Session 8 FDI: Foreign direct investment

Ý chính cần nắm:

1. Current trends
2. Theories of FDI
3. Political ideology
4. Benefits and costs
5. Policy instrument
6. Implications

Definition: Foreign direct investment (FDI) occurs when a firm invests directly in
facilities to produce or market a good or service in a foreign country.

1. Current trends

Form of FDI:

● GREENFIELD INVESTMENTS: involves the establishment of a new operation

in a foreign country.

Ex: Foxconn (invest 100% new)

● ACQUISITION Or MERGERS: involves acquiring or merging with an existing

firm in a foreign country.

Ex: Heineken

The direction of FDI (THE FLOW OF FDI)

● Outflow of FDI: are the flows of FDI out of a country.

ex: Thegioididong, Viettel,....

● Inflow of FDI: are the flows of FDI into a country.

ex: Samsung,....

● The stock of FDI: THE TOTAL accumulated value of foreign of foreign-

owned assets at a given

ex: equipment, machine, cash, product, human, manufacturing, buildings, time,

bonds, factories, AI, facilities,.....
● Gross fixed capital formation: the total amount of capital invested in
factories, stores, office buildings, and the like.
The source of FDI

● Transition (emerging) economies: Russia, China,

● The United States has consistently been the largest source country for FDI
● Other important source countries include the United Kingdom, France,
Germany, the Netherlands, and Japan

Q: WHY DO FIRMS CHOOSE ACQUISITION VS GREENFIELD INVESTMENTS?

firms prefer to acquire existing assets because:
 ● quicker
● less risky
● efficiency.. Transferring

The growth of FDI is a result of

- A fear of protectionism: want to circumvent trade barriers

- Political and economic changes: deregulation, privatization, fewer
restrictions on FDI
- New bilateral investment treaties: designed to facilitate investment
- Globalization of the world economy: many companies now view the world
as their market needs to be closer to their customers.

2. Theories of FDI:
Exporting involves producing goods at home and then shipping them to the
receiving country for sale
Licensing involves granting a foreign entity (the licensee) the right to produce and
sell the firm’s product in return for a royalty fee on every unit sold.
Q: Why does FDI occur instead of exporting and licensing?
→ the limitations of exporting and licensing as means for capitalizing on foreign
market opportunities
- Exporting can be limited by transportation costs and trade barriers
- While FDI maybe response to actual or threatened trade barriers such as
import tariffs or quotas

Licensing- International theory

- International theory (market imperfections theory)- compared to FDI
licensing is less attractive
● Firm could give away valuable technological know-how to a
potential foreign competitor.
● Does not give a firm the control over manufacturing,
marketing, and strategy in the foreign country
● The firm’s competitive advantage may be based on its
management, marketing, and manufacturing capabilities.
Limitations of Licensing
● licensing may result in a firm’s giving away valuable technological know-
how to a potential foreign competitor.
● licensing does not give a firm the tight control over manu- facturing,
marketing, and strategy in a foreign country that may be required to
maximize its profitability
● such capabilities are often not amenable to licensing.

THE ECLECTIC PARADIGM

● location-specific advantages : utilizing resource endowments or assets that

are tied to a particular foreign location and that a firm finds valuable to
combine with its own unique assets (such as the firm’s technological,
marketing, or manage- ment capabilities)
● externalities : firms can benefit from such ex- ternalities by locating close
to their source.
 3. Political ideology (WHAT ARE THE THEORETICAL APPROACHES TO FDI? )
● The radical view: see the MNE as a tool for exploiting host countries to the
exclusive benefit of their capitalist-imperialist home countries.
● The free market view: MNE is an instrument for dispersing the production
of goods and services to the most efficient locations around the globe
(comparative advantage:low labor cost, skilled human)
● pragmatic nationalism: FDI can benefit a host country by bringing capital,
skills, technology, and jobs, but those benefits come at a cost
● the free market stance creating
4. Benefits and costs of FDI

**BENEFITS OF BRING FDI TO VIETNAM: more money, employment, opportunity....

● for host and home country????

HOW DOES FDI BENEFIT THE HOST COUNTRY?

- Resource transfer effects: FDI brings capital, technology, and management
resources.
- Employment effects: FDI can bring jobs.
- Balance of payments effects: FDI can help a country to achieve a current
account surplus
- Effects on competition and economic growth: greenfield investments
increase the level of competition in a market, driving down prices and
improving the welfare of consumers
● Competition market can lead to increased productivity growth,
product and process innovation, and greater economic growth.

WHAT ARE THE COST FOR THE HOST COUNTRY? Inward FDI has three main costs?

- Adverse effects of FDI on competition within the host nation: subsidiaries

of foreign MNEs may have greater economic power than indigenous
competitors because they may be part of a larger international organization.
- Adverse effects on the balance of payments: when a foreign subsidiary
imports a substantial number of its inputs from abroad, there is a debit on
the current account of the host country’s balance of payments
- Perceived loss of national sovereignty and autonomy: decisions that affect
the host country will be made by a foreign parent that has no real
commitment to the host country, and over which the host country’s
government has no real control.

HOW DOES FDI BENEFIT THE HOME COUNTRY?

- Balance payment: The effect on the capital account of the home country’s
balance of payments from the inward flow of foreign earnings.
- Employment effect: The employment effects that arise from outward FDI
- Learning valuable skills: the gains from learning valuable skills from foreign
markets that can subsequently be transferred back to the home country.

WHAT ARE THE COST FOR THE HOME COUNTRY?

- The home-country’s balance of payments can suffer:

○ From the initial capital outflow required to fiance the FDI
 ○ If the purpose of the FDI is to serve the home market from a low
cost labor location
○ If the FDI is a substitute for direct exports
- Employment may also be negatively affected if the FDI is a substitute for
domestic production
○ But, international trade theory suggests that home-country concerns
about the negative economic effects of offshore production (FDI
undertaken to serve the home market) may not be valid
○ May stimulate economic growth and employment in the home
country by freezing resources to specialize in activities where the
home country has a comparative advantage.

GOVERNMENT (How does the government influence FDI?)

- Encourage outward FDI
- Encourage inward FDI
○ Offer incentives to foreign firms to invest in their countries
○ Gain from the resource-transfer and employment effects of FDI, and
capture FDI away from other potential host countries.
- Restrict outward FDI
- Restrict inward FDI: use ownership restraints and performance
requirements.
But, international trade theory suggests that home-country concerns about the
negative economic effects of offshore production (FDI undertaken to serve the
home market) may not be valid
- May stimulate economic growth and employment in the home country by
freeing resources to specialize in activities where the home country has a
comparative advantage

WHAT DOES FDI MEAN FOR MANAGERS?

- Managers need to consider what trade theory implies about FDI, and the
link between government policy and FDI
- The direction of FDI can be explained through the location-specific
advantages arguments associated with John Dunning
- however , it does not explain why FDI is preferable to exporting or
licensing, must consider internalization theory
- A host government’s attitude towards FDI is important in decisions about where to
locate foreign production facilities and where to make a foreign direct investment
- Firms have the most bargaining power when the host government values
what the firm has to offer, when the firm has multiple comparable
alternatives, and when the firm has a long time to complete negotiations.

*Quotas: number of things you export to

Session 8: Chapter 12: Global Capital Market

Key point
 ● Who are the main player in capital markets
● What are the risks of global capital markets ?
● What is Eurocurrency
● What is global bond market
● What do global capital markets mean for managers ?

1. Benefits of the global capital market

a. Function

Capital markets (Thị trường vốn): bring together those who want to invest money and those who
want to borrow money.

Investor: Those who want to invest money include corporations with surplus cash, individuals, and
nonbank financial institutions

Ex: corporations with surplus cash, individuals, and nonbank financial institutions, etc.

Market makers: are the financial service companies that connect investors and borrowers

Ex: Commercial banks, Investment banks.

Borrowers: Those who want to borrow money include individuals, companies, and governments.

Ex: Individual, companies, Government.

Commercial banks take cash deposits from corporations and individuals and pay them a rate of
interest in return. They then lend that money to borrowers at a higher rate of interest, making a profit
from the difference in interest rates

Capital market include debt market and equity market

Capital market loans to corporations are either equity loans or debt loans.

An equity loan is made when a corporation sells stock to investors. The company or the lender have
to pay dividends to the stockholders. Ultimately, the corporation honors this claim by paying
dividends to the stockholders. (trả cổ tức theo kỳ)

Stock prices increase when a corporation is projected to have greater earnings in the future, which
increases the probability that it will raise future dividend payments.
A debt loan requires the corporation to repay a predetermined portion of the loan amount (the sum of
the principal plus the specified interest) at regular intervals regardless of how much profit it is
making. The maturity period of debt loans vary from the very long term (Phải trả nợ bao gồm số tiền
gốc và lãi suất)

b. What makes the global capital market attractive ?

+ Interconnected: capital markets are highly interconnected and facilitate the free flow of
money around the world.

+ Lowers the cost of capital: borrowers benefit from the additional supply of funds global
capital markets provide.

+ Investment opportunities: Wider range of investment opportunities

-> Diversify portfolio and lower risk

+ Volatile exchange rate: Can make what would otherwise be profitable investment,
unprofitable.

Cost of capital: The price of borrowing the money or the rate of return that borrowers pay investors

c. The Growth of Global capital markets

Advance information technology: the growth of international communications technology and

advances in data processing capabilities
+ 24/24 trading
+ Financial market spread quickly

Deregulation by governments: Government traditionally limited foreign investment and the amount
of foreign investment citizens could make. Since the 1980s, the restrictions have been falling.

Ex: Viet Nam has lifted the general cap limitation on the ownership by foreign investors in public
offering of securities.

Financial regulation related to:

+ Conduct and culture
+ Technology regulation
+ Governance
+ Doing right by customer
● Privacy and data usage
● Artificial intelligent
● Cyber risk management

2. Risks of Global Capital Market

Some are concerned that due to deregulation and reduced controls on cross border capital flows,
individual nations are becoming more vulnerable to speculative capital flows.
-> having a destabilizing effect on national economies.

Speculative capital flows (Dòng vốn đầu cơ) may be the result of inaccurate information about the
investment opportunities *

A lack of information about the fundamental quality of foreign investments may encourage
speculative flows in the global capital market.

Faced with a lack of quality information, investors may react to dramatic news events in foreign
nations and pull their money out too quickly.

If global market continue to grow better quality information is likely to be available from financial
intermediaries

3. What is Eurocurrency

- A Eurocurrency is any currency bank outside its country of origin

- The eurocurrency is an important source of low cost funds for international companies

- About two-thirds of eurocurrencies are eurodollar (Dollar bank outside the US)

- Other important eurocurrencies are euro-yen, euro-pound, and euro-euro.

Why has the Eurocurrency market grown ?

The Eurocurrency market began in the 1950s when the Eastern bloc countries feared that the US
might seize their dollars

What makes the eurocurrency market attractive?

The main factor that makes the Eurocurrency market attractive to both depositors and borrowers is its
lack of government regulation.
-> This is why Eurocurrency still trendy today

What makes the Eurocurrency market unattractive

Eurocurrency market is unregulated: Higher risk that bank failure could cause depositors to lose
funds

Foreign exchange risk (rủi ro hối đoái): Companies borrowing Eurocurrencies can be exposed to
foreign exchange risk

5. What is the the global bond market

Bonds are an important means of financing for many companies

The most common bond is a fixed rate which gives investors fixed cash payoff

The global market grew rapidly during the 1980s and 1990s and countries to do so the 20th century

There are two types of international bonds

Foreign bond: are sold outside the borrower’s country and are denominated in the currency of the
country in which they are issued
Eurobonds: are the underwritten by a syndicate of banks and placed in countries other than the one in
whose currency the bond is denominated

It lacks regulatory interference: government limitations are generally less stringent for securities
denominated in foreign currencies and sold to holders of those foreign currencies.

Less Stringent disclosure requirement: Eurobond market disclosure requirements tend to be less
stringent than those of several national governments.

More favorable from tax perspective: The consequence was an upsurge in demand for Eurobonds
from investors who wanted to take advantage of their tax benefits

6. What is the global equity market ?

The Global equity market allows firms to:

By issuing stock in other countries, firms open the door to raising capital in the foreign market

Give the firm the option of compensating local managers and employees with stock

Provides for local ownership

Increases visibility with local stakeholders

How do exchange rates affect the cost of capital ?

Adverse exchange rates can increase the cost of foreign currency loans

It may be less attractive when exchange - rate risk is factored in when borrow foreign currencies

Firms must weigh the benefits of a lower interest rate against the risk of an increase in the real cost of
capital

What do global capital markets mean for managers ?

Growth in global capital markets has created opportunities for firms to borrow or invest
internationally

Growth in capital markets offers opportunities for firms, institutions, and individuals to diversify their
investments and reduce risk

Capital markets are likely to continue to integrate providing more opportunities for business.

Session 9 - Chapter 10: Foreign Currency exchange

1. The foreign exchange market in modern society

a) Definition → Answer the question “Why is the foreign exchange market

important?”

“The foreign exchange market”:

- Is used to convert the currency of one country into the currency of another.

- Provide insurance against foreign exchange risk (the adverse consequences of

unpredictable changes in exchange rate).
“The exchange rate”: The rate at which one currency is converted into another.

→ Affect firm sales, profits, and strategy.

b) When do firms use the foreign exchange market?

International companies use the foreign exchange market when:

- The payment for export, the income from FDI, or the income from licensing agreements with
foreign firms are in foreign currencies.

- They must pay a foreign company for its products or services in its country’s currency.

- They have spare cash that they wish to invest for short terms in money markets.

- They are involved in currency speculation (the short term movement of funds from one
currency to another in the hopes of profiting from shifts in exchange rate).

2. Insuring against foreign exchange risk

The possibility that unpredicted changes in future exchange rates will have adverse consequences for
the firms.

a) How can firms hedge against foreign exchange risk (unpredicted changes)?

→ The foreign exchange market provides insurance to protect against foreign exchange risk.

b) Overview of “Foreign exchange rate”

- Spot exchange rate: The current price level in the market to directly exchange one currency
for another.

+ Rate on particular day

+ Any parties (tourist)

- Forward exchange rate: The rate of exchange, agreed upon now, for a foreign exchange
market transaction that will occur at a specified date in the future.

+ Rate at some specific day in the future

+ Between importers/exporters; traders

- Currency swap: The simultaneous purchase and sale of a given amount of foreign exchange
for two different value dates.
 c) What is the difference between spot rates and forward exchange rates?

- Spot exchange rates:

+ Change continually depending on the demand and supply for that currency and other
currencies.

+ A foreign exchange dealer converts one currency into another on a particular day.

+ Can be quoted as the amount of foreign currency one US dollar can buy, or as the
value of a dollar for one unit of foreign currency.

- Forward exchange rates:

+ To insure or hedge against a possible adverse foreign exchange rate movement, firms
engage in forward exchange.

→ Two parties agree to exchange currency and execute the deal at some specific

date in the future.

+ The rate used for these transactions.

→ Typically quoted for 30, 90, or 180 days into the future.

Ex: US Importer and Japan

High-end camera Supplier.

d) What is a

→ The simultaneous purchase and sale of a given amount of foreign exchange for two different value
dates.

- Swap are transacted between:

+ International business and their banks

 + Banks

+ Governments

Ex:

- Apple assembles laptop computers in the US, but the screens are made in Japan.

- Apple sells some finished laptops in Japan.

3. What is the nature of the foreign exchange market?

→ The foreign exchange market is a global network of banks, brokers, and foreign exchange

dealers connected by electronic communications systems.

 - It never sleeps.

- The most important trading centers: London, NewYork, Zurich, Tokyo, and Singapore.

- The average total value of global foreign exchange trading in March, 1986 was just $200
billion; in April, 2010 it hit $4 trillion/day.

a) Do exchange rates differ between markets?

- No significant difference between exchange rates in the different trading centers.

Ex: In London, at 3 p.m., $1 = ¥120 → In New York, at the same time (10 a.m. local time), $1 =
¥120

- If exchange rates quoted in different markets were not essentially the same, there would be an
opportunity for arbitrage.

Ex: In London, at 3 p.m., $1 = ¥120, but in New York, at the same time (10 a.m. local time), $1 =
¥125

→ Arbitrage (buy low sell high)

→ Demand for Yen currency in NewYork increases, resulting in the appreciation of the Yen

against the dollar.

→ The price difference between New York and London would quickly disappear.

- Most transactions involve dollars on one side (it is a vehicle currency).

+ 85% of all foreign exchange transactions involve the US dollars.

+ Other vehicle currencies: the EURO, the Japanese YEN, and the British POUND.

+ China’s renminbi is still only used for about 0.3% of foreign exchange transactions.

b) How are exchange rates determined?

→ Exchange rates are determined by the demand and supply for different currencies.

- 3 factors impact future exchange rate movements:

+ A country’s price inflation

+ A country’s interest rate

 + Market psychology

c) How do prices influence exchange rates?

- Purchasing power parity (PPP) argues that given relatively efficient markets, the price of a
“basket of goods” should be roughly equivalent to each country.

→ Predict that changes in relative prices will result in a change in exchange rates.

- Purchasing power parity (PPP):

+ An economic theory that allows the comparison of the purchasing power of various
world currencies to one another.

+ It is a theoretical exchange rate that allows you to buy the same amount of goods
and services in every country.

d) How well does PPP work?

- It is most accurate in the long run, and for countries with high inflation and underdeveloped
capital markets.

- It is less useful for predicting short term exchange rate movements between the currencies
of advanced industrialized countries that have relatively small differences in inflation rates.

e) How do interest rates influence exchange rates?

- The International Fisher Effect (IFE) states that for any two countries the spot exchange rate
should change in an equal amount but in the opposite direction to the difference in nominal
interest rates between two countries.

- In other words: [(S1 - S2) / S2] * 100 = i$ - i¥

+ i$ and i¥ are the respective nominal interest rates in 2 countries (US and Japan).

+ S1 is the spot exchange rate at the beginning of the period.

+ S2 is the spot exchange rate at the end of the period.

f) How does investor psychology influence exchange rates?

- The Bandwagon effect with traders moving as a herd in the same direction at the same time.
 - The Bandwagon effect occurs when expectations on the part of traders turn into self-fulfilling
prophecies - traders can join the bandwagon and move exchange rates based on group
expectations.

- Investor psychology and bandwagon effects greatly influence short term exchange rate
movements.

- Government intervention can prevent the bandwagon from starting, but is not always
effective.

g) Should companies use exchange rate forecasting services?

There are two schools of thought:

- Efficient market:

+ Forward exchange rates do the best possible job of forecasting future spot exchange
rates, and, therefore, investing in forecasting services would be a waste of money.

+ If the foreign exchange market is efficient, then forward exchange rates should be
unbiased predictors of future spot rates.

→ Prices reflect all available information.

- Inefficient market:

+ Companies can improve the foreign exchange market’s estimate of future exchange
rates by investing in forecasting services.

+ Forward exchange rates will not be the best possible predictors of future spot
exchange rates and it may be worthwhile for international businesses to invest in
forecasting services.

+ However, the track record of professional forecasting services is not that good.

→ Prices do not reflect all available information.

h) How are exchange rates predicted?

- Fundamental analysis: Economic factors like interest rates, monetary policy, inflation rates,
or balance of payments information to predict exchange rates.

- Technical analysis: Charts trends with the assumption that past trends and waves are
reasonable predictors of future trends and waves.
 i) Are all currencies freely convertible?

- Freely convertible: When a government of a country allows both residents and non-residents
to purchase unlimited amounts of foreign currency with domestic currency.

- Externally convertible: When non-residents can convert their holdings of domestic

currency into a foreign currency, but when the ability of residents to convert currency is
limited in some way.

- Non-convertible: When both residents and non-residents are prohibited from converting
their holdings of domestic currency into a foreign currency.

→ Most countries today practice free convertibility, but many countries impose restrictions on

the amount of money that can be converted.

→ Countries limit convertibility to preserve foreign exchange reserves and prevent capital flight.

→ When a currency is non-convertible, firms may turn to countertrade: Barter-like agreements; it

was common in the past when more currencies were non-convertible, but today involves less than
10% of world trade.

4. What do exchange rates mean for managers?

Managers need to consider 3 types of foreign exchange risk:

- Transaction exposure:

+ The extent to which the income from individual transactions is affected by

fluctuations in foreign exchange values.

+ Includes obligations for the purchase or sale of goods and services at previously
agreed prices and the borrowing or lending of funds in foreign currencies.

- Translation exposure:

+ The impact of currency exchange rate changes on the reported financial statements of
a company.

+ Concerned with the present measurements of past events.

+ Gains or losses are “paper losses”.

+ They are unrealized.

 - Economic exposure:

+ The extent to which a firm’s future international earning power is affected by changes
in exchange rates.

+ Concerned with the long-term effect of changes in exchange rates on future prices,
sales and costs.

a) How can managers minimize exchange rate risk?

To minimize transaction and translation exposure, managers should:

- Buy forward

- Use swaps

- Lead and lag payables and receivables

+ Lead strategy: Collect foreign currency receivables early when it is expected to

depreciate. Pay foreign currency payables before the due date when it is expected to
appreciate.

+ Lag strategy: Delay collection of foreign currency receivables when it is expected to

appreciate. Delay payables if the currency is expected to depreciate.

To reduce economic exposure, managers should:

- Distribute productive assets to various locations so the firm’s long-term financial well-being
is not severely affected by changes in exchange rates.

- Ensure assets are not too concentrated in countries where likely rises in currency where likely
rises in currency values will lead to increase in the foreign prices of the goods and services
the firm produces.

In general, managers should:

- Have central control of exposure to protect resources efficiently and ensure that each subunit
adopts the correct mix of tactics and strategies.

- Distinguish between transaction and translation exposure on the one hand, and economic
exposure on the other hand.

- Attempt to forecast future exchange rates

 - Establish good reporting systems so the central finance function can regularly monitor the
firm’s exposure position.

- Produce monthly foreign exchange exposure reports.

5. Summary

- FEM functions: Currency conversations/Insurance.

- The spot exchange rate/The forward exchange rates/Currency swap.

- The law of one price/Purchasing power parity (PPP).

- Exchange rate forecasting.

- Exposure to foreign exchange risk.

Session 9 - Chapter 11: international Monetary system

I. What is the Monetary system
1. The monetary system refers to the institutional arrangement that country adopt to
govern exchange rates
2. A floating exchange rate system exist when a country allow foreign exchange
market to determine the relative value of a currency
→ Value of these currencies are determined by market force: The exchange rate
is determined by the equilibrium of supply and demand
3. The international monetary system
What is the international monetary system:
- Pegged exchange rate system: A value of a currency is fixed to a reference
currency. Ex: Iraq, Jordan use the U.S dollar as a currency pegged
+ Popular among the world’s smaller nations
+ Imposes monetary discipline and leads to lơ inflation
+ Adopting a pegged exchange rate regime can moderate inflationary
pressures in a country
- A dirty float(or manage float): A value of a currency is within a range of a reference
currency. Ex: Afghanistan, Algeria, Argentina, Armenia, Burundi, Cambodia,
Colombia, Croatia.
- A fixed exchange rate system: Many countries fixed their currency value at a
mutually agreed exchange rate. Ex: Fiji, Kuwait, Morocco, and Libya
II. The history of monetary system
1. The gold standard
The gold standard is when a country peg their currency to gold and guarantee convertibility
+ In the 1880s, most nations followed the gold standard
$1 = 23022 grains of “fine” (pure) gold
→ Can achieve balance of trade equilibrium
- The gold standard worked well from the 1870s until 1914.
+ But, many governments financed their World War I expenditures by
printing money and so, created inflation
- People lost confidence in the system
+ The demand on gold for their currency put pressure on countries' gold
reserves and forced them to suspend gold convertibility
- By 1939, the gold standard was dead
2. The Bretton Woods system (1994)
- A fixed exchange rate system was established
- All currencies were fixed to gold, but only the U.S. dollar was directly convertible
to gold
- Devaluations could not be used for competitive purposes.
- A country could not devalue its currency by more than 10% without IMF approval

+ Devaluation is when a country make it’s currency cheaper in order to sustain

a fixed exchange rate

- And there at Bretton Wood the IMF (International Monetary Fund) and the world
bank was found
+ The IMF focuses on lending money to countries in financial crisis. There are
three main types of financial crises: Currency crisis, Baking crisis and Foreign
debt crisis
+ The World Bank promote general economic development

- The Bretton Wood system collapse

+ Bretton Woods worked well until the late 1960s
+ Ie collapsed when huge increases in welfare programs and the Vietnam
war were financed by increasing the money supply and causing significant
inflation
Other countries increased the value ò their currencies relative to
the U.S. dollar in response to speculation the dollar would be devalued
 3. The Jamaica agreement
Under the Jamaican agreement
- Floating rates were declared acceptable
- Gold was abandoned as a reserve asset
- Total annual IMF quotas - the amount member countries contribute to the IMF - were
increased to $41 billion - today they are about $767 billion
4. What happen to exchange rate since 1973 (Timeline)

5. What is better Fixed rate or Float rate

Floating exchange rates provide
- Monetary policy autonomy
- Automatic trade balance adjustments
- Help countries recover from financial crises
Fixed exchange rate system
- Provides monetary discipline
- Minimizes speculation
- Reduces uncertainty

6. What type of exchange rate for today

 7. What does the monetary system mean for manager
Currency management
- The current system is a managed float - government intervention can influence
exchange rates
+ Speculation can also create volatile movements in exchange rates
Business strategy
- Business strategy - exchange rate movements can have a major impact on the
competitive position of businesses
+ Need strategic flexibility
Corporate - Government relations
- Corporate - government relations - businesses can influence government policy
towards the international monetary system
+ Companies should promote a system that facilitates international growth and
development
 SESSION 10:
Production Processes
Operations: supplies, inventory, process, logistics
• Supply chain management –cost, reliability; sometimes speed
• Inventory management may be subsumed into the supply chain management
and even reduced to near zero. However: materials & parts, semi-finished,
finished products inventories.
• ProSupply chain management –cost, reliability; sometimes speed
• Inventory management may be subsumed into the supply chain management
and even reduced to near zero. However: materials & parts, semi-finished,
finished products inventories.
• Processes vary (see next slides)
• Logistics = movement of material items into process, through process, and out of
process. See cesses vary (see next slides)
• Logistics = movement of material items into process, through process, and out of
process. See
Business schools classify manufacturing process in this way:

Job (surgical operations, container ship)

Batch (bread, medical drugs e.g. capsule and pills, software)
Flow chain (automobile, laptop assembly)
Flow processing (refining such as petroleum, sugar)

Why do business schools classify manufacturing processes in that way?

Because the economics are different in each case.
The two flow production systems are particularly significant because of their scale
economies.

How do you choose the location of your production?

you want to minimize costs and maximize quality.
For example:
Quality:
Materials locally available
Skill of the local workforce
Costs:
Infrastructure to transport supplies, produce
Labor
Local materials and energy
If you are acquiring or outsourcing, technology can affect both costs and quality.
Scale also probably would affect costs, but you would be negotiating the price, not
the costs of your potential source.

How do you choose the location of your production?

A more complicated list of localization factors
Raw Materials, energy and (often) water
Client markets
Labour skill and cost (partly indicated by competitiveness index, in part industry
dependent)
logistics and infrastructure: physical transport, communications, bureaucratic/digital
support
Ease of doing business
Choice between manufacture or buy own factory: terms of FDI
Supplier factory: enforceability of contracts (ease of doing business)
Support industries and even "rivals" (as they can provide information, labor and help
develop local industry)
Meteorological (depending on process) climate
Political (stability) climate.
Weight losing versus weight gaining production.

MACDONALD’S SLIDE

OPERATIONS AND MANUFACTURE

DISTRIBUTE
1. Manufacture vs services and AFF
2. Operations: supplies, inventory, process, logistics
● Supply chain management –cost, reliability; sometimes speed
● Inventory management may be subsumed into the supply chain management
and even reduced to near zero. However: materials & parts, semi-finished,
finished products inventories.
● Processes vary
● Logistics = movement of material items into process, through the process, and
out of the process. See https://www.youtube.com/watch?
v=erS2YMYcZO8&t=140s (Quá trình vận chuyển materials quay phim cho End Game, có các thủ tục làm
giấy tờ để thông hành đến địa điểm, khảo thí khu vực và pick out địa điểm thuận lợi cho lưu thông và vận chuyển
materials qua lại các địa điểm quay dựng)

3. Manufacturing process categories 4

 ● Business schools classify the manufacturing process in this way
https://youtu.be/ZQ0m2dmLLcM
1. Job (surgical operations, container ship)
2. Batch (bread, medical drugs e.g. capsule, and pills, software)
3. Flow chain (automobile, laptop assembly) > FLOW PRODUCTION
4. Flow processing (refining such as petroleum, sugar) > PROCESS PRODUCTION

4. Manufacturing process categories 5

● Why do business schools classify manufacturing processes in that way?
> Because the economics are different in each case.
● The two flow production systems are particularly significant because of their
scale economies.

You want to minimize costs and maximize quality.

Quality: Costs:
● Materials locally available ● Infrastructure to transport supplies,
● The skill of the local workforce produce
● Labor
● Local materials and energy

> If you are acquiring or outsourcing, technology can affect both costs and quality. Scale
also probably would affect costs, but you would be negotiating the price, not the costs
of your potential source.

How do you choose the location of your production?

A more complicated list of localization factors
● Raw Materials, energy, and (often) water
● Client markets
● Labour skill and cost (partly indicated by competitiveness index, in part industry
dependent)
● Logistics and infrastructure: physical transport, communications,
bureaucratic/digital support
● Ease of doing business
● The choice between manufacture or buy own factory: terms of FDI
● Supplier factory: enforceability of contracts (ease of doing business)
 ● Support industries and even "rivals" (as they can provide information, labor and
help develop local industry)
● Meteorological (depending on the process) climate
● Political (stability) climate.
● Weight losing versus weight gaining production. e.g.
https://www.youtube.com/watch?v=_rk2hPrEnk8

SUMMARY CHAPTER
1. The choice of an optimal production location must consider country factors,
technological factors, and production factors.
 ● Country factors include the influence of factor costs, political economy, and
national culture on production costs, along with the presence of location
externalities.
● Technological factors include the fixed costs of setting up production facilities,
the minimum efficient scale of production, and the availability of flexible
manufacturing technologies that allow for mass customization.
● Production factors include product features, locating production facilities, and
strategic roles for production facilities.
5. Location strategies either concentrate or decentralize manufacturing. The choice
should be made in light of country, technological, and production factors. All location
decisions involve trade-offs.
6. Foreign factories can improve their capabilities over time, and this can be of immense
strategic benefit to the firm. Managers need to view foreign factories as potential centers
of excellence and encourage and foster attempts by local managers to upgrade factory
capabilities.
7. An essential issue in many international businesses is determining which component
parts should be manufactured in-house and which should be outsourced to
independent suppliers. Both making and buying component parts are primarily based on
cost considerations and production capacity constraints, but each decision (make or buy)
is also influenced by several different factors.
8. The core global supply chain functions are logistics, purchasing (sourcing), production
(and operations management), and marketing channels.
● Logistics is the part of the supply chain that plans, implements, and controls the
effective flows and inventory of raw material, component parts, and products
used in manufacturing. The core activities performed in logistics are to manage
global distribution centers, inventory management, packaging, and materials
handling, transportation, and reverse logistics.
● Purchasing represents the part of the supply chain that involves worldwide
buying of raw material, component parts, and products used in the
manufacturing of the company’s products and services. The core activities
performed in purchasing include the development of an appropriate strategy for
global purchasing and selecting the type of purchasing strategy best suited for
the company.
11. Managing a supply chain involves orchestrating effective just-in-time inventory
systems, using information technology, coordination among functions and entities in the
chain, and developing inter-organizational relationships.
12. Just-in-time systems generate major cost savings by reducing warehousing and
inventory holding costs and by reducing the need to write off excess inventory. In
addition, JIT systems help the firm spot defective parts and remove them from the
manufacturing process quickly, thereby improving product quality.
13. Information technology, particularly Internet-based electronic data interchange, plays
a major role in materials management. EDI facilitates the tracking of inputs, allows the
firm to optimize its production schedule, lets the firm and its suppliers communicate in
real-time, and eliminates the flow of paperwork between a firm and its suppliers.
14. Global supply chain coordination refers to shared decision-making opportunities and
operational collaboration of key global supply chain activities.
15. The depth and involvement in inter-organizational relationships in global supply
chains should be based on the degree of coordination, integration, and transactional
versus relationship emphasis that the firm should adopt in partnering with other entities
in the global supply chain.

SLIDE ON E-LEARNING (McDonald didn’t mention much)

How are strategy, production, and supply chain management related?
1. Production (P): activities involved in creating a product
2. Supply chain management (SCM): the integration and coordination of logistics,
purchasing, operations, and market channel activities from raw materials to end
customers.
> How can P and SCM lower costs of value creation?
Disperse production to most efficient locations
Manage the global supply chain efficiency to better match supply and demand

> How can P and SCM add value by better serving customers’ needs?
Eliminate defective products from the supply chain and the manufacturing process.
SESSION 11: VALUE CHAINS AND GVCS: BUSINESS
PERSPECTIVES > INTRO TO GVCs // BUSINESS AND
INDUSTRY VALUE CHAINS
INTRODUCTION
The economies of each country has a lot of kinds of business with many different ways of
producing values. The economist divides these ways into 3 main types.
+ a) The producer value starting with the natural resource: Agriculture, Forestry and
Fisheries (AFF)
b) Mining ~ extraction (khai thác) doing with organic materials: Petroleum, minerals
→ 2 categories will use these materials and process them lead to the another type
+ Manufacture (industry) that we can find them, buy them, transform them in different
ways. It doesn’t distinguish between manufacturing and construction.
+ Service with materials belongs to the clients.
→ Manufacturing is the most important in the IB field. 60% of International trade comes
from Manufacturing profits.
● Use weight or value to measure (vì các sản phẩm là khác nhau, không thể đo lường
bằng unit)
● Different production processes → they lend international shipping in different

ways
● In chain production, it is conceivable that we will have different stages of production
in different countries.

Manufacturers need a supplier. And this supplier can also have its suppliers. The sequence of
suppliers called “ Supply chain”
● The components that you had, having the value not because of the materials but
because of the R&D design (research and development); after sale-service and
advertising

→ The value chain: the process or activities by which a company adds value to a
product, including production, marketing, and the provision of after-sales service.
- Supply chain and value chain may happen within one company.
- Supply chain and value chain often happen through different companies to make the
components and change into the final products
 - Design and manufacturers can be different companies.
→ We can have the whole value chain in the same business in the same country, or we

can have the whole value chain in 3+ countries (import from 1 country, manufacture to

your country and export to the 3rd country)

→ Global value chain: When you have minimum 3 nations (more than 2 nations)

involved in the business sequence (including supplier → manufacturing → sale) (supplier

country-home country-client country sequences)
● Oppose to import - export (it just include 2 countries) Cam (export) ---> VN (import)

SLIDE THẦY: Distribute Supply chains, value chains and GVCs

The entire economy, or any single industry, can be viewed as if it were a river flowing
from its source to the sea.

There is a sequence of stages. Most of them involve the physical products and research

being done here → Having value chain

Not only the production steps - providing physical content of the product, R&D;
product design; process design; marketing (distribution; after-service) are also
important in creating value.

So the various stages of the value chain -R&D, Design, Production, Distribution,
Marketing, after sales service & recycling- can be done in-house, or distributed across
several firms. These different firms may be in different countries.
→ Thus, the GVC: Global Value Chain.
 In both merchandise and service production, the firm can either (1) do everything itself
or else (2) contribute only part of the whole process. This is true not only for
production, but also for other stages in the creation of value: R&D, design, marketing,
and after-sales service.
● Many firms may participate in one or another stage.
● One firm may orchestrate this whole chain of value creation (Ex: Trung Nguyen
Legend); or there may be a network of participants, with several firms orchestrating
different chains (each company/country good at one aspect).

→ THE GLOBAL VALUE CHAIN is a sequence of value chains in more than 2 countries. It’s:
● NOT BECAUSE from the materials are in different countries
● NOT BECAUSE form the factories are in different countries
● NOT BECAUSE from the customers are in different countries
Headquarter → sale → factories → supply chain
Máy tính:
That was an example of a global value chain mostly within one firm, with suppliers added on.
● GVC often span across several firms as well as across several countries.
 → Note that this long list of manufacturers is

simply that: a list of component suppliers cho

các nước chính tham gia vào creating GVC

for iPhone

→ This is a value chain because of the different

stages of R&D, design, manufacturing,
assembly, sales and after sales-service. Not
because there is a long list of suppliers.
→ The different stages are performed in
different countries, hence GVC.
Nó có thể gồm 15 nước tham gia nhưng it just includes 5-6 stages:
● Design, raw materials, components, assembly, warehousing, logistics and retails,
after-service

Vì sao nên tham gia vào GVC?

- Quá trình chuyển đổi từ Raw materials ---> Final products to customer rất phức tạp,
cần rất nhiều tiền bạc và nguồn lực (đối với những sản phẩm tinh vi, cầu kỳ) (complex
industry) → CHỈ huge company mới làm được 1 mình
→ Business just have simple contribution in the GVC

→ 1 business tự làm hết tất cả thì không tạo ra GVC.

+ Có cần sale qua nước khác hay không ở bước cuối cùng?
→ Không cần, chỉ cần các giai đoạn sản xuất có sự tham gia của 3 nước trở lên.
+ 1 cty có nhiều chi nhánh ở nhiều nước (có các bước khác nhau) có gọi GVC?
→ Không, nó chỉ là supply chain + value within a company

→ GVC:
Được tham gia đóng góp bởi 3 nước trở lên ở từng giai đoạn khác nhau sản xuất để tạo nên
sản phẩm cuối cùng Nước A a1 ---> Nước B b1 → Nước C c1
Note:
● The links of supply chains and value chains may not be individual firms but clusters
of firms that are rivals, but also collaborate
● An important part of supply chain management is logistics management, the
integration of information flow for:
➔ Link with procurement
➔ Reception
➔ Material handling
➔ Production
➔ Packaging
➔ Inventory
➔ Transportation
➔ Warehousing
➔ Security
❖ Transportation alone involves several parties: shipper, freight broker, transporter,
receiver. Note that the shipper and the receiver may be the same firm, with locations
in different countries.

After session 11: (7/8)

● Mini-presentation 9 + After class
● Note:
❖ A good way to study the links and presentations is to open a world map in
a book or in your browser, and then check for supplier country-home
country-client country sequences. There should be a sequence of 3
countries to constitute a global value chain. The movement in placing your
finger on each country will enhance your recall.
❖ There is no need to memorize value chains as there are probably millions of
them. However, familiarity with several cases makes the concept less
abstract.
❖ A further exercise is to examine what exactly is being sold at each step. Do
this for one or two cases. More is better, but it takes some time.

If you wish to explore the topic of supply chains (not just GVCs) further, here are
some suggestions:
❖ Supply chain management
● Supply chains: https://youtu.be/Bblo8_B32Co
International Trade and Supply Chains
What makes an average car that has thousands of parts produced by hundreds of suppliers from dozens of
countries possible is not only the international trading system but also international supply chains.

Over the years the costs of transport and communication have fallen → companies to split up their

production lines into different production facilities

Now more and more, each stage of production occurs not just in a separate factory but in an entirely
different country. For example a car might have an engine made in Germany; a wiring harness from Tunisia;
an exhaust filter system from South Africa and finally be assembled in Mexico

-> This type of production is a major reason why global trade has grown so fast

Supply chains can allow poor countries to start manufacturing goods for the global market.
● By locating activities in countries where lower labour costs are or in countries where raw materials
are located → the total cost of production can be reduced → helps companies create new or better
products without continually raising the final price paid by consumers (giảm chi phí thay vì tăng giá
quá cao, người tiêu dùng đôi khi thấy không đáng để mua).
Supply chains also have some risks.
● a country that's part of the supply chain experiences a natural disaster → delay in production in that

country affects activities further down the supply chain → affects not only the production of final
product but also the intermediate goods as well. In 2011 floods in Thailand affected the final
production of goods around the world ranging from electronic goods to cars and shoes.
● Countries do not coordinate their regulatory policies, the rules that help ensure health and safety
supply chains can be affected. For example a chemical company that imports ingredients for aspirin
and acetaminophen into the United States must comply with similar or overlapping regulations from
five different agencies. The agencies sometimes fail to communicate among themselves and this delays
the shipment of products
→ To counter this, governments and corporations are working to smooth out some of those kinks

in the supply chain to minimize red tape while still protecting health and safety. By taking a closer
look at how supply chains operate, policies can be better designed to help both producers and
consumers.

● Rules of existing trading agreements between countries usually don't mesh well with supply chain
trade
→ In order to help correct this, trade officials should do more to think about supply chains when
designing trade agreements so the rules in these agreements can help supply chains work better in the
future.
 ● The example of supermarkets in the richer countries:
https://youtu.be/BNpk_OGEGlA
The Incredible Logistics of Grocery Stores

Supermarkets are a marvel obscured by banality. Nearly everyone in the developed world uses them regularly,
so we have no basis for comparison. A century ago, you could certainly buy a jar of peanut butter, but now, you
can buy regular peanut butter, or chunky peanut butter, or smooth peanut butter, or organic peanut butter—and it
doesn’t stop there. The stability and variety of choice in modern supermarkets is incredible.

For consumers, it’s simple—we can get everything we want, anytime, from a single store—but the complexity
behind that is truly stunning.

Even independent grocers now tend to rely on gigantic cooperatives to amass buying power and supply their
shelves, so industry-wide, scale and complexity is the norm. Now, supermarkets like this are involved with a
perpetual balancing act.

Keeping items in stock is of paramount financial concern—research into the matter has found that on the
third instance of a desired item being out of stock, consumers will go to an alternate store 70% of the time.
Therefore, the task is to keep everything in stock as much as possible, while having as little extra product as
possible.

Every item in a supermarket is labeled with a barcode—usually that code is standardized industry-wide, except
with some white-label products. When products arrive at the store, they are checked into its inventory
management software. From there, it’s simple math—as products are checked out and paid for, they’re
subtracted from the inventory count, and as that count gets low, the store knows it’s time to reorder. It’s a
straightforward concept—except when you actually implement it in the real world. There’s more than one way a
product can leave a store—it can get stolen, go bad, get damaged, or more. That means there’s always a slight
disparity between how many items there are on paper, and in reality.

Inventory management software can account for some of that, assuming employees feed it accurate data, but
stores also conduct a manual count every month or two to determine the actual disparity. This is most important
for financial reporting reasons—the retailer can’t know how profitable it actually is until it knows how much
product it lost—but it can also be used to tell the inventory management software how much it’s typically off,
and correct for that in the future to make sure re-orders happen on time. Then, there are other factors. For
example, if a supermarket runs a sale on a given item, that product will likely sell more, so inventory
management software needs to account for that in its ordering process to make sure that it correspondingly
ramps inventory up.
Now, some products are simple to keep in stock. Oreos, for example, have a long shelf live and come from a
massive manufacturer with multiple production facilities spread out across the world. That’s not the case with
all foods. Take, for example, grapes are quite difficult to keep in stock. If there’s a sudden surge in demand for
grapes, you can’t just order more from the factory—their global inventory levels are essentially decided years
before as growers decide whether to add or subtract vines from their vineyards. What’s more, grapes are highly
seasonal.

-> the industry has learned to take advantage of global climate patterns.

Now, how distribution centers work on the surface level is fairly standard—they bring in pallets of a single
product, break them down to the box level, and create pallets with smaller quantities of everything a store needs.
How each distribution center accomplishes that, however, differs.

Now, even as automation is making significant inroads, plenty of grocery distribution centers still use a far more
manual approach. That process is essentially the same—pallets are taken in, stored, and outbound pallets are
built with smaller quantities of each product—but each step is just completed by humans instead of machines.

Unpopular products are actually crucial to the business strategies of modern supermarkets. Supermarkets
view niche, slow-moving products as key differentiators, and key to customer retention, so they’re certainly
willing to sell these products even at a loss

Every additional niche product stocked increases the amount of storage space needed, and increases the overall
distance that pickers have to travel to assemble an average pallet—in the case of manual warehouses.
To mitigate these effects, while still maintaining their offerings of niche products, some supermarket chains,
including Kroger and H-E-B, have set up entire, dedicated distribution systems for slow-moving inventory. By
setting up these facilities, they can ship out less than box-load shipments of certain products, and stock them
without slowing down the process for fast-moving inventory.

The pure scale at which the supermarket industry operates is what has led to this level of supply-chain
complexity. When a single facility is responsible for distributing a sizable portion of a state's food supply, tiny,
incremental efficiency improvements can lead to huge savings for companies. While such commoditization and
consolidation of food supply is viewed as problematic by many people, ultimately, the average consumer just
wants a wide variety of food at a low-cost. That’s what this system provides. Any modern supply chain is
molded into what leads to commercial success, and as long as people continue to view the convenience of
having 30,000 options of what to eat at a moment’s notice as paramount, this is how the developed world will
cont

❖ Educational options (Các khóa học hiểu hơn về supply chain and logistics)
➔ Take a look at
https://www.hw.ac.uk/uk/study/postgraduate/international-
 business-management-logistics.htm (Mostly supply chain courses +
international stuff)
➔ Take a look at https://mainemaritime.edu/international-business-
and-logistics/international-business-logistics-bs/ (Same, more
emphasis on QM analysis and operations).

SESSION 12

Intro của thầy:

● Before industrial revolution most of the chain is value chain hoặc phục vụ địa phương
là chủ yếu.
● After the Second world war, thì mới có perfect context cho GVC, IB bắt đầu increase,
easier to communicate, to transport and to deliver across national boundary,
transport became cheaper,... At the same time, human manufacturing develop a little
bit, every country have different advantage ability + change style in manufacturing =>
Hình thành phân chia công đoạn sản xuất mỗi quốc gia tham gia một công đoạn sản
xuất.
● In the early 70s, GVC became more important.

Nội dung bài:

There are two viewpoints on value chains: business and economist's viewpoints.
From the business viewpoint:
● Information about the competitor’s supply chain
● Information about where our business fits in – for example suppliers and customers
● Including potential new suppliers and customers
● Existing businesses are embedded in a value chain and have some knowledge from
past experience etc.
Why are economists and Policy makers interested in the Global value
chain?

- 1993: Traditional Trade chiếm 50% tổng GDP của cả thế giới .
- 2013: Traditional Trade còn ⅓. => Nếu không có GVC thì lượng GDP sẽ bị mất 1
khoảng ⅓ tổng GDP của thế giới.

y=x
 - GVC strong correlation với Wealth, income.
- Thầy nói thêm: big business thì easier trong negotiation dễ gain được big deal hơn,
còn small business thì khó hơn, thường thì small business sẽ gain được smaller
deal. Nhưng mà tham gia vô GVC thì vẫn làm tăng trưởng nhanh hơn so với k tham
gia.

In conclusion: reasons The Economist cares about GVC:

● Participation in GVCs has a positive impact on income per capita. These gains are
related to GVC trade and not to conventional trade.
● The gains from GVC participation, however, are not automatic.
● We find less robust effects for low and lower-middle income countries.
● “Moving up” to more high-tech sectors as a result of participation in major supply
chains does take place but is not universal
Data: Most of the data available are very granular: ý thầy chổ này là data economist work
with thể hiện 1 group of business selling similar stuffs.
Note:
● Data ở worldbank, OECD,... thì chủ yếu phục vụ cho economist view point, business
không dùng nhiều. (tại vì economist cần xem cả cái industry).
● Export increase trên số liệu không reflect được hết kinh tế, có trường hợp công ty
nước ngoài drop off hàng hoá ở warehouse của VN rồi sau mới chuyển đến final
destination. Như vậy thì export, import của VN tăng lên nhưng không thực sự tạo ra
giá trị kinh tế.

Export/ Import:
- Export includes 2 parts: Value added by host country + Imported part (phần có từ
trước).
-

Comment của thầy trên graph này:

- Gross export always include 2 part: Domestic Value added + Foreign Value Added
- Backward Linkages: Tổng giá trị added của tất cả quốc gia trước.
- 3 dạng 1,2,4 là traditional export, import không phải là GVC. (tại vì chỉ có 2 countries
trong chuỗi)
- Dạng 3: Export intermediates further re-exported to third country => GVC.

SESSION 13

Analysis for International Business Strategy

Global value chain

“These interlinked core production activities and supporting services activities to produce a
final product coordinated and led by a lead firm are commonly referred to as global value
chains (GVCs).”
“Commonly referred to” is NOT a definition.
The databases do NOT limit GVCs to these cases.

Primary + support activities: page 368-370

1. We saw that the statistics on world trade generate curves that rise until 2014.
2. The curves are sensitive to events in the world economy such as a recession in the
early 1980s, the boom and bust in telecommunications around 2000, and especially
the global financial crisis of about 15 years ago.
3. Trade is more sensitive to these crises than GDP. The trade/GDP has a drop over
2008-2009 similar to the drop in the trade figure -even though it involves division by
a shrunken GDP.
4. We saw that the drop in 2014 is a drop in the dollar value of trade, not the actual
volume of “stuff”. The price of crude petroleum and other commodities with it
explain the drop in the curve.

Important Notes:

1. However, global value chain trade involves the repeated shipping of the same goods
(raw materials, components) and even services such as the chip design by IC Design.
2. Does this falsify the statistics for world trade? No, because each shipment really is
trade between businesses in different countries.
 3. However, we have to take this into account in our understanding of the statistics
-particularly for trade/GDP. The value added is counted several times in the
numerator, but not in the denominator. => multiple counting of the same
value added in accumulated exports.

4. What we do have is that total exports-total imports = total value added (formula
works for a global value chain with a border crossing at each sale)
=> “Total value added” is used to add to GDP.

SESSION 14:
Analysis for international business strategy
Think before acting (This is human, and applies to business strategy).
- Thinking: analyzing circumstances and analyzing your capacity.

To perfectly formulate your business strategy, you would need to know

everything happening in your economy, and also know the future.

Typically, firms hold on to design, final marketing, and after-sales service, as a lot
of the value is there, R&D usually too. However, telephone support is also often
farmed out to cheaper locations, with mixed results.

-----------------------------------------------------------------------------------------------------------
 (Part of)
Porter’s recipe for industry analysis
- Competition: price based
- Rivalry: anything in marketing (quality, distribution, promotion,...)

- Competitive rivalry is a measure of the extent of competition among

existing firms. Intense rivalry can:
+ Limit profits
+ Lead to competitive moves, including price cutting, increased
advertising expenditures, or spending on service/product
improvements and innovation.
Porter's Five Forces Analysis

Conclusion:
- Why do we bother analyzing? To make decisions that will improve the
profit margins of firms.
- How did we arrive at Michael Porter's model? It's basically a substitute
for having god-like knowledge of the economy.
 Mini: The automobile industry and VinFast.

1. Does Vietnam represent a sufficient market for VinFast to absorb the

output of a factory at prices competitive on the world market?
- NO. Because Vinfast manufacturer automobile with large capacity
production ⇒ Expensive (Scale of the economic)
⇒ Vietnam CANNOT buy Vinfast cars.

Can VinFast hope to export automobiles to that country?

(U.S., Europe, ASEAN)

2. Provide a partial description of the automobile industry in your chosen

ASEAN nation using the following three elements of Michael Porter’s
approach:
- Rivals:
+ Should list the main rivals, mention who is foreign and who is
domestic (this can be complicated because brand,
manufacture, and ownership are different)
+ How many units do they manufacture
● Production volume and details (are they independent
or a subsidiary of a foreign firm; do they manufacture
under license). Give the total production of all
manufacturers.
+ Who has the largest market share (not the same:
automobiles can be imported and exported)
● Sales per vendor.
⇒ If you have information about exports and imports of automobiles, take
these into account when comparing total production with total domestic
sales of automobiles.
Sale and Production of ASEAN Automobile Industry
- Clients (use consumers rather than the car dealers):
+ Should list the different segments
 ● Place the different models of the manufacturers on a
two-dimensional grid: the size of the car from
compact to SUV, and price of car from low to high.
+ Their sizes and the size of the total market. Is it growing?
● Compare the price of automobiles with the GDP per
capita figure, and comment.
- Substitute products/services:
+ Should list alternative ways people can move from home to
work, or from home to visit a friend, etc.

3. Do trade barriers protect domestic industry?

- The localization rate
- Non-tariff measures are very broad and include a number of
different measures, ranging from quantitative restrictions of all kinds
to technical regulations, as well as standards and customs rules,
among others.
- A non-tariff barrier is any measure, other than a customs tariff,
that acts as a barrier to international trade.
- NTMs are distinct from non-tariff barriers (NTBs). NTBs are subsets
of NTMs and are considered as measures that have potentially
trade-inhibiting effects.
Các biện pháp phi thuế trong thương mại thế giới và khu vực
ASEAN

- Regulation to block the entry of import ⇒ TRADE BARRIERS (non-

tariff trade barriers)
+ Taxation
+ Safety
+ Environmental standards
+ Customs procedures
+ Certification processes
+ Inspection
+ Testing arrangements
+ The incentivization of specific types of vehicles under “green”
or “national champion” initiatives
- Globally, UNCTD’S database reveals a total of 2828 reported NTMs
that affect the automotive sector, with the majority identified as TBT
measures, reflecting a variety of standards and technical
requirements.

Analysis of Automotive NTMs and NTBs in ASEAN (p. 44 - 46)

 No. Section Element
1 Can they sell or not complement Vietnam sales?
2.1 Rivals Production Sales
2.2 Clients Number Price to GDP/capita
2.3 Substitutes Public and private transport
3 Trade barriers Existence Protect domestic products?
Grid
Multiplying factor: Is the file merely a collection of data, or is it organized,
incorporates judgments, and does lead to an (imperfect) answer for VinFast?

We learned two things with respect to international business:

- Each country must be studied separately for marketing purposes, because
of the variety of purchasing power, substitutes, ownership requirements,
etc.
- Trade barriers complicate international marketing analysis and action.
 Chapter 15:
Entry Strategy and Strategic Alliances

Which markets:
1. The most attractive foreign markets tend to be found in
- Politically stable developed and developing nations that have free-
market systems.
- Where there is not a dramatic upsurge in either inflation rates or
private-sector debt.

When to enter those markets:

1. There are several advantages associated with entering a national market
early before other international businesses have established themselves.
- These advantages must be balanced against the pioneering costs
that early entrants often have to bear, including the greater risk of
business failure.

On what scale:
1. Large-scale entry into a national market constitutes a major strategic
commitment that is likely

Advantages Disadvantages

- To change the nature of competition There are also risks associated with
in that market. such a strategy.

- Limit the entrant’s future strategic

flexibility.

2. There are six modes of entering a foreign market:

6 modes Advantages Disadvantages

Exporting - Facilitating the - High transport costs.

realization of experience
curve economies. - Trade barriers.

- Avoiding the costs of - Problems with local

setting up marketing agents.
manufacturing
 operations in another
country.

Creating turnkey - Allow firms to export - The firm may

projects their process know-how
to countries where
foreign direct
investment (FDI) might
be prohibited.
inadvertently create
efficient global
competitors in the
process.

⇒ Enabling the firm to

earn a greater return
from this asset.

Licensing - The licensee bears the - The risk of losing

costs and risks of
opening a foreign
market.
technological know-how
to the licensee.
- A lack of tight control
over licensees.

Franchising - The franchisee bears - Problems of quality

the costs and risks of control of distant
opening a foreign franchisees.
market.

Establishing joint - Sharing the costs and - The risk of losing

ventures risks of opening a foreign control over technology.
market.
- A lack of tight control.
- Gaining local
knowledge and political
influence.

Setting up a wholly- - Tight control over - The firm must bear all
owned subsidiary technological know-how. the costs and risks of
opening a foreign
market.

The optimal choice of entry mode depends on the firm’s strategy.

- When technological know-how constitutes a firm’s core
competence.
⇒ Wholly-owned subsidiaries are preferred, since they best control
technology.
- When management know-how constitutes a firm’s core
competence.
 ⇒ Foreign franchises controlled by joint ventures seem to be
optimal.
- When the firm is pursuing a global standardization or
transnational strategy.
⇒ The need for tight control over operations to realize location and
experience curve economies suggests wholly-owned subsidiaries
are the best entry mode.

When establishing a wholly-owned subsidiary in a country, a firm must

decide whether to do so by a greenfield venture strategy or by acquiring
an established enterprise in the target market.

Advantages Disadvantage

Greenfield - It gives the firm a much

greater ability to build
the kind of subsidiary
company that it wants.

For example, it is much

easier to build
organizational culture
from scratch than it is to
change the culture of an
acquired unit.

Acquisitions - Quick to execute, may - When the acquiring

enable a firm to preempt firm overpays for the
its global competitors. target.

- Involve buying a known - When the cultures of

revenue and profit the acquiring and
stream. acquired firms clash.

- When there is a high

level of management
attrition after the
acquisition.

- When there is a failure

to integrate the
operations of the
acquiring and acquired
firm.
 3. Strategic alliances are cooperative agreements between actual or
potential competitors.

Advantages Disadvantages

- They facilitate entry into foreign
markets.
- Enable partners to share the fixed
costs and risks associated with new
products and processes.
- Facilitate the transfer of
complementary skills between
companies.
- Help firms establish technical
standards.
The firm risks giving away
technological know-how and market
access to its alliance partner.
The disadvantages associated with
alliances can be reduced if
- The firm selects partners carefully.
- Paying close attention to the firm’s
reputation and the structure of the
alliance ⇒ avoids unintended transfers
of know-how.

⇒ Two keys to making alliances work seem to be

- Building trust and informal communications networks between partners.
- Taking proactive steps to learn from alliance partners.

Session 7 (Ms. Gabriel)

CHAPTER 16: Exporting, Importing &
Countertrade
I. Why should you export?
1. Benefits
- Increase market size & profits

Ex: WTO (GATT) + FTAs → Lower barriers to trade

- Larger firms tend to seek out opportunities

-> Smaller tend to be more intimidated by complexities of exporting

2. Challenges
- Poor market analysis - lack understanding of consumer & rivals

- 4Ps strategy not suited to local market (product, pricing, place / distribution & promotion)

- Finance & paperwork issues

=> Exporting firms need to:

+ Identify market opportunities

+ Deal with forex risks

+ Import & export financing

+ Understand challenges of foreign market

●Changing consumer tastes & prefs (health conscious)

●Competitor’s behaviour (market saturated, or competitive pricing)

●Company competitive advantage (what can you offer better than the rest) =
unique selling point of product (organic pot noodles, special flavour, low carb)

3. Improve export performance

Collect info from reliable sources & get direct assistance from destination country

a) Government sources

- Why? Dedicated to providing business with intelligence, Official govt resources = more
reliable, not a scam.

- Who? Department of commerce, International trade body, Small business administration,

Local & state govts.

b) University sources

GlobalEDGE Michigan State University - read here

c) Export management companies (EMCs)

- Service providers and export consultants

- 2 types

+ Start export ops and firm later takes over

+ Start service with continuing responsibility for firm’s products

4. Reduce risks when exporting

- Enter on a small scale to reduce risk.

- Add additional product lines once operations are successful.

- Hire locals to promote firm products.

- [Consider local production… later] - remember Vietnam’s competitive advantage is low

cost, so probably best to keep production in Vietnam for now.

II. Finance & lack of trust → third party bank & letter of credit
- Because 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.

III. 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. There are 5 types of
countertrade
1. Barter
A direct exchange of goods and/or services between two parties without a cash
transaction. Example: One party trades salt for sugar from another party.

2. Counterpurchase
Reciprocal buying agreement (promise to make a future purchase). Example: Party A sells
salt to Party B. Party A promises to make a future purchase of sugar from Party B.

3. Offset
One party agrees to purchase goods and services with a specified percentage of the
proceeds from the original sale. Example: Party A and Country B enter a contract where
Party A agrees to buy sugar from Country B to manufacture candy. Country B then buys
that candy.

4. Buyback
Occurs when a firm builds a plant in a country or supplies technology, equipment,
training, or other services to the country and agrees to take a certain percentage of the
plant’s output as a partial payment for the contract.

Ex: Party A builds a salt-processing plant in Country B, providing capital to this developing
nation. In return, Country B pays Party A with salt from the plant.

5. Switch trading - the use of a specialized third party trading house in a countertrade
arrangement
Use counterpurchase credits to buy goods in that country. 3rd party buys credits from firm
 A & sells to firm B.

Ex: Party A and Party B are countertrading salt for sugar. Party A may switch its obligation
to pay Party B to a third party, known as the switch trader. The switch trader gets the
sugar from Party B at a discount and sells it for money. The money is used as Party A’s
payment to Party B.

=> What makes countertrade attractive?

- Helps with finance

+ Gives the willing firm a competitive edge

+ May be required by govt

=> What makes countertrade unattractive?

- Unusable or unprofitable goods.

- Need an in-house trading dept for countertrade deals.

- Best for large MNEs - global network to dispose of goods.