods from one country and prepares good for shipment to the world
- key market aspects of china
-
communist party
cultural revolution set back economic process
death of mao tse-tung
adopted free market-oriented policies - china's free market-oriented policies
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joint ventures with foreign firms
increase in FDI - hopes for political freedom
huge GDP growth - very attractive for foreign investors
many private businesses and sectors (i.e. agriculture)
many investors from overseas - china as a source of hard-working, low-cost labor
- china's main challenge
- increasing gap between rural and urban people
- key market aspects of india
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used to be part of the british empire
after 1991 - market-opening reforms (ie. reduced trade barriers, increased global FDI)
solid GDP growth
made high production/ low cost textiles - to sell for cheap to other markets
- india's challenges
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corruption
bad infrastructure
lack of clarity in govt. policy - key market aspects of southeast asia
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countries:
thailand
malaysia
indonesia
vietnam
low labor costs
recipients of significant FDI
exports generated by FDI - booming economy - marketplace of africa and middle east
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22% of world's land mass
lots of natural resources - key market aspects of africa
-
colonized by european powers (ie. france, belgium, italy, portugal, spain, UK)
some countries still dominated - in french speaking countries, french companies dominate international business
commodities boosted economy (ex. oil, metal)
agriculture is 40% of GDP in central african republic - key market aspects of south africa
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future dominant economic power and growth engine
fertile farmland and rich deposits for precious metals (ex. diamonds)
used as base for african operations by MNCs but stopped due to racism
22% of mineral exports for GDP - africa colonized by:
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france
belgium
germany
italy
portugal
spain
UK - africa's challenge
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most of country employed to get oils and metals
low diversity of employment fields - key market aspects of middle east
-
cradle of civilization
oil rich country
life after oil? - cradle of civilization - middle east
-
world's earliest farms, cities, governments, legal codes, etc
suffered through political conflict, instability and wars - raised risk for MNCs to do business
protests for:
poor employment opportunities
inequality of income
lack of democracy - key market aspects of dubai - middle east
-
part of united arab emirates
benefits of its foreign trade zone
good infrastructure
entry point for exports - united arab emirates
- Arab country in the southeast of the Arabian Peninsula on the Persian Gulf
- marketplace of south america
- suffers from income disparities and poverty - leads to political instability
- key market aspects of brazil
-
follows import substitution policies
export promotion
lack of social and economic mobility
mass production and competition - between local producers - import substitution - brazil
- promotes economic development and tries to stimulate local industry by discouraging imports and using high tariffs
- brazil's challenges
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industries can only gain from mass production or competition between local producers
prices of domestically produced goods rise in price on other markets - benefits importers, but cripples exporters
local firms must pay higher prices for domestically produced inputs than foreign competitors
government must subsidize firms and nationalize them - costs a lot
passed to taxpayers and consumers through high prices - increased taxes
government will run budget deficit - leads to inflation and destroys middle class savings
chain reaction in many major countries - export promotion - brazil
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country pursues economic growth by expanding its exportation industry
developed by taiwan, SG, HK - laws and customs in host country might determine:
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market access
prices
costs of inputs (labor, wages, technology) - list types of law
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common law
civil law
religious law
bureaucratic law - common law
-
UK and former colonies
based on judge's decision on individual cases through history
legal precedents used by judges for similar cases
statutory laws
judges as neural referees - statutory laws
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set down by a legislature or by a legislator
ie. transaction between firms and british government - shielded from the public - civil law
-
based on codification/ detailed listing of what is or is not acceptable
judges take on lawyer's tasks
ie. determining scope of evidence to be collected and present to court - codification
- process of collecting and restating law of jurisdiction in certain areas, forming a legal code
- religious laws
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based on officially established rules governing faith and practice of religion
laws influence behaviours which impacts interactions with firms
theocracy
may be problematic to firms (ie. islamic law - no interest on loans allowed)
lack of appeal procedures - MNCs should be cautious since without an independent judiciary, foreigners rights are not protected - bureaucratic law
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communism and dictatorships
law, economy, business run by bureaucrats (ex. operations management of international businesses) - managers confronted by arbitrary rules
- cons of bureaucratic laws
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lacks in:
consistency
predictability
appeal procedures - domestically oriented laws
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affect all facets of firm's domestic operations
affect business practices of foreign firms - domestically oriented laws - domestic operations
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ex. management, operations, finance, marketing, developing and using technology
might hinder domestic firms to compete internationally - domestically oriented laws - international business
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foreign firms must follow its laws and regulations
foreign firms with product for export must change production techniques to meet regulations of importing countries
ie. mexico's products not meeting FDA standards - list of laws directly affecting int. business
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sanctions
embargos
extraterritoriality
- embargos
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a comprehensive sanction against all commerce with a given country
an official ban on trade with particular country
countries can act alone or in unison
important for controlling export of high-tech goods
avoids the risk of dual-use - dual use
- technology designed for both civilian and military purposes
- extraterritoriality
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valid outside a country's territory
regulate business activities that are conducted outside their borders
ie. firms valuable to US can be sued if trying to engage in activities outside US
the Helms-Burton act - the helms-burton act
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most controversial application of extraterritoriality
directed at firms that 'traffic' in assets of US companies confiscated by cuban government
US can take action against new owners of these assets
goal - stop foreign companies to profit from cuban property that was stolen from US - ownership
- balance between government control of economy and reliance on market forces to find resources
- nationalization
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leftist governments transfer ownership of resources from private to public sector
most vulnerable sectors - natural resources (ex. oil, metals, mining)
ie. quebec government nationalized electric companies - hydro quebec - expropriation
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public firm takes property for purpose deemed to be in public interest even though owner of property may not be willing to sell it
private firms that suffer a loss of assets may get compensation from government - confiscation
- private firms are handed to government without any compensation
- privatization
-
conversion of state-owned property to privately owned property
good opportunity for entrepreneurs to invest in new firms
creates opportunities for int. business - opposite of nationalization
- causes of privatization
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unprofitability of state-owned firms - undercapitalized
competitive pressures of global markets
hard to raise capital required to upgrade and expand by government - key sectors of privatization
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telecommunications
transportation
manufacturing - list of laws directed against int. business
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ownership
nationalization
expropriation
confiscation
repatriation
- repatriation
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limit foreign ownership of domestic firms to avoid economy from being controlled by foreigners
imposing restrictions/ constraints on ownership and ability to repatriate profits earned in home country - cannot bring back to home countries what they earned - impacts of MNCs on host countries
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economic
political
cultural - MNCs must know national and local environments to:
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compete effectively in market
maintain productive relationships with governments - positive economic impacts of MNCs on host countries
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western supermarket chains:
more selection
high standards of quality and hygiene
national brands
direct investments in plants and factories
creating new employment opportunities
pays tax - benefits local economy
transfer of latest technology
- negative economic effects of MNCs
-
increases competition - may cause loss of employment and profit for local firms
country may become dependent on economic health of MNCs - financial fortunes become more significant and if MNCs pulls out, it can be devastating to local economy - political impacts of MNCs
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MNCs may want to intentionally or unintentionally have a political impact
size and dependency of firm can indicate high power in host countries
may misuse power to get something they want (ie. threaten to shift production and jobs to other locations) - positive cultural impacts of MNCs
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better and safer equipment
better health care
better sanitary food
introduce new products
raise local living standards
develop new norms, standards, behaviours - negative cultural impacts of MNCs
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loss of national identity
threatens national culture - local people more interested in adopting new cultures when buying a foreign product - list of dispute resolution in int. business
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forum shopping
principle of comity
arbitration - four essentials questions - dispute resolution in int. business
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which country's law applies?
where should the issue be resolved?
how will the conflict be resolved?
how will the settle be enforced? -
who acknowledges the agreement?
should have specific answers to each question to reduce uncertainty/ expense in resolving disputes - forum shopping
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each party seek court system most favorable to their own interest
occurs if contract has no answers to first 2 questions - principle of comity
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legal reciprocity - whether a foreign court is enforced or not
if yes, a country will honor and enforce within its own territory - judgements and decisions of foreign courts with limitations
3 conditions
- 3 conditions for principle of comity to apply
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reciprocity extended between countries (ie. A and B mutually agree to honor each other's court decisions)
defendant is given proper notice beforehand
foreign court judgement doesn't violate domestic statues or treaty obligations - arbitration
-
both parties in conflict agree to submit their cases to a private individual whose decision they will honor
pros:
fast
private
informality
cheaper - technological environment of int. business
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foundation - resource base:
fertile land
rich natural resources
labor supplies
availability of resources - can affect what products are made
investments shaping tech. environment:
ex. infrastructures - easier distribution of goods
ex. human capital - improved education
technology transfer - technology transfer
-
transfer of technology from one country to another
encouraged by FDIs
some countries require MNCs to transfer technology as a condition for operations - business requirement
ie. saudi arabia mandated that oil companies willing to extract oil must hire and train arabs - FDI and technology transfer
-
important for developing countries:
FDI brings jobs, essential technology to expand and develop the economy
host countries use tax incentives to attract MNCs to build factories there - list of intellectual property
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patents
trademarks
brand names - intellectual property rights
-
laws that protect intellectual property
promoted by international treaties
weak protection = high costs of int. businesses - intellectual property
-
important asset of most MNCs
important determinant of host country's technological environment
two things to consider:
willingness of MNCs to transfer technology
degree of protection - patent conflicts
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patents - different laws can lead to conflicts
ie. japanese file numerous patents with minor modifications of an existing patent
while us patentable inventions have to be novel, useful and nonobvious
- trademark and brand name conflicts
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most countries follow a 'first to file' approach - often abused against foreigners
ie. may not be taken in a specific country so they export the products but second country already has that name
administrative delays
ie. trademark applications take 4 times longer for foreign firm than japanese firm - accounting environment
- differences in policies and procedures of national accounting systems - can create operational and control problem
- roots of national differences - accounting
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accounting standards reflect influence of:
legal
cultural
political
economic factors
varies in common and code law countries
- economic influence - accounting
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how state funds are used
whether state-mandated production quotas are being met - cultural influence - accounting
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accounting system can reflect national culture
ie. french firms publish a social balance sheet meant to show treatment and compensation of workforces - common law - accounting
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accounting procedures normally evolve through decisions of independent standard setting boards
ie. GAAP - provides a true and fair view of firm's performance - code law - accounting
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codify the accounting procedures and standards
accounting determined by law and not collective wisdom - list of differences in accounting practices
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values for assets
values for inventory
tax authorities
accounting reserves
others:
capitalization of financial leases
capitalization of R&D
treatment of good will - determining values for assets
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assets should be valued at historical cost less depreciation
some at raised value to reflect true replacement value
must be careful when comparing strength of balance sheets of different countries - determining values for inventory
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2 methods:
LIFO - last in, first out
FIFO - first in, first out
must know which technique used for different countries - dealing with tax authorities
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accounting records - basis fro assessing income tax burden
ie. germany - taxable income measured by contents of firm's financial records - choosing between higher taxes or lower reported income
ie. US report 2 financial statements: IRS and shareholders - using account reserves
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accounts created in firm's financial report to record foreseeable future expenses that might affect operations
disliked by US IRS since these charges reduce a firm's taxable income
manipulation - creates a misleading picture of financial performance - capitalization of financial leases
-
identifies a company's lease obligation as an asset on its balance sheet
because although the company has not taken ownership of the asset, the transaction is still considered to be a beneficial economic exchange for the lease holder
expenses are higher in the early years and gradually decline over the term of the lease
countries that capitalize financial leases:
US
UK
canada
swiss - can do but not required - capitalization of R&D
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most countries - permits
US - prohibits - treatment of goodwill
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goodwill - value of an asset owned that is intangible but has a quantifiable "prudent value" in a business
firms needing second firm pays more than book value to get that firm's stock
ie. goodwill = excess payment
netherlands - amortize goodwill over five years
some countries choose between: immediate write off
capitalizing
amortizing over time - accounting impacts on capital markets on:
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performance
investment
loans - performance impact - accounting
-
accounting differences can distort measured performance of firms in different countries
ie. earning in german and french firms - understated due unmatched financial and tax reporting
ie. japan - price to earnings ratio of japanese to us is higher because japanese firms reduce reported profit - investment impact - accounting
-
NYSE - new york stock exchange
SEC - securities and exchange commission
NYSE concerned about SEC mandated accounting rules:
must be followed by publicly trade corporations
full and comprehensive disclosure of firm's financial performance info
problem - rules discourages foreign firms from listing on exchange and threatens exchange's global competitiveness
ie. firms rather list stocks on european or asian exchanges
- loans impact - accounting
- SEC requirements good for assessing riskiness of potential loans
- political environment
-
laws and regulations passed by any level of government can affect potential success of firm's operations in host country
- zoning regulation
- zoning - land use planning used by local government
- political risk assessment
- systematic analysis of political risk faced in foreign countries
- political risks
-
changes in political environment that affect value of firm's business activities
depends on type of business and duration in host country - 3 categories of political risk
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ownership risk
operating risk
transfer risk - ownership risk
- property of firm threatened through confiscation or expropriation
- operating risk
-
ongoing operations and/or employee safety is threatened
ex of causes. changes in law, environmental standards, tax, terrorism, etc
- transfer risk
- government interferes with firm's ability to transfer funds in and out of country
- 2 types of risks
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macropolitical risk
micropolitical risk - macropolitical risk
-
affects all firms in country
ex. civil war - micropolitical risk
-
affects only specific firm within specific industry
ex. nationalization of oil in saudi arabia - assessing political risk - questions to ask
-
1. country's political, economic, cultural structures?
2. democracy or dictatorship?
3. free market or government control?
government's view on foreign firms - see as promoting or hindering economic goals?
private sector expected to help little or a lot in helping to achieve economic goals of host country?
4. public or private sector customers?
public - favors domestic or foreign suppliers?
competitors - public or private?
5. changes in government policy?
firms should act arbitrarily or rely on rules and laws?
6. stability of existing government?
if new government, will there be big changes in economic policies?
risk in FDI, inflation?
will government want to expropriate firms?
- reducing political risks of foreign operations
-
government owned/sponsored organizations - insure firms against political risks:
overseas private investment corporations (OPIC)
multilateral investment guarantee agency (MIGA)
- OPIC
-
overseas private investment corporation
insures US overseas investments against:
nationalization
insurrections
revolutions
limited to firms operating in countries that have signed bilateral investment treaties with US - MIGA
-
multilateral investment guarantee agency
subsidiary of world bank
helps to insure against political risk - list characteristics of culture
-
learned
interrelated
adaptive
shared - define culture
-
collection of values, beliefs, behaviors, customs, attitudes that distinguish societies
determines rules of how firms should operate
businesses conducted within context of society - learned - culture
-
reflects learned behaviour transmitted from one member to another
can be intergenerational (ie. mother to daughter) - interrelated - culture
-
elements of culture are interrelated
ex. japana - harmony and loyalty = lifetime employment - adaptive - culture
-
changes in response to external forces that affect it
culture is always changing
ex. free market west germany vs communist east germany - same heritage but division created cultural difference - shared - culture
- shared by members of society
- list basic elements of culture
-
determines how members communicate and interact with each other
basic elements affect -> local environment (response to changing circumstances) -> affects int. business
social structure
language
communication
religion
values and attitudes - social structure
- framework that determines the roles of individuals within society
- list components of social structure
-
individuals, families and groups
social stratification
- individuals, families and groups
-
individuals -> live in families -> work together in groups
differs in culture:
definition of family
importance of each individual
ie. US firms discourage nepotism but arabs think family ties are crucial
ie. US firms promote individualism/ independence but Japanese children taught to work in groups - nepotism
- favoritism granted to relatives regardless of merit
- social stratification
-
classification of people into groups based on shared socio-economic conditions
categorizing people based on:
birth, occupation, educational achievements, etc
importance of these categories is different within every society
one's social position can affect facets of one's dealing with other people
MNCs operate in highly stratified societies:
helps during hiring and promotion procedures
must make sure certain messages only reached by targeted audience - to avoid offending other groups
social mobility - types of societies and social stratification
-
type of societies - social mobility
higher stratification - lower
lower stratification - higher - social mobility
-
ability of individuals to move from one stratum of society to another
affects individuals attitudes and behaviors towards factors like:
labor relations
human capital formation
risk taking
entrepreneurship
ie. british kids dropping out of school - believe their role in society is predetermined
ie. canada, us kids willing to pursue education - can rise in society - language - culture
-
primary delineator of cultural groups - how society communicates with each other
organizes how members of society think about the world - though patterns
provides clues about culture values and helps acculturation
ie. formal and informal ways to say 'you'
presence of more than one language group - diversity
provides differences within country - heterogeneous
accounts for cultural differences - marketing - list components of language
-
competitive weapon
lingua franca
translation
saying no - language as a competitive weapon
-
ability to communicate is a competitive advantage
very important during transactions and productions - lingua franca
-
predominant common language for int. business - english
does eliminate all cross-cultural misunderstandings
ex. humor, different interpretations of meaning of common words
advantage to USA, Canada since native english speakers - but fail to speak another language is disadvantage on foreign turf - translation
-
can overcome linguistic differences
translators:
- must be sensitive to subtleties in connotation of words
- must focus on translating ideas
- not use idioms and expressions, only common words with common meanings
can create marketing disasters
prevent failure with backtranslation
- backtranslation
-
one person translates document then second person translate the translated version back to original language
checks that intended message is still being sent - saying no - language - culture
-
no can be impolite in asian countries and middle east
- non verbal communication - culture
-
verbal or non verbal
most info transmitted to members of culture by means other than language
ie. facial expressions, hand gestures, tone of voice, eye contact, body position and posture
ex. handshakes, kissing
can lead to misunderstandings
ex. US stand far from each other while talking VS. arabic stands close
- communication - culture
-
verbal
non verbal
gifts and hospitality - gifts and hospitality
-
important means of communication
ex. japanese etiquette requires solicitous hospitality - bonds strengthened by gifts
ex. arabs believe in quality of people = quality of project - give gifts as appreciation
hospitality customs vary
ex. US want to see and be seen
ex. chinese want privacy
affects how bad new is delivered
ex. US - right away vs Korea - end of day - challenges of religious diversity - culture
-
must accommodate needs of all different beliefs
fail to accomodate can bring:
suffering from boycotting
low morale
loss of sales and profit
- key impacts of religion
-
legal system
homogeneity
tolerance - values - culture
-
values - principals and standards accepted by members
cultural values - stem from beliefs about individual's position in relation to family/ social hierarchy - attitudes - culture
-
attitudes - actions, feelings, thoughts that result from values
cultural attitudes - towards factors like time, age, education, status reflect values → shape behavior → determine opportunities for international businesses - different attitudes towards time
-
english - time is money -> represents opportunity to produce/ raise income
english - idle hands are the devil's workshop -> better positions in life determined through hard work
arabs - meetings can start late and family interruptions are acceptable
US - arrive before meeting and expect things to start on the dot - different attitudes towards age
-
US - youth is a virtue
asian countries - age is respected and mangers stature is correlated with age - difference attitude towards education
-
US - provides widespread access to higher education
german - well developed apprenticeships
japan - only take handful of the best for guaranteed best jobs
- different attitude towards status
-
status achieved varies:
inherited due to wealth or rank of ancestors
earned through hard work, personal/ professional accomplishments
japan - status depends on status of group they're in -> corporate affiliations (ex. graduated from prestige university -> working in toyota motor -> high status)
india - people divided into castes:
priests and intellectuals
soldiers and political leaders
business people
farmers and workers
untouchables -> perform the worst jobs
- Hall's low context approach
-
low-context-culture - words used by the speaker explicitly convey the speaker’s message to the listener
ex. USA, Canada, UK
depends more on specific terms of a transaction
demands more independence, and expects many relationships, but fewer intimate ones
ex. lawyers present → ensure clients’ interests = protected
- hall's high context culture
-
context of conversation is just as important as the words actually spoke
cultural clues needed to understand what is being said
ex. Arab, Chinese, Japan
value interpersonal relations to determine whether to enter a business arrangement
hold preliminary meetings to determine trust/teamwork
ex. No lawyers -> convey distrust
more likely to ask questions rather than attempt to work out a solution independently, and the questions are likely to be asked from the same few people - cultural cluster approach
-
countries that share many similarities in their cultures although there are differences
international businesses use this to formulate their internationalization strategies
ex. based on language - US firms export to canada/UK since all english speaking
closeness of culture affects the form that firms use to enter foreign markets - greenfield investment
-
brand new investment
investment in a manufacturing, office, or other physical company-related structure or group of structures in an area where no previous facilities exist
for when countries that aren’t very comfortable with each other
(Ex. Japan and Britain) - Hofstede’s Five Dimensions - cultural analysis
-
Social orientation: individualism ↔ collectivism
Power orientation: power respect ↔ power tolerance
Uncertainty orientation: uncertainty acceptance ↔ uncertainty avoidance
Goal orientation: aggressive goal behavior ↔ passive goal behavior
Time orientation: long-term outlook ↔ short-term outlook
- social orientation
-
person’s beliefs about the relative importance of the individual and the groups to which they belong
2 extremes:
individualism
collectivism
differences of social orientation
ex. USA - workers compensated according to individual achievements / can switch employers and get higher paying job
ex. Japan - CEO paid depending on performance of group / changing jobs is disloyalty to firm and deemed untrustworthy
- individualism - social orientation
-
cultural belief that the person comes first
ie. self respect, independence, own career interests
ex. USA, canada, UK - collectivism - social orientation
-
cultural belief that the group comes first
ie. well-defined social networks
ex. extended families, tribes, coworkers -
power orientation
-
belief that people in culture hold appropriateness of power and authority differences in hierarchies
2 extremes:
power respect
power tolerance
can lead to misunderstandings in business
- power respect - power orientation
-
society accept power and authority of superiors
based on superior's position on hierarchy
higher level positions carry right to make decisions - power tolerance - power orientation
-
society puts less importance to positions in hierarchy
questions decisions and refuses to do something
believe that hierarchies exist to solve problems and organize tasks
- uncertainty orientation
-
the feeling people have regarding uncertain situations
2 extremes:
uncertainty acceptance
uncertainty avoidance - uncertainty acceptance - uncertainty orientation
-
stimulated by change and thrive on new opportunities
risk can help an individual grow, develop and create new opportunities
flexible hierarchies, rules and procedures - uncertainty avoidance - uncertainty orientation
-
dislike ambiguity and will avoid whenever possible
more rigid hierarchies that elaborate rules and procedures
preserving status and prestige of firm through conservative low risk strategies - goal orientation
-
manner in which people are motivated to work towards different kinds of goals
2 extremes:
aggressive goal behaviour
passive goal behaviour - aggressive goal behaviour - goal orientation
-
place high value on material possessions, money, and assertiveness
define gender based roles more rigidly - very traditional where men work and women stay at home
- passive goal behaviour - goal orientation
- place high value on social relationship, quality of life, concern for others
- time orientation
- extent to which members of culture adopt long or short term outlook on work, life, and other aspects of society
- culture convergence
-
different cultures meddling and mixing with each other
ex. new techniques, lifestyles, attitudes, etc - understanding new cultures
-
self reference criterion
cross-cultural literacy - self reference criterion
-
unconscious use of one's own culture to help assess new surroundings
used when:
dealing with new cultures
communicating - cross-cultural literacy
-
knowledge of other cultures
first step in acculturation - acculturation
-
process by which people not only understand a foreign culture but also modify and adapt their behaviour to make it compatible with that culture
important for MNCs or people who interact with host countries - international business
-
transactions between parties from more than one country
transactions across national borders - examples of int. business transactions
-
import and export
trade
selling and buying - for lower labor costs
borrowing money from foreign bank - parties involved in int. business transactions
-
government agencies
groups of companies
individual companies
private individuals - domestic business
- transactions within boundaries of a single country
- key differences of domestic and int. business
-
boundaries
legal systems
availability of resources
currencies
cultures
skill and knowledge - reasons for studying int. business
-
affects everyone - small and large businesses
keep pace with competitors
get new business skills and techniques
get cultural literacy - int. business activities
-
exporting
importing
international investments
international licensing
int. franchising
management contracting - economic sanction
-
typically a ban on trade
can vary from:
imposing import duties on goods from
blocking the export of certain goods to the target country
full naval blockade of its ports in an effort to verify
curb or block specified imported goods - define extraterritoriality
-
exempts firm operating in a foreign country from the jurisdiction of the host country
instead, firm remains accountable to the laws of the native country
ex. troops in passage, passengers on war vessels, individuals on mission premises, and other agencies and persons - list of four tigers
-
korea
taiwan
singapore
hong kong - exporting
-
selling products made from own country to other countries
critical to firm's health - importing
- buying products made in foreign country and using it in own country
- 2 groups of export and import
-
trade in goods - tangible products
ex. merchandise - clothing, computers, raw materials
trade in services - intangible products
ex. services - banking, travelling, accounting activities - international investments
-
capital supplied by one firm of one country to another
2 categories:
FDI
FPI - FDI
-
foreign direct investment FDI
for active control of property, assets, or companies located in host countries
ie. instead of buying domestic firm, take plans from home country and applying to host company
home country
host country - home country
- where parent company is located
- host country
- any other country where company operates
- FPI
-
foreign portfolio
for any other purpose other than control of foreign financial assets
ex. stocks, bonds, certificates of deposit - international franchising
-
firm allows another firm in different country to operate chain of its company
franchisee must buy or use franchisor's operating system, brand names, trademarks, etc
royalty payment
form of int. licensing
entrepreneur type that runs the company - management contracting
-
firm allows another firm in different country to operate facilities or provide management services for them
agreed upon fee
ex. hotels - investors build or own the hotels and contract out to big brands
- 3 types of int. organizations
-
MNC
MNE
MNO - MNC
-
multinational corporation
engages in FDI
owns or controls value-adding activities in more than one country
legally incorporated
typically controls from central headquarters
extensive involved in int. business
ex. buy resource, build good, sell in many different countries - MNE
-
multinational enterprise
partnership between firms of different countries
for non true corporations - MNO
-
multinational organization
refers to both non profit and profit organizations - list of worlds' largest corporations
-
1. Wal-Mart
2. Royal Dutch Shell
3. Exxon Mobil
- globalization
- integration of markets, nation states and technologies
- pros of globalization
-
allows players to reach around the world farther, deeper, faster and cheaper
increased int. trade, especially in services due to development of technology
ex. internet - banking, shopping, education
growing FDI - 2 reasons for rise in int. business
-
strategic imperatives - motivate globalization
environmental changes - facilitate globalization - 4 components of strategic imperatives
-
core competencies
resources and supplies
new markets
industry rivals - core competencies - strategic imperatives
-
to leverage
core competency - unique advantage central to firm's operations
use this to increase firm's revenues and profits - new markets - strategic imperative
-
to seek because:
domestic market matured -> becomes hard to generate high revenue and profit growth
2 benefits:
economies of scale -> lower avg. costs as product sales increases
less dependency on one market -> create security and diversify revenue stream - industry rivals - strategic imperatives
-
to better compete with
- environmental causes of globalization
-
political changes
technological changes - political changes - globalization
-
o Before → barriers against foreign trade and investment
• Created by national governments
• Complicated process of firms wanting to enter new markets
o After WWI → many countries imposed tariffs on imported goods
• Favored local firms on government supply contracts
o After WWII → major trading powers negotiated reductions in tariffs and eliminated barriers to FDI
• General Agreement on Tariffs and Trade (GATT)
• World Trade Organization (WTO)
• Other accords → European Union, Mercosur Accord and NAFTA
- global marketplaces during cold war
-
o First world: rich, major trading (Europe, North America, Australia, Asia)
⬢ Where most international business activity took place
o Second world: Soviet Union, allied communist states
⬢ Walled itself off to commerce with First World
o Third world: low-medium income countries (Latin America, Africa, most of Asia)
⬢ Suppliers of raw materials and commodities to First World countries
- emerging markets
-
o Countries whose recent growth or prospects for future growth exceed that of traditional markets
o Many companies finding much of sales and profit growth attributable to emerging markets
BRIC
Big ten
Non high income countries
china and india
- BRIC
-
Brazil
Russia
India
China - big ten
- Argentina, Brazil, China, India, Indonesia, Mexico, Poland, South Africa, South Korea, Turkey
- Non-high Income Countries - emerging markets
-
most of Africa
Asia
Eastern Europe
Latin America - technological changes - globalization
-
o Improvements → made international business more feasible and profitable
o Improved Communication Technology
• Smart phones, tablets, emails → allow for global reports and news to be quickly received
o Improved Transportation Methods
• Stimulated growth in international tourism → largest component of int. trade in services
• Transport things faster around the globe
o Improved Information Processing (computers)
• Rapidly process vast quantities of information → easy management of factories and offices around the world - impact of the great depression
-
international economy collapsed due to:
prohibitive tariffs
quotas
protectionists measures on imported goods - ITO
-
International Trade Organization (ITO):
o No more trade wars and promote international trade
o Never came to be → couldn’t agree on how extensive its power were
• ITO taken over by General Agreement of Tariffs and Trade (GATT)
o Reduce barriers, allowed for discussions on trade policies and problems
o GATT replaced by WTO
- GATT
-
General Agreement of Tariffs and Trade
• Goal: Promote global trade → free and competitive international trading environment that benefitted efficient producers
o This was supported by MNCs
• Sponsored multilateral negotiations
o Reduced tariffs, quotas and nontariff barriers
o Tariff reduction negotiations went through 8 rounds of negotiations
• Uruguay Round: final round of negotiations
o Tariff rate decrease but countries saw nontariff barriers as impediment to growth of world trade
o Agreed to create WTO
MFN principal
- MFN principal
-
• Most favored nation (MFN) principle:
o Overcome discrimination in trade → help international business regardless of nationality
o Applies to all GATT member countries → any preferential treatment granted to one country must be granted to everyone too
o Encourage multilateral negotiations
- 2 exceptions to MFN principal
-
o Assist poorer countries in economic development
• Generalized system of preferences (GSP) Lower tariffs for 3rd worlds exclusively
• Can choose which countries are considered “developingâ€
o For comprehensive trade agreements that promote economic integration (EU, NAFTA)
- 3 goals of WTO
-
o Promote international trade flows → countries should have non-discriminatory, predictable trade policies
o Reduce trade barriers through negotiations
• Focus on specific sectors of world economy
o Make impartial procedures to resolve trade disputes
- WTO vs GATT
-
⬢ WTO incorporates GATT agreement but still different
o GATT: promote trade in goods VS WTO: beyond just goods
o WTO had more enforcement powers
- GATS
-
General agreement on trade in services (GATS):
• Want to reduce barriers in trade of services
o If government controls service → be nondiscriminatory → national treatment
- national treatment
- country treats foreign firms the same way as domestic
- TRIPS
-
Agreement on trade-related aspects of intellectual property rights
Bad enforcement of laws that prohibit illegal usage, copying and counterfeiting intellectual property → many victims
o In music, film, computer software
WTO agreed to strengthened protection of intellectual property rights
o Still problems → tax enforcement/rule breaking countries
- TRIMS
-
Trade-related investment measures agreement
• Relationship between trade and investment: one-third of annual trade is between subsidiaries of parent organization
o 3rd world: FDI important to promote growth → didn’t yield it
o WTO wants to eliminate national regulations on FDI that restrict trade
Affects:
• Trade balancing rules: no limits to imports so it has to equal their exports
• Foreign exchange access: no restriction to foreign investors’ access to foreign exchange
• Domestic sales requirements: doesn’t require invest to sell % of factory’s output in local market
- Enforcement of WTO decisions
-
• If rules aren’t followed → ask country to eliminate trade barrier
• If country doesn’t comply -> ask offended country to impose same barriers
• WTO has very effective enforcement
o However, labor workers and environmentalist want WTO to pay more attention
- 5 different economic integrations
-
o Free trade area
o Customs union
o Common market
o Economic union
o Political union
- Advantages of economic integration
-
o Open markets of member countries
o Lower production and distribution costs
o Improves international competiveness
- Disadvantages of economic integration
-
o Lets competitors into the local market
o Harms specific sectors of the economy
o Favors powerful special interest groups
- economic integration rank from high to low
-
political union
economic union
common market
customs union
free trade area - Free trade area
-
⬢ Encourage trade among members
⬢ Eliminates trade barriers
⬢ Vulnerable to trade deflection when nonmembers deflect exports to member nation with lowest external trade barriers
o Give high vs. low tariffs -> nonmember will export to low first the back to destined country (high)
⬢ Rules of origin: what is classified as member good and nonmember good
- Customs union
-
⬢ Eliminates internal trade barriers with members
⬢ Adopt external trade policies towards nonmembers
⬢ Avoids trade deflection -> common rules between members
- Common market
-
⬢ Like customs union but also eliminates barriers that inhibit movement of factors of product among members
⬢ Workers can practice in member country -> increase productivity ->
- 3 steps for foreign market selection
-
1. assess alternative markets
2. evaluate costs, benefits, risk of entering
3. select one with most potential for expansion - assessing alternative markets
-
factors to assess:
market potential
level of competition
legal and political environments
sociocultural factors
objective information - info easy to get (ex. currency stability)
subjective information - info hard to get (ex. honesty of government, process of obtaining a utility permit)
- market potential - assessing alternative markets
-
1. assess market potential - decision depend on product position (ie. luxury items won't sell in poor markets)
ex. GDP, population, infrastructure, etc
2. collect relevant data to specific product line considered - all past data and predicted future growth/depression
must measure economy subjectively and objectively
objective - per capita income, GDP
subjective - annual growth, bad economy - levels of competition - assessing alternative markets
-
consider current and future levels
ex. size, number of firms, market shares, pricing, strengths, weaknesses
successful firms continue to monitor markets and also look for new market opportunities - legal and political environment - assessing alternative markets
-
ex. tariffs, trade barriers, mode of entry
government stability - ex. price regulations, military coups
- sociocultural influences
-
subjective info and hard to quantify
minimize uncertainty by picking markets with similar to home market
recognize needs and preferences of host country - evaluating costs, benefits, and risks
-
potential costs - direct costs, opportunity costs
potential benefits
potential risks - direct costs - evaluating costs, benefits, and risks
-
start up costs - what firms incur upon entering new market
operating costs - costs for setting up business, shipping equipment, HR - opportunity costs - evaluating costs, benefits, and risks
-
forfeit profits - what firm could have earned in another market due to cool down time after entering first market
delay profits - what firm could have earned if decided to enter to faster - potential benefits - evaluating costs, benefits, and risks
-
higher sales and profits expected from new market
foreclosing of markets
new technology
synergy
competitive advantage for limiting competitors to earn profits
lower costs - low acquisition and manufacturing costs - potential risks - evaluating costs, benefits, and risks
-
exchange rate fluctuations
direct financial losses due to poor market potential assessment and inability to reach right decision
operating complexities
political instability - list different modes of entry
-
exporting
international licensing
international franchising
specialized modes
foreign direct investment - list decision factors for choosing mode of entry
-
ownership
location
internalization
others:
need for control
available resources
global strategy
trade off between level of risk and potential rewards - ownership advantages - decision factor for choosing a mode of entry
-
tangible or intangible resources owned by firm -> competitive advantage
should have this resource when entering new market
liability of foreignness - disadvantage that foreign firms face when competing against local firms - location advantages - decision factor for choosing a mode of entry
-
compare if host country production is relative to home country production
compare economic and noneconomic characteristics of home market to foreign markets
home country desirable -> enter via export (ex. tariffs, prohibitions, government influence)
host country desirable -> invest in facilities or license
- internalization advantages - decision factor for choosing a mode of entry
-
compare if firm is better to product good or service itself than contracting with another firm
level of transaction costs:
high - rely on FDI, joint ventures
low - franchise, license, contract manufacturing
decision based on:
nature of ownership advantages possessed
ability to ensure productive and harmonious working relations with local firms - advantages of exporting - mode of entry
-
control of financial exposure to host country
little or no capital investment needed for host distribution
decision to distribute product itself or use a middleman
enter market gradually - can assess local conditions, fine-tune products to meet foreign preferences
proactive vs reactive motivations
- proactive motivations - exporting
- increasing opportunities available PULL firm into foreign market
- reactive motivations - exporting
- decreasing opportunities in home market PUSH firm into foreign market
- list forms of exporting
-
indirect
direct
intracorporate transfers - indirect exporting - forms of exporting
-
firms sells product to domestic customer for export
little experience in int. business
dependent on others
limited profits - direct exporting - forms of exporting
-
firm sells product to foreign customers - distributors or end-users
deliberate efforts to expand business internationally
more exports, more aggressive in exploiting new markets
potential for high profits - intracorporate transfers - forms of exporting
-
firm sells product to another firm in a different country
ex. kuwait export, australian export
revenues are for the firm
may export semi-finished products for lower production costs - additional considerations for exporting
-
government policies
marketing concerns
logistical considerations
distribution issues - government policies - additional considerations for exporting
-
home country may encourage exporting as an entry mode - ex. export promo policies, export financing programs
but host country may impose tariffs and NTBs on imported goods to discourage firm foreign firms from relying on exports as an entry mode - marketing concerns - additional considerations for exporting
-
choice of exporting influenced by feedback from customers - ex. image, distribution, feedback
feedback less important for standardized products - ex. toothbrush, coffeemakers
feed more important for technology products - ex. computers, smartphones
- logistical considerations - additional considerations for exporting
-
logistical costs may be higher for exported goods than locally produced goods
ex. physical distribution costs of warehousing, packaging, transporting, distributing - distribution issues - additional considerations for exporting
-
firms may choose to establish own distribution network in foreign markets
2 benefits:
firm captures additional revenues
maintains control over distribution process - exporter and distributor relationship - distribution issues - additional considerations for exporting
-
critical for firm to choose a distributor with sufficient expertise and resources
ex. capital, labor, facilities, local reputation
and choose one with similar or compatible goals and business philosophy
why? exporter and distributor DEPEND on each other to ensure a good business relationship
- list types of export intermediaries
-
export management company
webb-pomerene association
international trading company
others:
manufacturer's agents
manufacturer's export agents
export and import brokers
freight forwarders - intermediaries
-
3rd parties that specialize in facilitating imports and exports
- EMC - export intermediaries
-
export management company
firms that act as client's export department
most are small operations that rely on services of professionals
knowledgeable about legal, financial, logistical details of exporting
may provide advice on consumer needs and distribution channels
2 functions of EMC:
commission agents
title to the goods - commission agents - EMC - export intermediaries
-
functions:
handle shipping
clear customs
prepare documents
in return for agree upon free - title to the goods - EMC - export intermediaries
-
functions:
buy goods from exporter
resell at higher price to foreign customers
may offer customer financing and design
may implement advertising and promos - webb-pomerene association - export intermediaries
-
group of US firms from same industry
functions:
coordinate exporting
perform promo activities overseas
oversee ways to better transportation
engage in market research
engage in contract negotiations
export goods for members
mostly dominated by larger firms
focus in raw materials - ex. wood pulp, sulfur, phosphate rock - international trading company - export intermediaries
-
firms directly engaged in importing and exporting variety of goods for its own account
functions - provides:
market research
customs documentation
international transportation
host country distribution
marketing
financing
have agents and offices worldwide
ex. soga shosha
- soga shosha - japanese
-
most important int. trading company in global marketplace
part of japan's keiretsu system
large customer base
invests in natural resources that are extremely profitable - manufacturer's agents - other export intermediaries
-
seek domestic orders for foreign manufacturers
usually on commission basis
- manufacturer's export agents - other export intermediaries
-
act as foreign sales department for domestic manufacturers
sells firm's good in foreign markets - export and import brokers - other export intermediaries
-
bring together int. buyers and sellers of standardized commodities
ex. coffee, grains, cocoa
- freight forwarders - other export intermediaries
-
specialized in physical transportation of goods
functions:
arrange customs documentation
obtain transportation service for clients - advantages of int. licensing - mode of entry
-
low start up cost
locational advantages without incurring ownership, managerial or investment obligations
establish presence in growing int. market
generate royalty income with little risk and investment
no dealing with mastering complexities of foreign retailing markets
- int. licensing - mode of entry
-
process:
1. licensor lease right use its intellectual property to licensee
2. licensee uses intellectual property to create products for local sale
3. licensee pays royalty fee back to licensor
4. licensor earns new revenues with lower investment
using as entry mode may be affected by host country policies - ex. raising tariffs
firms not advised to license in countries with weak intellectual protection rights
- issues of int. licensing - mode of entry
-
specifying agreement boundaries
determining compensation
establishing rights, privileges, constraints
specifying duration of contract - disadvantages of licensing - mode of entry
-
o Limited opportunities
o Potential litigations →risk of legal problems and misunderstandings
o Long-term strategic implications
o Competitive issues → sharing technology → may create future competitor
- issues in int. franchising - mode of entry
-
⬢ Franchise elements
o Franchisor receives fixed payment and royalty based on sales
⬢ Allows some flexibility to meet local customs and tastes
o Have formal contracts with set of terms
⬢ Franchise success
o Will work if franchisor has been successful domestically
o Due to unique products or advantageous operating procedures and systems
⬢ Transferability
o Effective when successful factors are transferable to foreign locations
⬢ Foreign investors
- advantages of int. franchising
-
• Product and system → franchisees enter a business that has an established and proven product and operating system
• Learning opportunities → franchisors obtain critical info about local market
o Can learn valuable lessons from franchisees that apply to worldwide markets
• Low-cost expansion
- disadvantages of
-
• Shared revenues
• Increased complexity → more complicated than domestic franchising
• Quality control → hard to maintain control of all franchisees
- BOT project - specialized mode of entry
-
functions:
build
operate
transfer
o Firm builds, operates facility and transfers ownership later
⬢ Contractor profits from operation and ownership of project
⬢ Bears financial risks
- management contract - mode of entry
-
⬢ Agreement where one firm provides managerial assistance (specialized services, technical expertise, other services ) to a second firm
⬢ For return of monetary compensation (flat fee or % of sales)
⬢ Allows firm to earn additional revenues withut incurring any investment risks or obligations
- advantages of contract manufacturing - mode of entry
-
o Reduced costs → lowers financial and human resources
o Distinctive competence
o Location advantages
- disadvantages of contract manufacturing - mode of entry
-
o Loss of control → over production process
o Quality issues → since it may not be strictly controlled
o Unexpected problems
- advantages of FDI - mode of entry
-
o Increased control → over operations and profit potential
• Important if firm needs to closely coordinate activities of its foreign subsidiaries to get strategic synergies
o Location production → beneficiary if host country customers prefer local factories
o Profit potential
- disadvantages of FDI - mode of entry
-
o Greater economic and political risks
• Exchange rates → erosion of value of foreign investment if exchange rates decrease
o Government instability
• Have trouble operating and financing subsidiaries while working around political, legal and cultural differences
o Complex operations
- 3 methods for FDI
-
o Greenfield strategy → building new facilities
o Brownfield strategy → buying existing assets in foreign country
o Joint Ventures → participating in a joint venture
- advantage of greenfield strategy
-
o Select most useful site → site that best meets needs
o Construct modern, up-to-date facilities
o Starts with clean slate → no debts, old equipment, modify old rules
o Reap economic development incentives
o Get acclimated to new business culture
- disadvantages of greenfield strategy
-
o Successful implementation takes time and patience
o Expensive for land in desired location
o Must comply with local regulations
o Must recruit and train a local workforce
o May be stigmatized as a foreign firm - advantages of brownfield strategy
-
o Control over firm’s resources → control acquired firm’s factories, employees, technology, brand anmes, distribution netowrks Acquire new firms as means of entering new market
o Adds no new capacity to industry → less competition
o Acquire as a means of entering new market or implementing a major strategic change
o Generates immediate revenues
- disadvantages of brownfield strategy
-
o Assumes all firm’s liabilities → financial, managerial
o Requires substantial up-front spending
o Inherits unresolved problems