CHAPTER 14: ENTRY STRATEGY AND STRATEGIC ALLIANCES
• First mover disadvantages include
(MCQ & ESSAY)
What Are The Basic Decisions Firms Make When
Expanding Globally?
• Firms expanding internationally must decide
1. Which markets to enter
2. When to enter them and on what scale
3. Which entry mode to use
– exporting
– licensing or franchising to a company in the host nation
– establishing a joint venture with a local company
– establishing a new wholly owned subsidiary
– acquiring an established enterprise
What Influences The Choice Of Entry Mode?
• Several factors affect the choice of entry mode including
– transport costs
– trade barriers
– political risks
– economic risks
– costs
– firm strategy
• The optimal mode varies by situation – what makes sense for
one company might not make sense for another
Which Foreign Markets Should Firms Enter?
• The choice of foreign markets will depend on their long run
profit potential
• Favorable markets
– are politically stable
– have free market systems
– have relatively low inflation rates
– have low private sector debt
• Less desirable markets
– are politically unstable
– have mixed or command economies
– have excessive levels of borrowing
• Markets are also more attractive when the product in question
is not widely available and satisfies an unmet need
When Should A Firm Enter A Foreign Market?
• Once attractive markets are identified, the firm must consider
the timing of entry
1. Entry is early when the firm enters a foreign market before
other foreign firms
2. Entry is late when the firm enters the market after firms have
already established themselves in the market
Why Enter A Foreign Market Early?
• First mover advantages include
1. the ability to pre-empt rivals by establishing a strong brand
name
2. the ability to build up sales volume and ride down the
experience curve ahead of rivals and gain a cost advantage over
later entrants
3. the ability to create switching costs that tie customers into
products or services making it difficult for later entrants to win
business
Why Enter A Foreign Market Late?
a. pioneering costs - arise when the foreign business system is so
different from that in a firm’s home market that the firm must
devote considerable time, effort and expense to learning the
rules of the game
i. the costs of business failure if the firm, due to its ignorance of
the foreign environment, makes some major mistakes
ii. the costs of promoting and establishing a product offering,
including the cost of educating customers
On What Scale Should A Firm Enter Foreign Markets?
• After choosing which market to enter and the timing of entry,
firms need to decide on the scale of market entry
– entering a foreign market on a significant scale is a major
strategic commitment that changes the competitive playing
field
• Firms that enter a market on a significant scale make a strategic
commitment to the market - the decision has a long term
impact and is difficult to reverse
– small-scale entry has the advantage of allowing a firm to learn
about a foreign market while simultaneously limiting the firm’s
exposure to that market
Is There A “Right” Way To Enter Foreign Markets?
• No, there are no “right” decisions when deciding which markets
to enter, and the timing and scale of entry - just decisions that
are associated with different levels of risk and reward
How Can Firms Enter Foreign Markets?
• These are six different ways to enter a foreign market
1. Exporting - common first step for many manufacturing firms
– later, firms may switch to another mode
2. Turnkey projects - the contractor handles every detail of the
project for a foreign client, including the training of operating
personnel
– at completion of the contract, the foreign client is handed the
"key" to a plant that is ready for full operation
3. Licensing - a licensor grants the rights to intangible property to
the licensee for a specified time period, and in return, receives
a royalty fee from the licensee
– patents, inventions, formulas, processes, designs, copyrights,
trademarks
4. Franchising - a specialized form of licensing in which the
franchisor not only sells intangible property to the franchisee,
but also insists that the franchisee agree to abide by strict rules
as to how it does business
– used primarily by service firms
5. Joint ventures with a host country firm - a firm that is jointly
owned by two or more otherwise independent firms
– most joint ventures are 50:50 partnerships
6. Wholly owned subsidiary - the firm owns 100 percent of the
stock
– set up a new operation
– acquire an established firm
Why Choose Exporting?
• Exporting is attractive because
– it avoids the costs of establishing local manufacturing
operations
– it helps the firm achieve experience curve and location
economies
• Exporting is unattractive because
– there may be lower-cost manufacturing locations
– high transport costs and tariffs can make it uneconomical
– agents in a foreign country may not act in exporter’s best
interest
 Entry Mode
1. Exporting
 common first step for many
manufacturing firms
 later, firms may switch to another mode
2. Turnkey Contract
 the contractor handles every detail of
the project for a foreign client, including
the training of operating personnel
 at completion of the contract, the
foreign client is handed the "key" to a
plant that is ready for full operation
3. Licensing
 a licensor grants the rights to intangible
property to the licensee for a specified
time period, and in return, receives a
royalty fee from the licensee
 patents, inventions, formulas, processes,
designs, copyrights, trademarks
4. Franchising
 a specialized form of licensing in which
the franchisor not only sells intangible
property to the franchisee, but also
insists that the franchisee agree to abide
by strict rules as to how it does business
 used primarily by service firms
5. Joint ventures with a host country firm
 a firm that is jointly owned by two or
more otherwise independent firms
 most joint ventures are 50:50
partnerships
6. Wholly owned subsidiary
 the firm owns 100 percent of the stock
 set up a new operation acquire an
established firm
Advantages
– it avoids the costs of establishing local
manufacturing operations
– it helps the firm achieve experience
curve and location economies
– they are a way of earning economic
returns from the know-how required
to assemble and run a technologically
complex process
– they can be less risky than
conventional FDI
– the firm avoids development costs
and risks associated with opening a
foreign market
– the firm avoids barriers to investment
– the firm can capitalize on market
opportunities without developing
those applications itself
– it avoids the costs and risks of opening
up a foreign market
– firms can quickly build a global
presence
– firms benefit from a local partner's
knowledge of local conditions,
culture, language, political systems,
and business systems
– the costs and risks of opening a
foreign market are shared
– they satisfy political considerations for
market entry
– they reduce the risk of losing control
over core competencies
– they give a firm the tight control over
operations in different countries that
is necessary for engaging in global
strategic coordination
– they may be required in order to
realize location and experience curve
economies
Disadvantages
– there may be lower-cost manufacturing
locations
– high transport costs and tariffs can make it
uneconomical
– agents in a foreign country may not act in
exporter’s best interest
– the firm has no long-term interest in the
foreign country
– the firm may create a competitor
– if the firm's process technology is a source
of competitive advantage, then selling this
technology through a turnkey project is
also selling competitive advantage to
potential and/or actual competitors
– the firm doesn’t have the tight control
required for realizing experience curve and
location economies
– the firm’s ability to coordinate strategic
moves across countries is limited
– proprietary (or intangible) assets could be
lost
• to reduce this risk, firms can use cross-
licensing agreements
– it inhibits the firm's ability to take profits
out of one country to support competitive
attacks in another
– the geographic distance of the firm from
franchisees can make it difficult to detect
poor quality
– the firm risks giving control of its
technology to its partner
– the firm may not have the tight control to
realize experience curve or location
economies
– shared ownership can lead to conflicts and
battles for control if goals and objectives
differ or change over time
– the firm bears the full cost and risk of
setting up overseas operations
Why Choose A Turnkey Arrangement? Which Entry Mode Is Best?
• Turnkey projects are attractive because
– they are a way of earning economic returns from the know-how
required to assemble and run a technologically complex process
– they can be less risky than conventional FDI
• Turnkey projects are unattractive because
– the firm has no long-term interest in the foreign country
– the firm may create a competitor
– if the firm's process technology is a source of competitive
advantage, then selling this technology through a turnkey
project is also selling competitive advantage to potential and/or
actual competitors

Why Choose Licensing?

• Licensing is attractive because
– the firm avoids development costs and risks associated with
opening a foreign market
– the firm avoids barriers to investment
– the firm can capitalize on market opportunities without
developing those applications itself
• Licensing is unattractive because
– the firm doesn’t have the tight control required for realizing
experience curve and location economies
– the firm’s ability to coordinate strategic moves across countries
is limited
– proprietary (or intangible) assets could be lost
• to reduce this risk, firms can use cross-licensing agreements

Why Choose Franchising?

• Franchising is attractive because
– it avoids the costs and risks of opening up a foreign market
– firms can quickly build a global presence
• Franchising is unattractive because
– it inhibits the firm's ability to take profits out of one country to
support competitive attacks in another
– the geographic distance of the firm from franchisees can make
it difficult to detect poor quality
Why Choose Joint Ventures?
• Joint ventures are attractive because
– firms benefit from a local partner's knowledge of local
conditions, culture, language, political systems, and business
systems
– the costs and risks of opening a foreign market are shared
– they satisfy political considerations for market entry
• Joint ventures are unattractive because
– the firm risks giving control of its technology to its partner
– the firm may not have the tight control to realize experience
curve or location economies
– shared ownership can lead to conflicts and battles for control if
goals and objectives differ or change over time
Why Choose A Wholly Owned Subsidiary?
• Wholly owned subsidiaries are attractive because
– they reduce the risk of losing control over core competencies
– they give a firm the tight control over operations in different
countries that is necessary for engaging in global strategic
coordination
– they may be required in order to realize location and
experience curve economies
• Wholly owned subsidiaries are unattractive because
– the firm bears the full cost and risk of setting up overseas
operations
How Do Core Competencies Influence Entry Mode?
• The optimal entry mode depends to some degree on the nature
of a firm’s core competencies
• When competitive advantage is based on proprietary
technological know-how
– avoid licensing and joint ventures unless the technological
advantage is only transitory, or can be established as the
dominant design
• When competitive advantage is based on management know-
how
– the risk of losing control over the management skills is not high,
and the benefits from getting greater use of brand names is
significant
How Do Pressures For Cost Reductions Influence Entry
Mode?
• When pressure for cost reductions is high, firms are more likely
to pursue some combination of exporting and wholly owned
subsidiaries
– allows the firm to achieve location and scale economies and
retain some control over product manufacturing and
distribution
– firms pursuing global standardization or transnational strategies
prefer wholly owned subsidiaries
Which Is Better – Greenfield or Acquisition?
• The choice depends on the situation confronting the firm
1. A greenfield strategy - build a subsidiary from the ground up
– greenfield venture may be better when the firm needs to
transfer organizationally embedded competencies, skills,
routines, and culture
2. An acquisition strategy – acquire an existing company
– acquisition may be better when there are well-established
competitors or global competitors interested in expanding
Why Choose Acquisition?
• Acquisitions are attractive because
– they are quick to execute
– they enable firms to preempt their competitors
– they may be less risky than greenfield ventures
• Acquisitions can fail when
– the acquiring firm overpays for the acquired firm
– the cultures of the acquiring and acquired firm clash
– attempts to realize synergies run into roadblocks and take much
longer than forecast
– there is inadequate pre-acquisition screening
• To avoid these problems, firms should
– carefully screen the firm to be acquired
– move rapidly to implement an integration plan

Why Choose Greenfield?

• The main advantage of a greenfield venture is that it gives the
firm a greater ability to build the kind of subsidiary company
that it wants
• But, greenfield ventures are slower to establish
• Greenfield ventures are also risky

What Are Strategic Alliances?

• Strategic alliances refer to cooperative agreements between
potential or actual competitors
– range from formal joint ventures to short-term contractual
agreements
– the number of strategic alliances has exploded in recent
decades

Why Choose Strategic Alliances?

• Strategic alliances are attractive because they
– facilitate entry into a foreign market
– allow firms to share the fixed costs and risks of developing
new products or processes
– bring together complementary skills and assets that neither
partner could easily develop on its own
– help a firm establish technological standards for the industry
that will benefit the firm
• But, the firm needs to be careful not to give away more than it
receives

What Makes Strategic Alliances Successful?

• The success of an alliance is a function of
1. Partner selection
• A good partner
– helps the firm achieve its strategic goals and has the
capabilities the firm lacks and that it values
– shares the firm’s vision for the purpose of the alliance
– will not exploit the alliance for its own ends

What Makes Strategic Alliances Successful?

2. Alliance structure
• The alliance should
– make it difficult to transfer technology not meant to be
transferred
– have contractual safeguards to guard against the risk of
opportunism by a partner
– allow for skills and technology swaps with equitable gains
– minimize the risk of opportunism by an alliance partner
3. The manner in which the alliance is managed
• Requires
– interpersonal relationships between managers
– learning from alliance partners
Chapter 16: Global Production, Outsourcing, and Logistics
(MCQ & ESSAY)
What Are The Main Production Issues For Firms?
• International firms must answer five interrelated questions
1. Where should production activities be located?
2. What should be the long-term strategic role of foreign
production sites?
3. Should the firm own foreign production activities or outsource
those activities to independent vendors?
4. How should a globally dispersed supply chain be managed, and
what is the role of Internet-based information technology in the
management of global logistics?
5. Should the firm manage global logistics itself, or should it
outsource the management to enterprises that specialize in this
activity?
How Are Strategy, Production, And Logistics Related?
• Production - activities involved in creating a product
• Logistics - procurement and physical transmission of material
through the supply chain, from suppliers to customers
• Questions: How can production and logistics
1. Lower the costs of value creation?
– disperse production to the most efficient locations
– manage the global supply chain efficiently to better match
supply and demand
2. Add value by better serving customer needs?
– eliminate defective products from the supply chain and the
manufacturing process
How Can Quality Be Improved?
• Most firms use the Six Sigma program - a direct descendant of
total quality management (TQM)
– aims to reduce defects, boost productivity, eliminate waste, and
cut costs throughout the company
• In the European Union, firms must meet ISO 9000 standards
before gaining access to the European marketplace
• Improved quality reduces costs
Where Should Production Be Located?
• Firms should locate production so that
– production and logistics can be locally responsive
– production and logistics can respond quickly to shifts in
customer demand
• Firms should consider
1. Country factors
2. Technological factors
3. Product factors
Why Are Country Factors Important?
• Manufacturing should be located where economic, political,
and cultural conditions are most conducive to the performance
of that activity
• Firms should consider
– the availability of skilled labor and supporting industries
– formal and informal trade barriers
– expectations about future exchange rate changes
– transportation costs
– regulations affecting FDI
Why Are Technological Factors Important?
• Firms should consider
1. The level of fixed costs
– if fixed costs are high, produce in a single location or a few
locations
– when fixed costs are low, multiple production plants may be
possible – allows firms to respond to local demands
2. The minimum efficient scale
– when minimum efficient scale (the level of output at which
most plant-level scale economies are exhausted) is high, choose
centralized production in a single location or a limited number
of locations
– when minimum efficient scale is low, respond to local market
demands and hedge against currency risk by operating in
multiple locations
Why Are Technological Factors Important?
3. The flexibility of the technology
– flexible manufacturing technology or lean production
• reduces set up times for complex equipment
• increases the utilization of individual machines
• improves quality control
– Flexible manufacturing allows firms to produce a wide variety of
end products at a relatively low unit cost
– Mass customization
– Flexible machine cells
What Should a Firm Do?
• Production should be concentrated in a few locations when
– fixed costs are substantial
– the minimum efficient scale of production is high
– flexible manufacturing technologies are available
• Production in multiple locations makes sense when
– both fixed costs and the minimum efficient scale of production
are relatively low
– appropriate flexible manufacturing technologies are not
available
Why Are Product Factors Important To Location
Decisions?
• Two product factors impact location decisions
1. The product's value-to-weight ratio
– If the value-to-weight ratio is high, produce the product in a
single location and export to other parts of the world
– If the value-to-weight ratio is low, there is greater pressure to
manufacture the product in multiple locations across the world
2. Whether the product serves universal needs
– When products serve universal needs, the need for local
responsiveness falls, and concentrating manufacturing in a
central location makes sense

What Is The Strategic Role Of Foreign Factories?
• The strategic role of foreign factories and the strategic
advantage of a particular location can change over time
– factories established to take advantage of low cost labor can
evolve into facilities with advanced design capabilities
• Improvement in a facility comes from
– Pressure to lower costs or respond to local markets
– An increase in the availability of advanced factors of production
What Is The Strategic Role Of Foreign Factories?
• Many companies now see foreign factories as globally dispersed
centers of excellence
– supports the development of a transnational strategy
– global learning - valuable knowledge can be found in foreign
subsidiaries
• implies that firms are less likely to switch production to new
locations simply because some underlying variable like wage
rates has changed
Should A Firm Outsource Production?
• Should a firm make or buy the component parts to go into its
final product?
• Make-or-buy decisions are important to firms' manufacturing
strategies
– service firms also face make-or-buy decisions
– decisions involving international markets are more complex
than those involving domestic markets
Why Make?
• Vertical integration - making component parts in-house
1. Lowers costs - if a firm is more efficient at that production
activity than any other enterprise, manufacturing in-house
makes sense
2. Facilitates investments in highly specialized assets - internal
production makes sense when substantial investments in
specialized assets are required
3. Protects proprietary technology – in-house production makes
sense when component parts contain proprietary technology
4. Facilitates the scheduling of adjacent processes - planning,
coordination, and scheduling of adjacent processes can be
easier with in-house production
Why Buy?
• Buying component parts from independent suppliers
1. Gives the firm greater flexibility
– important when changes in exchange rates and trade barriers
alter the attractiveness of various supply sources over time
2. Helps drive down the firm's cost structure
– avoids challenges of coordination and control of additional
subunits
– avoids the lack of incentive associated with internal suppliers
– avoids the difficulties with setting appropriate transfer prices
3. Helps the firm capture orders from international customers
• can help firms gain orders from suppliers’ countries
Do Strategic Alliances With Suppliers Make Sense?
• Sometimes, firms can capture the benefits of vertical
integration without the associated organizational problems by
forming long-term strategic alliances with key suppliers
• However, these commitments may actually limit strategic
flexibility
How Do Firms Manage The Global Supply Chain?
• Logistics encompasses the activities necessary to get materials
to a manufacturing facility, through the manufacturing process,
and out through a distribution system to the end user
• The goal is to
– manage a global supply chain at the lowest possible cost and in
a way that best serves customer needs
– establish a competitive advantage through superior customer
service
What Is The Role Of Just-In-Time Inventory?
• Just-in-time (JIT) systems economize on inventory holding costs
by having materials arrive at a manufacturing plant just in time
to enter the production process
• JIT systems
– generate major cost savings from reduced warehousing and
inventory holding costs
– can help the firm spot defective parts and take them out of the
manufacturing process to boost product quality
• But, a JIT system leaves the firm with no buffer stock of
inventory to meet unexpected demand or supply changes
What Is The Role Of Information Technology And The
Internet?
• Web-based information systems play a crucial role in materials
management
– allow firms to optimize production scheduling according to
when components are expected to arrive
• Electronic Data Interchange (EDI)
– facilitates the tracking of inputs
– allows the firm to optimize its production schedule
– lets the firm and its suppliers communicate in real time
– eliminates the flow of paperwork between the firm and its
suppliers
Chapter 17: Global Marketing and R&D How Does Distribution Influence Marketing Strategy?
(MCQ & ESSAY) • Distribution strategy refers to the means the firm chooses for
delivering the product to the consumer
• How a product is delivered depends on the firm’s market entry
What Is The Marketing Mix? strategy
• The marketing mix (the choices the firm offers to its targeted – firms that manufacturer the product locally can sell directly to
market) is comprised of the consumer, to the retailer, or to the wholesaler
1. Product attributes – firms that manufacture outside the country have the same
2. Distribution strategy options plus the option of selling to an import agent
3. Communication strategy
4. Pricing strategy

Should The Marketing Mix Be Changed For Each Market?

• Question: Are markets and brands becoming global?
• Theodore Levitt argued that world markets were becoming
increasingly similar making it unnecessary to localize the
marketing mix
• Question: Is Levitt right? Probably not!
– Levitt’s theory has become a lightning rod in the debate about
globalization
• The current consensus is that while the world is moving
towards global markets, global standardization is not possible
because of
– cultural and economic differences among nations
– trade barriers and differences in product and technical
standards

What Is Market Segmentation?

• Market segmentation - identifying distinct groups of consumers
whose purchasing behavior differs from others in important
ways
• Markets can be segmented by
– geography
– demography
– socio-cultural factors
– psychological factors
• Two key market segmentation issues
– The differences between countries in the structure of market
segments
– The existence of segments that transcend national borders
• when segments transcend national borders, a global strategy is
possible
How Do Product Attributes Influence Marketing Strategy?
• A product is like a bundle of attributes
• Products sell well when their attributes match consumer needs
– if consumer needs were the same everywhere, a firm could sell
the same product worldwide
• But, consumer needs depend on
1. Culture
• tradition, social structure, language, religion, education
How Do Product Attributes Influence Marketing Strategy?
2. Level of economic development
– consumers in highly developed countries tend to demand a lot
of extra performance attributes
– consumers in less developed nations tend to prefer more basic
products
3. Product and technical standards
– national differences can force firms to customize the marketing
mix
How Do Distribution Systems Differ?
• There are four main differences in distribution systems
1. Retail concentration – concentrated or fragmented
– in a concentrated retail system, a few retailers supply most of
the market – common in developed countries
– in a fragmented retail system there are many retailers, no one
of which has a major share of the market – common in
developing countries
2. Channel length - the number of intermediaries between the
producer and the consumer
– short channel - when the producer sells directly to the
consumer – common with concentrated systems
– long channel - when the producer sells through an import
agent, a wholesaler, and a retailer – common with fragmented
retail systems
How Do Distribution Systems Differ?
3. Channel exclusivity – how difficult it is for outsiders to access
– Japan's system is an example of a very exclusive system
4. Channel quality - the expertise, competencies, and skills of
established retailers in a nation, and their ability to sell and
support the products of international businesses
– the quality of retailers is good in most developed countries, but
is variable at best in emerging markets and less developed
countries
– firms may have to devote considerable resources to upgrading
channel quality
Which Distribution Strategy Should A Firm Choose?
• The optimal strategy depends on the relative costs and benefits
of each alternative
• When price is important, a shorter channel is better
– each intermediary in a channel adds its own markup to the
products
• When the retail sector is very fragmented, a long channel can
be beneficial
– economizes on selling costs
– can offer access to exclusive channels
Why Is Communication Strategy Important?
• Communicating product attributes to prospective customers is
a critical element in the marketing mix
• How a firm communicates with customers depends partly on
the choice of channel
• Communication channels available to a firm include
– direct selling
– sales promotion
– direct marketing
– advertising
What Are The Barriers to International Communication?
• The effectiveness of a firm's international communication can
be jeopardized by
1. Cultural barriers - it can be difficult to communicate messages
across cultures
– a message that means one thing in one country may mean
something quite different in another
– firms need to develop cross-cultural literacy, and use local input
when developing marketing messages
What Are The Barriers to International Communication?
2. Source and country of origin effects –
– Source effects occur when the receiver of the message
evaluates the message on the basis of status or image of the
sender
• can counter negative source effects by deemphasizing their
foreign origins
– Country of origin effects - the extent to which the place of
manufacturing influences product evaluations
3. Noise levels - the amount of other messages competing for a
potential consumer’s attention
– in highly developed countries, noise is very high
– in developing countries, noise levels tend to be lower
How Do Firms Communicate With Customers?
• Firms have to choose between two types of communication
strategies
1. A push strategy emphasizes personnel selling
2. A pull strategy emphasizes mass media advertising
Which Is Better – Push Versus Pull?
• The choice between strategies depends on
1. Product type and consumer sophistication
– a pull strategy works well for firms in consumer goods selling to
a large market segment
– a push strategy works well for industrial products
2. Channel length
– a pull strategy works better with longer distribution channels
3. Media availability
– a pull strategy relies on access to advertising media
– a push strategy may be better when media is not easily
available
What Is The Optimal Mix?
• In general, a push strategy is better
– for industrial products and/or complex new products
– when distribution channels are short
– when few print or electronic media are available
• A pull strategy is better
– for consumer goods products
– when distribution channels are long
– when sufficient print and electronic media are available to carry
the marketing message
Should A Firm Use Standardized Advertising?
• Standardized advertising makes sense when
– it has significant economic advantages
– creative talent is scarce and one large effort to develop a
campaign will be more successful than numerous smaller
efforts
– brand names are global
• Standardized advertising does not make sense when
– cultural differences among nations are significant
– advertising regulations limit standardized advertising
• Some firms standardize parts of a campaign to capture the
benefits of global standardization, but customize others to
respond to local cultural and legal environments
What Pricing Strategy Should Firms Use?
• Firms need to consider
1. Price discrimination
2. Strategic pricing
2. Regulations that affect pricing decisions
What Is Price Discrimination?
• Price discrimination - occurs when firms charge consumers in
different countries different prices for the same product
• For price discrimination to work
– must be able to keep national markets separate
– countries must have different price elasticities of demand -
measure of the responsiveness of demand for a product to
changes in price
• demand is elastic when a small change in price produces a large
change in demand
• demand is inelastic when a large change in price produces only
a small change in demand
– Typically, price elasticities are greater in countries with lower
income levels and larger numbers of competitors
What Is Strategic Pricing?
• Strategic pricing has three aspects
1. Predatory pricing - use profit gained in one market to support
aggressive pricing designed to drive competitors out in another
market
– after competitors have left, the firm will raise prices
2. Multi-point pricing - a firm’s pricing strategy in one market may
have an impact on a rival’s pricing strategy in another market
– managers should centrally monitor pricing decisions
3. Experience curve pricing - price low worldwide in an attempt to
build global sales volume as rapidly as possible, even if this
means taking large losses initially
– firms that are further along the experience curve have a cost
advantage relative to firms further up the curve

How Do Regulations Influence Pricing?

• A firm’s ability to set its own prices may be limited by
1. Antidumping regulations –
– dumping occurs whenever a firm sells a product for a price that
is less than the cost of producing it
• antidumping rules set a floor under export prices and limit a
firm’s ability to pursue strategic pricing
2. Competition policy –
– most industrialized nations have regulations designed to
promote competition and restrict monopoly practices
– can limit the prices that a firm can charge

How Should Firms Configure The Marketing Mix?

• Standardization versus customization is not an all or
nothing concept
• Most firms standardize some things and customize
others
• Firms should consider the costs and benefits of
standardizing and customizing each element of the
marketing mix
Why Is New Product Development Important?
• Firms today need to make product innovation a priority
• Today, competition is as much about technological
innovation as anything else
• The pace of technological change is faster than ever and
product life cycles are often very short
• New innovations can make existing products obsolete,
but at the same time, open the door to a host of new
opportunities
• Firms need close links between R&D, marketing, and
manufacturing
Chapter 18: Global Human Resource Management
(MCQ & ESSAY)
What Is Human Resource Management?
• Human resource management (HRM) refers to the activities an
organization carries out to utilize its human resources
effectively
• These activities include
– determining the firm's human resource strategy
– staffing
– performance evaluation
– management development
– compensation
– labor relations
• Firms need to ensure there is a fit between their human
resources practices and strategy
What Is The Strategic Role Of HRM In International Firms?
• HRM can help the firm reduce the costs of value creation and
add value by better serving customer needs
– more complex in an international business
• differences between countries in labor markets, culture, legal
systems, economic systems, etc.
• HRM must also determine when to use expatriate managers -
citizens of one country working abroad
– who should be sent on foreign assignments
– how they should be compensated
– how they should be trained
– how they should be reoriented when they return home
What Is A Staffing Policy?
• A firm’s staffing policy is concerned with the selection of
employees who have the skills required to perform a particular
job
– can be a tool for developing an promoting the firm’s corporate
culture - the organization’s norms and value system
– a strong corporate culture can help the firm implement its
strategy
• There are three main approaches to staffing policy within
international businesses
1. The ethnocentric approach
2. The polycentric approach
3. The geocentric approach
What Is An Ethnocentric Staffing Policy?
• The ethnocentric approach to staffing fills key management
positions with parent-country nationals
– makes sense for firms with an international strategy
• Firms that pursue an ethnocentric policy believe that
– there is a lack of qualified individuals in the host country to fill
senior management positions
– it is the best way to maintain a unified corporate culture
– value can be created by transferring core competencies to a
foreign operation via parent country nationals
• But
– it limits advancement opportunities for host country nationals
– it can lead to "cultural myopia"
What Is A Polycentric Staffing Policy?
• The polycentric approach recruits host country nationals to
manage subsidiaries in their own country, and parent country
nationals for positions at headquarters
– makes sense for firms pursuing a localization strategy
– can minimize cultural myopia
– may be less expensive to implement than an ethnocentric policy
• But
– host country nationals have limited opportunities to gain
experience outside their own country and so cannot progress
beyond senior positions in their own subsidiaries
– a gap can form between host country managers and parent
country managers
What Is A Geocentric Staffing Policy?
• The geocentric approach seeks the best people, regardless of
nationality for key jobs
– consistent with building a strong unifying culture and informal
management network
– makes sense for firms pursuing a global or transnational
strategy
– enables the firm to make the best use of its human resources
– builds a cadre of international executives who feel at home
working in a number of different cultures
• But
– can be limited by immigration laws
– is costly to implement
What Is Expatriate Failure?
Firms using an ethnocentric or geocentric staffing strategy will
have expatriate managers
Expatriate failure is the premature return of an expatriate
manager to the home country
each expatriate failure can cost between $250,000 and $1
million
Why Do Expatriate Managers Fail ?
• The main reasons for U.S. expatriate failure are
– the inability of an expatriate's spouse to adapt
– the manager’s inability to adjust
– other family-related reasons
– the manager’s personal or emotional maturity
– the manager’s inability to cope with larger overseas
responsibilities
• The reason for European expatriate failure is
– the inability of the manager’s spouse to adjust
• The main reasons for Japanese expatriate failure are
– the inability to cope with larger overseas responsibility
– difficulties with the new environment
– personal or emotional problems
– a lack of technical competence
– the inability of spouse to adjust
How Can Firms Reduce Expatriate Failure?
• Firms can reduce expatriate failure through improved selection
procedures
• Four dimensions that predict expatriate success are
1. Self-orientation - the expatriate's self-esteem, self-confidence,
and mental well-being
2. Others-orientation - the ability to interact effectively with host-
country nationals
3. Perceptual ability - the ability to understand why people of
other countries behave the way they do
4. Cultural toughness – the ability to adjust to the posting
Why Is A Global Mindset Important?
• A global mindset may be the fundamental attribute of a global
manager
– cognitive complexity
– cosmopolitan outlook
• A global mindset is often acquired early in life from
– a family that is bicultural
– living in foreign countries
– learning foreign languages as a regular part of family life
What Is Training And Management Development?
• After selecting a manager for a position, training and
development programs should be implemented
• Training focuses upon preparing the manager for a specific job
• Management development is concerned with developing the
skills of the manager over his or her career with the firm
– gives the manager a skill set and reinforces organizational
culture
• Historically, most firms focus more on training than on
management development
Why Is Training Important For Expatriate Managers?
• Training can reduce expatriate failure
• Cultural training - fosters an appreciation for the host country's
culture
• Language training - an exclusive reliance on English diminishes
an expatriate's ability to interact with host country nationals
• Practical training - helps the expatriate and her family ease
themselves into day-to-day life in the host country
• But, studies show only about 30% of managers sent on one- to
five-year expatriate assignments received training before their
departure
What Happens When Expatriates Return Home?
• Training and development should include preparing and
developing expatriate managers for reentry into their home
country organization
– need good programs for re-integrating expatriates back into
work life within their home country organization and for
utilizing the knowledge they acquired while abroad
Why Is Management Development Important To Firm
Strategy?
• Management development programs increase the overall skill
levels of managers through
– ongoing management education
– rotations of managers through jobs within the firm to give them
varied experiences
• Management development can be a strategic tool to build a
strong unifying culture and informal management network,
both of which are supportive of a transnational and global
strategy
How Should Expatriates Be Evaluated?
• Evaluating expatriates can be especially complex
– typically, both host nation managers and home office managers
evaluate the performance of expatriate managers
• But, both types of managers are subject to unintentional bias
– home country managers tend to rely on hard data when
evaluating expatriates
– host country managers can be biased towards their own frame
of reference
How Can Performance Appraisal Bias Be Reduced?
• To reduce bias in performance appraisal
– more weight should be given to an on-site manager's appraisal
than to an off-site manager's appraisal
– a former expatriate who has served in the same location should
be involved in the process
– home office managers should be consulted before an on-site
manager completes a formal termination evaluation
What Are The Key Issues In Compensating Expatriates?
• Two key issues on compensation
1. How to adjust compensation to reflect differences in economic
circumstances and compensation practices
2. How to pay expatriate managers

How Should National Differences In Compensation Be

Treated?
• Currently, there are substantial differences in executive
compensation across countries
• Question: Should pay be equalized across countries?
• Many firms have recently moved toward a compensation
structure that is based on global standards
– especially important in firms with a geocentric staffing policy
• But, most firms still set pay according to the prevailing
standards in each country

How Should Expatriates Be Paid?

• Most firms use the balance sheet approach - equalizes
purchasing power across countries so employees have the same
living standard in their foreign posting as at home
• A compensation package has five components
1. Base salary - normally in the same range as the base salary for a
similar position in the home country
– can be paid either in the home currency or in the local currency
2. Foreign service premium - extra pay the expatriate receives for
working outside his country of origin
– generally offered as an incentive to accept foreign assignments

How Should Expatriates Be Paid?

3. Various allowances - hardship, housing, cost-of-living,
education
4. Tax differentials - may have to pay income tax to both the
home country and the host-country governments if the host
country does not have a reciprocal tax treaty with the
expatriate’s home country
– company usually covers extra tax assessments
5. Benefits – many firms provide the same level of medical and
pension benefits abroad that employees receive at home
Chapter 19: Accounting in International Business
What Is Accounting?
• Accounting is the language of business – it is the way firms
communicate their financial positions
• Accounting is more complex for international firms because of
differences in accounting standards from country to country
– differences make it difficult for investors, creditors, and
governments to evaluate firms
• The International Accounting Standards Board (IASB) has made
some attempts to establish common accounting and auditing
standards across countries
Why Do Countries Use Different Accounting Systems?
• A country’s accounting system evolves in response to local
demands for accounting information
– One study found that among 22 countries, there were 76 ways
to assess the cost of goods sold, 65 differences in the
calculation of return on assets, and 20 ways to calculate net
profits
• The differences make it challenging to compare financial
performance of firms from different countries
• While there have been efforts to harmonize accounting
practices across countries, significant differences remain
What Determines National Accounting Standards?
• Five main variables influence the development of a country’s
accounting system
1. The relationship between business and the providers of capital
2. Political and economic ties with other countries
3. The level of inflation
4. The level of a country’s economic development
5. The prevailing culture in a country
How Do Providers Of Capital Influence Accounting?
• The three main external sources of capital for firms are
– individual investors
– banks
– government
• A country’s accounting system reflects the relative importance
of each constituency as a provider of capital
– accounting systems in the U.S. and Great Britain are oriented
toward individual investors
– Switzerland, Germany, and Japan focus on providing
information to banks
– France and Sweden prepare financial documents with the
government in mind
How Do Political And Economic Ties Influence Accounting?
• Similarities in accounting systems across countries can reflect
political or economic ties
– the U.S. accounting system influences the systems in Canada
and Mexico
– in the European Union, countries are moving toward common
standards
– the British system of accounting is used by many former
colonies
How Does Inflation Influence Accounting?
• The historic cost principal assumes the currency unit used to
report financial results is not losing its value due to inflation
– affects asset valuation
• if inflation is high, assets will be undervalued
How Do Levels of Development Influence Accounting?
• Developed nations tend to have more sophisticated accounting
systems than developing countries
– larger, more complex firms create accounting challenges
– providers of capital require detailed reports
• Many developing nations have accounting systems that were
inherited from former colonial powers
– lack of trained accountants
How Does Culture Influence Accounting?
• Uncertainty avoidance - the extent to which cultures socialize
their members to accept ambiguous situations and tolerate
uncertainty - impacts the country’s accounting system
– countries with low uncertainty avoidance cultures have strong
independent auditing professions
What Are Accounting And Auditing Standards?
• Accounting standards are rules for preparing financial
statements
– they define useful accounting information
• Auditing standards specify the rules for performing an audit
– the technical process by which an independent person gathers
evidence for determining if financial accounts conform to
required accounting standards and if they are also reliable
• It is difficult to compare financial reports from country to
country because of national differences in accounting and
auditing standards
Why Are International Accounting Standards Important?
• The growth of transnational financing and transnational
investment has created a need for transnational financial
reporting
– many companies obtain capital from foreign providers who are
demanding greater consistency
• The International Accounting Standards Board (IASB) is a major
proponent of standardization of accounting standards
– common accounting standards will facilitate the development
of global capital markets
– most IASB standards are consistent with standards already in
place in the United States
How Does Accounting Influence Control Systems?
• The control process in most firms is usually conducted
annually and involves three steps
1. Subunit goals are jointly determined by the head office
and subunit management
2. The head office monitors subunit performance
throughout the year
3. The head office intervenes if the subsidiary fails to
achieve its goal, and takes corrective actions if necessary

Why Are International Accounting Standards Important? Why Separate Subsidiary and Managerial Performance?
• About 100 nations have adopted IASB standards or permitted • Subsidiaries operate in different environments which
their use in reporting financial results influence profitability
– the EU has mandated harmonization of accounting principles • So, the evaluation of a subsidiary should be kept
for members separate from the evaluation of its manager
• By 2010, there could be only two major accounting bodies with • A manager’s evaluation should consider the country’s
substantial influence on global reporting – FASB in the United environment for business, and should take place after
States and IASB elsewhere making allowances for those items over which managers
have no control
What Is A Consolidated Financial Statement?
• A consolidated financial statement combines the separate
financial statements of two or more companies to yield a single
set of financial statements as if the individual companies were
really one
– used by multinational firms
• Transactions among members of a corporate family are not
included in consolidated financial statements
– they are recorded in separate statements
• The IASB requires firms to prepare consolidated financial
statements, as do most industrialized nations

How Do MNCs Handle Currency Translation?

• Foreign subsidiaries usually keep accounting records and
prepare financial statements in the local currency
• To prepare consolidated financial statements, all local financial
statements must be converted to the home currency
• There are two methods to determine what exchange rate
should be used when translating financial statement currencies
1. The current rate method
2. The temporal method

What Is The Current Rate Method?

• Under the current rate method, the exchange rate at the
balance sheet date is used to translate the financial statements
of a foreign subsidiary into the home currency of the
multinational firm
– can present a misleading picture of the financial situation
– method is incompatible with the historic cost principle

What is The Temporal Method?

• The temporal method translates assets valued in a foreign
currency into the home currency using the exchange rate that
exists when assets are purchased
– avoids the problems associated with the current rate method
– is still problematic because different exchange rates are used to
translate foreign assets
Chapter 20: Financial Management in International
Business
What Is Financial Management?
• Financial management involves
1. Investment decisions –what to finance
2. Financing decisions –how to finance those decisions
3. Money management decisions –how to manage the firm’s
financial resources most efficiently
• Good financial management can create a competitive
advantage
1. reduces the costs of creating value and adds value by improving
customer service
• Decisions are more complex in international business
1. Different currencies, tax regimes, regulations on capital flows,
economic and political risk, etc.
How Do Managers Make Investment Decisions?
• Financial managers must quantify the benefits, costs, and risks
associated with an investment in a foreign country
• To do this, managers use capital budgeting
– involves estimating the cash flows associated with the project
over time, and then discounting them to determine their net
present value
• If the net present value of the discounted cash flows is greater
than zero, the firm should go ahead with the project
Why Is Capital Budgeting More Difficult For International
Firms?
• Capital budgeting is more complicated in international business
– because a distinction must be made between cash flows to the
project and cash flows to the parent company
– because of political and economic risk
– because the connection between cash flows to the parent and
the source of financing must be recognized
What Is The Difference Between Project And Parent Cash
Flows?
• Cash flows to the project and cash flows to the parent company
can be quite different
• Parent companies are interested in the cash flows they will
receive, not the cash flows the project generates
– received cash flows are the basis for dividends, other
investments, repayment of debt, and so on
• Cash flows to the parent may be lower because of host country
limits on the repatriation of profits, host country local
reinvestment requirements, etc.
How Does Political Risk Influence Investment Decisions?
• Political risk - the likelihood that political forces will cause
drastic changes in a country’s business environment that hurt
the profit and other goals of a business
– higher in countries with social unrest or disorder, or where the
nature of the society increases the chance for social unrest
• Political change can result in the expropriation of a firm’s
assets, or complete economic collapse that renders a firm’s
assets worthless
How Does Economic Risk Influence Investment Decisions?
• Economic risk - the likelihood that economic mismanagement
will cause drastic changes in a country’s business environment
that hurt the profit and other goals of a business
• The biggest economic risk is inflation
– reflected in falling currency values and lower project cash flows
How Can Firms Adjust For Political And Economic Risk?
• Firms analyzing foreign investment opportunities can adjust for
risk
1. By raising the discount rate in countries where political and
economic risk is high
2. By lowering future cash flow estimates to account for adverse
political or economic changes that could occur in the future
How Do Firms Make Financing Decisions?
• Firms must consider two factors
1. How the foreign investment will be financed
– the cost of capital is usually lowest in the global capital market
– but, some governments require local debt or equity financing
– firms that anticipate a depreciation of the local currency, may
prefer local debt financing
2. How the financial structure (debt vs. equity) of the foreign
affiliate should be configured
– need to decide whether to adopt local capital structure norms
or maintain the structure used in the home country
• Most experts suggest that firms adopt the structure that
minimizes the cost of capital, whatever that may be
What Is Global Money Management?
• Money management decisions attempt to manage global cash
resources efficiently
• Firms need to
1. Minimize cash balances - need cash balances on hand for notes
payable and unexpected demands
– cash reserves are usually invested in money market accounts
that offer low rates of interest
– when firms invest in money market accounts they have
unlimited liquidity, but low interest rates
– when they invest in long-term instruments they have higher
interest rates, but low liquidity
What Is Global Money Management?
2. Reduce transaction costs - the cost of exchange
– every time a firm changes cash from one currency to another,
they face transaction costs
• Most banks also charge a transfer fee for moving cash from one
location to another
• Multilateral netting can reduce the number of transactions
between subsidiaries and the number of transaction costs
How Can Firms Limit Their Tax Liability?
• Every country has its own tax policies
– most countries feel they have the right to tax the foreign-
earned income of companies based in the country
• Double taxation occurs when the income of a foreign subsidiary
is taxed by the host-country government and by the home-
country government
How Can Firms Limit Their Tax Liability?
• Taxes can be minimized through
1. Tax credits - allow the firm to reduce the taxes paid to the
home government by the amount of taxes paid to the foreign
government
2. Tax treaties - agreement specifying what items of income will
be taxed by the authorities of the country where the income is
earned
3. Deferral principle - specifies that parent companies are not
taxed on foreign source income until they actually receive a
dividend
4. Tax havens - countries with a very low, or no, income tax –
firms can avoid income taxes by establishing a wholly-owned,
non-operating subsidiary in the country
How Do Firms Move Money Across Borders?
• Firms can transfer liquid funds across border via
1. Dividend remittances
2. Royalty payments and fees
3. Transfer prices
4. Fronting loans
• Firms that use more than one of these techniques are
unbundling
What Are Dividend Remittances?
• Paying dividends is the most common method of transferring
funds from subsidiaries to the parent
• The relative attractiveness of paying dividends varies according
to
– tax regulations – high tax rates make this less attractive
– foreign exchange risk – dividends might speed up in risky
countries
– the age of the subsidiary – older subsidiaries remit a higher
proportion of their earning in dividends
– the extent of local equity participation – local owners’ demands
for dividends come into play
What Are Royalty Payments And Fees?
• Royalties - the remuneration paid to the owners of technology,
patents, or trade names for the use of that technology or the
right to manufacture and/or sell products under those patents
or trade names
– can be levied as a fixed amount per unit or as a percentage of
gross revenues
– most parent companies charge subsidiaries royalties for the
technology, patents or trade names transferred to them
• A fee is compensation for professional services or expertise
supplied to a foreign subsidiary by the parent company or
another subsidiary
– royalties and fees are often tax-deductible locally
What Are Transfer Prices?
• Transfer prices - the price at which goods and services are
transferred between entities within the firm
• Transfer prices can be manipulated to
1. Reduce tax liabilities by shifting earnings from high-tax
countries to low-tax countries
2. Move funds out of a country where a significant currency
devaluation is expected
3. Move funds from a subsidiary to the parent when dividends are
restricted by the host government
4. Reduce import duties when ad valorem tariffs are in effect
What Makes Transfer Prices Unattractive?
• But, using transfer pricing can be problematic because
1. Governments think they are being cheated out of legitimate
income
2. Governments believe firms are breaking the spirit of the law
when transfer prices are used to circumvent restrictions of
capital flows
3. It complicates management incentives and performance
evaluation
What Are Fronting Loans?
• Fronting loans are loans between a parent and its subsidiary
channeled through a financial intermediary, usually a large
international bank
• Firms use fronting loans
– to circumvent host-country restrictions on the remittance of
funds from a foreign subsidiary to the parent company
– to gain tax advantages