International Business

Sessions 14-15

Key Aspects of International Management

 International Business

Sessions 14-15

Export, Import and Countertrade

14.1 Exports
 Why Export?

• Exporting is a way to increase market size and profits

• Lower trade barriers under the WTO and regional economic agreements, such
as the EU and NAFTA, make it easier than ever

• Large firms often proactively seek new export opportunities, but many
smaller firms export reactively

• Often intimidated by the complexities of exporting

 Why Export?

• Exporting firms need to

• Identify market opportunities

• Deal with foreign-exchange risk

• Navigate import and export financing

• Understand the challenges of doing business in a foreign market

How Do We Measure Export Performance?

Economic Measures (Sales) Economic Measures (Market)

• Export sales volume • Export market share

• Export sales growth • Export market share growth
• Export intensity • Rate of new market entry
• Export intensity growth

Non-Economic Measures

• Perceived export success

• Competitors’ assessment of firm’s export performance
Common Pitfalls of Exporting
• Poor market analysis

• Poor understanding of competitive conditions

• Lack of customization for local markets

• Poor distribution program

• Poorly executed promotional campaigns

• Problems securing financing

• General underestimation of the differences and expertise required for foreign market penetration

• An underestimation of the amount of paperwork and formalities involved

How Can Firms Improve Export Activities?
• Many firms are unaware of export opportunities available

• Firms need to analyze macroeconomic information and competitive

landscape

• Firms can get direct assistance from some countries and/or use an
export management companies

• Both Germany and Japan have developed extensive institutional structures for
promoting exports

• Japanese exporters can use knowledge and contacts of sogo shosha - great
trading houses

• Govt. of India and several industry bodies provide support to Indian exporters
What are Export Management Companies?
• Export management companies (EMCs) are export specialists that
act as the export marketing department or international
department for client firms

• Two types of assignments are common:

1. EMCs start export operations with the understanding that the firm will take
over after they are established
• Not all EMCs are equal—some do a better job than others

2. EMCs start services with the understanding that the EMC will have
continuing responsibility for selling the firm’s products
• But, firms that use EMCs may not develop their own export capabilities
Financial Risks Associated with Exporting
• Foreign exchange risk has an important role on doing business overseas. It may appear
in many different ways:
• Transaction Risk: Change in the exchange rate during a transaction between the seller and buyer may result in
loss for one of the parties. Companies may use hedging techniques to overcome this risk.
• Economic Risk: Over time, seller may become non-competitive due to movements in the exchange rate. One
way of mitigating this risk is to diversify sales markets potential through sourcing and manufacturing locations.
• Translation Risk: This type of risk is related to the loss resulting from restating the values of assets and liabilities
on the balance sheet. Companies may use nettings and swap techniques to prevent this risk.

• Risk of non-payment (Credit Risk):When buyers default on their payment obtaining the
monies due can be difficult and expensive
• Negotiating with buyers requires patience, understanding and flexibility to resolve conflicts in the
least costly manner
• Legal recourse is costly and time-consuming

• Political and economic risk: Foreign governments have been known to restrict or
prohibit export / import or commercial payments because of problems with the
economy or political instability
How Do Firms Reduce the Risks of Exporting?
• To reduce the risks of exporting, firms should
• Hire an EMC or export consultant to identify opportunities and handle paperwork and
regulations
• Focus on one or a few markets at first
• Enter a foreign market on a small scale in order to reduce the costs of any subsequent
failures
• Recognize the time and managerial commitment involved
• Develop a good relationship with local distributors and customers
• Hire locals to help establish a presence in the market
• Be proactive and hedge against currency fluctuations
• Consider local production
How Do Firms Overcome the Lack of Trust in Export
Financing?
• Trade implies parties from different countries exchanging goods and
payment

• The issue of trust is important

• Exporters prefer to receive payment prior to shipping goods, but importers

prefer to receive goods prior to making payments

• To get around this difference of preference, many international

transactions are facilitated by a third party - normally a reputable
bank

• Adds an element of trust to the relationship

How Do Firms Overcome The Lack of Trust in Export
Financing?

The Use of a Third Party

British Importer Indian Exporter

What is a Letter of Credit?

• A letter of credit is issued by a bank at the request of an importer

• States the bank will pay a specified sum of money to a beneficiary, normally
the exporter, on presentation of particular, specified documents

• Main advantage is that both parties are likely to trust a reputable bank even
if they do not trust each other
 What is a Draft?

• A draft
• An order written by an exporter instructing an importer, or an importer's agent, to
pay a specified amount of money at a specified time

• The instrument normally used in international commerce for

payment

• Also called a bill of exchange

What is a Draft?
• A sight draft is payable on presentation to the drawee

• A time draft allows for a delay in payment

• Normally 30, 60, 90, or 120 days

• Once a time draft has been “accepted” it becomes a negotiable instrument

that can be sold at a discount from its face value
How Does an International Trade Transaction Work?
A Typical International Trade Transaction

Source: Textbook
Export Credit Insurance
• Sometimes getting LC may be difficult
• Exporter may lose an order to another exporter who does not demand LC

• Buyer (importer) is in a strong bargaining position with multiple suppliers offering competing
products / services

• Exporter can insure against the possibility of default, unforeseen losses

• Buys export credit insurance

• Export credit insurance organizations

• Assist exporters in managing their credit risks by providing timely information on
worthiness of the buyers, bankers and the countries

• Provide credit insurance covers through policies, factoring etc. to offer covers similar to that
available to exporters in other countries
What Is a Bill of Lading?

• The bill of lading is issued to the exporter by the common carrier

transporting the merchandise

• It serves three purposes

1. It is a receipt - merchandise described on document has been received by
carrier
2. It is a contract - carrier is obligated to provide transportation service in
return for a certain charge
3. It is a document of title - can be used to obtain payment or a written
promise before the merchandise is released to the importer

Source: https://www.dripcapital.com/en-in/resources/blog/starting-export-business-step-14-final-documentation
 The Logistics of Exporting Foreign
Customs
Shipping
Exporter Dept. International
Carrier
Inland
Freight Carrier
Forwarder
Intermediate
Consignee

Inland Home
Carrier Customs
Importer’s
Bank

Exporter’s Importer
Bank
Source: https://www.shippingsolutions.com/export-documentation-procedure
Knowing Key Incoterms
• The Incoterms, published by International Chamber of Commerce (ICC), are
incorporated in contracts for the delivery of goods worldwide and provide
guidance to importers, exporters, lawyers, transporters, and insurers

• EXW – Ex Works
• The seller delivers when it places the goods at the disposal of the buyer at the seller’s
premises or at another named place (i.e., works, factory, warehouse, etc.)

• CPT – Carriage Paid to

• The seller delivers the goods to the carrier or another person nominated by the seller at
an agreed place (if any such place is agreed between parties) and that the seller must
contract for and pay the costs of carriage necessary to bring the goods to the named
place of destination

• CIP – Carriage and Insurance Paid to

• CPT + The seller also contracts for insurance cover against the buyer’s risk of loss of or
damage to the goods during the carriage
Source: https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-rules-2010/
Knowing Key Incoterms (contd…)
• DDP – Delivered Duty Paid
• The seller delivers the goods when the goods are placed at the disposal of the buyer,
cleared for import on the arriving means of transport ready for unloading at the named
place of destination
[Specific to Marine Transport]
• FOB – Free On Board
• The seller delivers the goods on board the vessel nominated by the buyer at the named
port of shipment; the buyer pays the cost of marine freight transport, insurance,
unloading, and transportation from the arrival port to the final destination

• CFR – Cost and Freight

• The seller delivers the goods on board the vessel; the risk of loss of or damage to the
goods passes when the goods are on board the vessel; the seller must contract for and
pay the costs and freight necessary to bring the goods to the named port of destination

• CIF – Cost, Insurance and Freight

• CFR + The seller also contracts for insurance cover against the buyer’s risk of loss of or
damage to the goods during the carriage
Source: https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-rules-2010/
14.2 Countertrade
 What is Countertrade?
• Countertrade - a range of barter-like agreements that facilitate the
trade of goods and services for other goods and services when they
cannot be traded for money

• Emerged as a means purchasing imports during the1960s when the USSR and the
Communist states of Eastern Europe had nonconvertible currencies

• Grew in popularity in the 1980s among many developing nations that lacked the
foreign exchange reserves required to purchase necessary imports

• Notable increase after the 1997 Asian financial crisis

What are the Forms of Countertrade?
• There are five distinct variations of countertrade

1. Barter - a direct exchange of goods and/or services between two parties

without a cash transaction

• The most restrictive countertrade arrangement

• Used primarily for one-time-only deals in transactions with trading partners

who are not creditworthy or trustworthy
What are the Forms of Countertrade?
2. Counterpurchase - a reciprocal buying agreement

• Occurs when a firm agrees to purchase a certain amount of materials back from a
country to which a sale is made

• Ex: When PepsiCo wanted to enter the Indian market, the government stipulated
that part of PepsiCo’s local profits had to be used to purchase tomatoes; this
requirement worked for PepsiCo, which also owned Pizza Hut and could export the
tomatoes for overseas consumption.
What are the Forms of Countertrade?
3. Offset - similar to Counterpurchase - one party agrees to purchase goods and
services with a specified percentage of the proceeds from the original sale

• Difference with Counterpurchase:

• Indirect transaction - not directly related to the product being imported and here
compensations can be secured in any other area with the aim of obtaining for the economy
what would otherwise have not been available to the buyer but for the purchase

• Ex: Boeing sells aircrafts to Ministry of Defence, and consequently spends as

much as 30% of contract value to buy software service and engineering design
services from Indian players like Infosys, TechMahindra etc. over a period of
time
What are the Forms of Countertrade?

4. A buyback occurs when a firm builds a plant in a country or supplies

technology, equipment, training, or other services to the country

• Agrees to take a certain percentage of the plant’s output as a partial

payment for the contract
What are the Forms of Countertrade?
5. Switch trading - the use of a specialized third-party trading house in a
countertrade arrangement

• When a firm enters a counterpurchase or offset agreement with a country,

it often ends up with counterpurchase credits which can be used to
purchase goods from that country

• Switch trading occurs when a third-party trading house buys the firm’s
counterpurchase credits and sells them to another firm that can better use
them
 Benefits of Countertrade
• It gives a firm a way to finance an export deal when other means are not
available

• It give a firm a competitive edge over a firm that is unwilling to enter a

countertrade agreement

• Countertrade arrangements may be required by the government of a

country to which a firm is exporting goods or services
 Disadvantages of Countertrade

• It may involve the exchange of unusable or poor-quality goods that the

firm cannot dispose of profitably

• It requires the firm to establish an in-house trading department to handle

countertrade deals

• Countertrade is most attractive to large, diverse multinational enterprises

that can use their worldwide network of contacts to dispose of goods
acquired in countertrade deals

• Sogo shosha firms in Japan (e.g., Sumitomo Corp)

14.3 Trade Financing
Trade Financing – Risks in Payment Methods
• Uncertainty over the timing of payments between the exporter and importer
• For exporters, any sale is a gift until payment is received
• For importers, any payment is a donation until the goods are received

Source: US Dept of Commerce, Trade Finance Guide

Trade Financing – Cash in Advance
• Exporter can avoid credit risk because payment is received before the ownership of the
goods is transferred

• For international sales, wire transfers and credit cards are the most commonly used
cash-in-advance options available to exporters

• Escrow services are also cash-in-advance option

• However, requiring payment in advance is the least attractive option for the buyer,
because it creates unfavorable cash flow, and the foreign buyers are also concerned
that the goods may not be sent if payment is made in advance

• Thus, exporters who insist on this payment method as their sole manner of doing
business may lose to competitors who offer more attractive payment terms.
Trade Financing – Letter of Credit (LC)
• One of the most secure instruments available to international traders

• An LC is a commitment by a bank on behalf of the buyer that payment will be made to

the exporter, provided that the terms and conditions stated in the LC have been met, as
verified through the presentation of all required documents

• The buyer establishes credit and pays his or her bank to render this service

• An LC is useful when reliable credit information about a foreign buyer is difficult to

obtain, but the exporter is satisfied with the creditworthiness of the buyer’s foreign
bank

• An LC also protects the buyer since no payment obligation arises until the goods have
been shipped as promised
Trade Financing – Documentary Collections
• A transaction whereby the exporter entrusts the collection of the payment for a sale
to its bank (remitting bank), which sends the documents that its buyer needs to the
importer’s bank (collecting bank), with instructions to release the documents to the
buyer for payment

• Funds are received from the importer and remitted to the exporter through the banks
involved in the collection in exchange for those documents

• D/Cs involve using a draft that requires the importer to pay the face amount either at
sight or on a specified date

• Although banks do act as facilitators for their clients, D/Cs offer no verification process
and limited recourse in the event of non-payment
Trade Financing – Open Account
• An open account transaction is a sale where the goods are shipped and delivered
before payment is due, which in international sales is typically in 30, 60 or 90 days

• Obviously, this is one of the most advantageous options to the importer in terms of
cash flow and cost, but it is consequently one of the highest risk options for an exporter

• Because of intense competition in export markets, foreign buyers often press exporters
for open account terms

• Exporters can offer competitive open account terms while substantially mitigating the
risk of non-payment by using one or more of the appropriate trade finance techniques

• When offering open account terms, the exporter can seek extra protection using export
credit insurance
Trade Financing – Consignment
• Payment is sent to the exporter only after the goods have been sold

• An international consignment transaction is based on a contractual arrangement in

which the foreign distributor receives, manages, and sells the goods for the exporter
who retains title to the goods until they are sold

• Risky as the exporter is not guaranteed any payment and its goods are in a foreign
country in the hands of an independent distributor or agent

• But, consignment helps exporters to

• Become more competitive on the basis of better availability and faster delivery of goods
• Reduce the direct costs of storing and managing inventory

• The key to success in exporting on consignment is to partner with a reputable and

trustworthy foreign distributor or a third-party logistics provider
 Trade Financing – Payment Mechanism Comparison
• Advance
Cash in xx LCs Documentary Collection Open Account Consignment
Recommended for Recommended for use Recommended for use Recommended for use in Recommended for use in
use in high-risk in higher-risk situations in established trade low-risk trading competitive environments
trade relationships or newly established relationships, in stable relationships or markets, to enter new markets and
or export markets, trade relationships export markets and for and in competitive increase sales in partnership
and appropriate when the exporter is transactions involving markets to win customers with a reliable and
for small export satisfied with the ocean shipments with the use of one or trustworthy foreign
transactions creditworthiness of the more appropriate trade distributor
buyer’s bank Pros: Bank assistance finance techniques
Pros: Payment in obtaining payment; Pros: Help enhance export
before shipment Pros: Payment made the process is simple, Pros: Boost competitiveness on the
eliminates risk of after shipment ; a fast, and less costly competitiveness in the basis of greater availability
non-payment variety of payment, than LCs global market; help and faster delivery of goods;
financing and risk establish and maintain a help reduce the direct costs
Cons : May lose mitigation options Cons: Banks’ role is successful trade of storing and managing
customers to available limited and they do relationship inventory
competitors over not guarantee
payment terms „ Cons: Labor intensive payment ; banks do Cons: Significant exposure Cons: Exporter is not
No additional process; relatively not verify the accuracy to the risk of non-payment guaranteed payment;
earnings through expensive in terms of of the documents ; additional costs additional costs associated
financing transaction costs associated with risk with risk mitigation
operations mitigation measures measures
Typical LC Process
1. The importer arranges for the issuing bank to open an LC in favor of the
exporter
2. The issuing bank transmits the LC to the nominated bank, which forwards
it to the exporter
3. The exporter forwards the goods and documents to a freight forwarder
4. The freight forwarder dispatches the goods and either the dispatcher or
the exporter submits documents to the nominated bank
5. The nominated bank checks documents for compliance with the LC and
collects payment from the issuing bank for the exporter
6. The importer’s account at the issuing bank is debited
7. The issuing bank releases documents to the importer to claim the goods
from the carrier and to clear them at customs
Typical LC Process
• xx

Source: https://tradefinanceanalytics.com/
Pre-Export Financing
• xx

Source: https://tradefinanceanalytics.com/
Factoring and Forfaiting
• A financier (factor) buys invoice from another
company at discount
• The factor takes the responsibility of payment
collection
• The seller gets immediate access to funds (partial)
• 1 – Seller concludes a credit sale with the buyer
• 2 – Seller sells the account receivable to the factor
(financier) and notify the same to the buyer
Forfaiting is a specialized form of
• 3 – Factor makes a part payment (advance) against
the account receivable purchased after adjusting the factoring which is undertaken on
discount or commission and interest on advance export transactions on a non
• 4 – Factor maintains the buyer’s account and follows up the recourse basis. As receivables are
payment usually guaranteed by the importer's
• 5 – Buyer makes the payment due to the factor bank through LC, the forfaiter frees
the exporter from the risk of non-
• 6 – Factor makes the final payment to the seller when
the account receivable is collected or on a payment by the importer.
guaranteed payment date Source: https://tradefinanceanalytics.com/
14.4 Export Processes in India
Typical Steps in Exporting from India
• Starting exports
Obtain
Obtain Importer-
Registration cum
Exporter Code Select products
Membership
(IEC) Number
Certificate (RCMC)

Provide
customized Find buyers Select markets
samples

Cover risks
Complete costing / Negotiate with through Export
pricing buyer(s) Credit Guarantee
Corp
Source: http://dgft.gov.in/foreigns-trade-policy-2015-20-
Typical Steps in Exporting from India (contd…)
• Processing export orders
Procure raw
Obtain pre-
Examine order and material and other
shipment finance
finalize contract inputs to fulfill the
(working capital)
order

Conduct quality
Perform labeling,
control checks /
Procure insurance packaging, and
pre-shipment
for goods in transit marking as per
inspection on final
buyer instructions
products

Submit documents
Obtain customs
to bank for
clearance from Realize revenue in
processing
Customs House the books
payments against
Agents
LC
Source: http://dgft.gov.in/foreigns-trade-policy-2015-20-
Trade Related Organizations in India and Their Roles
• Ministry of Commerce and Industry
• Directorate General of Foreign Trade http://dgft.gov.in
• Export Credit Guarantee Corporation of India Limited https://www.ecgc.in
• Federation of Indian Exporters Organization http://www.fieo.org
• India Trade Portal http://indiatradeportal.in
• Make in India http://makeinindia.com
• India Brand Equity Foundation http://www.ibef.org
• Start-up India https://www.startupindia.gov.in/

• ExIm Bank https://www.eximbankindia.in/

• Sectoral export promotion councils like Apparel Export Promotion

Council
Export Promotion in India
• 100% EOU
• Can be set up in any part of the country
• Businesses can import input material and equipment duty free or at concessional
rate
• Was eligible for tax exemption on export income till 2010
• STP / BTP / EHTP
• Specialized areas for different sectors – introduced in 1990s
• SEZ (earlier EPZ)
• Similar to EOU, but at a specific geographic location, notified by the government
• Can be set up by private entities, government, or in PPP mode
• Eligible for corporate tax exemption for first 15 years

The objectives are not only to promote export and earn foreign exchange, but also to
attract foreign investments and generate employment
Export Promotion in India
• Foreign Trade Policy 2015-20
• Framework for increasing exports of goods and services as well as generation of
employment and increasing value addition in the country, in line with the ‘Make
in India’ program

• Merchandise Exports from India Scheme (MEIS)’ for export of specified goods to
specified markets
• Exports of notified goods/ products to notified markets are granted freely transferable duty credit
scrips on realized FOB value of exports in free foreign exchange at specified rate
• Such duty credit scrips (ranging from 2% - 5%) can be used for payment of basic custom duties for
import of inputs or goods

• ‘Services Exports from India Scheme (SEIS) for export of services

• Service providers of notified services are eligible for freely transferable duty credit scrip @ 5% of
net foreign exchange earned

• http://dgft.gov.in/foreigns-trade-policy-2015-20-
 International Business

Sessions 14-15

Global Production and Supply Chain Management

14.5 Global Production and Supply Chain
Network
 Apple’s Supply Chain
• 200+ suppliers in 45 countries, who underwent 1049 reviews in 2018

• Q: Why does Apple outsource much of its production to companies

around the world rather than build its own facilities?

• Q: What makes Apple’s supply chains so productive and efficient?

• Q: What are the risks of developing an extensive supply chain?

Source: Company website
 What are the Main Production Issues for Firms?
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 Supply Chain
Management Related?

• Production?
• Activities involved in creating a product

• Supply Chain Management?

• The integration and coordination of logistics, purchasing, operations, and
market channel activities from raw material to the end-customer

• Strategy?
• Choosing an unique set of activities, and…
• Leveraging resources and capabilities to achieve a stated goal, and thus…
• Create, capture and deliver value for stakeholders
 How are Strategy, Production, and Supply Chain
Management Related?

• Questions: How can production and supply chain management…

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
14.5.1 Where to Produce?
 Where Should Production Be Located?

• Firms should locate production so that production and logistics

• Are cost effective, with no degradation in quality of product
• Can be locally responsive
• Can respond quickly to shifts in customer demand

• Firms should consider

1. Country factors
2. Technological factors
3. Production factors
 Why are Country Factors Important?

• 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

Koninklijke Philips NV has faced criticism for relocating much of its product design and
manufacturing to China, with some observers warning that political upheaval or an economic
downturn in China would result in a very costly slowdown in Philips’ core business activities.
As a member of Philips Corporate Planning team, what do you think?
 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

Why are Technological Factors Important?

2. The minimum efficient scale

• The level of output at which most plant-level scale economies are exhausted

• When minimum efficient scale 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 production technology

• Lean production

• Reduces set-up times for complex equipment

• Increases the utilization of individual machines

• Improves quality at all stages of manufacturing process

• Allows firms to produce a wide variety of end products at a relatively low unit cost
• Small production runs
• Mass customization
 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

• Lean 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 lean 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
How Are Location, Strategy, and Production Related?
Location, Strategy, and Production

Factors
 What are the Hidden Costs of Foreign Production
Locations?

• There may be hidden costs associated with foreign production

• Before making the decision to locate production in a foreign location,

firms must consider the potential for

• High employee turnover

• Poor workmanship

• Poor product quality

• Low productivity
14.5.2 Make or Buy Decisions
 Should a Firm Outsource Production?

• Question: 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
Why Make?

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
Why Buy?

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

 Make-or-Buy Decisions: Operationally Favoring a Make
Decision
Need to have close
control over Need assurance of
Cost of production
production continual supply
process

Industry drivers – preferences

Importance of Has excess of other stakeholders in the
quality control capacity in-house value chain and competitive
landscape

Involvement of Only limited

In-house MAKE
proprietary number of
decision
technology suppliers
Make-or-Buy Decisions: Operationally Favoring a Buy
Decision

Need to manage Brand preference

Cost of production
inventory costs from end-users

Volume
Multi-source
requirement is Non-essential item
policy
small

Lack of in-house Supplier

BUY decision
expertise competencies
14.5.3 Global Supply Chain System
 Functions of the Global Supply Chain: Logistics

• Logistics is the part of the supply chain that plans, implements, and controls the
effective flows and inventory of raw material, component parts, and finished
products

• The core activities performed in logistics are:

1. Global distribution center management

2. Inventory management

3. Packaging and materials handling

4. Transportation

5. Reverse logistics
 Global Supply Chain: Reverse Logistics
• Planning, implementing, and controlling the efficient, cost-effective
flow of raw materials, in-process inventory, finished goods…

• From point of consumption to the point of origin…

• For the purpose of recapturing value or proper disposal

• On average manufacturers spend 9-14% of their sales revenues on

returns

Do you return your old phone to manufacturer when you decide to

buy a new one?
 Function of the Global Supply Chain: Procurement
• Procurement is the part of the supply chain that involves worldwide
buying of raw material, component parts, and products used in
manufacturing of the company’s products and services.

• Global procurement strategy

• Level 1: Engage in domestic purchasing activities only

• Level 2: Engage in international purchasing when needed
• Level 3: Engage in international purchasing as part of firm’s overall supply chain
strategy
• Level 4: Engage in global purchasing across world-wide locations
• Level 5: Engage in global purchasing integrated across world-wide locations and
functional groups
 Global Procurement: Decision Points
• From whom to procure?
• Internal procurement vs. external procurement
• 35% of procurement in MNCs are internal (i.e., from another division / subsidiary)

• Where to procure?
• Domestic vs. global
Outsourcing Options and Terms
Outsourcing MNC buys products or services from one of its suppliers that produces them somewhere else,
whether domestically or globally. In that sense it also refers to external purchasing in relation to
purchasing strategy

Insourcing MNC decides to stop outsourcing products or services and instead starts to produce them internally.
It refers to internal purchasing in the context of purchasing industry.

Offshoring MNC moves a value creation activity somewhere globally (outside the MNC’s home country). It is a
form of global internal / external purchasing in terms of purchasing strategy.

Offshore MNC buys products or services from one of its suppliers globally (outside the MNC’s home
Outsourcing country). It is a form of global external purchasing in terms of purchasing strategy.

Near-shoring MNC transfers some value creation activities to suppliers in a nearby country, often one that
shares a border with the firm’s home country. Nearshoring is a form of global external
purchasing in terms of purchasing strategy.

Co-sourcing MNC uses both its own employees and an external supplier to perform certain tasks, often in
concert with each other. This applies to all four forms of purchasing strategy. It implies that the
relationship between the firm and its supplier is rather strategic in nature, with each party
having specific capabilities that need to be deployed together.
 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 trace issues in manufacturing process on immediate basis

• But, a JIT system leaves the firm with no buffer stock of inventory to
meet unexpected demand or supply changes
 Role of Information Technology in Supply Chain
• 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

• Options for global supply chains:

• Electronic data interchange (EDI)

• Enterprise resource planning (ERP)
• Collaborative planning, forecasting, and replenishment (CPFR)
• Vendor management of inventory (VMI)
• Warehouse management system (WMS)
• RFID based shipment tracking system
 Coordinating Global Supply Chains
• Global supply chain coordination refers to shared decision-making
opportunities and operational collaboration of key global supply chain
activities

• To achieve operational integration and collaboration, six operational objectives should be

addressed:
1. Responsiveness

2. Variance reduction

3. Inventory reduction

4. Shipment consolidation

5. Quality assurance

6. Life-cycle support
Inter-organizational Relationships

Upstream/Inbound Relationships
Inter-organizational Relationships

Downstream/Outbound Relationships
 Case: Olam’s Digital Supply Chain
• Business in 60 countries in all continents, except Antarctica
• Portfolio of speciality agri-products and food ingredients –
procurement to process (seed to shelf)
• ~20B USD in revenue

Source: olamgroup.com
 Case: Olam’s Digital Supply Chain
• Re-imagining Olam’s Supply Chain

Farmer App Micro Collector App Farmer Lead App Admin Dashboard
Enables users to control key
Enables farmers to Powered by data
Enables micro logistics configuration settings, define
view daily price, raise analytics, it enables
service providers to parameters such as prices,
intent to sell, accept Farmer Leads to
collect produce from quantity and quality, and assist
final offer, view ledger receive lots at
farmers, capture in real-time monitoring right
and connect on collection points and
farmer level quality from farmer registration, intent
agronomy related capture quality and
and create lots creation to receipt of produce in
queries transaction details
Source: olamgroup.com warehouses
Case: Olam’s Digital Supply Chain
• Key Digital solutions for agri supply chain

• Digital Origination and Traceability

• Aqua Feed – An app that enables the business to build better engagement with fish
farmers by providing superior technical advice using data collected through the app

• Spyder – A digital solution that enables timely and insightful training and information
sharing with farmers, while tracking crop development from sowing to harvesting
and managing each farmer account from input financing to crop sales

• Smart Factories – Digital technologies that can transform manufacturing units into
agile (excellence in customer service), reliable (consistent quality, high asset
productivity) and cost competitive ‘Lean Factories’

• Smart Farms – Digital solutions that help improve yields (e.g. by using drone
analytics) or reduce operating costs (e.g. through an app for monitoring field staff
productivity) in plantations
In Summary…
• Choice of optimal production locations = f (country factors, technology factors, product
factors)
• Country factors = {Factor costs, Political economy, National culture, Presence of location
externalities)
• Technology factors = {fixed cost of setting up production facilities, minimum efficient scale of
production, availability of lean manufacturing technology for mass customization}
• Product factors = {Product features, Location and strategic role of production facility}
• Make vs. buy decision = f (cost consideration, production capacity constraints, supplier
availability and supplier capabilities, need for control, customer preferences etc.)
• Global supply chain function = logistics + procurement + production + marketing
• Global supply chain coordination = shared decision making + operational collaboration
• Operational collaboration = f (degree of coordination, level of integration, transactional
vs. relationship emphasis)
 International Business

Sessions 14-15

Global Marketing and R&D

14.6 Global Marketing
 Should the Marketing Mix Be Changed for Each Market?

• The world is moving towards global markets, but global standardization

is not possible in all products because of

• Cultural differences among nations

• Economic differences among nations
• Trade barriers
• Differences in product and technical standards
 Issues with Market Segmentation

• Two key market segmentation issues

1. The differences between countries in the structure of market segments

• May have to develop a unique marketing mix to appeal to a

certain segment in a given country

2. The existence of segments that transcend national borders

• When segments transcend national borders (known as

intermarket segments), a global strategy is possible
 How Do Product Attributes Influence International
Marketing Strategy?
• 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

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 Does Distribution Influence International
Marketing Strategy?

• Distribution strategy - the means the firm chooses for delivering the
product to the consumer

• How a product is delivered depends on the firm’s market-entry strategy

• Firms that produce locally can sell directly to the consumer, to the retailer, or to
the wholesaler

• Firms that produce outside the country have the same options plus the option of
selling to an import agent
 How Do Distribution Systems Differ?

• There are four main differences in distribution systems

1. Retail concentration – concentrated or fragmented

• Concentrated retail system has a few retailers who supply most of the market

• Common in developed countries

• Fragmented retail system has many retailers, none of which has a major share of the market

• Common in developing countries

How Do Distribution Systems Differ?

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 the channel

• Some retail platforms may not be available to a producer

• Japan’s retail system is an 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

• Good quality in most developed countries, but variable in emerging markets and elsewhere

• 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 product

• When the retail sector is very fragmented, a long channel can be

beneficial

• Economizes on selling costs

• Can offer access to exclusive channels

 What Pricing Strategy Should Firms Use?

• Firms need to consider:

1. Price discrimination

2. Strategic pricing

3. 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

• Firms must be able to keep national markets separate

• Countries must have different price elasticity of demand

 What is Price Discrimination?

• Price elasticity of demand – a 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 elasticity is greater in countries with lower income levels and
larger numbers of competitors
What is Price Discrimination?
Elastic and Inelastic Demand Curves
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 and earn higher profits
What is Strategic Pricing?

2. Multipoint pricing - a firm’s pricing strategy in one market may have an impact
on a rival’s pricing strategy in another market

• Fuji (Japan) cut prices in the US but Kodak (US) did not retaliate in US, but cut prices in Japan
• Fuji withdrew from aggressive pricing

• Managers should centrally monitor pricing decisions

2. Experience curve pricing - price is lowered 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 prices may be limited by

1. Antidumping regulations –
• Dumping occurs when 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 charges

 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
 Questions Managers Need to Ask

•MixxxElement Question
Product core Do the customers have similar product needs across international
market segments?
Product adoption How is the product bought by customers in the international
market segments targeted?
Product How are established products vs. new products managed for
management customers in the international market segments?
Product branding What is the perception of the product brand by customers in the
international market segments?
 Questions Managers Need to Ask

•MixxxElement Question
Distribution Where is the product typically bought by customers in the
channels international market segments?
Wholesale What is the role of wholesalers?
distribution
Retail distribution What is the availability of different types of retail stores in the
international markets?
 Questions Managers Need to Ask

•MixxxElement Question
Advertising How is the product awareness created for a product to reach
customers in international market segments?
Publicity What role does publicity play among customers?
Sales promotion Are rebates, coupons etc. motivate customers?
 Questions Managers Need to Ask

•MixxxElement Question
Value Is the price of product critical to the customer’s understanding of
the value of the product itself?
Demand Is the demand for the product similar to domestic demand?
Costs How are fixed and variable costs differ for international sales
compared to domestic sales?
Retail price Are there trade tariffs, NTBs or other regulatory factors that
influence the pricing equation?
Levi Strauss experienced a significant financial turnaround in the second half
of the 2000s by customizing its product attributes, distribution, pricing, and
communications strategies to the needs of its regional markets
• Moved production facilities from the US to low-cost locations
• Pricing products differentially across countries – expensive in Europe
• Styling, color and material take care of local preferences as well as climate

Consider a product that is currently struggling for market share in your home
market (Godrej refrigerators? Patanjali ayurvedic products?). If you were hired
as a consultant by the product marketing manager, how would you adjust the
marketing mix to improve sales? What are the expected costs and benefits of
doing so?
 Global Services Marketing
• Typical services characteristics
• Intangibility
• Perishability and absence of inventory (production ➔ consumption)
• Lack of transportability
• Lack of homogeneity
• Labor intensive
• Inability to forecast demand accurately
• Significant buyer involvement

• Additional 3Ps in the Mix - People, Physical evidence and Process

• Best practices?
14.7 Global R&D
 Importance of New Product Development Important

• Product innovation should be a strategic 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

 Where Should R&D Be Located?
• New product ideas come from the interactions of scientific research,
demand conditions, and competitive conditions

• The rate of new product development is greater in countries where…

• More money is spent on basic and applied research and development

• Demand is strong
• Consumers are affluent
• Competition is intense
 How Can R&D, Marketing, and Production Be
Integrated?

• Since new product development has a high failure rate, new product
development efforts should involve close coordination between R&D,
marketing, and production

• Integration will ensure that

• Customer needs drive product development

• New products are designed for ease of manufacture
• Development costs are kept in check
• Time to market is minimized
 Why Are Cross-Functional Teams Important?

• Cross-functional integration is facilitated by cross-functional product

development teams

• Effective cross-functional teams should

• Be led by a heavyweight project manager with status in the organization
• Include members from all the critical functional areas
• Have members located together
• Establish clear goals
• Develop an effective conflict-resolution process
 How Can Firms Build Global R&D Capabilities?

• To adequately commercialize new technologies, firms need to integrate

R&D and marketing

• To successfully commercialize new technologies, firms may need to

develop different versions for different countries

• So, a firm may need R&D centers in North America, Asia, and Europe that are
closely linked by formal and informal integrating mechanisms with marketing
operations in each country of their respective regions and with their various
manufacturing facilities
Drivers of R&D Sites

Source: INSEAD
 Dilemma of MNCs with Global R&D Networks
• Consider the two faces of the global innovation movement

• Company A, having grown through acquisition, produces multiple brands for multiple
markets and operates a worldwide network of research and product development centers
• Each of its R&D sites was initially responsible for its own brands and local market, but with globalization
these distinctions have lost their importance

• Company B, on the other hand, was built largely through internal growth and has two
global brands
• It operates one primary R&D center supported by a handful of special-purpose sites around the world
• This comparatively sparse network has helped Company B win wide admiration for the efficiency of its
engineering

• Your take? Do you want to change A’s network for effectiveness? Is B’s network ideal?
 Dilemma of MNCs with Global R&D Networks
• 77% of R&D sites of MNCs are outside of their home countries (Study by INSEAD)
A’s Challenges
• Number of nodes in a network exponentially increases its complexity and more
expensive to operate
• Company A has considered closing some sites, but has resisted doing so because it fears
losing capabilities and insights, and roiling local markets
• But, periodic budget cuts impact engineers’ morale

B’s Challenges
• Its network might be too compact, limiting its access to knowledge that could maximize
its performance
Challenges of Global Innovation

Source: INSEAD
 Building Org. Capabilities for Global Innovation
• Add nodes in R&D network if you can

• Cost-effectively access critical knowledge that could not otherwise be tapped

• Locate capabilities where they can deliver results better, faster, and cheaper than anywhere else in the
network

• Well-planned multi-site network needs organizational processes and tools to foster

innovation and collaboration across geographies, cultures, and organizational silos

• Common product and component architectures that give global teams a shared language to foster
collaboration
• Globally aligned processes, roles, and structures are seen as important
• Cross-location steering committees to manage pipelines and portfolios, and information systems that
enable 24/7 flows of knowledge, ideas, and designs
• Culture
• Team members should be able to work effectively in culturally diverse environments
• International background can be a prerequisite for a senior R&D management role Source: INSEAD
 Exercise: Expanding Pharma R&D Facilities to Asia
• Your company, based in the US and currently having drug discovery and
research facility only in the US, wants to leverage the talent pool in Asia
and is looking to set up new R&D facility in Asia

• Using Global Competitiveness Report and patenting trends published

by World Intellectual Property Office, identify your potential
destination among top five Asian economies

• https://www3.wipo.int/ipstats/pmhindex.htm?tab=pct
• http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessRepo
rt2019.pdf
 Exercise: Expanding Pharma R&D Facilities to Asia
C•ountry R&D Score (in 12th Pillar PCT Pharma Patents Filed
- Innovation Capability) with WIPO in 10 Years

China 79.5 5995

India 57.1 2565
Indonesia 23.2 11
Japan 100 6722
South Korea 92.5 4330
Field of
Origin Code technol 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
ogy
Pharmaceuti
China CN 247 321 407 409 479 495 701 916 1,012 1,008
cals
Pharmaceuti
India IN 251 255 293 261 293 257 273 263 217 202
cals
Pharmaceuti
Indonesia ID 4 3 1 2 1
cals
Pharmaceuti
Japan JP 717 686 652 583 644 676 680 709 741 634
cals
Republic of Pharmaceuti
KR 278 339 423 434 483 437 447 433 548 508
Korea cals
In Summary…
• Theodore Levitt’s extreme position: one global market for standardized products

• Product attributes, distribution strategies, communication strategies, and pricing need

variation across markets due to
• Differences in consumer tastes - differences in culture, differences in economic development
• Differences in competitive landscape
• Differences in distribution systems due to infrastructure, geography etc.
• Regulatory requirements

• R&D and new product development may need to be dispersed across geographies to
leverage global talent and benefit from customer proximity
 International Business

Sessions 14-15

Global Finance and Accounting

 What is International Financial Management?

• International 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 across the world
 What is International Accounting?
• Accounting is the language of business

• It is the way firms record financial transactions and communicate 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

• It is difficult to compare financial reports from country to country because of

national differences in accounting and auditing standards
14.8 Accounting and International
Business
 What Determines National Accounting Standards?

• Several variables influence the development of a country’s accounting

system, including

• The relationship between business and the providers of capital

• Political and economic ties with other countries

• The level of inflation

• The level of a country’s economic development

• The prevailing culture in a country

 How Do Providers of Capital Influence Accounting?

• A country’s accounting system reflects the relative importance of each

constituency as a provider of capital

• Accounting systems in the United States and Great Britain are oriented toward
investors and capital markets

• Switzerland and Germany focus on providing information to banks

 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 the Philippines

• In the European Union, countries are moving toward common standards

• The British system of accounting is used by many former colonies

 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 are Auditing Standards Different From Accounting
Standards?

• Accounting standards are rules for preparing financial statements

• They define useful accounting information to summarize economic activities in

standard terms

• 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
 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

• Standardization of accounting practices across national borders is

probably in the best interests of the world economy

• Will facilitate the development of global capital markets

 Why are International Accounting Standards Important?
• The International Accounting Standards Board (IASB) is a major
proponent of standardization of accounting standards through IFRS

• Most IASB standards are consistent with US GAAP standards already in place in the
U.S.

• The EU has mandated harmonization of accounting principles for members

• IFRS adoption as of 2018:

• Indian Accounting Standards

(Ind AS) are based on and
substantially converged with
IFRS Standards

Source: ifrs.org
 Comparison of Standards
• https://www.pwc.in/assets/pdfs/publications/2017/ifrs-us-gaap-ind-as-
and-indian-gaap-similarities-and-differences.pdf
 In Summary…Accounting Standards
• Through consistent reporting, a company’s stakeholders can assess the financial health
of the firm
• Historically, countries have followed different accounting standards
• If different accounting standards are used, however, it’s difficult for investors or lenders
to compare two companies or determine their financial condition
• US firms and any listed on a US stock exchange must prepare financial statements in
accordance with the US Financial Accounting Standards Board (FASB) standards, which
are known as generally accepted accounting principles (GAAP)
• Firms based in the EU follow standards adopted by the IASB known as IFRS
• 150+ nations have adopted or permit companies to use IFRS to report their financials
• The FASB and IASB are working on harmonizing the two accounting standards
• The three main advantages of a single set of international accounting standards are
• Increased comparability between firms, reducing investor risk, facilitating cross-border financing and investment
• Reduction in the cost of preparing consolidated financial statements for multinational firms
• Improved reliability and credibility of financial reports
 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
 How Do Exchange Rates Influence Control?
• Budgets and performance data are usually expressed in the corporate
currency

• Normally the home currency

• Facilitates comparisons between subsidiaries

• But, can create distortions in financial statements

 How Do Exchange Rates Influence Control?
• The Lessard-Lorange Model

• Firms can deal with the problems of exchange rates and control in three ways

1. The initial rate

• The spot exchange rate when the budget is adopted

2. The projected rate

• The spot exchange rate forecast for the end of the budget picture

3. The ending rate

• The spot exchange rate when the budget and performance are being
compared
What is the Lessard-Lorange Model?
Possible Combinations of Exchange Rates in the Control Process
 Reflect: Currency Depreciation in Host Country
• You are the CFO of a U.S. firm whose wholly owned subsidiary in Mexico
manufactures component parts for your U.S. assembly operations
• The subsidiary has been financed by bank borrowings in the United States
• One of your analysts told you that the Mexican peso is expected to depreciate
by 30 percent against the U.S. dollar on the foreign exchange markets over the
next year
• What actions, if any, should you take?

• Transfer peso funds out of Mexico now, pay off now / invest in the U.S. in dollars
to pay off the loan later; raise fresh capital in Mexico in peso
• Use a forward rate to lock in an exchange rate now for future remittances, but
the forward rate will likely already reflect the expected depreciation
• Pay off the loan with funds already in the U.S. over time, and retain the pesos in
Mexico for reinvestment if needed
 Why Separate Subsidiary and Managerial Performance?
• Subsidiaries operate in different environments, which influence
profitability

• The evaluation of a subsidiary should be kept separate from the evaluation of

its manager

• A manager’s evaluation should

• Consider the country’s environment for business

• Take place after making allowances for those items over which managers have
no control
In Summary…Accounting and IB
• In most international businesses, the annual budget is the main instrument to control
and manage subsidiary performance
• Periodic interventions by headquarters as and when necessary

• All budgets and performance data needs to be expressed in the corporate currency
• Enhances comparability among subsidiary
• Distorts control process if exchange rates fluctuate

• Lessard-Lorange model
• Use a projected spot exchange rate to translate both budgets and performance figures in corporate
currency

• Transfer prices can introduce significant distortion into the control process
• Policies must be agreed upon when setting budgets and evaluating subsidiary performance

• Subsidiary managerial performance may be carried out using numbers in host country
currency
14.9 Financial Management and
International Business
 Importance of Financial Management

• Prudent financial management can create a competitive advantage

• Reduces the costs of creating value and adds value by improving customer
service

• Decisions are more complex in international business

• Different currencies, tax regimes, regulations on capital flows, economic and

political risk, etc.
 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, and currency fluctuations

• 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
International Capital Budgeting from the Parent Firm’s
Perspective: Alternatives
Approach for international decision makers:
1. Estimate future cash flows in foreign currency
2. Estimate the discount rate in host country
3. Calculate the foreign currency NPV using the foreign cost of capital
4. Translate the foreign currency NPV into dollars using the spot
exchange rate

Another approach:

• Change the foreign cash flows into dollars at the exchange rates expected to
prevail. Find the $NPV using the dollar cost of capital.
14.9.1 Global Money Management
 What is Global Money Management?
• Money management decisions attempt to manage global cash
resources efficiently

• Firms need to

1. Minimize cash balance requirements - need cash balances on hand for notes
payable and unexpected demands

2. Reduce transaction costs - the cost of exchange

3. Manage the tax burden - limit total tax liability

4. Move money across borders - transfer liquid funds across border

 Minimize Cash Balance

• 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
 Minimize Cash Balance

• Pooling cash reserves centrally helps in

• Deposits carry larger amounts and fetch better interest rates

• A financial hub as a centralized location offers great short term investment

opportunities typically not available in small countries

• Total size of the cash pool to be held in liquid accounts can be reduced ,
allowing firms to invest more in longer term financial instruments that earn
better interests
 Minimize Cash Balance: Example of Reduced Cash
Requirement Due to Centralized Pooling
• Japanese co. with two subsidiaries in South Korea and China
• Policy: Required cash balance: Average day-to-day cash needs + 3σ
• Cash needs in each country are normally distributed, independent of each other
Country Expected Day-to-day Cash Needs Std. Deviation (σ) Required Cash Balance
Japan 12 MUSD 3 MUSD 21 MUSD
S. Korea 10 MUSD 1 MUSD 13 MUSD
China 6 MUSD 2 MUSD 12 MUSD
Total 28 MUSD 46 MUSD
• If cash is maintained centrally, we may add the distributions
• Combined distribution
• Mean: 12+10+6 = 28 MUSD
• σ = SQRT (30000002 + 10000002 + 20000002) = 3.74 MUSD
• Required cash balance = 39.23 MUSD
• Cash that can be deployed elsewhere = 6.77 MUSD
 Reduce Transaction Costs
• 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
 Reduce Transaction Costs: Example of Multilateral
Netting
• Japanese HQ and two subsidiaries in China and South Korea
Payment for engg.
services $ 6M
S. Korea
China Subsidiary Purchase of raw material
procured from China $ 5M Subsidiary

Japan HQ
 Reduce Transaction Costs: Example of Multilateral
Netting
• Two netting transactions suffice China
Payment for engg.
services $ 6M S. Korea
Subsidiary Purchase of raw material Subsidiary
procured from China $ 5M

Receiving Paying Subsidiary Total Net Receipts

Subsidiary Receipts (Payments)
S. China Japan
Korea (HQ) Japan
S. Korea - $ 6M $ 1M $ 7M ($ 3M) HQ
China $ 5M - $ 2M $ 7M ($ 2M)
Japan $ 5M $ 3M - $ 8M $ 5M
(HQ) China S. Korea
Subsidiary Subsidiary
Total $ 10M $ 9M $ 3M $ 22M $ 5M

Japan
HQ
 Manage the Tax Burden
• Every country has its own tax policies

• Most countries feel that 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
 Base Erosion and Profit Shifting (BEPS)
• Corporate tax planning strategies used by multinationals to "shift" profits from higher–
tax jurisdictions to lower–tax jurisdictions
• “Eroding" the "tax–base" of the higher–tax jurisdictions
• Exploiting gaps and mismatches in tax rules
• Led to an estimated tax loss of $240 billion in 2018

• BEPS tools
• IP–based BEPS tools: Enable the profits to be extracted via the cross–border charge–out of internal
virtual IP assets (known as "intergroup IP charging“)

• Debt–based BEPS tools: Enable the profits to be extracted via the cross–border charge–out artificially
high interest (known as "earnings stripping“)

• TP–based BEPS tools: Shift profits to the haven by asserting that a process performed in the haven
(e.g., contract manufacturing), justifies a large increase in the transfer price ("TP") at which the
finished product is charged–out by the haven to higher–tax jurisdictions.

• OECD BEPS: https://www.oecd.org/tax/beps/

• National tax guides https://dits.deloitte.com/#TaxGuides

Some of today’s top companies, including Apple, Google, and Microsoft, seek
to minimize their tax burden by storing significant amounts of cash in foreign
countries with low corporate tax rates. Some view this as a shrewd business
practice, while others call it unethical tax avoidance.

As the chief financial officer of a multinational enterprise with an expected $10

billion in profits for the upcoming fiscal year, would you advise that the
company follow Apple, Google, Microsoft, and others in storing cash in Ireland,
the Cayman Islands, or another tax haven? Why or why not?
 Mechanisms of Moving 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
 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 reduce attractiveness

• Foreign exchange risk – dividends might be sped 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
 What Are Royalty Payments and Fees?

• 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 (WHT)

 What are Transfer Prices?
• Transfer prices - the price at which goods and services are transferred
between entities within the firm
• Both China and S. Korea subsidiaries are owned 100% by the Japanese
parent; and pianos are produced in China and sold in S. Korea

Japan HQ (Z)

Controlled transaction Uncontrolled transaction

China S. Korea
@ transfer price @ USD 5000 S. Korean
Subsidiary Subsidiary
(X) (Y) Market

Cost of production:
USD 1000
 Effect of Transfer Price Variation
• Scenario 1: Price X charges to Y for the supply of one piano is similar to
the market price ($ 4,000 and this ensures a profit of $ 3,000 for X)
Scenario 1 X Y Cons. at Z Japan HQ
(Z)
Revenue 4000 5000 5000
Direct / indirect cost 1000 4000 1000 China
Controlled transaction @
S. Korea
Uncontrolled transaction
transfer price @ USD 5000
Subsidiary Subsidiary S. Korean
Profit before tax 3000 1000 4000 (X) (Y) Market

Corp tax rate 25% 16.5%

Profit after tax 2250 835 3085

• Scenario 2: X charges a non-market price of $ 2,000 (e.g., variable cost of

producing one unit) Scenario 2 X Y Cons. at Z
Revenue 2000 5000 5000

• Scenario 2 is preferred by Z Direct / indirect cost 1000 2000 1000

• The result is an extra profit after tax Profit before tax 1000 3000 4000
of $ 170 per piano sold Corp tax rate 25% 16.5%
Profit after tax 750 2505 3255
 Why Transfer Prices are Manipulated?
• 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

 Arms Length Principle in Transfer Pricing
• Terms and conditions of controlled transactions may not differ from
those which would be made for uncontrolled transaction (transactions
between independent enterprises)

China S. Korea
Subsidiary Subsidiary S. Korean
(X) (Y) Market

Chinese Co. S. Korea Co. S. Korean

(A) (B) Market
 Consequences of Inappropriate Transfer Pricing
• Actions tax authorities may take if Arms Length Principle is violated

• Tax authorities can make an adjustment to the profit(s) of the associated

enterprise(s) involved in the transaction

• In our example under scenario 2, the Chinese tax authorities have an interest that X
sells the piano against the market price: that would result in a higher profit for X and
more tax

• The Chinese authorities may therefore make a correction to the profits of X in line
with their transfer pricing rules

• The S. Korean authorities will not automatically follow such a correction

• That will, among other things, depend on whether there is double tax treaty in place between S. Korea
and China.
 Expectations from Firms
• Transfer pricing regulations impose a number of obligations on firms if it
has controlled transactions:
• A firm should be able to prove that the terms and conditions of internal transactions
are comparable to those which would have been agreed in the free market when
concluding comparable transactions (referred to as “arm’s length”)
• The firm should keep documentation on record which shows:
• (a) how the transfer pricing has been established and
• (b) whether the transfer pricing is in line with the arm’s length principle
• The firm should file annual tax returns on the basis of arm’s length terms and
conditions of controlled transactions
• The obligations may seem straight forward, in practice, taxpayers often spend a lot
of time and effort in making sure these are met
• A transfer pricing analysis which aims to meet the second obligation mentioned can go to 100 pages!
• Refer to Related Party Transactions in Annual Report (Claus (h) of sub-section 3 of Section 134 of
Companies Act 2013)
 Example – Infosys FY19 Annual Report: RPTs

…
 What Makes Transfer Prices Problematic?

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

 OECD Transfer Pricing Guidelines
• https://www.oecd-ilibrary.org/taxation/oecd-transfer-pricing-guidelines-for-
multinational-enterprises-and-tax-administrations-2017_tpg-2017-en

Comparable Transactional
Uncontrolled Resale
Cost Plus Net Margin Profit Split
Price Price
Method

• Worked-out examples
• https://transferpricingasia.com/2017/03/17/five-transfer-pricing-methods-examples/
 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

What are Fronting Loans?

An Example of the Tax Aspects of a Fronting Loan

 Closing Case: Google and its Tax Strategy
• 2011: Avoided ~ $2 billion in worldwide corporate tax by shifting $9.8
billion in revenues into a shell company in Bermuda where there is no
income tax

• 2011: Revenue in UK ~ £2.5 billion, corporate tax £6 million

• Eric Schmidt: “We are empowering billions of pounds of startups,…key

player in ecommerce growth…”
 Closing Case: Google and its Tax Strategy
• Double Irish
• US entity gives rights to all IP to Irish
entity and Irish entity becomes
responsible for sales in Europe
➔All European earnings are taxed in
Ireland (@12.5% vs. 35% in the US)

• The Irish entity becomes tax-resident in

Bermuda (no corp tax)

• A 2nd Irish entity is created and the

1st one licenses company products to the
2nd entity

• The 2nd entity books sales in Europe and

includes royalty payment as cost to reduce
taxable income in Ireland Source: offshorecompany.com
 Closing Case: Google and its Tax Strategy
• Dutch sandwich
• 3rd entity created in Netherlands
• 1st one licenses company products
to the 3rd entity
• The 2nd entity books sales in the EU
and pays royalty to 3rd entity in
Netherlands, which in turn
passes them to 1st entity in
Bermuda
• Ireland does not impose any withholding Source: offshorecompany.com
tax as money moves within the EU
• Netherlands does not impose EU withholding tax for royalties going to Bermuda

• Questions:
• Is the practice ethical, and in the best interest of stakeholders?
• If no, how can these practices be outlawed globally?
• What does Bermuda gain from no corporate tax?
In Summary…Financial Management and IB
• In international capital budgeting the firm needs to recognize the specific risks arising
from the foreign location
• Political and economic risks (including forex risks)
• May be addressed by applying a higher discount rate or forecasting lower cash flows

• Cost of capital is generally higher in local capital markets and hence firms prefer to
finance their investments by borrowing from global capital markets
• Firms may want to use local capital markets if local currency is expected to depreciate

• Global money management = Utilize firm’s cash resources in most efficient manner
• Holding cash at a centralized depository reduces firm’s cash pool requirements
• Multilateral netting reduces the forex transaction costs

• Transfer funds across borders = {dividend remittance, royalty payments, transfer pricing,
fronting loans}

• Base Erosion and Profit Shifting = Mechanisms firms deploy to reduce total tax liability
 International Business

Sessions 14-15

CSR, Ethics and Sustainability in

International Business
How Do We Define Ethics?
• Ethics - accepted principles of right or wrong that govern
• The conduct of a person
• The members of a profession
• The actions of an organization

• Business ethics - accepted principles of right or wrong governing the

conduct of business people

• Ethical strategy - a strategy, or course of action, that does not violate

these accepted principles
Which Ethical Issues are Most Relevant to International
Firms?
• Employment practices

• Human rights

• Environmental pollution

• Corruption

• Moral obligations of multinational companies

How are Ethics Relevant to Employment Practices?
• Nike has been criticized for unacceptable employment practices in several
developing countries since 1990s and it continues to as recent as 2017
• Low wages, unhygienic working conditions, abuse
• Does not follow its own Code of Conduct at supplier locations
• Spends exorbitant amount on sponsoring Christiano Ronaldo and Tiger Woods!

• Suppose work conditions in a host nation are

clearly inferior to those in the MNC’s home
nation

• Which standards should apply?

• Home country standards
• Host country standards
• Something in between
Image Source: ohsoethical.website
How are Ethics Relevant to Employment Practices?
• Firms should

• Establish minimal acceptable standards that safeguard the basic rights and
dignity of employees

• Audit foreign subsidiaries and subcontractors regularly to ensure they are

meeting the standards

• Take corrective action as necessary

How are Ethics Relevant to Human Rights?
• Basic human rights are taken for granted in developed countries

• Freedom of association
• Freedom of speech
• Freedom of assembly
• Freedom of movement

• Question: What are the

responsibilities of firms
Unocal’s Yadana Gas Project in Myanmar:
in countries where basic The Military Govt. systematically violated human rights to
human rights are not arrange for land and labor to Unocal
respected? Unocal eventually had to compensate the Myanmar
citizens for a case against it in the US
Image Source: http://www.ens-newswire.com/ens/dec2004/2004-12-17-02.html
How are Ethics Relevant to Human Rights?
• Question: Is it ethical for companies to do business with countries
with repressive regimes?

• Myanmar

• Nigeria

• Question: Does multinational investment actually help bring change

to these countries and ultimately improve the rights of citizens?

• China
NGRBC 2018 (National Guidelines on Responsible Business
Conduct) in India
• http://www.mca.gov.in/Ministry/pdf/NationalPlanBusinessHumanRight_13022019.pdf

• In 2011 MCA issued National Voluntary Guidelines that encompass social, economic
and environmental responsibilities of businesses, including the activities in their value
chain

• Drivers of the 2018 NGRBC : UNGPs, SDGs, Paris Agreement on Climate Change
(2015),Core Conventions 138 (minimum age of employment of children) and Core
Convention 182 (worst forms of child labour) of the International Labour Organization,
the BRR framework, and the CA 2013

• State’s duty to protect human rights

• Corporate responsibility to respect human rights
• Access to effective remedies to business related human rights abuse
How are Business Ethics Relevant to Environmental
Pollution?
• Some parts of the environment are a public
good that no one owns, but anyone can
despoil

• What happens when environmental

regulations in host nations are far inferior to
those in the home nation?

• Is it permissible for multinationals to

pollute in developing countries simply
because there are no regulations against
it?
• Legal versus ethical behavior

Image Source: http://ohsoethical.website/category/expose/

Tragedy of Commons
• Occurs when a resource held in common by all, but owned by no one, is overused
by individuals, resulting in its degradation

• Externalizing the cost, internalizing

the gain

• Remedy?
• Privatization of common with incentives to
maintain it
• Environmental taxation
• Government regulation and stricter management
by the state

Image Source: sustainable-environment.uk

How are Business Ethics Relevant to Corruption?
• The U.S. Foreign Corrupt Practices Act outlawed the practice of paying
bribes to foreign government officials in order to gain business
• Amended to allow for facilitating payments

• The Convention on Combating Bribery of Foreign Public Officials in

International Business Transactions was adopted by the Organization
for Economic Cooperation and Development (OECD)

• Obliges member states to make the bribery of foreign public officials a

criminal offense
How are Business Ethics Relevant to Corruption?
• But, is it permissible for multinationals to pay government officials
facilitating payments if doing so creates local income and jobs?

• Is it ok to do a little evil in order to do a greater good?

• Does grease money actually improve efficiency and help growth?

How are Business Ethics Relevant to Moral Obligations?
• Social responsibility refers to the idea that managers should consider
the social consequences of economic actions when making business
decisions

• There should be a presumption in favor of decisions that have both good

economic and good social consequences
• It is the right way for a business to behave
How are Business Ethics Relevant to Moral Obligations?
• Advocates argue that businesses need to recognize their noblesse
oblige - honorable and benevolent behavior that is the responsibility
of successful companies

• Give something back to the societies that have made their success possible

• But, are multinationals morally required to use their power to

enhance local welfare?
What are Ethical Dilemmas?
• Ethical dilemmas - situations in which none of the available
alternatives seems ethically acceptable

• Real-world decisions are complex, difficult to frame, and involve

consequences that are difficult to quantify

• The ethical obligations of an MNE toward employment conditions, human

rights, corruption, environmental pollution, and the use of power are not
always clear cut
• The right course of action is not always clear
Why Do Managers Behave Unethically?

1. Personal ethics - the generally accepted principles of right and

wrong governing the conduct of individuals

• Expatriates may face pressure to violate their personal ethics because

they are away from their ordinary social context and supporting culture

• Managers fail to question whether a decision or action is ethical, and

instead rely on economic analysis when making decisions
Why Do Managers Behave Unethically?
2. Decision-making processes - the values and norms that are shared
among employees of an organization

• Organization culture that does not emphasize business culture encourages

unethical behavior

3. Organization culture - organization culture can legitimize unethical

behavior or reinforce the need for ethical behavior

4. Unrealistic performance expectations - encourage managers to cut

corners or act in an unethical manner
Why Do Managers Behave Unethically?
5. Leadership - helps establish the culture of an organization, and set
the examples that others follow

• When leaders act unethically, subordinates may act unethically, too

6. Societal culture – firms headquartered in cultures where

individualism and uncertainty avoidance are strong are more likely
to stress ethical behavior than firms headquartered in cultures
where masculinity and power distance rank high
Why Do Managers Behave Unethically?
The job market of the 21st century is often referred to as the “gig economy.” Employers such as
Uber, Amazon, Airbnb, and others are increasingly relying on short-term freelance employees
who work on a piecemeal basis.

Proponents of the gig economy suggest it offers workers the freedom to work where and
when they want, while employers can reduce labor costs by avoiding health insurance and
payroll taxes. Others suggest that businesses are simply taking advantage of a tough economy
to cut benefits and offer lower wages to people desperate for work.

If you were the head of a large corporation, would you consider it ethical to profit from the gig
economy?
How Can Managers Make Ethical Decisions?
1. Hire and promote people with a well- grounded sense of personal
ethics

• Refrain from promoting individuals who have acted unethically

• Try to hire only people with strong ethics

• Prospective employees should find out as much as they can about the
ethical climate in an organization prior to taking a position
How Can Managers Make Ethical Decisions?
2. Build an organizational culture that places a high value on ethical
behavior

• Articulate values that place a strong emphasis on ethical behavior

• Emphasize the importance of a code of ethics - formal statement of the

ethical priorities a business adheres to

• Implement a system of incentives and rewards that recognize people who

engage in ethical behavior and sanction those who do not
How Can Managers Make Ethical Decisions?
3. Make sure that leaders within the business articulate the rhetoric
of ethical behavior and act in a manner that is consistent with that
rhetoric

• Give life and meaning to words

• Make sure that leaders emphasize the importance of ethics verbally and
through their actions
How Can Managers Make Ethical Decisions?
4. Put decision-making processes in place that require people to
consider the ethical dimensions of business decisions

• Ask whether
• Decisions fall within the accepted values of standards that typically apply in the
organizational environment

• Decisions can be communicated to all stakeholders affected by it

• If colleagues would approve of decisions

How Can Managers Make Ethical Decisions?
• Managers can also use a five-step process to think through ethical
problems:

Step1: Identify which stakeholders (the individuals or groups who have

an interest, stake, or claim in the actions and overall performance of a
company) a decision would affect and in what ways
• Internal stakeholders are people who work for or who own the business
such as employees, the board of directors, and stockholders

• External stakeholders are the individuals or groups who have some

claim on a firm such as customers, suppliers, and unions
How Can Managers Make Ethical Decisions?
Step 2: Determine whether a proposed decision would violate the
fundamental rights of any stakeholders

Step 3: Establish moral intent - place moral concerns ahead of other

concerns in cases where either the fundamental rights of
stakeholders or key moral principles have been violated
How Can Managers Make Ethical Decisions?
Step 4: Engage in ethical behavior

Step 5: Audit decisions and review them to make sure that they are
consistent with ethical principles

• This step is often overlooked even though it is critical to finding out

whether a decision process is working
How Can Managers Make Ethical Decisions?
5. Develop moral courage
• Enables managers to walk away from a decision that is profitable, but
unethical

• Gives an employee the strength to say no to a superior who instructs her to

pursue actions that are unethical

• Gives employees the integrity to go public to the media and blow the
whistle on persistent unethical behavior in a company
How Can Managers Make Ethical Decisions?
• In the end, there are clearly things that an international business
should do, and there are things that an international business should
not do

• But, it is important to remember that not all ethical dilemmas have a

clean and obvious solution

• In these situations, firms must rely on the decision-making ability of its

managers
Own an iPhone? Got a Story to Tell?
• Apple owes its first iPhone success story to Chinese workers!

• https://www.nytimes.com/2012/01/22/business/apple-america-and-a-
squeezed-middle-class.html?_r=2&ref=charlesduhigg&pagewanted=all

• Plastic screen vs. Corning Gorilla glass screen

• Precision technology to cut glass sheet for iPhones

• Putting it on a large number of iPhones in short notice

• One million iPhones were sold in 2007

Image Source: inc.com
Case - Apple and its Suppliers: CSR
• Context
• https://www.ign.com/videos/2015/7/22/apples-broken-promises-pcmag-gr

• Question
• Examine the ethical challenges faced by a company operating globally
and develop solutions

• What are the dimensions of the challenges faced by Apple and its suppliers?

• How do executives at Apple, a highly valued organization, carry out the

company’s corporate social responsibilities?

• How should a firm manage CSR across organizational and institutional

boundaries?
Balancing Act of a CEO: Purpose vs. Profit
• https://ig.ft.com/esg-purpose-profit-game/
In Summary…
• Business Ethics == Accepted principles of right or wrong, that govern the
conduct of an individual, group, or organization in business / org. activities
• Ethical issues in international business = f (variation among political
systems, law, economic development and culture among nations)
• Common ethical issues ➔ Employment practices, human rights, environmental
regulations, corruption, social responsibility
• Practitioners should
• Favor hiring and promoting people with well-grounded sense of personal ethics
• Build an organizational culture and demonstrate exemplary behaviors
• Decision-making process should factor in ethical dimension of the decision
• Establish a role of ethics officer, with responsibility for ethical decision-making
• Be morally courageous and encourage others to be so
• Make CSR a cornerstone of enterprise policy
• Pursue strategies that are sustainable
 International Business

Sessions 14-15

A Brief Look at the Simulation Case

Production
• The company has 9 ready factories in India and 1 under construction in Europe

• Following an initial expansion, company’s own production can still barely cater to
demand

• To alleviate the situation, we have decided to outsource some production capacity

• But the company has been too cautious in trying to maintain minimum inventories, and
consequently have seen some unsatisfied demand
Production
• Production costs are generally lower in India than in Europe

• However, as we only recently expanded production to Europe, the administration costs

there are relatively higher for the time being

• Features carry their own costs and can become a sizable portion of the final unit cost

• Also, the factory investment costs are a significant part of the total costs

• The investment cost of building a factory is higher in Europe compared to India and so
are the associated plant administration costs
Sales, Marketing and Market Areas
• Overall market demand is still growing, with Europe holding the largest market size –
for the time being

• Market research indicates that Europe’s lackluster growth prospects will allow India
and South Korea to surpass Europe soon

• The most interesting market from a volume potential is India, which has the highest
growth rate

• Market signals are indicating that India’s car industry is finally witnessing the
infrastructural support needed for newer technologies and is starting to open up to
major investments in technology, making long-term market prospects look increasingly
promising
Sales, Marketing and Market Areas
• The markets differ in their technological preferences and expected market
developments
• Given the relatively cheaper price of gasoline in India, we can expect traditional combustion engine
vehicles and hybrids to hold their ground better there than in South Korea or Europe
• There are vast natural gas reserves in India, leaving a high probability of hydrogen vehicles gaining
ground in the future
• EU’s increased scrutiny towards emissions means there are indications of there being higher growth
prospects for electric and hydrogen-powered vehicles in Europe
• South Korea has a huge capacity for coal-fired electricity, providing a solid ground for meeting
electric vehicle demand

• The refueling and maintenance infrastructure for each powertrain technology is an

essential component of demand forecasting
• An inadequate charging infrastructure for electric vehicles leaves very little incentive to purchase an
EV
Sales, Marketing and Market Areas
•x
R&D
• The company is already well-versed in combustion engine technology

• We have also made some inroads into hybrid technology, but we have already missed
the first train to that market segment

• Electric vehicle technology is showing promising growth, whereas hydrogen remains

more uncertain

• Currently the R&D cost requirements for both electric vehicles and hydrogen vehicles
are relatively high, and the payback times for such investments are not overly
encouraging

• Nevertheless, we expect the general increase in know-how to change this situation

over time
Logistics and Transportation
• Our logistics network allows us to transport our products to all three market regions

• Transportation costs and tariffs between one region and another can differ greatly
• This holds especially true for tariffs between the India and South Korea
Financial Management
• The whole industry is experiencing major changes and therefore larger-than-normal
investments are considered perfectly normal at present

• Our own finances are on a solid ground, which has allowed us to expand our horizons

• We’ve recently increased our R&D personnel capacity, and focused our efforts on
developing hybrid technology

• We have also begun construction on new manufacturing plants in both the India and
Europe, to cater to the increasing demand
Financial Management
• Besides using our current cash reserves for the research, we should also consider
additional financing from external sources

• The first-to-market strategy in a powertrain has the benefit of capturing larger market
shares, but the higher expenses can just as easily eat into profits

• We should make our R&D investment calculations and strategy decisions accordingly

• There is also the option to expand our manufacturing capacity in Europe keeping in
mind the transportation and tariffs along with currency fluctuation
Financial Management
• At the end of a financial year, the company must have a minimum INR 200000 K cash in
hand in each region. This is to ensure adequate working capital

• Failure to maintain this cash level, will result in a short-term loan in the respective
areas to ensure the minimum cash requirement is maintained

• Short term loans are tricky as they carry a high interest rate and must be paid back
immediately once cash is available with the company
Procurement
• The company has the option of choosing from 5 component suppliers

• The number of components sourced are equally distributed between the number of
suppliers chosen

• The component supplier costs are inclusive of logistics cost

• Each supplier is continuously trying to improve their sustainability processes

• Due to this the costs might increase in the future
• Sustainability rating and an ethical score which might be important to certain markets in the
long run

• The company needs to be very careful about the selection of suppliers as changing
suppliers in the middle have a significant cost involved
• Apart from a vendor due diligence study there are other associated costs
Transfer Pricing
• While determining transfer prices, multipliers (between 1 and 2) are applied to the
direct variable cost of production

• In practice, this means that the direct variable cost of production can be multiplied
with a number between 1 and 2 and the outcome is the transfer price

• When used wisely, these multipliers can also be used to benefit from differences in
corporate tax rates in different areas

• At a minimum, the company should use the multipliers to take benefit from any
accumulated losses that may have been created
Thank You
Appendix