MB0053 INTERNATIONAL BUSINESS MANAGEMENT

1. Discuss Porters diamond model for international trade.

In the early 1980s, U.S. industry saw its economic competitiveness eroded by Japanese and European competitors. Porter concluded that classical international trade theories, which mainly focused on slowly changing, inherited variables such as natural resources, climate, size of working population, etc., could only partially explain why nations gain competitive advantage in a given industry. Successful international industries tend to be located within particular cities and regions. Geographic concentration is vital for firms to efficiently draw on each others resources and capabilities and to benefit from a shared culture and learning experience, supply capabilities and local infrastructure. Industry clusters are geographical concentrations of interconnected businesses, suppliers, and associated institutions in a particular field. Clusters lead to productivity increases, higher innovation rates and faster new business developments. Porter argued that productivity is the main factor for international competitiveness and that the standard of living of a countrys population can be improved as a direct result of increases in that factor. Clusters may take different forms between firms producing different products across value-added chains or between firms producing similar products at different stages of the same chain. Porters Diamond of competitive advantage model of nations consists of four ma in attributes that shape the national environment in which local, connected firms compete:

1. FACTOR CONDITIONS The nations relative position in vital industrial production factors such as skilled labor or infrastructure, are important determinants of national competiveness. Both the level of individual factors and the overall composition of the resource mix must be considered. Factors can be country specific or industry specific. For example, Japans large pool of engineers -- reflected by a much higher number of engineering

graduates per capita than almost any other nation -- has been vital to Japans success in many manufacturing industries.

2. DEMAND CONDITIONS The nature of home demand for an industrys products and services requires considerin g both the quantity and quality of the demand. For example, Japans sophisticated and knowledgeable buyers of cameras helped stimulate the Japanese camera industry to improve product quality and to launch new, innovative models. 3. RELATED AND SUPPORTING INDUSTRIES The presence or absence in the nation of internationally competitive supplier and related industries is a key factor. Until the mid-1980s for example, the technological leadership in the U.S. semiconductor industry provided the basis for U.S. success in personal computers and several other technically advanced electronic products. Adoption of the automobile took off in the USA after the construction of a national system of highways and gas stations. 4. FIRM STRATEGY, STRUCTURE, AND RIVALRY The national conditions that determine how companies are created organized and managed, as well as the nature and extent of domestic rivalry. For example, the predominance of engineers on the topmanagement teams of German and Japanese firms results in emphasizing the improvement of the manufacturing processes and product design. Furthermore, domestic rivalry creates pressure to launch new products, to improve quality, to reduce costs and to invest in new, more advanced technologies. Porter stated two additional variables that indirectly influence the diamond: 5. CHANCE EVENTS Disruptive developments outside the control of firms and governments that allow in new players who exploit opportunities arising from a reshaped industry structure. For example, radical innovations, unexpected oil price rises, revolutions, wars, etc. 6. GOVERNMENT

Government choice of policies can influence each of the four determinants. Successful government policies work in those industries where underlying determinants of national advantage are present and reinforced by government actions. Government can raise the odds of gaining competitive advantage but lacks the power to create advantages on its own. These six attributes promote or impede the creation of competitive advantages of firms, clusters, and nations. All conditions need to be present and favorable for an industry/company within a country to attain global supremacy. Managers can use the diamond model during their internationalization efforts to determine if the home market can support and sustain a successful internationalization effort or to asses in which country to

invest next. The model helps entrepreneurs decide where to start their next venture. Government officials can use the model for guidance on how to best build a supporting policy framework for a given industry.

2. Evaluate the importance of political stability for conducting international business. What is political risk? Political risk
Political risk is generally defined as the risk to business interests resulting from political instability or political change. Political risk exists in every country around the globe and varies in magnitude and type from country to country. Political risks may arise from policy changes by governments to change controls imposed on exchange rates and interest rates (Barlett et al, 2004). Moreover, political risk may be caused by actions of legitimate governments such as controls on prices, outputs, activities, and currency and remittance restrictions. Political risk may also result from events outside of government controls such as war, revolution, terrorism, labor strikes, and extortion. Political risk can adversely affect all aspects of international business from the right to export or import goods to the right to own or operate a business. AON (www.aon.com), for example, categorizes risk based on economic; exchange transfer; strike, riot, or civil commotion; war; terrorism; sovereign nonpayment; legal and regulatory; political interference; and supply chain vulnerability. For a firm considering a new foreign market, there are three broad categories of international business: trade, international licensing of technology and intellectual property, and foreign direct investment. A company developing a business plan may have different elements of all three categories depending on the type of product or service. The choice of entry depends on the firms experience, the nature of its product or services, capital resources, and the amount of risk its willing to consider ( Schaffer et al, 2005). The risk between these three categories of market entry varies significantly with trade ranked the least risky if the company does not have offices overseas and does not keep inventories there. On the other side of the spectrum is direct foreign investment, which generally brings the greatest economic exposure and thus the greatest risk to the company. Companies can reduce their exposure to political risk by careful planning and monitoring political developments. The company should have a deep understanding of domestic and international affairs for the country they are considering entering. The company should know how politically stable the country is, strength of its institutions, and existence of any political or religious conflicts, ethnic composition, and minority rights. The countrys standing in the international arena should also be part of the consideration; this includes its relations with neighbors, border disputes, membership in international organizations, and recognition of international law. If the company does not have the resources to conduct such research and analysis, it may find such information at their foreign embassies, international chambers of commerce, political risk consulting firms, insurance companies, and from international businessmen familiar with a particular region. In some countries, the governments will establish agencies to help private businesses grow overseas. Governments may also offer political risk insurance to promote exports or economic development. Private businesses may also purchase political risk insurance from insurance companies specialized in international business. Insurance companies offering political risk insurance will

generally provide coverage against inconvertibility, expropriation and political violence, including civil strife (US Small Business Administration). Careful planning and vigilance should be part of any companys preparation for developing an international presence.

3. Discuss the role of WTO in international trade. Explain any 2 major agreements in WTO.
The World Trade Organization (WTO) is an organization that intends to supervise and liberalize international trade. The organization officially commenced on 1 January 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade (GATT), which commenced in 1948. The organization deals with regulation of trade between participating countries; it provides a framework for negotiating and formalizing trade agreements, and a dispute resolution process aimed at enforcing participant's adherence to WTO agreements, which are signed by representatives of member governments and ratified by their parliaments. Most of the issues that the WTO focuses on derive from previous trade negotiations, especially from the Uruguay Round (19861994).

Regional trade agreements

WTO rules say regional trade agreements have to meet certain conditions. But interpreting the wording of these rules has proved controversial, and has been a central element in the work of the Regional Trade Agreements Committee. As a result, since 1995 the committee has failed to complete its assessments of whether individual trade agreements conform with WTO provisions. This is now an important challenge, particularly when nearly all member governments are parties to regional agreements, are negotiating them, or are considering negotiating them. In the Doha Declaration, members agreed to negotiate a solution, giving due regard to the role that these agreements can play in fostering development. The declaration mandates negotiations aimed at clarifying and improving disciplines and procedures under the existing WTO provisions applying to regional trade agreements. The negotiations shall take into account the developmental aspects of regional trade agreements. These negotiations fell into the general timetable established for virtually all negotiations under the Doha Declaration. The original deadline of 1 January 2005 was missed and the current unofficial aim is to finish the talks by the end of 2006. The 2003 Fifth Ministerial Conference in Mexico was intended to take stock of progress, provide any necessary political guidance, and take decisions as necessary. Negotiations take place in the Rules Negotiating Group.

Dispute Settlement Understanding

The 1994 Marrakesh Ministerial Conference mandated WTO member governments to conduct a review of the Dispute Settlement Understanding (DSU, the WTO agreement on dispute settlement) within four years of the entry into force of the WTO Agreement (i.e. by 1 January 1999).

The Dispute Settlement Body (DSB) started the review in late 1997, and held a series of informal discussions on the basis of proposals and issues that members identified. Many, if not all, members clearly felt that improvements should be made to the understanding. However, the DSB could not reach a consensus on the results of the review. The Doha Declaration mandates negotiations and states (in par 47) that these will not be part of the single undertaking i.e. that they will not be tied to the overall success or failure of the other negotiations mandated by the declaration. Originally set to conclude by May 2003, the negotiations are continuing without a deadline.

4. Write short note on: a) Strategic planning b) Ethical convergence Strategic planning
Strategic planning is an organizational management activity that is used to set priorities, focus energy and resources, strengthen operations, ensure that employees and other stakeholders are working toward common goals, establish agreement around intended outcomes/results, and assess and adjust the organization's direction in response to a changing environment. It is a disciplined effort that produces fundamental decisions and actions that shape and guide what an organization is, who it serves, what it does, and why it does it, with a focus on the future. Effective strategic planning articulates not only where an organization is going and the actions needed to make progress, but also how it will know if it is successful. There are many different frameworks and methodologies for strategic planning and management. While there is no absolute rules regarding the right framework, most follow a similar pattern and have common attributes. Many frameworks cycle through some variation on some very basic phases: 1) analysis or assessment, where an understanding of the current internal and external environments is developed, 2) strategy formulation, where high level strategy is developed and a basic organization level strategic plan is documented 3) strategy execution, where the high level plan is translated into more operational planning and action items, and 4) evaluation or sustainment / management phase, where ongoing refinement and evaluation of performance, culture, communications, data reporting, and other strategic management issues occurs.

Ethical convergence
For a business to create a more ethical culture, however, its compliance professionals must master the tools associated with soft and hard compliance. SOFT COMPLIANCE Soft compliance represents organizational efforts to induce people to willingly participate in the firms ethical culture. In recent years a whole new body of learning has arisen, called behavioral ethics. This is a rigorous academic field, drawing on social scientific methodologies, that examines why some people act

ethically while others do not. Its important to distinguish it from classical ethics, which establishes and then reinforces the professional standards by which a companys employees should behave. Behavioral ethics focuses on why some employees do, while others do not, adhere to those standards. This is a new and emerging field. Nonetheless, the behavioral ethicists have already taught a number of important lessons. For example, framing an issue as an ethical question generally leads to more ethical responses. The ultimate promise of behavioral ethics is that it provides pragmatic tools that have been demonstrated to work. Admittedly though, behavioral ethics sometimes can seem, well, soft especially to seasoned professionals who have spent years in a regulatory environment in which names were taken and enforcement referrals were made. As a result, compliance still has a lot to learn here. But with the promise of pragmatic tools that really work, soft compliance is the future. HARD COMPLIANCE On the other hand, hard compliance represents the more traditional compliance function of investigating possible wrongdoing. However often compliance professionals explain their career to themselves in positive or even inspirational terms, their actions are fundamentally negative, saying in effect: There are bad people out there, and its my job to find them! This has led to a strange dynamic: professionals in the compliance department view themselves as doing well, while at the same time, everyone else in the organization views them as akin to the police. Compliance isnt part of the official government, but it seems to be a fellow traveler. With some perspective, its easy to see how people on the business side feel that way. In general, most compliance investigators are knowledgeable, thoughtful, and professional. They ask good questions, and they submit excellent findings.

5. Explain in various modes of payment in international trade. Discuss the role of letter of credit in the same.
Cash-in-Advance Cash in Advance is a pre-payment method in which, an importer the payment for the items to be imported in advance prior to the shipment of goods. The importer must trust that the supplier will ship the product on time and that the goods will be as advertised. Cash-in-Advance method of payment creates a lot of risk factors for the importers. However, this method of payment is inexpensive as it involves direct importer-exporter contact without commercial bank involvement. Letters of Credit
Letters of credit (LCs) are one of the most secure instruments available to international traders. An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions stated in the LC have been met, as verified through the presentation of all required documents. The buyer establishes credit and pays his or her bank to render this service. An LC is useful when reliable credit information about a foreign buyer is difficult to obtain, but the exporter is satisfied with the creditworthiness of the buyers foreign

bank. An LC also protects the buyer since no payment obligation arises until the goods have been shipped as promised.

Documentary Collections
A documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of the payment for a sale to its bank (remitting bank), which sends the documents that its buyer needs to the importers bank (collecting bank), with instructions to release the documents to the buyer for payment. Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents. D/Cs involve using a draft that requires the importer to pay the face amount either at sight (document against payment) or on a specified date (document against acceptance). The collection letter gives instructions that specify the documents required for the transfer of title to the goods. Although banks do act as facilitators for their clients, D/Cs offer no verification process and limited recourse in the event of non-payment. D/Cs are generally less expensive than LCs.

Open Account
An open account transaction is a sale where the goods are shipped and delivered before payment is due, which in international sales is typically in 30, 60 or 90 days. Obviously, this is one of the most advantageous options to the importer in terms of cash flow and cost, but it is consequently one of the highest risk options for an exporter. Because of intense competition in export markets, foreign buyers often press exporters for open account terms since the extension of credit by the seller to the buyer is more common abroad. Therefore, exporters who are reluctant to extend credit may lose a sale to their competitors. Exporters can offer competitive open account terms while substantially mitigating the risk of non-payment by using one or more of the appropriate trade finance techniques covered later in this Guide. When offering open account terms, the exporter can seek extra protection using export credit insurance.

Consignment Consignment purchase terms can be the most beneficial method of payment for the importer. In this method of purchase, importer makes the payment only once the goods or imported items are sold to the end user. In case of no selling, the same item is returned to the foreign supplier. Consignment purchase is considered the most risky and time taking method of payment for the exporter.

6. Explain the various modes of entry in international business which could be used a part of strategy to enter foreign market.
The decision of how to enter a foreign market can have a significant impact on the results. Expansion into foreign markets can be achieved via the following four mechanisms: Exporting Licensing Joint Venture Direct Investment

Exporting
Exporting is the marketing and direct sale of domestically-produced goods in another country. Exporting is a traditional and well-established method of reaching foreign markets. Since exporting does not require that the goods be produced in the target country, no investment in foreign production facilities is required. Most of the costs associated with exporting take the form of marketing expenses.Exporting commonly requires coordination among four players: Exporter Importer Transport provider Government

Licensing
Licensing essentially permits a company in the target country to use the property of the licensor. Such property usually is intangible, such as trademarks, patents, and production techniques. The licensee pays a fee in exchange for the rights to use the intangible property and possibly for technical assistance. Because little investment on the part of the licensor is required, licensing has the potential to provide a very large ROI. However, because the licensee produces and markets the product, potential returns from manufacturing and marketing activities may be lost.

Joint Venture
There are five common objectives in a joint venture: market entry, risk/reward sharing, technology sharing and joint product development, and conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships. Such alliances often are favorable when: the partners' strategic goals converge while their competitive goals diverge; the partners' size, market power, and resources are small compared to the industry leaders; and Partners' are able to learn from one another while limiting access to their own proprietary skills.

The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources, and government intentions. Potential problems include: conflict over asymmetric new investments mistrust over proprietary knowledge performance ambiguity - how to split the pie lack of parent firm support cultural clashes if, how, and when to terminate the relationship

Joint ventures have conflicting pressures to cooperate and compete: Strategic imperative: the partners want to maximize the advantage gained for the joint venture, but they also want to maximize their own competitive position. The joint venture attempts to develop shared resources, but each firm wants to develop and protect its own proprietary resources. The joint venture is controlled through negotiations and coordination processes, while each firm would like to have hierarchical control.

Foreign Direct Investment

Foreign direct investment (FDI) is the direct ownership of facilities in the target country. It involves the transfer of resources including capital, technology, and personnel. Direct foreign investment may be made through the acquisition of an existing entity or the establishment of a new enterprise. Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment. However, it requires a high level of resources and a high degree of commitment. Example: The Case of EuroDisney Different modes of entry may be more appropriate under different circumstances, and the mode of entry is an important factor in the success of the project. Walt Disney Co. faced the challenge of building a theme park in Europe. Disney's mode of entry in Japan had been licensing. However, the firm chose direct investment in its European theme park, owning 49% with the remaining 51% held publicly. Besides the mode of entry, another important element in Disney's decision was exactly where in Europe to locate. There are many factors in the site selection decision, and a company carefully must define and evaluate the criteria for choosing a location. The problems with the EuroDisney project illustrate that even if a company has been successful in the past, as Disney had been with its California, Florida, and Tokyo theme parks, future success is not guaranteed, especially when moving into a different country and culture. The appropriate adjustments for national differences always should be made.