CHAPTER 8

ENTRY STRATEGIES IN GLOBAL BUSINESS

8.1 STRATEGY CHOICE AND IMPLEMENTATION: GOING INTERNATIONAL

-depends on the amount of risk that entrepreneurs are willing to take
-Fundamental Consideration: risk-return trade-off
-The greater the risk entrepreneurs are willing to take, the greater the rewards
-wide range of opportunities that suits their risk profile
-Global competition in a free enterprise system cannot be avoided
-businesses seek to explore opportunities both at home and abroad
1. Export-Import Business
-low-risk operation given the fact that capital is not tied up, and it is relatively easy to
enter or exit out of this business
-International Trade offers tremendous opportunities to entrepreneurs interested
in penetrating foreign markets by exporting or importing merchandise at
competitive prices for domestic consumption
-well-established techniques for financing trade (TRADE FINANCE) that are
aimed at facilitating trade and minimizing financial risk
-The exporter is assured payment will be received soon after the importer
receives the stated merchandise in good condition
-accomplished with the help of agreed upon documents
-banks play an important role in facilitating international trade
-conduct export-import business with as little as 3 or 4 employees
-opportunity is significant and various governmental and non-governmental
agencies offered specialized seminars and programs on how to identify markets
overseas and sell merchandise there
-Global Technology Network
-network of domestic and international partners
-relatively easy to participate in the export-import business, competition is
generally keen and the profit margins may not be high
2. Licensing
-arm’s length
-Merchandise is shipped, and payment is received
-relationship with the overseas partner is closer
-company providing the license must:
1. Evaluate
2. Understand
3. Trust the overseas partner
-involves slightly more risk to the licensor
-company or individual provides the foreign partner with the necessary means to
manufacture and sell its products in the target country for an annual license fee
 -When a product is licensed, the foreign partner will use the licensor’s patented
technology as agreed to manufacture and sell products that meet the licensor
standards
-COMMON APPROACH TO PROTECT THE LICENSOR: penalty clauses
3. Franchising
-obligates the parent firm to provide specialized equipment and/or services to the
franchisee
-fund some start-up cost
-franchisee pays annual fees
-based upon sales generated and seed money provided for the venture
-OBJECTIVE: when a customer visits its franchisee in any country, the quality of
products and services provided are similar
4. Strategic Alliances
-marriages of convenience between 2 or more firms that stand to gain revenue
through cooperation with each other for specific reasons and for a given period of
time
-cooperative ventures
-MAJOR CHARACTERISTIC: non equity arrangements
-Do not involve creation of a separate entity with joint ownership
-AIM: enhancing revenues
-Choosing the right alliance partner is the key to success of strategic alliance
5. International Joint Ventures
-AIM: prefer to share risks as well as the return with a local corporate entity
-OBJECTIVE: use joint production and sales distribution networks to generate
increased revenue, market share, and profits
-business that is jointly owned and operated by 2 or more firms
-firms will want to diversify to reduce risks
-enable each partner to use its comparative advantage for the betterment of joint
operations
-IJV with local firms often lead to the transfer of management and technical
expertise in the long term
6. Cross Border Mergers and Acquisitions
-In acquisitions, home country firm will purchase the host country firm and
implement its own international business strategy
-company being acquired should be well established and have a good reputation
in the local market
-exit strategy must always be in place at the time of entry into the host country
and not after the merger or acquisition has taken place
7. Wholly owned subsidiaries
-subsidiaries
-require a large capital investment
-risk and rewards are high
8.2 MULTINATIONAL ENTERPRISES (MNEs)
-headquartered in one country, but own and control manufacturing services
-large corporations with significant amounts of resources at their disposal
-MNEs are a force to be reckoned with as they are likely to play a pivotal and more
dominant geopolitical role in the future

8.3 MNEs AND THEIR GLOBAL STRATEGIC MOTIVES

-MNEs could enter foreign markets as traders, licensors, franchisors, joint venture or
strategic partners through mergers and acquisitions or as a wholly-owned subsidiaries
-Objective: Maximize shareholder’s wealth
-companies go abroad to maximize profits so that shareholders can receive larger
dividends and allow share prices to rise over time
-Revenue Maximizing Strategies
1. Entering High-Growth Markets
-rising per capita income and growing middle class with a high demand
for goods and services
2. Entering Stable, High-Income Markets
-Countries:
1. United states
2. Japan
3. Canada
4. European Union
-economic growth rates in these stable economies may be low compared
with emerging economies
-high per capita income levels translate to high consumption that could
prove to be a stable source of revenue and profits
3. Entering Countries with Monopolistic Market Structures
-Market Structure
-degree of competition in specific industries within a country
-Monopolistic Market Structure
-few players in a particular industry in a country
4. Entering Trade-Restricted Sectors
-impose various types of trade barriers to protect certain high profile
industries from global competition
-trade barriers leads to decreased competition from abroad and raise
prices and profits of domestic forms
-trade barriers lead to lesser quality domestic products and services
-Foreign Direct Investments
-only profitable way for foreign firms to enter these trade-restricted
markets
-foreign firm should be willing to make long-term commitments and
investments
 -2 Major Reasons:
1. Massive competition in the home market will be reflected in decreasing
profit margins and market saturations for their product or service
2. Firms may genuinely identify new business opportunities abroad based
upon their competitive advantage
-Cost Minimizing Strategies
-to minimize cost (lisod sad)
-If the domestic market for a product is highly competitive, then the MNE may not
make much profit
1. Economies of Scale in Production
-If firm continues to increase output, the average cost per unit will
decrease until it reaches an optimum level because the firm will be
using its fixed assets most efficiently
2. Minimizing Factor Input Cost
-factors of production vary from country to country because of
factor endowments and productivity
3. Reacting to Exchange Rate Movements
-currency of a particular country is expected to strengthen
overtime
-FDI may flow into that country to buy assets with relatively
inexpensive prices
-initial investment will receive higher income when those profits
are converted into home currency
-Risk Minimizing Strategies
-key approach: diversification abroad
1. Diversification
-global corporate cash flows and earnings will be relatively stable
-All countries do not grow at the same rate, nor do they follow the
same business cycle
-companies want to diversify so that when there is an economic
downturn at home, the economies of foreign countries where
investment has been made may do well
-businesses must determine how to efficiently diversify
2. Correlation of Returns
-simple approach to diversification
-Identify oversees projects that have performance levels
that are not highly correlated to domestic cash flows or
project returns over time
-through spreadsheet simulation
-to determine after tax cash flow and return
on investment
 -If the correlation coefficient is one or close to one, the
international project’s returns are very highly correlated to those of
the domestic projects
-If the correlation coefficient is low or negative, the international
and domestic projects complement one another, and risk can be
reduced
3. Product Life Cycle Theory
-explains what happens to a product at different stages
1. Introduction
2. Growth
3. Maturity
4. Decline
-Raymond Vernon
-MNEs facing competition at home during the third phase
will be forced to become efficient.
-MNE will therefore want to diversify through investment
abroad and stabilize corporate cash flow
-Dunning’s Eclectic Theory of Foreign Direct Investment
-John Dunning 1980
-Eclectic Theory
-structure and core competency of firms that seek to locate production
abroad
-3 key economic advantages
1. Ownership, or firm specific, advantages
-internal to the firm that can be transferred at a very low cost
within a MNE regardless of location
2. Locational, or country-specific, advantages
-economic, political, and social systems of a particular country
3. Internationalization advantages
-mode of entry abroad
-concern over the costs of monitoring contractual obligations or
concern over misappropriation of technology or trade secrets

8.4 HOST COUNTRY PERSPECTIVE OF FOREIGN DIRECT INVESTMENT

-FDI as a complement or substitute for domestic investments
-investments are financed through domestic savings
-favorable investment climate to proactively attract FDI as an important alternative
source of funding domestic growth
-Good investment Climate
-government policies encourage:
1. Entrepreneurship
2. Employment generation
3. Environmental protection
 4. Sustainable economic growth
5. Poverty reduction
-FDI is stimulated by the
1. Availability of efficient physical infrastructure
2. Investment in people
-through better education and health care
-investment produces growth, but investment also chases sustainable growth
-size of the current account deficit indicates the financing needs of a country or how
much a country needs to attract or borrow from abroad
-benefits of FDI
1. Create new jobs
2. Access to new technologies
3. Transfer of important management skills
4. Domestic competition
5. Choice
6. Generate tax revenues
7. Reduces poverty
8. Accelerates economic development
-Costs of FDI
1. Become exploited
a. Natural Resources
-sacrifice environmental quality, health, and social fabric of host countries
b. Labor
-preventing human capital development
-tarnish the image of countries concerned
2. Lack of CSR
-corporations should seriously consider the social consequences of their
business decisions if they are to have a long term mutually productive
relationship in a country or region
3. Political interference

8.5 IMPROVING HOST COUNTRY’S INVESTMENT CLIMATE

-proper economic reforms
-transparent government structure
-rule of law
-Good Investment Climate
-government policies enable firms and entrepreneurs to:
1. Invest profitably
2. create jobs
3. contribute to economic growth
4. reduce poverty
-Goal: create a sustainable investment climate that benefits the whole society for the
long-term
-Good Governance
-calls for transparency and a proper system of check and balance as well as
accountability of public officials
-Governance has an impact upon the provision of social service investment
CHAPTER 9
CONTROL OF GLOBAL BUSINESS

9.1 STRATEGY FORMULATION

-ONE MAJOR STRATEGIC GOAL FORMULATION: to adopt an overall shareholder or
stakeholder orientation
-Shareholder- owners of given business/corporation
-Stakeholder- individuals or groups that have a vested interest or stake in the
business/corporation
-Mission statement
-general purpose
-written statement of why the company exists and what it strives to accomplish
-general guidelines for the given company’s strategy formulation and
decision-making
-provide a blueprint for companies in their strategy formulation and control
functions
-CRITICAL DIFFERENCE: extent to which they express an orientation toward
shareholders vs stakeholders or vice versa
-Shareholder vs Stakeholders
-Shareholder Model of Strategy Formulation
-operates from the basin premise that the key strategic purpose of a
business is to maximize financial returns for its owners or shareholders
-Milton Friedman
-Nobel Laureate economist
-”to make as much money for their shareholders as possible”
-Stakeholder model of strategy formulation
-business exists to benefit not just their shareholders but also the various
groups that arguably have a meaningful stake in their operations
-considerable emphasis on how this business decisions affect its customers and
the neighborhoods and communities where it does business
-Understanding the differences between shareholder and stakeholder
orientations in strategy formulations is important in determining appropriate
control system

9.2 STRATEGY IMPLEMENTATION

-Operational Plans
-very short term plans formulated for implementing strategic goals
-Tactical Plans
-1-3 year plans formulated for implementing strategic goals
-4 Part Typology
-Professor Raymond E. Miles and Charles C. Snow
1. Prospectors
 -basic strategic implementation involves extending their success
through global expansion and finding new market opportunities
2. Defenders
-implement a basic market strategy of concentrating on existing
operations and generally defending their home turf
3. Reactors
-responding in an ad hoc manner to strategic actions initiated by
competitors
4. Analyzers
-middle ground between being prospectors and defenders
-steps to extend their markets, while at the same time putting a lot
of emphasis on avoiding excessive risk and defending existing
operations

9.3 COORDINATION
-Impediments to coordination
-legal, political, economic, technological
-Knowledge Management and systems
-Tacit Knowledge
-knowledge that is informal in nature and difficult to communicate
-Explicit Knowledge
-knowledge that is codifiable and easy to communicate or write down
-MAJOR CHALLENGE: making necessary transformations of tacit knowledge
into explicit knowledge
-Absorptive Capacity
-The ability of organizations to recognize, assimilate, and apply new
knowledge

9.4 CONTROL SYSTEM

1. Bureaucratic Controls
-rules and regulations that are promulgated within a global business
-maintain consistent procedures within an organization
-play an important role with respect to organizational risk management
-Financial Budgets that are implemented within a global business are a quintessential
type of bureaucratic control
2. Interpersonal Controls
-personal contact with subordinates as a way of managing an organization
-works best in smaller organizations
3. Output Controls and Measurement
-aspect of organizational control
-involve establishing specific goals on given metrics and then measuring to what
extent these goals are being achieved at certain time intervals
a. Profits
 b. Growth
c. Productivity
-Technology continues to play a very important role in increasing
employee and general corporate productivity
d. Market share
-Percentage of the business in a certain market that is captured by a
product or service the organization provides
-Antitrust Law
- businesses should keep in mind
-anticompetitive concentration of business power
-INDICATOR: very high business market shares
-important for that company lawyers to provide it with a clear
understanding of the potential antitrust implications of taking that
approach
e. Quality/Six Sigma Initiatives
-Quality may apply to product or service
-Sigma
-How far a given problem deviates from a given norm
-six sigma procedure
-barely deviates from perfection
f. Corporate Social Responsibility
-giving back to the communities where they do business is an important
output they may want to measure and control
-important output control

9.5 ORGANIZATION CULTURE AND THE CHANGE CONTROL FUNCTION

-Organizational Culture
-personality of a given organization
-its shared norms and values
-effective control mechanism for an organization
-Type of Organizational Culture
-If a global business has a strong and accepted cultural norm of employees doing
only the highest quality work, it may not be necessary for supervisors to
constantly monitor employee’s work quality
-Organizational Change
-implementation of a different business or cultural path for an organization
-considerable resistance to such change
CHAPTER 10
ORGANIZATION OF GLOBAL BUSINESS

10.1 THE STATELESS CORPORATION

-Stateless Corporations
-New phase in the evolution of the multinational corporation, where work is
sourced wherever it is most efficient and the corporation transcends nationality
altogether
-2 Examples:
1. Lenovo
2. ArcelorMittal
-become global
1. Export department
2. Overseas Sales Office - promote export of goods that are domestically
made
3. manufacturing facilities - cater local demand
-Globally integrated enterprise
-a business organization that sources the work from the most efficient location
-transcend nationality altogether
-C.K. Prahalad
-stateless corporations represent the fourth stage of globalization
-stages:
1. Produce goods in one country and export them to other countries
2. Establish foreign subsidiaries to handle the exports from home countries
3. Global firms set up operations in other countries
4. Stateless corporations locate their core corporate functions and top
executives in different countries
-in order to achieve competitive advantage

10.2 ORGANIZING GLOBAL BUSINESS

-Organization
-tool that people use to coordinate their actions to obtain something they seek or
value
-Organizational structure
-formal system of task and authority relationships that control how people
coordinate their actions and use resources to achieve organizational goals
-pattern of organizational roles, relationships, and procedures that enable such
coordinated action by its members
-allows a company to fail or succeed
-Purpose:
1. Wide variety of activities based upon a division of labor that leads to
Departmentalization, Standardization, Specialization of tasks and functions
 2. Permits to the organization members the coordination of their activities by
integration mechanism
3. Determines the boundaries of the organization and regulates its interfaces with
the environment and its interactions with other organizations
-Division
- business subunit consists of a collection of functions or departments that share
responsibility for producing a particular product or service

10.3 EXPORT DEPARTMENTS AND INTERNATIONAL DIVISIONS

-CREATING AN EXPORT DEPARTMENT
-First step: export products
-done by 1 or 2 sales representatives
-as the demand for the exported products grows, the number of people needed to
handle the job increases as well, which leads to the formation of an export
department
-INTERNATIONAL DIVISION
-as the volume of export grows, it may become feasible for the firm to
manufacture and sell the products in the countries where the exports are being
shipped
-viable to adjust the product to local taste and culture
-CONSEQUENCE: export department becomes the international division
-Advantage:
1. Permits global business to concentrate all international efforts and
expertise in one location
2. It signals to international customers their importance to the company
3. Fosters a global mindset in the people working within the division, and
facilitates the key process of designing products that cater to local tastes
and culture
-Disadvantage:
1. Potential conflict between domestic and international operations
2. Separating domestic and international operations may result to lack of
communication and coordination
-Drawbacks of separation:
1. Preventing the design of products with both domestic and international
appeal
2. Precluding the sharing of core competencies and knowledge
3. Complicating the capture of learning-curve savings resulting from
consolidating production in manufacturing plants around the world

10.4 FOUR ORGANIZATIONAL STRUCTURES FOR GLOBAL BUSINESS

1. Functional Structure
-creates an initial division of labor with regard to the main activities that
must be performed by the organization to continue conducting business
 -activities are grouped by a common function from the bottom to the top of
an organization
-organizational structure that groups people together because they hold
similar positions in a company, perform a similar set of tasks, or use the
same kinds of skills
-narrow product line or a highly integrated product mix
-Advantages:
1. Promotes economies of scale
2. Promotes in-depth skill development of employees by providing a
well-defined career kladder that allows employees to be exposed
to a range of activities within their own functional expertise
3. Encourages collaboration, efficiency and quality within the function
-Disadvantages:
1. Inability to respond to environmental changes that require
coordination between the functional areas
-overloaded
-tasks become backlogged and top management cannot
respond fast enough
2. Employee has a restricted view of the organization’s primary goal
-lead to optimization at the expense of global optimization
-employees may make decisions that optimize a given
function but not the global business as a whole
3. Accountability is diffused because profit and loss accounts are
calculated for the entire firm rather than for each function
2. Divisional Structure
-organizational structure in which functions are grouped together to serve
the needs of products, markets, or geographical regions.
-organized according to the various outputs of the global business
-Each division is managed as a separate business
-coordination across the divisions is overseen by a group of managers at
a corporate headquarters who are responsible for allocating resources
among divisions and deciding upon the long-term strategy of the firm
-Advantage:
1. Focus their activities upon a special kind of product, market, or
geographic region
-narrow focus helps a division to create a high quality
product and customer service
2. Divisions develop a common identity and approach to problem
solving
-increases cohesiveness and results in improved decision
making and performance
3. Respond to the requirements of individual product, market,
geographical regions and quickly adapt as these needs changes
 4. Employee’s identification with their division increases their
commitment, loyalty, and job satisfaction
-Disadvantages:
1. Requires a high operating and managing costs which is
consequence of each division having its own set of functions
2. Communication problems
3. Start to compete for organizational resources and may start to
pursue divisional goals at the expense of the goals of the global
business as a whole
a. Product Structure
-groups products into separate divisions according to their
similarities or differences
-four product divisions
b. Market Structure
-groups products into separate divisions according to the needs of
different customers
-customer structure or customer class structure
-three market divisions
c. Geographical Structure
-groups products into separate divisions according to the needs of
the different geographical regions the company serves
-area structure
-three geographical region divisions
3. Hybrid Structure
-organized by more than one dimension at the top level
-combination of different organizational structure
4. Matrix Structure
-organizational structure in which people are grouped simultaneously by
division and function
-need the simultaneous benefits of both the functional and divisional
structures (technological expertise within functions and the horizontal
coordination across functions)
-functional managers and the division managers have equal authority
-employees report to both managers
-Advantages:
1. Allows the company to meet multiple demands from the
environment
2. Resources can be flexibly allocated and the firm can adapt to
changing external conditions
3. Provides employees the opportunity to acquire both functional and
division related skills
4. Facilitates innovation
 5. Provides a work setting in which employees with different
functional expertise can cooperate to solve non-programmed
decision making problems
-Disadvantages/Problems
1. Determining the responsibility and authority relationships between
the functional and divisional managers
2. Limit opportunities for promotion because most employees move
laterally from division to division
-used only by companies that depend upon rapid product development for
their survival or by firms that manufacture products designed to meet
specific customer needs
-common in high-tech and biotechnology companies
CHAPTER 11
GLOBAL HUMAN RESOURCE MANAGEMENT

11.1 GLOBAL STRATEGIC HUMAN RESOURCE DEVELOPMENT

-Way to gain understanding of strategic HRM
-examine recent statistical analysis
-International trade rules and treaties (Ex: NAFTA)
-strongly influence the growth or decline of employment in this sector
-Immigration rules and the ability of foreign born individuals to work in a given country
vary widely throughout the world
-Norms also differ widely (regarding part time vs full time)
-Global economic recession increased unemployment
-Some countries face high degree of unemployment than others
-Global human resource statistics give us helpful clue into establishing and running
operations in various countries, as well as into given national cultures
-Considerable cultural differences exist among countries, differences that have profound
impact on the practices of international human resource management
-Geert Hofstede
-Dutch social scientist
-5 MAJOR DIMENSIONS OF NATIONAL CULTURE
1. Power distance
-degree of equality of authority distribution in a given society and
its workplace and employee expectations related to the same
2. Uncertainty avoidance
-cultures desire for predictability or the lack of the same in the
workplace and otherwise
3. Individualism or Collectivism
-extent that people think of themselves as members of a group or
collective, as opposed to as discrete individuals
-High individualistic
-employees tend to be evaluated and rewarded in great
measure for their own individual achievement
-Collectivism
-measure success as part of a group
4. Masculinity or Femininity
-values that are traditionally associated with one gender or the
other
-Masculine
-competition
-assertiveness
-achievement
-Feminine
-putting high values on thinks like care for the weak
 -relationships
-countries included here have more liberal policies
5. Long-term or Short-term Orientation
-extent to which members of a given society value long-term
planning and looking to the future as opposed to a more
immediate short-term perspective
-Multinational corporations managing operations around the globe need to be keenly
aware of these issues, particularly with respect to moving employees
-Good strategic HRM makes sure that executives making such transitions are well
trained with respect to the cultural values in their new home country
-Countries around the globe have vastly different regulatory legal-political systems and
structures that govern the conduct of HRM
-Outsourcing
-involves a company subcontracting a certain production function to a third party
-EXAMPLE: Automatic Data Processing Corporation
-Offshoring
-transferring an organizational function to another country, regardless of whether
this function is outsourced or stays within the same company or corporation
-EXAMPLE: General Motors transferring the manufacturing of its Saturn
Automobile from a GM plant in Detroit, Michigan, to a GM plant in Monterrey,
Mexico
-EXAMPLE OF OUTSOURCING AND OFFSHORING
-Reebok transferring the manufacturing to a third party manufacturing company
in Vietnam or Thailand
-Counter arguments
1. Quality of such outsourced or offshored goods and services may not always be
on a par with products manufactured or services provided by the company’s own
U.S-based workers
2. Allegations of arguably unethical behavior
-Increasing globalization, technological advances, and consumer pressure for lower
prices ensure that the outsourcing and offshoring trend by U.S corporations is here to
stay

11.2 STAFFING POLICIES

-Key essential decision: How to staff
-Parent Country Nationals
-headquarters or parent country employees being sent to work for their given
company overseas
-Host Country Nationals
-workers already living in the foreign or host country where the parent company is
opening operation
-Third Country Nationals
-employees from parent\host countries employed in a host/foreign country
-Expatriates
-employees working in countries other than their native country
1. Virtual Staffing
-Drawbacks
1. Very hard to build strong and trusting relationships with people in foreign
offices
2. Virtually managing
3. Require expatriates to actually move to and live in the place of their
foreign assignment
2. Expatriates Issues in Staffing
-depend largely on the particular situation and the particular corporation involved
-local labor market may simply not have enough qualified workers
-REASON FOR HIRING: Control
-Staffing foreign operations with workers from the parent company will
help impose the values and structure of headquarters and the parent
country on the foreign operation
-RISKS OF AN EXPATRIATE STAFFING POLICY
-due to this, there is a trend towards shorter-term expatriate assignments
1. Rates of expatriates failure
-expatriate does not complete his or her assignment and comes
home early (with a 30% additional)
2. Family Issues
-Repatriation
-the process that takes place when the expatriate employee returns home
-PROBLEMS CAUSE:
1. Culture shock
-benefits of this practice exceeds cost
-Expatriate workers
-bring skill sets that are unavailable in the local workforce or that are
complementary to what the local workforce has to offer
-Third country national expatriates
-represent cheaper source of labor than other alternatives
-Expatriate assignments
-provide very useful career development opportunities for employees
-All interested employees are given expatriate opportunities
3. Training and Development
-Training
-providing employees with skills specific to the jobs they are going to be
doing
-Development
-preparing employees for new future assignmentor higher-level positions
4. Needs Assessment
 -assessing the company training and development needs in their international
HRM context is directly related to company international strategic planning
a. Types of Training Development
-differ depending on the given situation
-development instructional styles differ from country to country
b. Expatriates Needs in Training and Development
-special training
-for preparation of expatriates

11.3 PERFORMANCE APPRAISAL AND COMPENSATION

-Performance Appraisal
-assessing employees performance
-has multiple purposes and repercussions for the individual and the organization
-link between performance appraisal and compensations
-employees who are performing well should receive higher rewards and compensation
1. Assessing Performance
-KEY PURPOSE: provide feedback to employees regarding how they are doing
-SECOND PURPOSE: help identify areas for potential training and development
-performance is relatively easy to measure for some jobs
-measuring overall job performance is more difficult
2. Cultural Differences in Assessing Performance
-cultural norms, rules, and even legal differences help to influence how
performance appraisals are conducted around the world
3. Compensation and National Differences in Cost of Living
-MAJOR CHALLENGE: Compensating employees around the world
-cost of living differs dramatically around the globe
-such differentials in cost of living are clearly important factors considered by
corporate HR and other executives in determining where to establish foreign
operations and the amounts of compensation necessary to provide employees
with livable wages in different locales throughout the world
-There are also national differences in the forms of compensation employees
receive in different parts of the world
-International HR managers must make sure that the compensation packages
they offer in a given country are compatible with norms in that country
4. Expatriate Issues in Compensation
-Balance Sheet Approach
-involves keeping the expatriate on the home country’s salary structure
(balance sheet) and then providing various additional allowances so that
the expatriate can essentially maintain a home country standard of living
while working elsewhere
-increasing number of countries now split expatriate compensation between
home and current country of residence currencies
 5. Executive Pay
-HOT BUTTON ISSUE: Executive compensation
-Global economic crisis (2008)
-heightened scrutiny has also emanated from recent increased reporting
requirements with respect to total top executive compensation throughout
the world
-United Nations International Labor Organization (World of Work Report)
-FOCUS: widening gap over time between executive and employee pay

11.4 INTERNATIONAL TRADE, LABOR RELATIONS, AND HRM

- United Nations International Labor Organization (ILO)
-engaged in considerable efforts to develop a set of minimal labor standards for
all UN members and other countries
-minimal standards involve prohibitions against slave or forced labor, restrictions
on the use of child labor, certain basic job safety protections, and the right of the
workers to form labor unions, among other things
-Labor standards are very hard to enforce
-there has been a growing trend to try and establish enforceable labor standards
in the context of given bi- or multinational free trade agreements
1. NORTH AMERICAN AGREEMENT ON LABOR COOPERATION (NAALC)
-NAFTA
-established free trade between the US, Canada, Mexico
-relatively low wages received by workers in Mexico and the general
perceived lack of enforcement of labor rights in that country
-Ross Perot
-Texas business man (1992)
-ran as a third party candidate
-predicts that NAFTA would create a “giant sucking sound” of US jobs to
Mexico
-3 countries expressed considerable concern about the delegation of
national sovereignty to a commission of this kind
-COMPROMISE SOLUTION: special labor side agreement (NAALC)
-strongly enforce its own existing labor laws and regulations
-unusual enforcement mechanism whereby parties in any of the
NAFTA countries can go to the labor department in their own
country and file a formal complaint about labor standards in
another NAFTA country
-MAJOR COMPLAINT: lacks any real “teeth”
2. International Labor Relations
-CENTRAL TENET OF UN ILOs global labor standards
-rights of workers to have freedom of association, form labor unions, and
engage in collective bargaining
 -PHILOSOPHICAL NOTION:
-individual workers, especially those who are less educated or skilled, are
frequently relatively powerless vis a vis their employer and thus are
potentially subject to unfair treatment
-Labor Union
-formal organization representing a group of groups of employees, these
employees collectively may have the ability to stand toe-to-toe with the
employer
-PRIMARY GOAL: Collective bargaining agreement
-a contract comprehensively setting forth employee terms and
conditions of employment at a given workplace or group of
workplaces
-rates of pay, amounts of vacation time, seniority rights
-Have extensive grievance procedures whereby employees with
complaints regarding the administration of the labor contract can
have their grievances effectively heard
3. Comparative Labor Relations
-labor relations are primarily regulated not by the national government, but rather
by provincial government
-National Labor Relations Board
-independent federal agency created by congress in 1935 to administer
the ​National Labor Relations Act
-primary law governing relations between unions and employers in
the private sector
-statute guarantees the right of employees to
-organize and to bargain collectively with their employers
-to engage in other protected concerted activity with or without union
-or refrain from all such activity
-INTERESTING LABOR RELATIONS SYSTEM: Multi employer bargaining
-Germany
-negotiations in which a number of employers jointly bargain with a given
labor union
-PROMINENT FEATURE OF GERMAN LABOR RELATIONS: codetermination
-allocates seats for employers on corporate board of directors
-employee representation of corporate BOD
-gives workers a say in corporate management far greater than in most any other
country in the world
CHAPTER 12
GLOBAL MARKETING

-Companies must conduct research on their foreign markets

-Market Potential
-total number of units of a product that could possibly be sold
-Kinds of Markets
1. Consumer Markets
2. Industrial Markets
3. Government Markets
-Information Required:Surveying International Demographics:
1. Population
2. Income levels
3. Purchasing power
4. Age of a nation’s population
5. Ethnicity
6. Location of area: Urban or Rural

12.1 MARKETING RESEARCH VS. MARKETING INTELLIGENCE SYSTEMS

-Marketing Research
-collects information at one specific time
-Methods
1. Personal interview
2. Mail surveys
3. Focus groups
-Marketing research study is prompted by information that a company’s marketing
intelligence System provides
-Marketing Intelligence System
-collect information regularly over time about the overseas environment in which
the company operates
-KEY COMPONENT THAT DETERMINES WHICH SPECIFIC TYPES OF
INFORMATION IS NEEDED: decisions marketing managers need to make in overseas
markets

12.2 MAKING THE STANDARDIZATION AND ADAPTATION DECISION

-FIRST AND MOST IMPORTANT DECISION:
-degree to which its marketing strategies for those international markets will be
the same or different from those already being deployed in its domestic markets
-Standardization
-marketing strategies used in its international operations will be the same as
those being used domestically
-advantage:
1. Cost
 2. Avoids the expense of establishing new operations
3. Quickly implemented
-Adaptation
-means that the strategies will be different
-Advantages:
1. Sales
- since it recognizes the needs and wants of customers in
non-domestic markets
-Disadvantages:
1. Costly
-All aspects of the international marketer’s marketing strategy are subject to
standardization and adaptation decisions
1. Product
2. Promotion
3. Distribution
4. pricing
-Glocalization
-marketing strategy that involves pursuing a standardization strategy in foreign
markets when possible and an adaptation when necessary

12.3 DEVELOPING THE INTERNATIONAL PRODUCT MIX

-4 options
A. Sell the same domestic product overseas
B. Modify products for different countries and regions
C. Develop new products for foreign markets
D. Incorporate all product differences into one design and develop a global product
Global Product
-a product that can be sold in most world market

1. Developing new products for international markets

-Steps
a. Source new product ideas
Sources:
-internal
-external
-unexpected
b. Concept Testing
-step in the new product development process in which the new product
idea is presented to a small sample of the international market to gauge
its reaction
c. Business Analysis
-step in the new product development process in which projections of
potential revenues and profits for a potential new products are made
 d. Market Testing
-step in the new product development process in which a company will
develop the marketing mix for a new product
e. Commercialization
-new product is manufactured, the marketing mix is finalized, and the
product is introduced to the foreign market
2. Managing existing products
-Product Life cycle theory
-depiction of the sales and profits for a new product over its lifetime
-useful tool for managing products after they have been introduced to
foreign markets
-helps international markets decide when to modify their marketing
strategy
Stages:
1. Introduction Stage
-sales gradually increase
2. Growth stage
-sales and profits rapidly increase
-profits reach a maximum
3. Maturity Stage
-sales a reach peak
4. Decline Stage
-sales and profits have continuously declined
-promotion needs to be increased during the growth and maturity stages because
of a desire to begin reaching mass markets and the influx of more competitors
-Product Elimination
-a formal written procedure to determine which of a company’s products
should be dropped
3. Where to locate research and development facilities
-2 options:
1. Having one facility in the home country
-reduce R&D costs
-exert more control and coordination
2. One facility in the home country and one or more additional facilities in the
foreign markets
-new products developed overseas are more likely to be attuned to the
company’s overseas markets
-technology developed overseas can be transferred back to the home
country
-ADVANTAGE
-MNC can use the intelligence of foreign scientists and engineers
-Reverse Strategy
 -development of a new product first for emerging markets, then selling ito
to developed markets
-companies are finding that products originally developed for emerging
markets can successfully be sold in developed markets
4. Product Counterfeiting
-Sinister aspect of product development: counterfeiting

12.4 DEVELOPING THE INTERNATIONAL PROMOTION MIX

-4 Major Methods
1. Advertising
a. Television Advertising
-used more frequently
-international marketers must be aware of legal restraints in host country
b. Radio
-effective medium in PH
c. Magazines
-can be directed to consumers and business audiences
-directed to more focused market
-Publication Types:
1. Vertical Publication
-target specific industry
2. Horizontal Publication
-specific jobs in various industries
d. Direct Mail
-most focused of advertising media
-specific target market
e. News papers
-for avid readers
-Advantage
1. Low cost per contact
f. Personal Selling
-very effective method to generate sales in international markets
-Disadvantage
1. High cost per contact
-Involves:
1. Direct
2. Face-to-face contact
-MAJOR DECISIONS: use expatriates or locals as sales personnel
2. Sales Promotion
-MOST WIDELY USED PROMOTIONAL TECHNIQUES
1. contest and sweepstakes
2. Coupons
 3. end-aisle displays in stores
4. Sponsorships
5. trade shows
-brand managers favor sales promotion over advertising because the results from
an advertising campaign are often difficult to measure and may take several
years to be realized
-LARGEST WELL KNOWN TRADE SHOW: Hannover, Germany
-not all trade shows require huge amounts of space and are not
dominated by large companies
-Exhibit booth personnel are available to answer questions
` -competitors can be monitored
-in order to benefit the most from trade shows overseas, companies must notify
customers and prospects in advance where and when they will be exhibiting
-efforts should be made to attract visitors to the booth
-it is important for companies to collect information from visitors to the exhibit
3. Personal Selling
4. Publicity
-Publicity
-stories about a company, its products and services, and its executives
that appear in media
-while no direct payment is made to the media, large companies that conduct
business overseas have public relations department that attempt to influence
media to positively report about them
-success is not always guaranteed
-Benefits:
1. Paves the way for sales calls
2. Helps sell minor products and stretched the promotional budget
3. Favorable stories provide objective, punish biased, third party
endorsement: MOST IMPORTANT
12.5 DEVELOPING THE INTERNATIONAL DISTRIBUTION MIX
-2 Major Aspects
1. Channels of Distribution
-Disadvantages
1. Carry competitive products
-devotion of time
2. Relinquishes control over much of the marketing effort
-2 options
1. Indirect Strategy
-Use of channels of distribution to market products and services to
international markets
-firms does not incur cost until the channel sells products
-Advantages:
-channels can be introduced more quickly
 -excellent knowledge in foreign market
-does not require an upfront investment
2. Direct Strategy
-bypassing channels of distribution by using marketing and sales offices
located in foreign countries
-Disadvantage
-required recruitment
-2 Major Kinds of Channels
1. Agent
-acts on behalf of a company in a foreign market and will be compensated
by a commission on the volume of sales achieved
-makes profit: commission>cost
2. Distributor
-purchases products from the company doing business in international
markets and resells them to other buyers
-makes profit: (selling price > paid price ) + cost involved in reselling
2. Physical Distribution
-refers to a company’s storage and transportation operations used in moving its
products to their foreign markets
-Storage
-involves the use of warehouses for a company’s products
-when a company decides to begin selling its products overseas, it encounters a
new set of variables that affect its physical distribution operations
-MAJOR CHALLENGE: poor logistics infrastructures
-the greater distance required for international shipments requires sellers to place
more emphasis on the package designed to protect products in transit
-the greater distance also increases the logistics cost for international shipments
-Freight forwarder
-agents for companies shipping products to international customers who
are chiefly involved with physical distribution activities and documentation
-IMPORTANT DEVELOPMENT: Containerization
-shipping products to overseas markets in trailer-sized containers
-reduces handling cost, spoilage, and pilferage
-Intermodal Transport
-international shipments using different modes of transportation
-KEY COMPONENT: Physical distribution

12.6 DEVELOPING THE INTERNATIONAL PRICING MIX

-4 Major aspects
1. Developing Pricing Objectives for international markets
-4 Major objectives
1. Performance objectives
-​Bottom Line Goals
 a. Net Profit
b. ROI
c. Market Share
d. Penetration
2. Prevention objectives
a. Deter competition
-through low prices that they cannot match
b. Deter government scrutiny
3. Maintenance pricing
-designed to keep the status quo
a. Maintain competitive party
b. Maintain favorable dealer relations
4. Survival objective
-allow a company to survive in an international market
2. Setting prices in international markets
-task of setting specific prices in its various international markets
-5 Factors considered
1. Cost
2. Attractiveness of competitive products and their prices
3. Competitiveness of the product
4. Marketing support
5. demand
-APPROACH TO SETTING PRICES: charge the same price
-recognizes the fixed and variable costs associated with products
-Market differentiation approach
-recognizes cost but places a greater emphasis upon the demand that
exists for products at various prices

3. Addressing the issue of dumping

-Dumping
-a price in the foreign market that undercuts the prices of companies
competing here
-facilitated by the home country providing subsidies to companies that are
dumping
-2 Pricing Strategies:
1. If home country firm sets price below what it charges the domestic market
2. If price is above what is domestically charged, but below marginal cost
needed to move the product overseas and sell it here
4. Setting transfer prices
-Transfer prices
-price a company charges its overseas subsidiaries
-MNCs have subsidiaries overseas to which they will sell products
 -bosses often allege that a transfer price is set not to maximize profits, but
minimize taxes
-HOW TO DEAL: stipulate prices charged (arm's length price)
-Arm's length price
-price that an overseas market is willing to pay
-Important because it affects:
1. Sales
2. Cost
3. Profit
-Gray Marketing
-unauthorized importers reselling a manufacturer’s product in the manufacturer’s
domestic market at a price less than what the manufacturer charges in that
domestic market

12.7 DEVELOPING THE CUSTOMER SERVICE MIX

-IMPORTANT RESPONSIBILITY FOR INTERNATIONAL MARKETS: Customer Service
-Choice is based on:
1. Perception of vendor’s willingness
2. Ability to perform various services for them
-Current foreign customers are likely to become more loyal
-EMPHASIS DRIVEN BY: distance between vendors and customers
-Forum Corporation
-When the all-important issue of customer service is examined, it has been
estimated that customers are 5 times more likely to switch vendors because of
perceived customer service problems than for price or product issues.
-Share of wallet
-percentage of purchases in a category a buyer gives to one vendor
-Companies must guard against providing too high level of service
-Reliability
-performance of various aspects of customer service that meets customer
expectations
a. Receiving shipments on time
b. Order accuracy, completeness and condition
c. Getting repairs done one time
d. Consistency of product quality
-IMPORTANT ASPECT OF CUSTOMER SERVICE:handling of customer complaints
-it takes only a single, poorly handled complaint to result in a lower level of
satisfaction, thereby increasing the probability that the customer will choose
another company
-Jay Narivaha
-senior vp
-customers who have problems resolved are more loyal than those who do not
make their concerns
-company should fear non complainers
-MOST EFFECTIVE STRATEGY: deal with it immediately
CHAPTER 13
GLOBAL OPERATIONS AND SUPPLY-CHAIN MANAGEMENT

13.1 Global Operations Management

-Businesses exist to create goods and services
-Production system
-businesses use to create the goods and services or to produce the products
-Manufacturing System
-the value of the goods dominates the value of the services
-Service System
-the value of service dominates the value of the goods
-production system can be modeled as a system that begins with inputs and creates
from them outputs via a production process
-Input
-materials, land, labor, machines and equipment, and, energy information
-Output
-desired goods and services
-Production facilities
-sites where production takes place
-Components
-products that can be conceptualized as being integrated by several
goods and services
-Raw materials
-materials used to produce companies
-Production stages
-production process involves several steps
-different production stages may need to be assigned to different production facilities
-Production stages can also be present at businesses with service system
-Operations management
-management of the direct resources that are involved in the production system
of a business organization
-include application in service industry
-Manufacturing management or Production management
-operations management applied in manufacturing firms
-Domestic Operations management
-production system direct resources originate from and reside only in one
country
-Global operations management
-originate from or are located in more than one country
 -4 business functions
-can be classified between global or domestic
-Procurement, Logistics and Research and Development are service functions in
both manufacturing and service system
1. Procurement
-acquisition of goods and services
2. Production
-transformation required by production process
3. Logistics
-movement of materials in production system
4. Research and development
-design of new product

13.2 Global Procurement

-business enterprise face the strategic decision to determine the organizational
boundaries of the firm
-Make or buy decision/Sourcing decision
-determining which components and raw materials should be produced in-house
and which components and raw materials should be acquired from suppliers
-Global Procurement
-when a firm buys components and raw materials globally
-Global Production
-when a firm produces goods and services globally
-Advantages
1. Firm does not need to invest the money that is associated with making
2. Firm can focus upon the production stages and components with the most value
added
3. Firm can maximize its flexibility by allocating its orders among the suppliers in a
dynamic way
4. If global suppliers are selling to many companies in the same industry but in
different countries, these suppliers can achieve economies of scale
5. Global procurement is required as a result of a business practice known as offset
-Offsets
-originated in international defense procurement but is now
common in all industries
-The buying firm does not need to learn a new business, avoiding the business
risks that the supplier is taking, and simplifying its own production process
thereby creating an advantage
-Disadvantages
1. Relying upon suppliers on important dimension
2. Compete for the attention of suppliers
3. Profits that the company could earn by producing the goods and services
in-house may now go to the suppliers
 4. Buying from suppliers could unintentionally lead to suppliers becoming
competitors
5. Procuring goods and services from suppliers can also carry the risk of suppliers
providing those same goods and services to the competition
-Outsourcing
-when a firm has been making goods and services in-house, and then decides to
buy these goods and services from suppliers
-Domestic Outsourcing
-when the firm doing the outsourcing and the supplier that will provide the
outsourced goods and services are located in the same country
-Global Outsourcing/Offshoring
-when the firm doing the outsourcing and the supplier that will provide the
outsourced goods and services are located in different countries
-Offshoring
-when a firm and the supplier are located in different countries
-Outsourcing
-managed by an outside vendor
-What began as a straightforward arm's-length agreement between a buyer and a
supplier has become structured more like a partnership agreement
-any increase in the client’s volume of business is reflected in the outsorcerer's scale of
charges, and both parties in some way also share the risks and rewards of the
outsourced activity
-Hollow Corporation
-only completes product design and outsources all other production process
functions
-Insourcing
-when the firm has been buying goods and services from suppliers and then
decides to make these goods and services in-house

13.3 Global Production

-Advantages of Making
1. Cost/Cost Control
-Producing firm is making the product it has designed, knowledge of the
product may provide efficiency advantages over potential suppliers
2. Control over quality
-If the supplier does not have an intimate knowledge of how the
component or raw materials will be used in the product, final assembly
may suffer due to decreased quality
3. Control over deliveries
4. Secures the supply source
5. Sometimes it is the only option for components and raw materials that are
highly specialized, particularly as a matter of trust
 -When components and raw materials involve intellectual property, making
affords complete protection of the intellectual property
-Disadvantages of Making
1. It requires the company to have expertise in the production of the
component or raw materials that will be made
2. Internal supplier may not have the incentives to improve their product
since they do not face competition
-Dual Sourcing
-producing in-house and purchasing from suppliers the
components and efficient as the external suppliers
3. Firm may not be able to gain economies of scale that can be gained by a
supplier that is able to pool the activity of a large number of firms
4. Firm would incur both fixed and variable cost, while when buying, the firm
would only incur variable costs
-If the demand for the product, and hence the component decreases, then the firm
would need to financially absorb both a decline in sales and a higher cost per
component produced because fixed costs would be allocated over a smaller number of
units

13.4 Location Decision

-Location Design
-determining iof products made in-house will be produced in one or more facilities
and of these facilities should be located in one or more countries
1. Location of Production Facilities for Components and Raw Materials
Considerations:
1. Fixed cost
-When fixed costs are high, one production facility will be favored
-When fixed costs are low, several production facilities may be justified
based upon other factors
2. Notion of minimum efficient scale and its comparison to demand
-As volume increases, unit costs decrease due to economies of scale and
learning curve effects
-Learning curve
-capture the following observed experiences
-the more times a task is performed, the less time and cost it will
take in each subsequent repetition
-Minimum efficient scale
-point at which unit cost stabilizes
-When demand is equal or lower than the minimum efficient scale,
one production facility location is preferred
-When the demand is higher than the minimum efficient scale,
several production facilities are economically feasible
3. Value-to-Weight Ratio
 -for the one versus many production facilities
-Goods with high value-to-weight ratios are expensive but do not
weight very much
4. Locate Single or Multiple Production Facilities
a. Heckscher-Ohlin Model
-comparative advantage
-factor endowments
b. Infrastructure
-Basic necessities of a production facility
c. Trade Policies
d. Financial considerations
i. Transaction risks
ii. Translation risks
iii. Economic risks
iv. Government incentives
-tax breaks or low corporate tax
e. Political considerations
i. Social stability
ii. Form of government
iii. Public attitudes toward foregin investment
2. Location of Production Facilities for Products
-If a product can serve the needs of all customers around the world, then the
company may locate all production facilities in one country
-if a product must be customized for different countries, then multiple production
facilities will be needed
-ONE REASON: serving the world market with its standard motorcycle designs
-ONE CONSIDERATION IN DECIDING PRODUCTION FACILITY LOCATION:
proximity to markets
-product’s image
3. Relocation of Production Facilities
-location of a production facility is a long-term decision and because this decision
is such a significant cost driver

13.5 Global Supply-Chain Management

-Supply Chain
-encompasses all the activities associated with the flow and transformation of
goods and services from raw materials to the end-user, including the
corresponding flows of monetary funds and information
-Supply Chain Management
-management of all the activities in the supply chain, in order to minimize the total
cost of the supply chain and to maximize the value of the product to the end-user
-Global Supply-Chain Management
-management of global supply chains
 -Best run companies have the best supply chain
-Role of Information Technology
-Telecommunication Networks
-collections of computer hardware and software arranged to transmit
information from one place to another
-Internetworking
-the linking separate networks into an interconnected network, where
each network retains its own identity
-Internet
-international network of networks containing hundreds of thousands of
private and public networks in more than 150 countries
-Enterprise Resource Planning (ERP) System
-software packages designed to integrate the majority of a firm’s business
processes, execute all transactions related to integration of the firm’s
business processes, store each piece of data only once in an
enterprise-wide database, allow access to data information in real time
and operate in client server environment, whether traditional or
web-based
-AIMS
1. Store all information in a single database
2. Represent each business function by a module
3. Design the system as a collection of business processes and not
functions
-ANATOMY
1. Multi-Language
-property of ERP software to be in multiple language
2. Multi-National
-property of ERP software to handle the accounting standards of
multiple countries
3. Multi-Currency
-refers to the property of ERP software to handle multiple
currencies
-ERP systems have been used with enormous success to integrate most
business processes within a company
-backbone in the coordination and collaboration of global supply chains
-integrate business processes within a company and along the supply chain

CHAPTER 14
GLOBAL FINANCIAL MANAGEMENT

14.1 Measuring Foreign Exchange Exposure

-2 kinds of short term effects of currency movements
1. Transactions risk
-arises from export and import
-how short-term changes in exchange rates can affect operating costs and revenues of
firms engaged in international business activities
2. Translation risk
-on the consolidated accounting statements of a firm
-Consolidated accounting statements
-income statements and balance sheets of multinational corporations and
of all subsidiaries abroad due to home country tax requirements
-Long term effects of currency movements
1. Economic risk
-the ways in which long term exchange rate movements affect firms
-Special drawing right
-basket of currencies consisting of dollars, euros, pounds, and yen created by the IMF

14.2 Hedging FOREX Risk with derivatives

-Hedging
-using currency derivatives to reduce potential transaction, translation, and economic
risks of currency movements that could lead to losses for a firm or investor
-Speculators
-attempts in currencies and currency derivatives to earn profit from trading them and
help to make prices efficient
-Currency Futures Contracts
-standardized agreements to buy or sell a specified amount of currency at a date in the
future at a predetermined price
-Long position
-buying a currency in a currency futures contract and profiting on an increase in the
value of the currency
-Short position
-selling a currency in a currency futures contract and profiting on a decrease in the value
of the currency
-Organized exchanges
-the trading of futures contracts in major currencies and offering price transparency and
efficiency in addition to elimination of counterparty risk due to guaranteed payments on
contacts
-Marked-to-market
-futures contract in which gains (losses) are earned (paid) in cash at the end of each
trading day
-margin
 -small commitment fee needed to purchase a futures contract
-margin call
-losses that are incurred and that cause the participant’s balance to fall below the
maintenance margin at the end of the trading day
-currency forward contract
-futures contract available in currencies of emerging market countries by large banks in
the OTC market
-Over the counter market
-derivatives market run by large banks
-call option
-an investor’s right to buy an asset at a predetermined price
-put option
-an investor;s right to sell an asset at a predetermined price
-premium
-the price paid by the buyer to the seller for an option contract
-currency swaps
-allows firms to exchange currencies at a previously agreed exchange rate as a way to
hedge exchange rate movements
-plain vanilla currency swap
-an interest rate swap, often combined with a currency swap, if the interest being
swapped is in different currencies

14.3 Financing International Trade and Investment

-Money Center Banks
-large global banks that dominate international banking
-CHIPS (Clearing House Interbank Payments System)
-organization in NYC that provides large, wholesale dollar payments services for
businesses, banks, and governments
-SWIFT (Society of Worldwide Interbank Financial Telecommunications)
-Organization that provides secure communications for contracts, invoices, and other
trade documents that normally accompany cash payments
-Payment in advance
-safest method
-exposes the importer to risk concerning delivery of the goods
-exporter and importer may split the payment with half due immediately, and half due
upon delivery
-Commercial Letter of Credit
-offers payment protection to both parties, as the importer’s bank writes a guarantee of
payment
-Banker’s Acceptance
-When a bank sells a letter of credit into the financial marketplace as a money market
instrument
-Open Account
-a simple agreement wherein the exporter sends an invoice with the goods, and the
exporter pays upon the receipt
-Syndicate
-a group of banks that collectively make a loan to a firm
-Lead Bank
- negotiates the loan term with the firm and communicates with a group of managing
banks that will underwrite the loan
-Loans
-priced using floating international interest rate + premium of credit risk
-LIBOR (London Interbank Offered Rate)
-common international interest rate used in the US, Europe, and other countries
-SIBOR (Singapore Interbank Offered Rate)
-often used in the Pacific Basin Region
Other Relevant Terms:
-Importer
-a person or organization that brings goods or services into a country from abroad for
sale
-Beneficiary Bank
-It is the receiving bank where you have your account
-Fedwire (Federal Reserve Wire Network)
-It is a real-time gross settlement funds transfer system operated by the United States
Federal Reserve Banks that allows financial institutions to electronically transfer funds
between its more than 9,289 participants (as of March 19, 2009)
-Federal Reserve System
-central banking system of the United States of America
-Participation Loan
-loans made by multiple lenders to a single borrower
-Floating international interest rate
-Changes in the floating interest rate are based on a reference rate
-Credit Risk
-It is the risk of default on a debt that may arise from a borrower failing to make required
payments
-Pacific Basin
-The Pacific Basin includes the Pacific Rim and the islands in the Pacific Ocean
-Bond Ratings
-Moody’s and Standard and Poor’s rating services that are important in assuring foreign
investors of the credit quality of bond issues
-Bonds can be categorized in three ways:
1. Domestic
2. Foreign
3. Eurobond
-Domestic Bonds
- debt contracts sold by firms domiciled in a country in the home currency
-Foreign Bonds
- bonds that are issued by foreign firms in another country in the home currency of that
country
-Eurobonds
- Bonds that are sold in any country outside the home country but in the home country’s
currency
-stock markets enable firms to issue new equity and raise long-term capital
-However, it should be recognized that bonds are much more important source of long-term
financing for capital investments in land, buildings, and fixed assets.
-Mix of bond and stock investment is recommended
-Diversification of stocks in different sectors can help to manage risk for long-term investors
-Recent Mergers to allow consolidation of stock exchanges and lower transaction costs:
1. New York Stock Exchange and Euronext
2. NASDAQ and American Stock Exchange
3. London Stock Exchange and Borsa Italiana
4. Chicago Mercantile Exchange and the Chicago Board of Trade
-Diversification
- buying securities in a portfolio with price patterns over time that are different from one
another, which reduces the volatility of the portfolio
-Home bias
- investing most if retirement and other savings in one’s home country, which reduces
diversification
-Contagion
- When stock markets in many countries move down in concert with one another and
thereby reduce international diversification benefits
-Government Financing
- play an important role in providing interim credit to help business firms in a financial
crisis.
-It can also reduce damage to the economy from which it would otherwise require many
years to recover.
-International Monetary Fund and World Bank
- established as agencies of the United Nations and its purposes are to promote
international monetary stability and trade
-Export-Import (Ex-Im) bank
- a U.S. government export finance agency that supports U.S. firms competing against
exports of other countries that are government supported
-Trade finance
- bank and government loans used by exporters to finance working capital (i.e., labor,
materials, inventory, and accounts receivable)
-Term financing
- bank and government loans to importers to cover the cost of major purchases
-Bank of International Cooperation (JBIC)
- supports exporters around the world that have at least 30 percent Japanese content

14.4 Multinational Capital Budgeting

-it is important to convert earnings on investments over time to their present values
-important to convert to the home currency in order to compute to present value
-fluctuations can affect profitability
-Net Present Value
-difference between present value of future profits on an investment project minus the
initial investment cost
-if diversification does not sufficiently control exchange risk, another approach is to hedge
exchange rate movements using derivative contracts
-country risk
-the uncertainty in predicting how a variety of different factors will affect an investment in
a country
-sensitivity analysis
-an examination of optimistic, expected, and pessimistic scenarios to give a more
complete picture of the risks and returns of investments abroad
-Cost of capital
-the required rate of return demanded by stock and bond investors and is used in net
present value capital budgeting analyses as the discount rate
-WACC
-sum of the cost of equity and debt weighted by the amount of financing from these twi
capital sources
-cost of debt
-the weighted average of different interest rates paid on long-term borrowings
-cost of equity
-the required rate of return by stockholders in a firm and is estimated by means of the
CAPM
-beta risk
-a measurement of the general market risk of a stock in the CAPM
-international CAPM
-asset pricing model that includes both domestic and global market factors to estimate
the cost of equity or required rate of return on stocks
-size factor
-whether a firm is small or large and how this size provides an estimate of the cost of
equity
-value factor
-whether a firm has growth or value and how this firm characteristic provides an estimate
of the cost of equity
14.5 Currency Risk and Stock Valuation
-foreign sales will decline due to local currency appreciation
-import cost rise when local currency depreciates
-firms can experience fluctuations in cash flows due to currency movements
-Export sales
-channel for currency movements to impact MNC cash flows
-Exchange rate sensitivity
-a stock value measured with the coefficient obtained by regressing the stock’s return on
a currency’s return over time
-Exchange risk betas
-the sensitivity of a stock to market risk affected by currency movements