international business 2007
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Background For International Business
Globalization and International
Business
1
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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
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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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g p
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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p
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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j
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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g
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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g
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
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