MODULE TEMPLATE

1. Title of module: Introduction to International Business

2. Overview/Introduction
3. Learning Outcome/Objective
At the end of the unit, the students are expected to:
1. identify the management goal and organizational structure of the MNS;
2. describe the key theories that justify international business;
3. explain the common methods used to conduct international business; and

4. Learning Content/Topic
Unit 2: Introduction to International Business
 Managing the MNCs
 Why Firms Pursue International Business
 How Firms Engage in International Business

Managing the MNCs

The most common goal of an MNC is to maximize shareholder wealth.
Managers of these MNCs are expected to come up with decisions that will
maximize the price of stock that eventually benefits the shareholders. In doing
so, MNCs can easily obtain funds from shareholders. Further, these MNCs aim
to satisfy the government, suppliers, banks and even employees.

But then the reality is MNC managers may make decisions that conflict
with the firm’s goal to maximize shareholder wealth. This conflict of goals is
referred to as the agency problem.

For MNCs, the cost to ensure that managers maximize shareholder wealth
(called agency costs) is usually larger than for strictly domestic companies for
many (discussed in module 1). Firstly, MNCs with subsidiaries spread across the
world will encounter greater problems with agencies as it is more difficult to track
managers of distant subsidiaries in foreign countries. Second, managers of
international branches born in diverse cultures may not obey common objectives.
Third, the sheer size of the larger MNCs can also create major problems with the
agencies. Fourth, some managers appear to downplay the short-term
consequences of actions that may result in actions that are incompatible with
optimizing shareholder wealth for international subsidiaries of the MNCs.
Parent Control of Agency Problems. An MNC's parent company can be
able to prevent issues with proper governance of the agency. The priorities for
each subsidiary should be clearly articulated to ensure that all branches
concentrate on maximizing the value of the MNC rather than their respective
subsidiary values. The parent may supervise the subsidiary decisions to verify
that the subsidiary managers are meeting the MNC 's objectives.

The parent may also enforce compensation plans which reward the
subsidiary managers who fulfill the goals of the MNC. A common motivation is to
give the MNC's stock to managers as part of their compensation, so they can
directly benefit from a higher stock price while making decisions that increase the
value of the MNC.

Corporate Control of Agency Problems. There are also various types

of corporate control that can help avoid conflicts with agencies and thereby
ensure that managers take decisions to appease shareholders of the MNC.
When the managers make bad decisions that will their interest, it could be
possible for another company to buy it at a low price which would possibly
replace the weak managers. Furthermore, institutional investors with large
holdings of an MNC 's stock have some influence over management because if
managers make poor decisions they can complain to the board of directors. They
may be attempting to make improvements in a poorly performing MNC, such as
replacing high-level managers. In demanding changes in an MNC, institutional
investors may even work together, because an MNC would not want to lose all of
its major shareholders.

One drawback of the method of corporate control is that investors rely on

data from the managers of the firm's reporting. When the managers represent
themselves rather than the investors, their success can be underestimated. In
other words, MNCs will alter their financial statements to keep investors unaware
of their financial issues.
 One limitation of the corporate control process is that investors rely on the
reporting by the firm’s managers for information. If managers are serving
themselves rather than the investors, they may exaggerate their performance. In
other words, MNCs may alter their financial reporting so that investors would not
be aware of their financial problems. This allows businesses to introduce an
internal monitoring process, which managers can easily oversee. Some specific
methods for enhancing internal control processes include:

 establishing a centralized database of information

 ensuring that all data are reported consistently among subsidiaries
 implementing a system that automatically checks data for unusual
discrepancies relative to norms
 speeding the process by which all departments and all subsidiaries
have access to the data that they need
 making executives more accountable for financial statements by
personally verifying their accuracy

The above-mentioned systems may make it easier for the executives

of the firm in monitoring financial reporting process. As a result, the likelihood
of company managers being able to manipulate the reporting process has
been reduced and therefore the accuracy of financial information for existing
and prospective investors has improved.

Why Firms Pursue International Business

The most common theories as to why firms become motivated to
pursue international business:

1. The theory of comparative advantage.

International business growth is heightened by realization that
country-specific specialization will improve the efficiency of production.
Some countries have technological advantages (such as Japan and the
United States). Some countries have an advantage over basic labor costs
(Jamaica, Mexico and South Korea). Because these advantages cannot
be easily exported, countries prefer to specialize in the production of
 goods that can be manufactured with greater efficiency using their
advantages.
If a country is specialized in certain products, it may not produce
other products, therefore trade between countries is essential. It is the
point of the classical comparative advantage principle. Comparative
advantages allow companies to enter outside markets. For example, an
island specialized in tourism and for most goods that island relies on
foreign trade. Although some goods could be produced on this island,
specializing in tourism is more efficient for them, that is, the island is better
off using some revenue earned from tourism to import products than trying
to produce all the products they need.

2. The imperfect markets theory

If the market for each country from all the other countries is closed,
there will be no international business. If markets were perfect, output factors
would be readily transferable and would flow wherever requested. Yet the real
world suffers from an imperfect market where production factors are very
immobile. . Transfers of factors of production require costs and with
restrictions, thus markets for various resources for production are imperfect
and this provide an incentive for firms to seek out foreign opportunities.

3. The product cycle theory.

According to this theory, as a result of some perceived advantage over
existing rivals, companies are established in the home market, such as a
market demand for at least one more manufacturer of the commodity.
Because business knowledge and competition are accessible at home more
readily, a company is likely to develop itself first in its home country. Exporting
must initially satisfy international demand for the firm's product. As time goes
on, the company may find that selling the commodity in international markets
is the only way to maintain its advantage over competition in foreign
countries, thereby reducing its transportation costs. Foreign-market
competition will increase as other suppliers become more familiar with the
company's product. The business could develop strategies to expand
international demand for its product. A typical strategy is to try to differentiate
 the product in such a way that other rivals cannot sell exactly the same
product. It helps it to consider new prospects beyond its home country as a
firm matures.

How Firms Engage in International Business

Firms use several methods to conduct international business.

International trade. It is a fairly cautious approach that businesses

may use to enter markets or get products at a low cost. This strategy implies
minimal risk as the company is not placing any of its money at risk. When the
company experiences a reduction in its export or import, that part of its
business will usually be decreased or discontinued at a low cost.

Internet Facilitates International Trade. Most businesses use their

websites to list the items they are offering, along with the price of each
product. It helps them to market their goods quickly to potential importers
everywhere across the world, without sending brochures to various countries.
Furthermore, a company can add or change prices to its product line by
simply revising its website. Importers therefore only need to track the web site
of an exporter regularly to keep their product details up-to - date.

Businesses may also use its website to accept online orders. Internet
makes shipping process easier to track. Warehouse can also use internet for
inventory tracking.

Licensing. This requires a corporation to provide the technology

(copyrights, patents, trademarks, or trade names) in return for payments or
other defined benefits. Licensing enables businesses to use their products in
international markets without significant foreign investment without the
transportation costs arising from the export. A significant drawback to
licensing is that the business providing the technology is having trouble
maintaining quality control in the international manufacturing process.
 Internet Facilitates Licensing. Many businesses with an international
reputation use their brand to market online goods. They may use foreign
manufacturers to produce some of their products, according to their
requirements.

Franchising. It obliges a firm to make specialized sales or service

strategy, support assistance, and if necessary, an initial investment available
in exchange for a periodic fees. With franchising firms are allowed to enter
foreign markets without a significant foreign investment. Consequently, the
brand name and logo of a firm in one country is author to be used by a firm in
another country for a fee.
Joint ventures. This is a jointly owned and operated venture by two or
more companies. Many companies penetrate foreign markets by entering into
a joint venture with companies residing in those markets. Most joint ventures
in a given project allow two firms to apply their respective comparative
advantages.

Acquisitions of existing operations. Many companies buy other

businesses in other foreign countries as a way of entering international
markets. It helps companies to have complete leverage of their international
businesses and get a significant portion of global market share quickly.

The acquisition of an existing company, however, is subject to the

possibility of substantial losses due to the large investment necessary.
Therefore, if international transactions do badly, it can be difficult to sell the
transactions at a fair price.

Several businesses engage in limited international acquisitions to get a

stake in international operations. It requires less investment than complete
foreign acquisitions, and therefore exposes the company to less risk. At the
other side, the company does not have full ownership of only partly acquired
international operations.
 Establishing new foreign subsidiaries. Firms may also enter
international markets by setting up new operations to manufacture and
distribute their goods in foreign countries. This approach involves a significant
investment, as does international acquisition. Establishing new subsidiaries
may be preferred to international acquisitions because the operations can be
tailored precisely to the needs of the company. Furthermore, it can require a
smaller investment than would be required to buy existing operations.
However, once the subsidiary is built up and a customer base is created, the
firm does not reap any benefits from the investment.
Management contracts. A firm in one country offers to run facilities or
to offer management services to a company in another country at negotiated
cost.

5. Teaching and Learning Activities

Teaching and learning activities shall be made by the subject
instructor by lecture method or assigned readings thru the use of this module
with the aid of learning materials from youtube, articles and published
researches lifted from google and google scholar related to the subject for
discussion. Messenger, video calls shall be utilized from time to time to raise
questions or clarifications about the topics whenever necessary. When
circumstances permit, learners may have individual or group activities to allow
them to collaborate with other peer learners.
6. Recommended learning materials and resources for supplementary
reading.
For further readings:
International Financial Management. 13 th edition
www.slideshare,net
7. Flexible Teaching Learning Modality (FTLM) adapted
For students who will have the chance to participate online:

Online (synchronous)

 google classroom

 messenger ( thru group chat)

 facebook video call

  text messages ( for additional announcements)

 electronic mail

For those who do not have internet connections:

Remote (asynchronous)

 module, case study, exercises, problems sets, etc

 text messages

 submission thru identified drop boxes located at the

school guard house or barangay halls

8. Assessment Task
Recitation

Quiz

Essay:

1. Agency Problems of MNCs.

a. Explain the agency problem of MNCs.

b. Why might agency costs be larger for an MNC than for a purely
domestic firm?
2. Comparative Advantage.
a. Explain how the theory of comparative advantage relates to the
need for international business.
b. Explain how the product cycle theory relates to the growth of an
MNC.
3. Imperfect Markets.
a. Explain how the existence of imperfect markets has led to the
establishment of subsidiaries in foreign markets.
b. If perfect markets existed, would wages, prices, and interest rates
among countries be more similar or less similar than under conditions
of imperfect markets? Why?
4. Assessing Motives for International Business. Fort Worth, Inc., specializes
in manufacturing some basic parts for sports utility vehicles (SUVs) that are
 produced and sold in the United States. Its main advantage in the United
States is that its production is efficient and less costly than that of some other
unionized manufacturers. It has a substantial market share in the United
States. Its manufacturing process is labor intensive. It pays relatively low
wages compared to U.S. competitors, but has guaranteed the local workers
that their job positions will not be eliminated for the next 30 years. It hired a
consultant to determine whether it should set up a subsidiary in Mexico,
where the parts would be produced. The consultant suggested that Fort
Worth should expand for the following reasons. Offer your opinion on whether
the consultant’s reasons are logical.
a. Theory of Competitive Advantage: There are not many SUVs sold in
Mexico, so Fort Worth, Inc., would not have to face much competition
there.
b. Imperfect Markets Theory: Fort Worth cannot easily transfer workers
to Mexico, but it can establish a subsidiary there in order to penetrate a
new market.
c. Product Cycle Theory: Fort Worth has been successful in the United
States. It has limited growth opportunities because it already controls
much of the U.S. market for the parts it produces. Thus, the natural
next step is to conduct the same business in a foreign country.
d. Exchange Rate Risk: The exchange rate of the peso has weakened
recently, so this would allow Fort Worth to build a plant at a very low
cost (by exchanging dollars for the cheap pesos to build the plant).
e. Political Risk: The political conditions in Mexico have stabilized in
the last few months, so Fort Worth should attempt to penetrate the
Mexican market now.
9. References
Online references:
https://content.personalfinancelab.com
https://www.academia.edu
https://poseidon01.ssrn.com
https://talentedge.com

ebook:
Jeff Madura. (2018) International Financial Management. Cengage
Learning, ISBN 978-1-337-26996-4 (13th edition).
http://www.cengagebrain.co.nz/shop/isbn/978-1-337-26996-4