International Business 2007

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Background For International Business

Globalization and International

Business

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Chapter Objectives

To define globalization and international businessand show how they affect each other

To understand why companies engage in

international business and why internationalbusiness growth has accelerated

To discuss the major criticisms of globalization To become familiar with different ways in which a

company can accomplish its global objectives To apply social science disciplines tounderstanding the differences betweeninternational and domestic business


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Definition of Globalization

The broadening set of

interdependent relationships amongpeople from different parts of a

world that happens to be divided

into nations


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Definition of International Business

All commercial transactions

including sales, investments, andtransportationthat take place

between two or more countries


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International Business:

Operations and Influences


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Factors in Increased Globalization

1. Increase in and expansion of technology

2. Liberalization of cross-border trade and resource

movements

3. Development of services that support international

business

4. Growing consumer pressures

5. Increased global competition

6. Changing political situations

7. Expanded cross-national cooperation


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The Criticisms of

GlobalizationThreats to national sovereignty

Growth and environmental stress

Growing income inequality


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Reasons That Firms Engage in

International BusinessExpanding sales

Acquiring resources

Minimizing risk


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Modes of International

Operations


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Modes of Operation in

International BusinessMerchandise exports and imports

Service exports and imports

Tourism and Transportation

Service Performance

Asset Use

Investments


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Types of International Organizations

Collaborative arrangements

Strategic Alliance

Multinational Enterprise (MNE)


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Physical and Social Factors Affecting

International Business Operations


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Competitive Factors Affecting

International Business


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Views on future of international

business and globalization

Further globalization is inevitable.

International business will grow primarily

along regional rather than global lines.Forces working against further

globalization and international business will

slow down both trends.


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Comparative Environmental

Frameworks

The Cultural Environments Facing

Business

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Chapter Objectives

To understand methods for learning about

cultural environments

To analyze the major causes of culturaldifference and change

To discuss behavioral factors influencing

countries business practicesTo understand cultural guidelines for

companies that operate internationally


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The People Factor

Culture refers to learned norms based on the

values, attitudes, and beliefs of a group of

peopleCultural diversity

Cultural collision

Sensitivity and Adjustment


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Cultural Awareness

There is no foolproof way to build your

awareness of culture

Hard to isolate culture from economic andpolitical conditions

Education about a culture helps

Studies of cultures have shortcomings


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The Nation as a Point of Reference

National boundaries act as proxy for culture

Not everyone in a country shares the same

cultureCertain cultural attributes may link groups

from different nations more closely than

certain groups within nations


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How Cultures Form and

Change

Cultural values set early in life

Changes occur from:

Choice Imposition


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Language as a Cultural Stabilizer

When people from different areas speak the samelanguage, culture spreads more easily

Among nations that share a same language,

commerce is easier Isolation from other groups, especially because of

language, tends to stabilize cultures. Some countries see language as being so

important that they regulate the inclusion offoreign words and/or mandate the use of thecountrys official language for business purposes.


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Major Language Groups: Population

and Output


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Religion as a Cultural

Stabilizer

Centuries of profound religious influence

continue to play a major role in shaping

cultural valuesMany religions influence specific beliefs

that may affect business


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Issues in Social Stratification

Ascribed group memberships are determined atbirth

Acquired group memberships are based on ones

choice of affiliation Performance orientation of the society Open vs. Closed society Attitude towards gender

Attitude towards age Importance of family group Prestige of occupation


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Issues in Work Motivation

Materialism and Motivation

Expectation of Success and Reward

Assertiveness: The MasculinityFemininityIndex

Hierarchies of Needs


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The Hierarchy of Needs vs. The

Need Hierarchy


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Factors Affecting Relationship

Preferences

Power distance: general relationship

between superiors and subordinates.

Individualism vs. collectivism: degree ofdependence on organization


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Factors Affecting Risk-taking

Behavior

Uncertainty avoidance

Trust

Future orientationFatalism


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Factors Affecting Information and

Task Processing

Perception of cues

Obtaining Information: Low-Context versus

High-Context Cultures Information Processing


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Factors Affecting the

Communication Process

Spoken and Written language

Silent language:

color associations conversational distance

perception of time and punctuality

body language and gestures

prestige


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Dealing with Cultural

Differences

Accommodation

Cultural distance

Culture shockCompany and Management orientations

polycentric

ethnocentric geocentric

Factors Affecting Strategies


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Factors Affecting Strategies

for Instituting Cultural

ChangeValue systems

Cost/benefits of change

Resistance to too much changeParticipation

Reward sharing

Opinion leadershipTiming

Learning abroad


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The Political and Legal Environments

Facing Business


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To discuss the goals and functions of a political system To profile trends in the emergence and diffusion of contemporary

political systems To explain the idea of political risk and describe approaches to

managing it To understand how political and legal systems affect the conduct of

business To describe trends in the evolution and diffusion of contemporary

legal systems To discuss the issue of the rule of law versus the rule of man

To explain legal issues facing international companies To explain the idea of intellectual property and to discuss areas of

concern and controversy

Objectives


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Political and Legal Factors Influencing

International Business Operations


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Definition of a Political

System

The complete set of institutions, political

organizations, and interest groups,

The relationships among institutions, andthe political norms and rules that govern

their functions


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Individualism vs. Collectivism

Individualism: primacy of the rights and

role of the individual

Collectivism: primacy of the rights androle of the community


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Political Ideology

The system of ideas that expresses the

goals, theories, and aims of a sociopolitical

programMost modern societies are pluralistic

different groups champion competing

political ideologies


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The Political Spectrum


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Democracy

Wide participation by citizens in the

decision-making process

Five types: Parliamentary

Liberal

Multiparty Representative

Social


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Fundamental Features of Democratic

Political Systems


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Totalitarianism

Restricts decision making to a few

individuals

Types: Authoritarianism

Fascism

Secular totalitarianism

Theocratic totalitarianism


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Trends in Political Systems

Engines of democracy: Failure of totalitarian systems to deliver

economic progress Improved communication technology

Belief that democracy leads to improved

standards of living


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Definition of Political Risk

The risk that political decisions or events in

a country negatively affect the profitability

or sustainability of an investmentTypes:

Procedural

Distributive

Catastrophic


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Definition of a Legal System

The mechanism for creating, interpreting, andenforcing the laws in a specified jurisdiction

Types: Common law Civil law Theocratic law

Customary law Mixed systems


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The Diffusion of Civil Law


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Trends in Legal Systems

The preference for stability

The influence of national legacies


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Bases of Rules

Rule of Man

Rule of Law


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Operational concerns that face

managers worldwide

Starting a business

Entering and enforcing contracts

Hiring and firing local workersClosing down the business


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Strategic concerns that face

managers worldwide

Product safety and liability

Marketplace behavior

Product originLegal jurisdiction

Arbitration


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Intangible property rights that are a result of

intellectual effort

Intellectual property rights refer to the rightto control and derive the benefits from

writing, inventions, processes and

identifiersLocal attitudes play a large role in piracy

Intellectual property


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The Economic Environment


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Objectives

To understand the importance of economic analysisof foreign markets

To identify the major dimensions of international

economic analysis To compare and contrast macroeconomic indicators To profile the characteristics of the types of

economic systems To discuss the idea of economic freedom To profile the idea, drivers, and constraints of

economic transition


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Importance of Economic

Environments

Company managers study economic environments

to estimate how trends affect their performance

A countrys economic policies are a leading

indicator of governments goals and its planned

use of economic tools and market reforms.

Economic development directly impacts citizens,

managers, policymakers, and institutions.


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Economic Factors Affecting International

Business Operations


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Elements of the Economic

Environment

Gross national income (GNI): the incomegenerated both by total domestic productionas well as the international productionactivities of national companies

Gross domestic product (GDP): the totalvalue of all goods and services produced

within a nations borders over one year, nomatter whether domestic or foreign-ownedcompanies make the product.


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Adjustments to GNI

Number of people in a country

Growth rate

Local cost of livingEconomic sustainability


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Other features of an economy

Inflation

Unemployment

Debt Income distribution

Poverty

Labor costsProductivity

Balance of payments


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Components of a Countrys Balance

of Payments

D fi i i f E i


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Definition of Economic

System

A mechanism that deals with the

production, distribution, and consumption

of goods and servicesTypes:

Market economy

Command economy Mixed economy

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The Economic Freedom Index

Approximates the extent to which agovernment intervenes in the areas of freechoice, free enterprise, and market-driven

prices for reasons that go beyond the basicneed to protect property, liberty, citizensafety, and market efficiency

Countries with the freest economies havehad the highest annual growth and a greaterdegree of wealth creation.


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T iti t M k t


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Transition to a Market

Economy

Liberalizing economic activity Reforming business activity Establishing legal and institutional frameworks Success is linked to how well the government deals

with: Privatization

Deregulation

Property right protection Fiscal and monetary reform

Antitrust legislation

R f d


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Reforms and

Economic Progress


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Globalization and Society


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Objectives

To identify problems in evaluating the activities ofmultinational enterprises (MNEs)

To evaluate the major economic effects of MNEs onhome and host countries

To understand the foundations of responsiblecorporate behavior in the international sphere

To discuss some key issues in the social activities andconsequences of globalized business

To examine corporate responses to globalization


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Evaluating the Impact of FDI

FDI is Foreign Direct Investment

The large size of some MNEs causes

concern for some countriesMNEs and countries need to understand the

impact of FDI in home and host countries


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What MNEs Have To Offer


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Considering the Logic of FDI

Need to consider relationship between those

who make foreign investments (MNEs) and

possible effects on receiving countriesAreas to consider:

Stakeholder trade-offs

Cause-and-effect relationships Individual and aggregate effects

The Economic Impact of the


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The Economic Impact of the

MNE

Balance-of-Payments effects:Net import effect

Net capital flow

Growth and Employment effects: Home-country losses

Host-country gains Host-country losses

Wh C i C Ab t Ethi l


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Why Companies Care About Ethical

Behavior

Instrumental in achieving two objectives: To develop competitive advantage

To avoid being perceived as irresponsible

Th C lt l F d ti f Ethi l


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The Cultural Foundations of Ethical

Behavior

Relativism vs. Normativism: do truths

depend on the values of the groups or are

there universal standardsNegotiating between evils

Respecting cultural identity

Th L l F d ti f Ethi l


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The Legal Foundations of Ethical

Behavior

Legal justification for ethical behavior may

not be sufficient because not everything that

is unethical is illegalThe law is a good basis because it embodies

local cultural values

Laws will become similar in differentcountries


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Ethics and Bribery

Bribes are payments or promises to pay cash oranything of value

Bribes used to get government contracts or to get

officials to do what they should be doing anyway Problems with bribery:

Affects performance of company & country

Erodes government authority

Damage reputations when disclosed Increases cost of doing business

Where Bribes Are (and Are Not)


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Where Bribes Are (and Are Not)

Business as Usual

Whats Being Done Abo t


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Whats Being Done About

Corruption?

Cross-National Accords: The OECD, the

ICC and the UN

The U.S. Foreign Corrupt Properties Act

Industry Initiatives

Relativism, the Rule of Law, and

Responsibility


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Ethics and the Environment

Sustainability

Global Warming and The Kyoto Protocol

National and Regional Initiatives Company-Specific Initiatives

Ethical Dilemmas and the


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Ethical Dilemmas and the

Pharmaceutical Industry

Tiered pricing and other price-related issues

WTO Agreement on Trade-Related Aspects

of Intellectual Property Rights (TRIPS)R&D and the Bottom Line

S f W k R l t d P i


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Sources of Worker-Related Pressures in

the Global Supply Chain

Ethical Dimensions of Labor


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Ethical Dimensions of Labor

Conditions

Ethical Trading Initiative

The Problem of Child Labor

What MNEs Can and Cant Do


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Corporate Codes of Ethics

Motivations for Corporate Responsibility

Developing a good Code of Conduct


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International Trade and Factor

Mobility Theory

Theories and Institutions: Trade

and Investment


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Objectives

To understand theories of international trade To explain how global efficiency can be improved

through free trade

To identify factors affecting national trade patterns To explain why a countrys export capabilities are

dynamic To understand why production factors To explain the relationship between foreign trade

and international factor mobility

International Operations and


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International Operations and

Economic Connections

Laissez Faire versus Interventionist


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Laissez-Faire versus Interventionist

Approaches to Exports & Imports

Interventionist: Mercantilism

NeomercantilismFree-trade theories:

Absolute advantage

Comparative advantage


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Theories of Trade Patterns

Explaining trade patterns: Country size

Factor proportions Country similarity

Trade competitiveness:

Product life cycle theory Porter diamond

What the major trade theories Do and


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What the major trade theories Do and

Dont discuss


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Mercantilist Theory

Mercantilist theory proposed that a country

should try to achieve a favorable balance of

trade (export more than it imports) Neomercantilist policy also seeks a

favorable balance of trade, but its purpose is

to achieve some social or political objective


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Theory of Absolute Advantage

Suggests specialization through free trade

because consumers will be better off if they

can buy foreign-made products that arepriced more cheaply than domestic ones

A country may produce goods more

efficiently because of a natural advantage or

because of an acquired advantage


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Theory of Comparative Advantage

Also proposes specialization through free

trade because it says that total global output

can increase even if one country has anabsolute advantage in the production of all

products


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Theories of Specialization

Both absolute and comparative advantage theoriesare based on specialization

Assumptions policymakers question:

full employment economic efficiency division of gains transport costs statics and dynamics

services production networks mobility

d h i


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Trade Pattern Theories

How much a country will depend on trade if

it follows a free trade policy

What types of products countries willexport and import

With which partners countries will

primarily trade

h Of C Si


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Theory Of Country Size

Countries with large land areas are apt tohave varied climates and natural resources

They are generally more self-sufficient thansmaller countries are

Large countries production and marketcenters are more likely to be located at a

greater distance from other countries,raising the transport costs of foreign trade

F P i Th


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Factor-Proportions Theory

A countrys relative endowments of land,

labor, and capital will determine the relative

costs of these factorsFactor costs will determine which goods the

country can produce most efficiently

Worldwide trade of major


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Worldwide trade of major

manufactured goods

C i il i Th


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Country-similarity Theory

Most trade today occurs among high-income

countries because they share similar market

segments and because they produce and consume

so much more than emerging economies Much of the pattern of two-way trading partners

may be explained by cultural similarity between

the countries, political and economic agreements,and by the distance between them

Product Life Cycle (PLC)


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Product Life Cycle (PLC)

Theory

Companies will manufacture products first

in the countries in which they were

researched and developed, almost alwaysdeveloped countries

Over the products life cycle, production

will shift to foreign locations, especially to

developing economies as the product

reaches the stages of maturity and decline

Life Cycle of the International


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Life Cycle of the International

Product

Th P t Di d


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The Porter Diamond

Four conditions as important for

competitive superiority:

demand conditions factor conditions

related and supporting industries

firm strategy, structure, and rivalry

Limitations of the Porter Diamond


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tat o s o t e o te a o d

Theory

Production factors and finished goods are

only partially mobile internationally

The cost and feasibility of transferringproduction factors rather than exporting

finished goods internationally will

determine which alternative is better

The Relationship


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p

between Trade and Factor Mobility

Capital and labor move internationally to

gain more income and flee adverse political

situationsAlthough international mobility of

production factors may be a substitute for

trade, the mobility may stimulate trade

through sales of components, equipment,

and complementary products


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Governmental Influence On Trade

Obj ti


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Objectives

To explain the rationales for governmental policies thatenhance and restrict trade

To show the effects of pressure groups on trade policies To describe the potential and actual effects of

governmental intervention on the free flow of trade To illustrate the major means by which trade is restricted

and regulated To demonstrate the business uncertainties and business

opportunities created by governmental trade policies

Physical and Social Factors Affecting


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y g

the Flow of Goods and Services

Why Governments Intervene in


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y

Trade

Possible impacts of import

t i ti d i d t t


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restrictions designed to create

domestic employment

May lead to retaliation by other countries.Are less likely retaliated against effectively by

small economies.

Are less likely to be met with retaliation ifimplemented by small economies.

May decrease export jobs because of price

increases for components.May decrease export jobs because of lower

incomes abroad.

Protecting Infant Ind stries


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Protecting Infant-Industries

The infant-industry argument for protection

holds that governmental prevention of

import competition is necessary to help

certain industries move from high-cost to

low-cost production

Developing an Industrial Base


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Developing an Industrial Base

Countries seek protection to promote

industrialization because that type of production: Brings faster growth than agriculture.

Brings in investment funds. Diversifies the economy.

Brings more income than primary products do.

Reduces imports and promotes exports.

Helps the nation-building process.

Economic Relationships


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p

with Other Countries

Trade controls are used to improve economic

relations with other countries

Their objectives include improving the balance of: payments

raising prices to foreign consumers

gaining fair access to foreign markets

preventing foreign monopoly prices

assuring that domestic consumers get low prices

lowering profit margins for foreign producers

Maintaining essential


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g

industries

In protecting essential industries, countries

must: Determine which ones are essential.

Consider costs and alternatives.

Consider political consequences.

Preventing Shipments to


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Unfriendly Countries

Considerable governmental interference in

international trade is motivated by:political rather than economic concerns

maintaining domestic supplies of essential

goods

preventing potential enemies from gaining

goods that would help them achieve theirobjectives

Maintaining or extending spheres of


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influence

Governments give aid and credits to, and

encourage imports from, countries that join

a political alliance or vote a preferred way

within international bodies.

A countrys trade restrictions may coerce

governments to follow certain political

actions or punish companies whose

governments do not.

Preserving national identity


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Preserving national identity

To sustain this collective identity that sets

their citizens apart from those in other

nations, countries limit foreign products and

services in certain sectors.

Instruments of Trade Control


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Instruments of Trade Control

Trade controls that directly affect price and

indirectly affect quantity include: tariffs

subsidies

customs-valuation methods

special fees

Nontariff Barriers: Quantity Controls


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Nontariff Barriers: Quantity Controls

Trade controls that directly affect quantity andindirectly affect price include: quotas voluntary export restraint (VERs)

buy local legislation

standards and labels licensing arrangements

specific permission requirements

administrative delays reciprocal requirements restrictions on services

Dealing With Governmental Trade


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Influences

When facing import competition,

companies can: Move abroad

Seek other market niches

Make domestic output competitive

Try to get protection


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Cross-national Cooperation And

Agreements

Objectives


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Objectives

To identify the major characteristics and challenges of the World TradeOrganization

To discuss the pros and cons of global, bilateral, and regionalintegration

To describe the static and dynamic impact of trade agreements on

trade and investment flows To define different forms of regional economic integration To compare and contrast different regional trading groups, including

but not exclusively the European Union (EU), the North AmericanFree Trade Agreement (NAFTA), the Southern Common Market(MERCOSUR), and the Association of South East Asian Nations

(ASEAN) To describe other forms of global cooperation, such as the UnitedNations and the Organization of Petroleum Exporting Countries(OPEC)

GATT


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GATT

The General Agreement on Tariffs and

Trade (GATT), begun in 1947, created a

continuing means for countries to negotiate

the reduction and elimination of trade

barriers and to agree on simplified

mechanisms for the conduct of international

trade

WTO


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WTO

The World Trade Organization (WTO)

replaced GATT in 1995 as a continuing

means of trade negotiations that aspires to

foster the principle of trade without

discrimination and to provide a better

means of mediating trade disputes and of

enforcing agreements

Regional Economic


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Integration

Efforts at regional economic integrationbegan to emerge after World War II ascountries saw benefits of cooperation and

larger market sizesThe major types of economic integration are:

the free trade area

the customs union the common market

Impact of Free Trade Agreements


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Impact of Free Trade Agreements

The Effects of Integration


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The Effects of Integration

Once protection is eliminated among

member countries, trade creation allows

MNEs to specialize and trade based on

comparative advantage

Trade diversion occurs when the supply of

products shifts from countries that are not

members of an economic bloc to those that

are

European Union


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European Union Regional, as opposed to global, economic integration occurs

because of the greater ease of promoting cooperation on asmaller scale The European Union (EU) is an effective common market that

has abolished most restrictions on factor mobility and isharmonizing national political, economic, and social policies

The EU is comprised of 27 countries, including 12 countriesfrom mostly Central and Eastern Europe that joined since2004

The EU has abolished trade barriers on: intrazonal trade instituted a common external tariff created a common currency, the euro

Implications of the EU for


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corporate strategy

Companies need to determine where to

produce products.

Companies need to determine what theirentry strategy will be.

Companies need to balance the

commonness of the EU with national

differences.


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Regional economic integration in the

i


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Americas

Caribbean Community (CARICOM)

Central American Common Market (CACM)

Central American Free Trade Agreement (CAFTA-

DR)

Andean Community (CAN)

The Southern Common Market (MERCOSUR)

The proposed South American Community ofNations.

Regional economic integration in

A i & Af i


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Asia & Africa

Association of Southeast Asian Nations

(ASEAN)

Asia Pacific Economic Cooperation(APEC)

The African Union

Forms of International Cooperation


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Forms of International Cooperation

The United Nations is comprised of

representatives of most of the countries in

the world and international trade and

development in a number of significant

ways

Commodity Agreements


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Commodity Agreements

Many developing countries rely oncommodity exports to supply the hardcurrency they need for economic

development Instability in commodity prices has resulted

in fluctuations in export earnings

OPEC is an effective commodity agreementin terms of attempting to stabilize supply andprice


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World Financial Environment

Global Foreign Exchange And

Capital Markets

Objectives


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Objectives

To learn the fundamentals of foreign exchange To identify the major characteristics of the foreign

exchange market and how governments controlthe flow of currencies across national borders

To describe how the foreign exchange marketworks

To examine the different institutions that deal inforeign exchange

To understand why companies deal in foreignexchange

Foreign Exchange


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Foreign Exchange

Foreign exchange is money denominated in

the currency of another nation or group of

nations

The market in which these transactions take

place is the foreign-exchange market.

The exchange rate is the price of a currency

The Foreign Exchange


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The Foreign Exchange

The Bank for International Settlements divides theforeign exchange market into reporting dealers (alsoknown as dealer banks or money center banks), otherfinancial institutions, and nonfinancial institutions.

Dealers can trade currency by telephone orelectronically, especially through Reuters, EBS, orBloomberg

The foreign exchange market is divided into the over-

the-counter market (OTC) and the exchange-tradedmarket

Some Traditional Foreign Exchange

I t t


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Instruments

Spot transactions involve the exchange of

currency on the second day after the date on which

the two dealers agree to the transaction

Outright forward transactions involve theexchange of currency three or more days after the

date on which the dealers agree to the transaction

An FX swap is a simultaneous spot and forward

transaction

Foreign Exchange Derivatives


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Foreign Exchange Derivatives

Currency swaps deal more with interest-bearing

financial instruments (such as a bond), and they

involve the exchange of principal and interest

payments. Options are the right but not the obligation to trade

foreign currency in the future.

A futures contract is an agreement between two

parties to buy or sell a particular currency at a

particular price on a particular future date.

Some Aspects

Of Th F i E h M k t


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Of The Foreign Exchange Market

Approximately $3.2 trillion in foreign

exchange is traded every day.

The US dollar is the most widely tradedcurrency in the world (on one side of 86%

of all transactions)

London is the main foreign exchange

market in the world

Why the US dollar is the most widely

t d d


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traded currency

An investment currency in many capital markets.

A reserve currency held by many central banks.

A transaction currency in many international

commodity markets.

An invoice currency in many contracts.

An intervention currency employed by monetary

authorities in market operations to influence theirown exchange rates.

The Spot Market


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p

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

If the quote is in American terms, the dealer quotes

the foreign currency as the number of dollars andcents per unit of the foreign currency If the quote is in European terms, the dealer quotes

the number of units of the foreign currency per

dollar The numerator is called the terms currency and

the denominator the base currency.

The Forward Market


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If the foreign currency in a forward contract is

expected to strengthen in the future (the dollar

equivalent of the foreign currency is higher in the

forward market than in the spot market), thecurrency is selling at a premium. If the opposite is

true, it is selling at a discount

An option is the right, but not the obligation, to

trade foreign currency in the future

Options can be traded OTC or on an exchange

Futures


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A foreign currency future is an exchange-

traded instrument that guarantees a future

price for the trading of foreign exchange,

but the contracts are for a specific amount

and specific maturity date

Foreign-Exchange Markets:

Exchange Based and OTC Options


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Exchange-Based and OTC Options

The Foreign-Exchange Trading

Process


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Process

The Foreign Exchange Trading

Process


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Process

Companies work with foreign exchangedealers to trade currency

Dealers also work with each other and can

trade currency through: voice brokers

electronic brokerage services

directly with other bank dealers

Internet trades of foreign exchange arebecoming more significant

How Companies Use Foreign

Exchange


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Exchange

The major institutions that trade foreign exchange

are the large commercial and investment banks

and securities exchanges

Commercial and investment banks deal in avariety of different currencies all over the world

The CME Group and the Philadelphia Stock

Exchange trade currency futures and options

Letter-of-Credit Relationships


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How Companies Use Foreign

Exchange


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Exchange

Companies use foreign exchange to settle

transactions involving the imports and

exports of goods and services, for foreign

investments, and to earn money through

arbitrage orspeculation


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The Determination of Exchange

Rates

Objectives


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To describe the International Monetary Fund and its role in thedetermination of exchange rates

To discuss the major exchange-rate arrangements that countriesuse

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

To identify the major determinants of exchange rates To show how managers try to forecast exchange-rate

movements

To explain how exchange-rate movements influence businessdecisions

The International Monetary

Fund


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Fund

Originally organized in 1945Objectives:

To promote international monetary cooperation,

exchange stability, and orderly exchangearrangements

To foster economic growth and high levels ofemployment

To provide temporary financial assistance tocountries to help ease balance-of-paymentsadjustment

IMF History


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The Bretton Woods Agreement set a fixed

exchange rate against gold & the US dollar

The Jamaica Agreement (1976) eliminated

par values against gold and the US dollar

and permitted greater flexibility.

Voting is through the Quota system

Special Drawing Right


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The Special Drawing Right (SDR) is a

special asset the IMF created to increase

international reserves

The value of the SDR is based upon the

weighted average of a basket of four

currencies: the U.S. dollar, the euro, the

Japanese yen, and the British pound.

Exchange Rates


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The world can be divided into: Countries that basically let their currencies float

according to market forces with minimal or noCentral Bank intervention

Countries that do not but rely on heavy CentralBank intervention and control

Anyone involved in international business needs

to understand how the exchange rates ofcountries with which they do business aredetermined

The Euro


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European Monetary System (EMS): established by the EU(then the EC) in 1979 as a means of creating exchange ratestability within the bloc

European Central Bank: established by the EU on July 1,

1998, to set monetary policy and to administer the euro Euro: the common European currency established on Jan.

1, 1999 as part of the EUs move toward monetary unionas called for by the Treaty of Maastricht of 1992

European Monetary Union (EMU): a formal arrangementlinking many but not all of the currencies of the EU

Africa


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African countries are committed to

establishing a common currency by 2021,

but there are many obstacles to

accomplishing this objective

The Determination Of Exchange

Rates


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Rates

Currencies that float freely respond to supply anddemand conditions free from governmentintervention

The demand for a countrys currency is a functionof the demand for its goods and services and thedemand for financial assets denominated in itscurrency

Fixed exchange rates do not automatically changein value due to supply and demand conditions butare regulated by their Central Banks

Central Banks


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Central banks are the key institutions in countries thatintervene in foreign-exchange markets to influencecurrency values

The Bank for International Settlements (BIS) in

Switzerland acts as a central bankers bank. It facilitates communication and transactions among the

worlds central banks A central bank intervenes in money markets by increasing

a supply of its countrys currency when it wants to pushthe value of the currency down and by stimulating demandfor the currency when it wants the currencys value to rise

Black Markets The Result of Fixed

Exchange Rates


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Exchange Rates

Many countries that strictly control and

regulate the convertibility of their currency

have a black market that maintains an

exchange rate that is more indicative of

supply and demand than is the official rate

Foreign-Exchange

Convertibility


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Convertibility

Fully convertible currencies, often called hard

currencies, are those that the government allows

both residents and nonresidents to purchase in

unlimited amounts Currencies that are not fully convertible are often

called soft currencies, or weak currencies

They tend to be the currencies of developing

countries

Exchange Controls


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To conserve scarce foreign exchange, some

governments impose exchange restrictions

on companies or individuals who want to

exchange money, such as import licensing

multiple exchange rates

import deposit requirements quantity controls

Factors that determine exchange rates


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purchasing-power parity

differences in real interest rates

confidence in the governments ability tomanage the political and economic

environment

certain technical factors that result from

trading

Forecasting Exchange-Rate

Movements


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Movements

Fundamental forecasting uses trends in

economic variables to predict future rates.

The data can be plugged into an

econometric model or evaluated on a more

subjective basis.

Technical forecasting uses past trends in

exchange rates themselves to spot futuretrends in rates.

Factors to Monitor


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Major factors that managers should monitorwhen trying to predict the timing,magnitude, and direction of an exchange-

rate change include the institutional setting

fundamental analysis

confidence factors

events

technical analysis

Business Implications of Exchange-

Rate Changes


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Exchange rates can affect business

decisions in three major areas: Marketing

Production

Finance


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Global, Strategy, Structure, and

Implementation

The Strategy Of International

Business

Objectives


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To examine the idea of industry structure, firmstrategy, and value creation

To profile the features and functions of the valuechain framework

To appreciate how managers configure andcoordinate a value chain

To identify the dimensions that shape how managersdevelop strategy

To profile the types of strategies firms use ininternational business

The Role of Strategy in International

Business


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Industry, Strategy, And Firm

Performance


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Managers, as agents of their firms, devise

strategies to engage international markets in

ways that sustain the companys boost its

profitability and growth

Strategy is defined as the efforts of

managers to build and strengthen the

companys competitive position within itsindustry in order to create superior value


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The Five Forces Model


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Managers typically anchor analysis of industrystructure by modeling the strength and importanceof the so-called five fundamental forces.: the moves of rivals battling for market share

the entry of new rivals seeking market share the efforts of other companies outside the industry to

convince buyers to switch to their own substituteproducts

the push by input suppliers to charge more for their

inputs the push by output buyers to pay less for products

The Five Forces Model of Industry

Structure


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Events that can change industry

structure


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Competitors moves.

Government policies.

Changes in economics.Shifting buyer preferences.

Technological developments.

Rate of market growth.

Strategy and Value


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Strategy is defined as the efforts of

managers to build and strengthen the

companys competitive position within its

industry in order to create superior value

Value is the measure of a firms ability to

sell what it makes for more than the cost it

incurred to make it

Creating Value


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Firms create value either through a low-cost

leadership strategy or a differentiation

strategy

The Firm As Value Chain


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Interpreting the firm within the context of

the value chain provides a strong tool to

improve the accuracy of strategic analyses

and decisions

The Value Chain Framework


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What Is a Value Chain?


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The value chain lets managers deconstruct

the general idea of create value into a

series of discrete activities

The function of the value chain is shaped by

how managers opt to configure and then

coordinate discrete value activities

Dimensions of The Value

Chain


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Primary activities that create and deliver the

product.

Support activities that aid the individuals and

groups engaged in primary activities. Profit margin reports the difference between the

total revenue generated by sales and the total cost

of the activities that led to those sales.

Orientationnamely, whether the particular

activity takes place upstream or downstream.


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Pressures for Global

Integration


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Companies that operate internationally face

the asymmetric pressures of global

integration versus local responsiveness

Change, whether in managers,

competencies, industries, or environments,

often spurs companies to rethink and reset

their value activities

Integration-Responsiveness (IR)

Grid (I): Industry Types


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Types Of Strategy


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The firm entering and competing in foreignmarkets can adopt either an: international

multidomestic global

transnational strategy

Often, firms use a mix of these four typesdue to company, industry, and environmentalsituations

Integration-Responsiveness (IR)

Grid (II): Strategy Types


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Country Evaluation And Selection

Objectives


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To grasp company strategies for sequencing the penetration ofcountries

To see how scanning techniques can help managers both limitgeographic alternatives and consider otherwise overlooked areas

To discern the major opportunity and risk variables a company shouldconsider when deciding whether and where to expand abroad

To know the methods and problems when collecting and comparinginformation internationally

To understand some simplifying tools for helping to decide where tooperate

To consider how companies allocate emphasis among the countrieswhere they operate

To comprehend why location decisions do not necessarily comparedifferent countries possibilities

Location Decisions Affecting

International Operations


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Location


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Companies lack resources to take advantage of all

international opportunities.

Companies need to:

Determine the order of country entry. Set the rates of resource allocation among countries.

In choosing geographic sites, a company must

decide: Where to sell.

Where to produce.

The Location-Decision

Process


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Scanning


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Scanning techniques aid managers in

considering alternatives that might

otherwise be overlooked

They also help limit the final detailed

feasibility studies to a manageable number

of those that appear most promising

Information that is important in

Scanning


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Opportunities: Sales expansion - Economic and Demographic

Variables

Resource acquisition - Cost Considerations

Factors to Consider in Analyzing

Risk


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Four broad categories of risk that

companies may consider are:political

monetary

competitive

natural disaster

Some Problems with Research

Results and Data


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The amount, accuracy, and timeliness of

published data vary substantially among

countries

Managers should be particularly aware of

different definitions of terms, different

collection methods, and different base years

for reports, as well as misleading responses

Country Comparison Tools


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Companies frequently use several tools to compareopportunities and risk in various countries, such as gridsthat rate country projects according to a number ofseparate dimensions and matrices, such as one on whichcompanies plot opportunity on one axis and risk onanother

When allocating resources among countries, companiesneed to consider how to treat reinvestments anddivestments, the interdependence of operations in different

countries, and whether they should follow diversificationversus concentration strategies

Simplified Market-Penetration Grid


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OpportunityRisk Matrix


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Allocating Among Locations


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Companies may reduce the risk of liabilityof foreignness by moving first to countriesmore similar to their home countries

Companies may contract with experiencedcompanies to handle operations for them,limit the resources they commit to foreignoperations, and delay entry to many

countries until they are operatingsuccessfully in one or a few

The Usual Pattern of

Internationalization


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Geographic Diversification

versus Concentration


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Strategies for ultimately reaching a high

level of commitment in many countries are: Diversificationgo to many fast and then build

up slowly in each. Concentrationgo to one or a few and build up

fast before going to others.

A hybrid of the two.

To Diversify or to Concentrate: The

Role of Product and Market Factors


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Reinvestment Versus

Harvesting


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A company may have to make new

commitments to maintain competitiveness

abroad.

Companies must decide how to get out of

operations if: They no longer fit the overall strategy.

There are better alternative opportunities.

Noncomparative Decision Making


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Companies often evaluate entry to a country

without comparing that country with other

countries

This is because they may need to react

quickly to proposals, to respond to

competitive threats, and because multiple

feasibility studies seldom are finishedsimultaneously


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Export And ImportStrategies

Objectives


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To introduce the ideas of export and import To identify the elements of export and exporting

strategies To compare direct and indirect selling of exporting

To identify the elements of import and importingstrategies

To discuss the types and roles of third-partyintermediaries in exporting

To discuss the role of countertrade in internationalbusiness

Environmental Factors Influencing

Export and Import Operations


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Exports & Imports


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Exporting refers to the sale of goods or

services produced by a company based in

one country to customers that reside in a

different country Importing is the purchase of goods or

services by a company based in one country

from sellers that reside in another

Advantages of Exporting


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Lower investment way to enter foreign

markets

Lower risk way to enter foreign markets

Expands sales

Achieves scale economies

Diversifies sales

Characteristics of Exporters


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The probability of a companys becoming

an exporter increases with company size,

but the extent of exporting does not directly

correlate with sizeCompanies export to increase sales

revenues, use excess capacity, and diversify

markets

Phases of Export

Development


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Pitfalls of Exporting


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Companies new to exporting (and also someexperienced exporters) often make many mistakes

One way to avoid mistakes is to develop acomprehensive export strategy that includes ananalysis of the companys resources as well as itsexport potential

Companies can also improve the odds of exportsuccess by working with an experienced exportintermediary

Designing an Export Strategy


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As a company establishes its export

business plan, it must: assess export potential

obtain expert counseling

select a country or countries where it will focus

its exports

formulate its strategy

determine how to get its goods to market

The International

Transaction Chain


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Types of imports


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Industrial and consumer goods to

independent individuals and companies.

Intermediate goods and services that are

part of the firms global supply chain.

Strategic Advantages of

Imports


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Specialization of Labor

Global Rivalry

Local Unavailability

Diversification of Operating Risks

Customs Agencies


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Customs agencies assess and collect duties, as wellas ensure that import regulations are adhered to

A custom broker helps by valuing products toqualify for:

more favorable duty treatment qualifying products for duty refunds through drawbackprovisions

deferring duties by using bonded warehouses and foreigntrade zones

limiting liability by properly marking an importscountry of origin

Principal types of exporting


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Direct: goods and services are sold to an

independent party outside of the exporters

home country.

Indirect exports: goods and services aresold to an intermediary in the domestic

market, which then sells the goods in the

export market.

Indirect Selling


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Exporters may deal directly with: agents or distributors in a foreign country

indirectly through third-party intermediaries,

such as export management companies other types of trading companies

Direct Selling


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Through distributors who usually deal with

retailers instead of end users

To retailers and end users

Internet marketing is a new form of direct

exporting that is allowing many small- and

medium-sized companies to access export

markets as never before

Export Documentation


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Key export documents are:pro forma invoice

commercial invoice

bill of lading consular invoice

certificate of origin

shippers export declaration export packing list

Export Assistance


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Trading companies can perform many of the functions forwhich manufacturers lack the expertise

Exporters can use the services of other specialists, such asfreight forwarders, to facilitate exporting

These specialists can help an exporter with the complexdocumentation that accompanies exports Government agencies in some countries, such as the Ex-Im

Bank in the United States, provide assistance in: terms of direct loans to importers

bank guarantees to fund an exporters working capital needs insurance against commercial and political risk

Trade Information by Type and

Source


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Countertrade


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Countertrade is when goods and services

are traded for each other. It is used when a

firm exports to a country whose currency

creates barriers to efficient tradeCommon types are: barter, buyback, offset,

switch trading, and counter purchase


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Direct Investment and Collaborative

Strategies

Chapter Objectives To clarify why companies may need to use modes other than

exporting to operate effectively in international business


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exporting to operate effectively in international business To comprehend why and how companies make foreign direct

investments To understand the major motives that guide managers when

choosing a collaborative arrangement for international business To define the major types of collaborative arrangements To describe what companies should consider when entering

into arrangements with other companies To grasp what makes collaborative arrangements succeed or

fail To see how companies can manage diverse collaborative

arrangements

Factors Affecting Operating Modes

in International Business


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Foreign Expansion: Alternative

Operating Modes


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Why Exporting May Not Be Feasible


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1. When production abroad is cheaper than at home2. When transportation costs to move goods or services

internationally are too expensive

3. When companies lack domestic capacity

4. When products and services need to be alteredsubstantially to gain sufficient consumer demand abroad

5. When governments inhibit the import of foreignproducts

6. When buyers prefer products originating from aparticular country

Foreign Direct Investment


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Control accompanies investment

Three primary reasons that spur companies

to want a controlling interest:

internalization theory

appropriability theory

freedom to pursue global objectives

Foreign Direct Investment (FDI)

approaches


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Internalization theory holds that it is sometimescheaper to handle operations oneself than to

contract with another company

The idea of denying rivals access to resources(capital, patents, trademarks, and management

know-how) is called the appropriability theory

When a company has a wholly owned foreign

operation, it may more easily have that operationparticipate in a global strategy.

Methods for Making FDI


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The advantages of acquiring an existing operationinclude: adding no further capacity to the market

avoiding start-up problems

easier financing

Companies may choose to build if: no desired company is available for acquisition

acquisition will lead to carry-over problems acquisition is harder to finance

Collaborative Arrangements and

International Objectives


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General Motives for Collaborative

Arrangements


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To Spread and Reduce Costs

To Specialize in Competencies

To Avoid or Counter Competition

To Secure Vertical and Horizontal Links

To Gain Knowledge

International Motives for

Collaborative Arrangements


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Gain location-specific assets

Overcome legal constraints

Diversify geographically

Minimize exposure in risky environments

Types of Collaborative Arrangements


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Companies have a wider choice of operatingform when there is less likelihood of

competition

Internal handling of foreign operationsusually means more control and no sharing

of profits

MNEs want returns from their intangibleassets

Licensing


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Licensing agreements may be: exclusive or nonexclusive

used for patents, copyrights, trademarks, and

other intangible propertyLicensing often has an economic motive,

such as the desire for faster start-up, lower

costs, or access to additional resources

Franchising


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

necessary assets

Many types of products and many countries

participate in franchising

Franchisors face a dilemma: the more standardization, the less acceptance in the foreign

country

the more adjustment to the foreign country, the less the

franchisor is needed

Management Contracts


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Management contracts are used primarilywhen the foreign company can manage

better than the owners

Turnkey Operations


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Turnkey operations are: Most commonly performed by construction

companies

Often performed for a governmental agency

Joint Ventures


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Joint ventures may have variouscombinations of ownership

The type of legal organization may be a

partnership, a corporation, or some otherform permitted in the country of operation

When more than two organizations

participate, the joint venture is sometimescalled a consortium

Equity Alliances


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An equity alliance is a collaborativearrangement in which at least one of the

collaborating companies takes an ownership

position (almost always minority) in theother(s).

Equity alliances help solidify collaboration

Collaborative Strategy and

Complexity of Control


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How to Dissolve a JointVenture


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Problems of Collaborative

Arrangements


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The major strains on collaborativearrangements are due to five factors: Relative importance to partners

Divergent objectives Control problems

Comparative contributions and appropriations

Differences in culture

Managing Foreign Arrangements

h l i diff i d


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The evolution to a different operating modemay:be the result of experience

necessitate costly termination fees create organizational tensions

Country Attractiveness/Company

Strength Matrix


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Negotiating Process

I h l


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In technology agreements: seller does not want to give information

without assurance of payment

buyer does not want to pay without evaluatinginformation

Performance Assessment

Wh ll b i i h h


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When collaborating with another company,managers must: continue to monitor performance

assess whether to take over operations


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The Organization of International

Business

Objectives

P fil h l i d di f h


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Profile the evolving understanding of theorganization of international business

Describe traditional and contemporarystructures

Study the systems used to coordinate andcontrol operations

Profile the role of organization culture

Examine special situations in the organizationof international business

Factors Affecting Organizing

Operations


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Organization in the International

Business

Th i ti f i t ti l b i i h ll i d


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The organization of international business is challenging dueto: the geographic and cultural distances that separate countries the need to operate differently among countries the large number of uncontrollable factors the high uncertainty resulting from rapid change in the international

environment problems in gathering reliable data in many places

Organization in the MNE is an integrated function of itsformal structure, coordination and control systems, and theshared values that make up its culture

Prevailing environmental and workplace trends pressuremanagers to question their customary approaches toorganizing their companies


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Horizontal Differentiation

H i t l diff ti ti d ib h th


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Horizontal differentiation describes how thecompany designs its formal structure to

perform three functions: Specify the total set of organizational tasks

Divide those tasks into jobs, departments,subsidiaries, and divisions so the work gets done

Assign authority and authority relationships tomake sure work gets done in ways that support the

companys strategy

Functional structure


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International divisionstructure


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Product division structure


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Geographic (area) division structure


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Matrix division structure


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Contemporary structures

Contemporary structures like the network


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Contemporary structures, like the networkor virtual formats, arrange work roles,

responsibilities, and relationships in ways

that eliminate the horizontal, vertical, orexternal boundaries that block the

development of knowledge-generating and

decision-making relationships

Simplified Network Structure


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Coordination and Control Systems

No matter what sort of structure the MNE


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No matter what sort of structure the MNEuses, it needs to develop coordination and

control mechanisms to prevent duplication

of efforts, to ensure that headquartersmanagers do not withhold the best

resources from the international operations,

and to include insights from anywhere inthe organization

Coordination Systems

Coordination can take place via standardization


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

Standardization relies on specifying standard

operating procedures:planning relies on general goals and detailed

objectives

mutual adjustment relies on frequent interaction

among related parties

Approaches to Coordination

Coordination by standardization:


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Coordination by standardization: Sets universal rules and procedures that apply to units

worldwide.

Enforces consistency in performance of activities in

geographically dispersed units.

Coordination by plan requires interdependent units

to meet common deadlines and objectives.

Coordination by mutual adjustment requiresmanagers to interact personally with counterparts.

Control Methods

Companies exercise control through:


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Companies exercise control through: Market control uses external market

mechanisms to establish objective standards.

Bureaucratic control emphasizes organizationalauthority and relies on rules and regulations.

Clan control uses shared values and ideals to

moderate employee behavior.

Control Mechanisms

Reports


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ReportsVisits to Subsidiaries

Management Performance Evaluations

Cost and Accounting Comparisons

Evaluative Measurements

Information Systems

Organization Culture

The set of fundamental assumptions about


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The set of fundamental assumptions aboutthe organization and its goals and practices

that members of the company share

A system of shared values about what isimportant and beliefs about how the world

works.

Importance of Culture

Key features of a companys organization


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Key features of a company s organizationculture include: Values and principles of management.

Work climate and atmosphere. Patterns of how we do things around here. Traditions.

Ethical standards.

An organizations culture often shapes thestrategic moves it considers.

Challenges and Pitfalls

Managers from different countries often have


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Managers from different countries often havevalues that differ from those endorsed by thecompany

People in an MNE often have slight exposureto the values held by senior managers

Evidence suggests that mixing nationalcultures on teams does not necessarily

improve performance


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Managing International Operations

Marketing Globally

Objectives

To understand a range of product policies and the circumstances inwhich they are appropriate internationally


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g p pwhich they are appropriate internationally To grasp the reasons for product alterations when deciding between

standardized versus differentiated marketing programs amongcountries

To appreciate the pricing complexities when selling in foreign markets

To interpret country differences that may necessitate alterations inpromotional practices To comprehend the different branding strategies companies may

employ internationally To discern complications of international distribution and practices of

effective distribution

To perceive why and how emphasis in the marketing mix may varyamong countries

Marketing as a Means of Pursuing anInternational Strategy


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Marketing Orientations

International marketing strategies depend


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International marketing strategies dependon companies orientations that include: Production

Sales Customer

Strategic marketing

Societal marketing

Production Orientation

Companies focus primarily on production -


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

emphasis on marketing.

Used internationally for certain cases: Commodity sales

Passive exports

Foreign-market segments or niches

Other Orientations

Sales orientation: a company tries to sell abroadh t it ll d ti ll d i th

International Business 2007

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Transcript of International Business 2007