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MGCR 382 - International Business (Midterm)


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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

proximity to US market
political and legal stability
good infrastructure and education
lots of natural resources

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

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
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
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:
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

Switzerland - banking
Andorra - investment firms, banking
Monaco - tax haven (low income tax)
Liechtenstein - tax haven, many headquarters

middle income countries not in the EU:

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
inability to collect taxes
looting corporate assets
private-own companies > state-owned
low interest

key market aspects of central asian republics
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
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

newly independent states

Gorbachev's economic and political reforms led to soviet union's collapse and subsequent declaration of independence by 15 soviet republics

commonwealth of independent states

forum to discuss issues of mutual concerns

examples of russia's natural resources
natural gas
fertile farmland

large families or interrelated companies

key aspects of keiretsu
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
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

privately owned, family centered conglomerates that dominate the korean economy
examples of chaebols
daewoo group

key market aspects of taiwan
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
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
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


hong kong's harbor
can also enter mainland china

entrepot for china

entrepreneurs act like intermediaries to mainland china

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
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
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
bad infrastructure
lack of clarity in govt. policy

key market aspects of southeast asia

low labor costs
recipients of significant FDI
exports generated by FDI - booming economy

marketplace of africa and middle east
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
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:

africa's challenge
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
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
country pursues economic growth by expanding its exportation industry

developed by taiwan, SG, HK

laws and customs in host country might determine:
market access
costs of inputs (labor, wages, technology)

list types of law
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
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

process of collecting and restating law of jurisdiction in certain areas, forming a legal code
religious laws
based on officially established rules governing faith and practice of religion

laws influence behaviours which impacts interactions with firms


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
communism and dictatorships

law, economy, business run by bureaucrats (ex. operations management of international businesses) - managers confronted by arbitrary rules

cons of bureaucratic laws
lacks in:
appeal procedures

domestically oriented laws
affect all facets of firm's domestic operations

affect business practices of foreign firms

domestically oriented laws - domestic operations
ex. management, operations, finance, marketing, developing and using technology

might hinder domestic firms to compete internationally

domestically oriented laws - international business
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

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
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
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

balance between government control of economy and reliance on market forces to find resources
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

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

private firms are handed to government without any compensation
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
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

list of laws directed against int. business

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

MNCs must know national and local environments to:
compete effectively in market

maintain productive relationships with governments

positive economic impacts of MNCs on host countries
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
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
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
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
forum shopping
principle of comity

four essentials questions - dispute resolution in int. business
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
each party seek court system most favorable to their own interest

occurs if contract has no answers to first 2 questions

principle of comity
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
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

both parties in conflict agree to submit their cases to a private individual whose decision they will honor


technological environment of int. business
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
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
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
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
accounting standards reflect influence of:
economic factors

varies in common and code law countries

economic influence - accounting
how state funds are used

whether state-mandated production quotas are being met

cultural influence - accounting
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
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
codify the accounting procedures and standards

accounting determined by law and not collective wisdom

list of differences in accounting practices
values for assets
values for inventory
tax authorities
accounting reserves

capitalization of financial leases
capitalization of R&D
treatment of good will

determining values for assets
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
2 methods:
LIFO - last in, first out
FIFO - first in, first out

must know which technique used for different countries

dealing with tax authorities
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
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:

swiss - can do but not required

capitalization of R&D
most countries - permits
US - prohibits
treatment of goodwill
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
amortizing over time

accounting impacts on capital markets on:

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
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
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)

overseas private investment corporation

insures US overseas investments against:

limited to firms operating in countries that have signed bilateral investment treaties with US

multilateral investment guarantee agency

subsidiary of world bank

helps to insure against political risk

list characteristics of culture

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
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

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

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
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

can overcome linguistic differences

- 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

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
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

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:

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

cross-cultural literacy
knowledge of other cultures

first step in 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
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
legal systems
availability of resources
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
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
hong kong

selling products made from own country to other countries

critical to firm's health

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:

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
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

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

multinational enterprise

partnership between firms of different countries

for non true corporations

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

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

Big ten
Non high income countries
china and india


big ten
Argentina, Brazil, China, India, Indonesia, Mexico, Poland, South Africa, South Korea, Turkey
Non-high Income Countries - emerging markets
most of Africa
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


protectionists measures on imported goods

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

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 “developing”

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 incorporates GATT agreement but still different

o GATT: promote trade in goods VS WTO: beyond just goods
o WTO had more enforcement powers

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
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

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

• 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


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
international licensing
international franchising
specialized modes
foreign direct investment

list decision factors for choosing mode of entry

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
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

manufacturer's agents
manufacturer's export agents
export and import brokers
freight forwarders

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
handle shipping
clear customs
prepare documents

in return for agree upon free

title to the goods - EMC - export intermediaries
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

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

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

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
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

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

Deck Info