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

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

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

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

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

ii.

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

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

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

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

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

bills and notes. Political disrupt especially military countries disrupt trade and investments. In that manner the companies should understand the treaties among countries and the la of each country in which they want to operate as well as how laws are enforced o operate profitably abroad. This takes two forms. behavior and interpersonal activities. physiology and sociology describe in part people’s social and mental development. The related social science disciplines of anthropology. Population distribution around d the world and the impact of human activity on the environment exert a strong influence in IB. Discuss a company’s physical and societal environments. Political leaders control the IB as well. Each country has its own laws regulating business. Companies effect and are effected by their operating environment. Manager should learn the analytical tools to determine the impact of an international company on the economy’s of the host and home countries and the effect of a countries economic policies and and commissions of the company. ii. Eg. This could be in one or two forms. Eg. A portfolio investment is a noncontrolling interest in a company or ownership odf a loan to another party. Popularity of deference sports and how they are play in different countries. Managers who know geography can better determine the location. quality and availability of the world resources. Why should companies understand them when engaging in international business? • Mangers in international business must understand social science disciplines and how they affect all functional business fields. Behavioral factors – The interpersonal norms of a country may necessitate a company’s alteration of operations. attitudes. Managers can be better understanding societal values. Agreements among countries set international law.foreign property in exchange for a financial return such as interest and dividends. Ymichi’s ownership of the Seattle marine’s baseball team is a Japanese FDI in the US. Eg. Eg. Control need not be 100% or even 50% interest. Foreign Portfolio investments are investments are important for most companies that have extensive international operations. Disney with Hong Kong government. Economic factors – This explains country differences in costs. Geographical Influence – Natural condition affect what can be produced where. quantity. When Tow more companies share ownership of an FDI call as Joint ventures. . FDI is one that gives the investor a controlling interest in a foreign company. FDI not the domain of only the large companies. 6. iii. Eg. and believes concerning them self and others. • Portfolio Investment – Key component of the portfolio investments are non contrail of a foreign operation and financial benefits (loans). iv. currency values and market size. (Direct and portfolio). (Stock in a company or loan to a company or country in the form of bond. Higher incomes in the US influence people to play golf in Japan. US and China precedence. Physical and societal factors could be identified as follows: i. Domestic and international lows determine largely what the managers of a company operating internationally can do. Political policies and legal practices – Politics determines where and how international business can take place. US investments in UK.

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

religion. age. Geography considers to varying degrees both natural and human influences on the landscape.( 8. Company’s employee encounters distress because of an inability to accept or adjust to foreign behavior. International business includes people from different cultures. nationality. • • • • • • • • 9. IB managers should be aware of different geographic characteristics before launching product to the particular country. Cultures differ based on. It should realize that accountant ways of doing business might not be the right or the best way. (Values. political party membership and income levels. Family education and work and the treatment of mental health problems. Every business function managing a work force. • People simultaneously belong to different groups and therefore they have different cutlers. values and believes of a group people. gender. Managers have different work attitudes than production workers do. securing funds are subject to potential cultural problems. When doing business abroad company should first determine what business practices in a foreign country differ from its own country. marketing a output. language and race) • Feeling of we National identity through rights and symbol of the country. • Culture refers to the learn norms based on attitudes. Define culture and discuss cultural differences and its effects on international business. Management must decide what adjustment is necessary to operate efficiently in the foreign country. profession. races and classes Variations within countries . People in urban areas differ in certain attitudes from people in rural areas. Eg. work organization.• various skills of human activities including issues related to daily life. ethnicity. International business mangers should attempt to understand the role of the function in individual and social behavior of business societies. dealing with regulators. although a common division separates human and physical geography. The major problems of cultural collision in International business are a company implements practices that work less well than intended. • Shortcomings Existence of sub cultures within the nation – Ethnic group. What are the advantages and shortcomings of using the nation as a proxy for culture • Advantages Similarities among people is a cause and effect of national boundaries Laws happily primarily along national lines • Witching a bounce of a nation people share common attributes. • Non national cultures can link groups from different nations more closely than groups within a nation (Eg. purchasing supplies. Geography – The study of physical and human landscapes the processors that affect them how and why they change over time and how and why they vary spatially. An international company must be sensitive to these cultural differences to predict an control its relationships and operations.

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

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

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

subordinated. Usually wanting and having an autocratic or paternalistic management style in their organization. When power distance or low people prefer and usually have consultative styles. Eg: if an international company transfers typical Dutch managers (typically low power distance) to Morocco (typically high power distance) these managers might consult with their subordinates in an attempt to improve their work. However these efforts might make subordinates feel so unconformable that their performance deteriorate rather than improves. Those employees preferring an autocratic style or superior subordinate relationship are also willing to accept decision making by a majority of subordinate. What they don’t accept is the interaction between superiors and subordinates in decision making. Clearly it may be easier for organizations to initiate certain types of worker participation methods in some countries than in others. Individualism: Safe work environment motivate collectivist. Challenge motivate individualist. Attributes of individualism are low dependence on the organization and desire for personal time, freedom and challenge. Attributes of collectivism are dependence on the organization and desires for training, good physical conditions and benefits. In those countries with high individualism, self actualization will be a prime motivator because employee wants challenges. How ever in countries with high collectivism the provision on safe physical and emotional environment (security need) will be a prime motivator. The degree of individualism and collectivism also influence how employees interact with their colleagues. Eg. Japan – collectivist culture and USA Individualistic. Measuring country differences in terms of individualism vs collectivism is complex and contravening. As a result people may vary their individualism depending on circumstances. Eg: China and Mexico are characterize as collectivist cultures and they includes the nuclear family (husband, wife miner children and vertically. extended family- (several generation). Horizontally extended family – (aunts, uncles and cosines). This different affect business in several ways. • Material rewards from an individuals work will be less rewarding as these revolves are divided among several people. • Geographical motilities reduce because re location means other members of a family also have to find new jobs people prefer to remain near relatives. • Purchasing decisions may be complicated because of the interrelated roles of family members. • Security and social needs may be met extensively at home than in the work place.

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

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

15. Contrast monochromic versus polychromic cultures. (Page 64)
Information processing includes ordering task. Cultures in Northern Europe are called monochromic. In such cultures people prefer to work sequentially (people will finish with one customer before dealing with another. Cultures in Southern Europe are called polychromic cultures where people work simultaneously on all the task they face. Eg. They feel uncomfortable when not dealing immediately with all customers who need services. Northern European business people might erroneously believe their Southern European counterparts are not interested in doing business when they do not get full attention.

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

Inform propose changes to all stake holders well in advance to avoided resistance. Ethnocentrism – This is the believe. Eg. Issuing a bonus shares. 18. Fords sends Mexican operative from its plants in Mexico to US to observe operative methods. that once home culture is superior to the others. Eg. Participation – Employees are more willing to implement change when they take part in the decision to change. 73) Value system . Religious taboos about eating shrimp and crayfish. Family members dominate business organizations in Turkey. Thinks change is easy. Collectivism or communitarian refers to the primacy of the right and role of the company. The various approaches when instituting change in the international arena are value system. List and discuss the various approaches international managers seek to understand when instituting change in the international arena. Reward sharing – Employees are more apt to support change when they expect personnel or group rewards. Toyota has purposely blended Japanese culture in it French plant. Individualism refers to the primacy of the rights and role of the individuals. Geocentrism exists when a company bases is operations on an informed knowledge of its organization culture with home and hot country need capabilities and constant. Geocentrism – Geocentric management often uses business practices that are hybrid of home and foreign norms. Discuss the individualistic and communitarian paradigms on the roles of governments. The cost benefit of change – The cost of change may exceed it benefit. This evolves around the issue of whether society is better served by guaranteed individual freedom and self expression in search of economic self interest or by developing political needs and methods to subordinate both individuals and the community. Opinion Leaders: Manager seeks to introduce change should first convince those who influence others. (Page no. Political officials and agencies have a limited role in an individualistic society. Resistance to too much change – This may be lower if the number of changes is not too great. Eg. 17. This is the preferred approach to business dealings with another culture as it increases the introduction of innovations and reduces failures. Eg. Believes home country objective should prevail. Eg.• • a distinct way such as introduce a new products or ways to produce and sell them. the more resistance it will generate/create. Companies such as Fuji and Kodak created technology for while you wait photo development in Saudi Arabia as customers wanted to retrieve photos without any one else seen them. Ethnocentrism management overlooks national differences and ignores important factors since they have become constant to certain cause and effect relationship in the home country. Political system with an individualistic orientation is best . Eg. Timing – Companies should time change to occur when resistance is lightly to be low. Learning Abroad – International companies should learn things abroad that they can apply at home. The more a change upsets important value. Eg.Companies may need to transfer new product or operating methods from one country to another to have competitive advantages. Eg.

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

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

25.18 97.a centrally planned economy built ownership and control of the factors of production.define inflation and discuss the effects of inflation on international business.87 Investm ent Freedo m 87. Types of economic systems Market economy. investment freedom. when setting prices in international business is low. 24. trade freedom.79 Fiscal Freed om 95.ipr as intrinsically legitimate . property rights. business freedom.a free market economy built upon the private ownership and control of the factors of production. 3 99 Hong Kong Singapor .21 88.3 Monet ary Freedo m 93.? Inflation means increase in the general price level.38 Trade Freed om 88. financial freedom.07 93. freedom from corruption.the market valuve of all final goods and servicess produced by a country domestically owned firms in a given year.8 90. Inflation is affect to the exchange rates as well. 23. 26. fiscal freedom.0 Governm ent Size 92.but those with a more collectivist out look extol the virtues of shared ownership.an economic factor that management needs to be c onsider is inflation. upon govtment Mixed economy. if contry has a high per capita income it reflect that it has a potentiality to the internatinal business. Describe and discuss the three ways economies can be categorized.86 Financ ial Freedo m 90 80 Proper ty Rights 90 50 Freedo m from Corrupti on 90 90 Labou r Freed om 83 94 93. monetary freedom. Command economy.25 87. the world wealth can be measured by through per capita gni. but significant govtment intervention is still evident.if a contry has a low per capita income it reflect that low potentiality of intyernational business. government size. lab our freedom. define gni and it effects on intrenational business? gross national income.0 90.  Count ry Year Over all Scor e 2008 2008 Busine ss Freedo m 90. a useful way to classify countries is by economic system. When the inflation is low.When the inflation is high when setting prices in international business it is high.an economy in which economic decisions are largely market –driven and ownership is largely private.

0 82.laws take time to be legislated and tested in courts .67 80. and to establish legal and institutional frame works.82 83. economic transition .0 71.8 80.the shift from a command or mixed economy to a free market economy largely depends on a governments ability to dismantle features such as central planning create features such as consumer sovereignty the success of the transition process depends upon the governments ability to liberise economic activity .57 80.to reform business practices .5 59.24 61. 2 92.55 92.8 86.5 78. 4 94. 3 85.91 83. 7 27.98 78. 30.2 86.25 80.2 68.68 83.72 79. relativism .32 91.79 86. 30.0 83.a theory stating that ethical truths depend on the groups holding them.e Ireland Australia United States New Zealand Canada Chile Switzerla nd United Kingdom 2008 2008 2008 2008 2008 2008 2008 2008 82.moral concepts must be considered along with legal ones.18 79. 5 82.2 64.5 75.81 55.67 83.2 87.56 80.9 96. the law is slow to develop in emerging areas of concern.5 62. Normative . What factors make it difficult to evaluate whether the overall effects of FDI are sufficiently positive? 29. 28.8 87. and there may not be enough laws passed that deal with ethical issues.22 89.99 53.74 67.55 40. Explain why the argument that "anything that is legal is ethical" is insufficient.75 90 80 80 70 70 80 70 90 90 90 80 80 80 70 80 90 90 90 90 90 90 90 90 90 74 87 73 96 85 73 91 86 80.89 90. making intervention by outsiders unethical.83 59.0 61.a theory stating that universal standards of behavior (based on peoples own values) exist that all cultures should follow. making non intervention unethical.69 99.35 82 80. .further they cannot anticipate all future ethical diliemas .3 60.1 68.79 79. Countries with civil law systems rely on specificity in the law . The law often is based on separated from legal concepts .basically they are a reaction to issues that have already surfaced.67 88.06 84.48 83. 9 90 82 80.

Latin America and Africa. clothing. Multiple pressures on MNEs from external stakeholders to adopt responsible employment in their overseas operations could be illustrated as follows. • The law is not appropriate for regulating all business activity because not everything that is unethical is illegal.case law in which the courts establish precedent. It would be difficult to solve every ethical behavioral problem with a law. Consumers Individual Investors Corporate Investors Pressure for ethical behavior with respect to workers Media Trade Unions Governments NGO’s . Further they cannot anticipate all future ethical dilemmas. The law often based on moral concepts that are precisely defined and that cannot be separated from legal concepts. Law takes time to be legislated and tested in courts. Many labor issues that MNE’s must deal with include fair wages. • The law is slow to develop in emerging areas of concern. and freedom of association. footwear. This would be true of many dimensions of interpersonal behavior. Eg:. These issues are especially critical in retail. Discuss the ethical dimensions and pressures related to labor issues that MNEs face. By this standard a person or company can do anything that is not illegal. usually in the developing countries of Asia. working hours.Some people argue that the legal justification for ethical behavior is the only important one. The law is often needed of testing by the courts. • • • 31. child labor. and agriculture where MNE s outsource production to independent companies abroad. working conditions. Moral concepts must be considered along with legal ones. The law is not very efficient. However there are reasons why this legal argument of’ "anything that is legal is ethical" is insufficient. basically they are a reaction to issues that have already surfaced.

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

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

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

One should not assume that future absolute or comparative advantages will remain constant. Discuss the factors that contribute to the effects of the Heckscher-Ohlin theory. The theories of absolute and comparative advantage deal with commodities rather than services. citing the factors that differentiate this theory. Discuss the theory of country size. Hong Kong and the Netherlands – land price is very high because it’s in demand. Therefore. these countries engage in businesses that require less land compared to countries such as Australia and Canada that has abundant land compared to the population and they engage in businesses and industries requires larger extent of lands such as agriculture. If they perceive that a trading partner is gaining too large share of benefits. managers might expect to find cheap labor rates and export competitiveness in products that require large amounts of labor relative to capital. which is based on countries’ production factors: land. For example. If it costs more to transport the goods than is saved through specialization. The theory said that differences in countries’ endowments of labor compared to their endowments of land or capital explained differences in the cost of production factors Land – In countries in which there are many people relative to the amount of land – for example. o o o It is assumed a simple world compose two countries and two commodities. where labor is abundant in comparison to capital excels in the production of hand made carpets that differ in appearance as well as in production method from carpets produced in industrial countries by machines purchased with cheap capital. o o 37. The theories of absolute and comparative advantage assume that resources can move domestically from the production of one good to another and at no cost. they may forgo absolute gains for themselves so as to prevent relative losses. However. an increasing portion of world trade is in services. The theory of country size holds that large countries usually depend less on trade than small countries. Iran. Labor and Capital – In countries where there is little capital available for investment and where the amount of investment per worker is low. labor. Heckscher-Ohlin developed Factor-Proportion Theory.and absolute economic growth. The theories of absolute and comparative advantage address countries’ advantages by looking at them at one point in time. This fact doesn’t render the theories obsolete. because resources must go into producing services too. and capital. But this assumption is not completely valid. 38. then the advantages of trade are negated. Countries with large land areas are apt to have varied climates and an .

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

In other words. By this time. The producing country will increase its exports in this stage but lose certain key export markets in which local production commence. Germany is traditionally strong in Machinery & Equipment Switzerland for Pharmaceutical products Denmark for Dairy products Trade in new products occurs because countries specialize to gain acquired advantage by apportioning their research costs more strongly to some sectors . Country Similarity Theory -says that a producer having developed a new product in response to observed market conditions in the home market will turn to markets that are most similar to those at home. reduce per unit cost. Markets in high income countries can support the development and sale of both new products and variations of existing products than the markets in low income countries.) Discuss the country similarity theory.Stage 2: Growth Stage – As sales of new products grow. The demand may justify producing in some foreign countries to reduce or eliminate transport charges. market and cost factors have dictated that almost all production is in emerging economies. the country in which the innovation first emerged and exported from then becomes the importer. thus creating more demand in emerging markets. by the sales at this stage are likely to stay almost entirely in the countries producing the product. Producers have incentive to shift production to emerging economies where they have inexpensive factors of production to standardized production. particularly in other high-income countries. Exports decrease from the innovating countries as foreign production displaces it. making cost an important competitive weapon. International trade takes place because of the differences among countries in terms of natural resources and factor endowment proportions. 41. competitors enter the market and demand grows substantially in foreign markets. Longer production runs become possible for foreign plants which in turn. which export to the declining or small niche markets in high income countries. The markets in high-income countries declines more rapidly than those in lowincome economies as affluent customers demand ever-newer products. there are incentives for companies to develop process technology. citing factors that lead similar countries to trade with each other. Because sales are growing rapidly both at home and abroad. Eg. Stage 4: Decline Stage – Those factors of occurring during the mature stage continue to evolve. Most trade takes place among high income countries. Stage 3: Maturity Stage – The demand begins to level off. The production process will still be labor intensive as the technology is not developed at this stage in the face of the different competitive products. There often a is a shakeout of producers such that product models become highly standardized. although it may be growing in some countries and declining in others.

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

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

Tendency of too may countries to identify the same industries excessive competition and inadequate returns. These are the two major policies adopted by any government for promoting it’s strategic trade policy.Even if a country successfully targets an industry. Country may target an industry for which global demand never reaches expectations. It may upgrade production factors by improving human skills through education. Short Term Policies have usually resulted in small payoffs. There are limited circumstances when targeting will work. which is costly to the supporting economy. provide infrastructure promote a highly competitive environment and induce consumers to demand an ever higher quality of products and services. Once many people are employed in a distressed industry. Usually but not . conditions change. A small economy is in a situation where the scale of decision making is manageable and where most people affected know each other and can reach a mutual agreement. 43. Eg: Sub-Saharan African example. Eg: Costa Rica a small country with 2003 GNP of $35. In a large economy this is impossible. largely because government find difficulty in identifying and targeting the right ones. Eg: Thailand’s support of the steel co’s which have had high costs due to poorly trained managers and rising labour costs in relation to other nearby countries. Company’s development of internationally competitive products depends on their domestic  Demand Conditions  Factor Conditions  Related and Support Industries  Firm Strategy. there are pressures to continue to support it.) What are the four conditions in the Porter Diamond? What are the limitations of the Porter Diamond in explaining countries' competitive advantage? Porters Diamond theory shows 4 conditions as important for competitive superiority. Eg: British and French joint support for supersonic passenger aircraft but the Co’s in the targeted industry do not become competitive. especially for small countries.3 bn was only about 15% of the value of Wal-mart’s sales for the year. efficiency and innovation. Structure and Rivalry The frame work of the theory is a useful tool for understanding how and where globally competitive companies develop and sustain themselves. Eg: Government may alter conditions that affect factor proportions.

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

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

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

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

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

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

Costa Rica’s import substitution policies from 1960 to 80’s. Tax US$ 63.) Define dumping and discuss its effects on a country's economy. There are trade barriers . Profit is now US$ 136.e export led development. A country may concentrate its industrialization activities on products for which it would seems to have a comparative advantage does not guarantee that those products become competitive exports. 50.one price argument for government influence on trade is the optimum tariff theory says that a foreign producer will lower it’s prices if the importing country places a tax on it’s products. i. Previous US $ 63.Industrialization emphasizes either products to sell domestically or products to export. Optimum Tariff Theory. but export development of the same products may be feasible later. Eg. Emerging economies promotes Industrialization by restricting imports in order to boost local production for local consumption.where and which exporters will voluntarily reduce profit more. But India will eventually promote the export of cars. In reality it is difficult to distinguish between import substitution and export promotion. Eg. P182 Companies some times export below the cost or below their home country prices and this practice is called dumping.which interfere with export of manufacturing goods from emerging economies. Most countries prohibit imports of dumped products but enforcement usually occurs only if the imported product disrupts .36 instead of US$ 200 per unit. 49.) Explain the optimum tariff theory. Exporter lowers the price to US$ 636..36 per unit. Taiwan and South Korea have achieved rapid economic growth by promoting the development of industries that export their output. Exporter’s selling price US$ 700 per unit 10% tax is imposed on the domestic price.64 per unit has shifted to the importing country. Exporter lower it’s price by any amount .64 Importer’s price is still US$ 700. Local industries capture the sales. If this happens benefits shifts to the importing country because the foreign producer lower it’s profits on the export sales. Exporters cost price US$ 500 per unit. But these countries now believe that import substitution is not the best approach to develop new industries.revenue goes to the importing country and the tariff is deemed an optimum one Many Eg’s of products whose prices did not rise as much as the amount of the imposed tariff. Industrialization initially results import substitution. Eg. However it is difficult to predict when . This is better than a no profit at all situation. If protected industries does not function efficiently local consumers will have to pay higher prices or higher taxes. India restricts importation of automobiles and parts.

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

Discuss this issue of "comparable access" or "fairness. but only if their home governments allow U. List and define the types of nontariff barriers that limit the quantity of goods traded. but French farmers also protested at McDonald’s restaurants by dumping manure at entryways and throwing potatoes at its customers. energy.S. For example. Not only did the French government maintain the restrictions.S. governments would find it impractical to negotiate and monitor separate agreements for each of the thousands of different products and services that might be traded. 52. nontariff barriers may affect either price or quantity directly. or a group of countries. Define and explain the different types of tariffs (duties). if collected by a country through which the goods have passed.S. For example. Economic theory supports this idea. since it assumes that producers that operate in industries in which increased production leads to steep cost declines but that lack equal access to a competitor’s market will struggle to gain enough sales to be cost-competitive. The comparable-access argument has been used in the semiconductor. The import tariff is by far the most common. That is. However. hormone-treated beef. like the EU. countries’ imposition of additional import restrictions to coerce other countries to reduce their entry barriers may escalate trade frictions. governments charge a tariff on a good when it crosses an official boundary-whether it be that of country. it is an import tariff. France prohibited the entry of U. chemicals.tat market access can lead to restrictions that may deny one’s own consumers lower prices. government permits foreign financial service companies to operate in the United States. Second. if collected by the importing country. A tariff is the most common type of trade control and is a tax that government levy on a good shipped internationally. say Mexico. 53. tit . First. softwood lumber. Tariff barriers affect prices.for ." P181 Companies and industries often argue that they are entitled to the same access to foreign markets as foreign industries and companies have to their markets. it is a transit tariff. P185 A common distinction is between tariff barriers and nontariff barriers. and telecommunications industries. The United States countered by placing additional taxes on such French products ad Roquefort cheese and foie gras in an effort to prod France to rescind its restrictions.to their markets. Third. Tariffs collected by the exporting country are called an export tariff. some reject using the idea of fairness to justify comparable market access. that have agreed to impose a common tariff on goods entering their bloc. The argument for equal access is also presented as one of fairness. financial service companies equivalent market access. the U. aircrafts. P187 .

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

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

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

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

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

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

Parliament must approve the legislation before submitting it to the Council for adaptation. the Agriculture Council of Ministers is comprised of the Ministers of Agriculture of all member countries. The European Court of Justice The Court of Justice ensures consistent interpretation and application of EU treaties. which more clearly represents the interests of the governments and is more likely to consider the interest of individuals in the EU. The Council is also known as the Council of Ministers. based pharmaceutical company to share its data-collection process with its German competitors. The Court of Justice is an appeals court for individuals. such as Foreign Affairs. and organizations fined by the Commission for infringing Treaty Law? The Court of Justice is relevant to MNCs because it deals mostly with economic matters. The Council of Ministers is presided over by a presidency. This specific council. the Court of Justice has taken up a high-profile case involving aviation agreements between the United States and Europe. or individuals and companies may bring cases to the Court. . The Court is required to hear every case referred to it. control over the budget. The three major responsibilities of the Parliament are legislative power. it is deciding whether it is lawful for the EU to force a U. whose members represent their member governments. and Agriculture. EC institutions. even minor disputes over trade regulation and export issues. which is composed of different ministers of the member countries. For example. The European Parliament The Parliament is composed of 626 members who are elected every five years. In recent cases. and its membership is based on country population. this doesn’t mean that there is just one member of the Council for each EU member country. European Council. However. and supervision of executive decisions. Economy and Finance. the Council is much more democratic than the Commission because its members are elected officials in their home countries. firms. The Commission presents community legislation to the Parliament. which rotates between the member states ever six months. Member states. and it is hearing an appeal by General Electric-regarding the European Commission’s refusal to allow GE to acquire Honeywell.shifting to the Council. In many respects. There are more than 25 different councils. decides issues dealing with agriculture. for example.S.

What is significant. What are the major regional trading groups in Africa.59. and Asia? P220 Latin America Southern common market (MERCOSUR) Andean community (CAN) Latin American integration association (LAIA) South American community of nations (CSN) Asia Association of south East Asian nations (ASEAN) Asia pacific economic cooperation (APEC) Africa African union Southern African development community (SADC) Common market for eastern and southern Africa (COMESA) Economic and monetary community of central Africa West African economic and monetary unit (WAEMU) Two of the original examples of regional economic integration in Latin America. Thailand. the Philippines. organized in 1967. Although Canadian – Mexican trade was not significant when the agreement was signed.S. In addition. 60. Myanmar. – Canadian trade were. and Vietnam. SAARC . comprises Brunei. Indonesia. Latin America. in terms of both geographic location and trading importance. The Association of South East Asian Nations (ASEAN). Singapore. NAFTA is a powerful trading bloc with a combined population and total GNI greater than the 15member EU. even though its population is about one-third that of Mexico. What was the rationale for NAFTA? P 215 NAFTA has a logical rationale. Laos. Canada has a much richer economy than that of Mexico. is the tremendous size of the U. Mexican and U. Cambodia.S. economy in comparison to those of Canada and Mexico. the Latin American Free Trade Association (LAFTA) and the Caribbean Free Trade Association (CARIFTA).S. U. changed their names to the Latin American Integration Association (ALADI) and the Caribbean Community and Common Market (CARICOM). Malaysia. especially when compared with the EU. The two-way trading relationship between the United States and Canada is the largest in the world.

There are two basic types of commodity control agreements 1. oil by OPEC countries/wool controlled by Australia/ Diamonds by DeBeers Company South Africa. Quota system determines how producing and consuming countries divide total output and sales. FX can be in the form of cash. The commodities that doesn’t has a ready substitute have more control over price than the commodities with substitutes. In a buffer stock system. Many developing countries derive the bulk of their export earnings from one or two commodities. It is the number of units of one currency that buys one unit of another currency. OPEC 2. 62. Producers alliances – E. or they simply provide services for member countries without engaging in price stabilization mechanism. Spot transactions involve the exchange of currency the second day after the date on which the two FX traders agree to the transaction.g. The major reason for invasion of Kuwait was because it was producing more than it’s quota. International commodity control agreements(ICCAs) ICCAs are agreements between producing and consuming countries. Some players buy and sell foreign exchange because they are exporters and importers of goods and services. E. 63. or other short term claims. 80 % of exports of developing countries are primary commodities. It takes the form of a producer’s alliance or a commodity control agreement. The market in which these transactions take place is the foreign exchange market. What are foreign exchange and the exchange rate? Foreign exchange is money denominated in the currency of another nation or group of nations. Others buy and sell FX because of FDI. Exchange rates makes international price and cost comparisons possible. and this number can change daily. bank deposits. Others are portfolio investors they buy foreign stocks. The rate at which the transaction is settled is the spot rate.Discuss the characteristics of the spot market. forward market and futures market. ICCAs attempt to control prices through buffer stocks or quotas. Exchange rate is the price of a currency. and mutual funds hoping to sell them at a more profitable exchange rate later. traveler’s checks.61. The effectiveness of commodity agreement depends on the type of commodity. a commodity organization or country stockpiles a commodity and buys or sells the commodity to try to minimize price fluctuations. bonds. There are many players in the FX market.g. funds available on credit and debit cards. . What is the purpose of commodity agreements? It is designed to stabilize commodity price and supply.

There traders always quote a bid and offer rate. Future is traded on an exchange. The FC is less valuable for a company than a forward contract. not over the counter. and it is the traders profit market. It is the single purchase or sale of a currency for future delivery. That is the price they willing to sell and willing buy. A forward contract is tailored to the amount and time frame that the company needs. A key aspect of exchanging one currency to another is its convertibility. The rate at which the transaction is settled is the forward rate and is a contract rate between the two parties. The spread is the different between the bid and offer rates. meaning that foreigners can convert their currency in to local currency and can convert back to their currency. Many currencies do not have a forward market due to the small size and volume of transactions in that currency. The . Different between the spot and forward rates is either forward discount or the forward premium. some governments impose exchange restrictions on companies or individuals who want to exchange money. Euro.not fully convertible currencies Most countries today have nonresident or external. 64. Discuss the issues of foreign exchange convertibility. A future contract is an agreement between two parties to buy or sell a particular currency at a particular price on a particular future date. as specified in a standardized contract to all participants in that currency futures exchange. companies work with exchange brokers when purchasing future contracts. To conserve scare foreign resources. Hard currencies-fully convertible currencies. British Pound Soft currencies. How ever it may be useful to speculators and small companies that do not have a good enough relationship with a bank to enter in to a forward contract or that need a contract for an amount that is too small for the forward market. Fully convertibles currencies are those that the government allows both residence and non residents to purchase in unlimited amounts. convertibility. whereas a future contract is for a specific amount and a specific maturity date. Instead of working with a banker. Forward transactions involve the exchange of currency three or more days after the date on which the traders agree to the transaction. The forward transaction will be settled at the forward rate no matter what the actual spot rate is at the time of settlement.US dollar.

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

December 27. The quota is a pool of money that the IMF can draw on to lend to countries. or benchmark value. Unless the executive board decides otherwise. euro. 1947 No of countries. The value of SDR is based on the weighted average of five currencies. Highest authority.67. foreign exchange.march 1. trade balance and other economic indicators.List and define the categories of exchange rate regimes. . Although the SDR was intended to serve as a substitute for gold.one representative from each country Day-to-day authority. and reserve positions in the IMF). the weight of each currency changes for every five years. 68. Hampshire after the world war. to bring economic stability and growth to the world. It is the unit in which IMF keeps it’s records.What is the International Monetary Fund (IMF)? What are its objectives? IMF is formed by the major allied governments in bretton Wood . These weights were chosen because they broadly reflected the importance of each currency in international trade. SDR serves as the IMF”s unit of account and are used for imf transactions and operations. for each currency initially quoted in terms of gold and the US$. yen. (By 2004 it was USD. • To promote international monetary cooperation • • • • To facilitate the expansion & balanced growth of international trade To promote exchange rate stability To establish a multilateral system of payments To make it’s resources available to its members who are experiencing balance of payments difficulties.29 by beginning.What is a Special Drawing Right (SDR)? How is it used? The SDR is an international reserve asset created to supplement members existing reserve assets (official holding of gold. and pound).1945 Financial operations. monetary reserves. Official existence. 69. it has not taken over the role of gold or the dollar as primary reserve assets. A country has to contribute a sum of money. called a quota. depend in national income.board of governors.24 person board of executive directors Major objectives of IMF. 184 by 2005 The Bretton wood agreement established a par value. However several countries base their value of currency on the value of SDR.

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

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

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

per capita income. rather than many. Liability of Foreigners Companies may reduce risks from the liability of foreignness by • Going first to countries with characteristics similar to their home counties. . Management can make predictions based on past patterns Companies should .Pg. growth rate and population are also good indicators of market size and future sales. • Into markets that competitors have not entered • Where there are clusters of competitors iv Monetary Risk Companies may accept a lower return in order to move their financial resources more easily. 390 – 400: Text Book} v 84. Management must make projections about what will happen to future sales. and/or changes in rules.Use expert analysis {Ref. • Operating with forms requiring commitment of fewer resources abroad. • Moving initially to one or a few. Competitive Risk In terms of competition. iii. Risk and Uncertainty Most investors prefer certainty to uncertainty. ii.Examine views of government decision makers . Political Risk Political risk may come from wars and insurrections. B) Risks i. iv.Get a cross section of opinions .Companies should consider different ways to produce the same product. It is possible to make a reasonable projection of aluminum sales simply by examining different countries aluminum consumption in relation to their GDP per capita. Data such as GDP. foreign countries. Red Tapes and Corruptions Red tape and corruption add to operating costs. Chapter 12 . some different strategies are to be go • First where local firms are most apt to enter the market as competitors.Part 5 .) Discuss the main reason that simply multiplying the country's expected per capita consumption by its population doesn't necessarily lead to a good estimate for potential demand. For an example take Aluminum. takeover of property. • Having experience intermediaries handle operations for them.

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

especially when moving to dissimilar countries. Its infusion of capital. considers them less risky than at the onset. But is the business grows successfully the company may want to handle the operations with its own staff. personnel and technology are highest for these operations. which it would then export. a company doesn’t necessarily move at the same speed along each axis. However. the company might. equipment and production facilities. A slow movement along one axis may free up resources that allow faster expansion along another. At an early stage of international involvement. the deeper its international commitment becomes.5 in recommended text book (page 397) When the company moves from the center on any axis. Later. because simply multiplying countries expected per capita consumption by its population doesn’t necessarily lead to a good estimate for potential demand. make an even higher commitment through foreign direct investments to produce abroad. Refer figure 12. companies must consider variables other than income and population when estimating potential demand for their products in different countries. importing and exporting require the least formal commitment and pose the least risk to the company’s resources. there are alternative risk minimization expansion patterns they can undertake. personnel. By doing this a company initially would limit its need to invest more capital in such additional production facilities as plants and machinery and in such functions as managing a foreign workforce. An alternative to move slowly along ‘A’ axis is to move slowly along the B axis. A company could use excess production capacity to produce more goods. Moving slowly along the ‘C’ axis is a means to minimize the risk of the liability of foreignness. specially for dissimilar countries. in addition to exporting. In fact companies may jump over some of the steps on any axis. A company can then commit fewer resources to international endeavors. . and realizes that the volume of business may justify the development of internal capabilities such as hiring trained personal to maintain a department for foreign sales or purchases.Therefore. ‘A’ axis shows that companies generally move gradually from a purely domestic focus to one that eventually encompasses operations in multiple countries. Axis ‘C’ shows that importing or exporting is usually the first mode a company undertakes in becoming international. Some of which are quite dissimilar from one’s own country. instead relying on intermediaries that already know how to operate in a foreign market.) How do companies' international involvements (commitments) typically evolve over time? Although companies may prefer operations in countries more similar to their home countries. This is because it has learned more about foreign operations and the countries where the intermediaries have secured business. (Refer recommended text book page 391 for more details) 85. such as capital. ‘B’ axis shows that a company may use intermediaries to handle foreign operations during early stages of international expansion because it minimizes risks.

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

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

recent opening of Treasury bills for foreign investors can be considered. obsolescence and inaccuracy of available and published data are the most common problems encountered by managers when comparing and examining published data on different countries. Government policies towards FDI are favorable and earning can be taken away from the country without much restrictions. Singapore is having better currency convertibility and well established capital market. Hence it is difficult to generalize the outcome of the data. The common practice is to convert financial data into some common currency. Some organizations provide inaccurate information purposely to mislead the government and competitors. However. WHAT PROBLEMS MIGHT MANAGERS ENCOUNTER WHEN EXAMINING AND COMPARING PUBLISHED DATA ON DIFFERENT COUNTRIES ? Most of the companies in the world undertake business research to reduce uncertainties in their decision process. percentage return on investment can be higher than in Singapore. still investors are prefer to invest in Singapore even under low returns. figures on national income and per capita income are particularly difficult to compare. This can be explained by using monitory risk and liquidity preference theory as in Singapore Liquid preference is high and hence monitory risk is lower. However lack of information. Another compatibility issue is arisen with exchange rates. For Example. Some cultures are inherited with the characteristic of vital information/data. Further most of the companies are doing business research by using the already published and available data. Inaccuracy of available data mainly results from the inability of many governments to collect the needed information. For an investor. it was found that many Chinese organizations purposely provide inaccurate information. For example. Further. Therefore. because of difference in activity taking place outside the market economy. Further cultural factors of the country also affect the availability of accurate and timely data. Further Sri Lankan Government is ready to offer high interest compare to other borrowing organizations. Further. different countries used different standards to collect data and uses different definitions for analyzing purposes. with all these incentives. Possible buyers for most of the industries are also concentrated in Singapore. Hence still Singapore is more favorable investment destination than Sri Lanka. providing accurate and timely information is not its top priority. For example.This scenario could be better explained by taking Sri Lanka and Singapore as examples. if someone compare Sri Lanka & Singapore for investment decision. If a government is economically weak. different countries may have different definitions for component “family income”. (89). However in Sri Lanka. as there are many incentives offered by Government to attract more foreign investments. Singapore is more favorable for FDI. For example if Japanese .

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

Allows 100% ownership -U b. present e. Business laws. Exchange problems c. Market size. Market share. Market share. immediate potential (0–2 years) g. Size of investment needed b. Political-unrest potential d. 3–10 years II A A III A A IV A A V A A 0-5 0-3 0-2 0-4 0-3 0-2 0-2 ------- -- 4 3 2 3 2 2 2 3 1 1 2 1 1 1 3 2 2 4 3 2 2 3 2 2 1 1 1 0 TOTAL 3. present e. Risk (lower number = preferred rating) a. Unacceptable (U) factors -a. Return (higher number = preferred rating) a. 3–10 years f. Allows licensing to majority-owned subsidiary -A 2. 3–10 years 18 10 18 10 0-4 0-3 0-3 0-4 0-2 ------ 2 0 0 1 0 1 0 1 0 1 3 3 2 4 2 2 3 3 3 2 TOTAL 3 3 14 13 . Market size. Country Comparison Grid for Market Penetration VARIABLE WEIGHT I 1. 3–10 years b. Business laws. Acceptable (A). Direct costs c. Tax rate d. Market loss.

 Opportunity Risk Matrix  Country Attractiveness – Company Strength Matrix .

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

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

Pitfalls of Exporting 1) Failure to obtain qualified export counseling in developing a plan to guide export expansion 2) Insufficient commitment by top management to overcome the initial difficulties and financial requirements of exporting 3) Misestimating the complexity & costs of ocean shipping and customs clearance to export transactions 4) Poor selection of overseas agents & distributors 5) Chasing orders from around the instead of establishment a base of profitable operations and manageable growth 6) Neglecting export markets and customers when the domestic market booms 7) Failure to treat international distributors on an equal basis with their domestic counterparts 8) Unwillingness to modify products to meet other countries’ regulations or cultural preferences 9) Failure to print service.Examples of situations in which each would be used Prefer Diversification If 1) Growth rate of each market Low 2) Sales stability in each market low 3) Competitive lead time Short 4) Spillover effects High 5) Need for product adaptation Low 6) Need for communication & distribution adaptation Low 7) Program control requirements Low 8) Extend of constraints Low Prefer Concentration If High High Long Low High High High High 93) What are some key characteristics of exporters and discuss the potential pitfalls of exporting. Characteristics of Exporters 1) The probability of being an exporter increases with company size. The greater the percentage of exports to total revenues. and warranty messages in locally understood languages 10)Failure to consider use of an export management company or other marketing intermediary when the company does not have the personnel to direct specialized export functions . the greater the intensity. 2) Export intensity. sales. is not positively correlated with company size. as defined by sales revenues. percentage of total revenues coming from export sales.

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

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

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

Limiting liability by property marking an import’s country of origin. When merchandise reaches the port of entry. Qualifying for duty refunds through drawback provisions. An importer needs to know how to clear goods. • • • Valuing products in such a way that they qualify for more favourable duty treatment – Different product categories have different duties. and how do they help potential exporters? .) What role does the customs agency of a government play? Customs are the country’s import and export procedures and restrictions. 4. Because governments assess duties on imports based in part on the country of origin. When importing goods into any country. the goods may be rejected and prohibited from entering the country. the importer must file documents with customs official. Companies do not have to pay duties on imports stored in bounded warehouses and foreign trade zones until the goods are removed for sale or used in a manufacturing process. the importer pays the duty and the goods are then released. 6. If the goods are allowed to enter. Discuss the various ways a broker or other important consultant can help an importer minimize import duties. Deferring duties by using bonded warehouses and foreign trade zones. Then customs officials examine the goods to determine whether they are any restrictions on their importation. Some exporters use in their manufacturing process imported parts and components on which they paid a duty. the administration of certain navigation laws and treaties are some primary duties of Customs Agencies. If so. Customs agencies assess and collect duties and ensure that import regulations are adhered to. The assessment and collection of all duties. • 98)What are export management companies. the enforcement of customs and related laws. 97). a mistake in marking the country of origin could result in a higher import duty. a company must be familiar with the customs operations of the importing country because once cargo reaches a port of entry. Simplified import entry Permit entry Sight entry Write-offs 96. who assign a provisional value and tariff classification to the merchandise. customs officials take control of the product and process. It also deals with smuggling operations. 5. taxes and fees on imported merchandise. what duties to pay and what special laws exist regarding the importation of products.3.

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

“Offsets. In some way. “. Offset trade is an exchange of goods or services for cash that includes a reciprocal commitment to find opportunities for the importers to earn hard currency.. coproduction.. 10. Offset arrangement are usually one of two types Direct offsets: include generated business that directly relates to the export product Indirect offsets: include generated business unrelated to the exported product Monitoring bank that credit and debit payment Monitoring bank that credit and debit payment Exporter’s product division Canada Good Importer in US Importer in 3rd country Payment Importer in Payment Good Payment Good Exporter in Canada Exporter in canada Let us inspect some examples of prevailing definitions.09. or offset. but then undertakes the promotion of exports from the importing country in order to help it earn foreign exchange. 99) Discuss offset trade. barter. traveling abroad for the first hand experience allows them to asses’ market conditions and sales opportunities. the exporter sells the product for cash. an offset is a contract imposing performance conditions on the seller of a good or service so that the purchasing government can recoup. and countertrade are compensatory trade agreements – agreements that incorporate some method of reducing the amount of foreign exchange needed to buy a military item or some means of creating revenue to help pay for it” 2. 1. reciprocity beyond that associated with normal . some of its investment. In offset trade. EMC helps to identify new opportunities in select foreign markets where distribution may be lacking. they have the experience to select agents and distributors and they also manage their foreign distribution network through visit to the markets they distribute into.

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

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

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

2. 5. excess capacity exists  To specialize in core competencies Licensing may yield returns on products that lie outside of a firm’s strategic priority  To avoid or counter competition Markets are too small to support many competitors. to allow them to specialize in their competencies. 3.) Describe the general motives and international motives for collaborative arrangements. horizontal economies . that is . to secure vertical and horizontal links. 6. 8. to avoid competition. to escape punitive labor contracts. firms combine to challenge a market leader  To secure vertical and horizontal links savings and supply assurances exist across the value chain. General motives for collaborative arrangements General motives are the reasons that companies collaborate with other companies in either domestic or foreign operations to spread and reduce costs. the opportunity to establish new (more efficient) facilities. Longer time for implementation Land unavail or expensive Registration in factory construction Recruiting local workforce Perceived as foreign 104. the avoidance of carry over problems The existence of government incentives The availability of development capital The creation of additional capacity Can select best site Economic development incentives Clean Slate Disadvantages 1.  To spread and reduce costs Potential volume is relatively low. and to implement compatible managerial styles and practices. 4. regardless of whether they operate internationally. Collaborative arrangements may serve companies’ goals. 3. In addition. 7. 4. and to gain knowledge. 5. to hire and train fresh labor forces. 2. there are gains from collaborative arrangements that are specific to companies’ international operations.

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

and the ability to develop either low-cost or differentiated products within the context of its value chain. production capacity. However. and the internalization advantages that result from integrating transactions within the company’s value chain. such as the ownership advantages of the company. Companies that have lower levels of ownership advantages either do not enter foreign markets or use low-risk strategies such as exporting. international experience.A company’s choice of entry mode to a foreign market depends on different factors. Ownership advantages are the firm’s specific assets. An exporter usually resides far from the final consumer and often enlists various intermediaries to manage marketing and service value activities. and internalization advantages. . if the competition has found ways to create superior values by servicing the local market through foreign direct investment.management and personnel. the company might also do well following the same strategy. and strategic motivations. If the competition is servicing markets by exporting. means that many global industries have only a few major players. synergies. Exporting allows managers to exercise operational control but does not provide them the option to exercise as much marketing control. Global concentration. Companies typically consider these questions in evaluating the export option. the company might not be successful in the future if it only exports to the market. It also must fit the company’s strategy. or would our resources be better used for developing new domestic business? These questions require managers to take into account issues such as global concentration. and financing and how will we meet these demands? Does export help us leverage our core competency without undue risk of diffusion? Does export fit into the current configuration of our value chain? Can our existing coordination methods also deal with the managerial demands created by export transactions? Are the projected benefits of export worth the costs. and a company’s strategy for penetrating a particular market might depend on the competition. for instance. The choice of exporting as an entry mode is not just a function of ownership. location. • • • • • • What do we want to gain from exporting? Is exporting consistent with our other goals? What demands will export place on our key resources. the location advantages of the market.

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

Franchisors once depended on trade shows a few times a year and costly visits to foreign countries to promote their expansion. necessitating massive housing construction and importation of personnel.royalty to the licensor. however.  Able to obtain efficient operations. • Features which differ from others. the acceptance of the franchising concept depends very much on the existence of high levels of income. and what are the possible advantages to both parties in the contract? • Management contract. 111. • Advantages to the company.The rights may be exclusive(the licensor can give rights to no other company) or nonexclusive(it can give away rights). mass media. nevetheless.  Receives income without having to make a capital outlay.  Size of the contract is very big (million to billions)  Payment for a turnkey operation usually occurs in stages as a project develops. Advantages to the management company. China has been slow to accept franchises. A company may transfer their management talent by using part of its management personnel to assist a foreign company for a specified period for a fee. 109) What is a management contract.  Many turnkey contracts are for construction in remote areas. education. ready-to-operate Facilities. for example. and an entrepreneurial spirit. seven days a week. they now receive emailed request for the information around the clock. because of the internet. A type of collaborative arrangement in which one company contracts with another to build complete. What type of ownership sharing can exist in joint ventures? . • 110) What is a turnkey operation? What features generally make turnkey operations different from other collaborative arrangement? • Turnkey operation. Major Dilemma that Franchisors face in their international operations.  May gain income with little capital outlay.

Eg:.i. Alternative Ways• Partners have different objectives for the joint ventures. Divorce Scenario Planned Vs Unplanned Friendly Vs Unfriendly (Canada) Both agree Vs Example General Motors (US) & Toyota (Japan) AT & T (US) & Olivetti (Italy) Vitro (Mexico) & Corning (US) Coors Brewing Co (US) & Molson Breweries Ralston Purina (US) & Taiyo Fishery (Japan) . so that it is more difficult to break 113.Alternative dissolution of joint ventures. 112. the joining together of several entities to resources and perhaps peruse a major undertaking. why would companies form them? Equity alliance is a collaborative arrangement in which one of the collaborating companies takes an ownership position in the other(s). each party takes an ownership. • Partners perceive they contribute more than their counterpart do. Companies form equity ownerships to solidify a collaborating contract . such as by buying part of each others or by swapping some shares with each other. in some cases. such as supplier buyer contract .) Main reason is.• • • • • Consortiums: . Firms from two or more countries establishing an operation in a third country A private firm and a local government. • Partners disagree on control issues or fail to provide sufficient directions. one or all partners become dissatisfied with the ventures..e. A private firm joining a government own firm in a third country. There is considerable variation in both way that joint ventures dissolve and that outcome of the operation after the dissolution. What are equity alliances. • Partners view the joint ventures’ impotence differently. • Partners have incompatible operating culture. Two firms from the same country joining together in a foreign market.

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

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

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

Demoralized lower-level workers instructions. Cross-unit coordination and wait for strategic fit are impeded. lower-level decisions are made. With the contemporary structure a world wide company can divide and parcel out work to the most efficient locations. vertical or external boundaries that block the development of knowledge generating and decision making relationships in the company. suppliers and other stakeholders. 120. Headquarters needs timely reports to allocate resources. And enable companies to make them more locally responsive without sacrificing the potentials of global integration. or modular structure.CENTRALIZATION Disadvantages Initiative among lower-level employees is discouraged. MNEs use a range of control mechanisms to direct the activities of individuals toward the achievement of organizational goals. However the features are same. And let managers send work digitally across the internet to where it could be done more efficiently. bottom-up preempted. Contemporary structures take a range of names such as learning organization. 119. personnel and . Back office functions can be moved to low cost locations. Reports are a one of powerful control mechanism. Further it eliminates vertical and horizontal boundaries within the company as well as breakdown barriers within the company and its customers. own projects at the expense innovation of global performance. monitor performance and reward personnel. vertical organization. Information flows from the top thus. Further in this structure particularly the front line employees who deal directly with resource and markets have greater authority. Describe using reports as a control mechanism. is DECENTRALIZATION Disadvantages The organization is put at risk if bad. Subsidiaries likely favor their down. The structure should not be defined by or limited to the horizontal. Reports are intended first to evaluate operating units and second to evaluate management in those units. Describe some of the general features of contemporary Structures. Decisions on how to use capital.

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