THE MULTINATIONAL ENTERPRISE Intra-corporate Structure: Structure that deals with what is happening inside of a corporation.

An intra-company analysis considers those areas that are internal. The specific areas that are addressed are the anatomy of the corporation, the overall goals, objectives and mission of the company, the products and services that the company offers, and get to the root consideration of why the company is looking to go international and its position in the industry. Once the company analyzes these, it can gain a better understanding of whether or not a global or international strategy makes sense. A company should go global, then, to reduce costs of purchasing materials, get suppliers to compete for your business, enlarge the market, increase profits, the product require new skill or technology, and the company wants to stay ahead of the competition. Inter-corporate Structure: The relationship of the corporation and its environments. What is outside of the corporation. This method of analyzing the company switches the focus from internal working to external factors. Some examples of external areas analyzed here are external variables, government policies, geo-cultural and political/legal environments, and market opportunities. This second area looks into how international business strategies will be affected by things outside the company’s control. Although the items identified during the intercorporate analysis are not immediately controllable by the company, they can take action that will enable them to adjust to these factors. M.N.E. (Multinational Enterprise): Large firms whose operations and functions span national borders. Operates in different countries and adjusts products and practices to each at a higher relative costs. Transnational Corporation (TNC): Corporations owned and managed by nationals in different countries. Criteria Identifying a Multinational: Structure (anatomy itself), performance, coordination, and behavior. Microeconomic advantages of the firm operating internationally: Cost reduction, sales expansion, income and sales smoothing, and variety. A. Anatomy of a corporation There are promoters and sponsors. 1. The promoters or founders create the corporation. They have the ideas of type of industry, products, no liability unless corporation once formed assumes it. 2. The sponsors back the ideas of the promoters and incur no liability. Three requirements must be met to form a corporation: 1. The Charter of the Corporation must be written 2. The Articles of the Corporation, stating the relation between the corporation and the State. This must be filed with the Secretary of the State. 3. The by-laws, constitution and regulations of the corporation. Then the corporation comes into existence. CORPORATE STRUCTURE: Shareholders and, stockholders who do not intervene in the day to day operations of the corporation but the only interest is in the return of their investments , bondholders, Board of Directors, CEO’s, management,

supervisors, foremen, and employees. The purpose of the corporation is to make a profit (goals and objectives). The board of directors is responsible to the shareholders with right to dividends not the investment per se, they are the legal representatives, and can be sued. There are a minimum of three members on the Board (President, Treasurer, and Secretary), and usually there are seven, nine, or thirteen members. The board acts as a whole, and should be insured because propensity of legal issues such as derivative suits. The anatomy of the corporation differs from the international markets vs. the domestic market. It also differs among the various industries and how they serve the global markets. Variables "outside" of the corporation include the consumers (actual customers and potential customers), suppliers, alliances and partners, the investment community, distributors, the media community, trade and professional organizations, international organizations, government, unions and competition, and the public in general. Minimization of costs is the goal of cost-seeking corporations. In an inelastic market demand, corporations may control price and are sometimes impenetrable. They control quantities geographically. Since tariffs are expensive, foreigners are prevented from entering the markets. PHASE I: INTRACORPORATE RESEARCH There are two analyses: Inter- and intra-corporate research and analysis. The corporation's purpose is to interact with the environment. When doing this, the corporate "bubble" is pierced. We need to understand and recognize the anatomy of the corporation, how to enter, why to go international, and how it answers the basic economic questions. Firms continually enact strategies to improve their cash flows and therefore enhance shareholder's wealth. Some strategies involve the penetration of foreign markets. Since foreign markets can be distinctly different from local markets, they create opportunities for improving the firm's cash flows. Many barriers to entry into foreign markets have been reduced or removed recently, thereby encouraging firms to pursue international business (producing and/or selling goods in foreign countries). Consequently, many firms have evolved into multinational corporations (MNCs), which are defined as firms that engage in some form of international business. Initially, firms may merely attempt to export products to a particular country or import supplies from a foreign manufacturer. Over time, however, many of them recognize additional foreign opportunities and eventually establish subsidiaries in foreign countries. Some businesses, such as Dow Chemical, Exxon, Intel, and Proctor and Gamble, commonly generate more than half their sales in foreign countries. A prime example is the Coca-Cola Company, which distributes its products in more than 180 countries and uses 53 different currencies; over 65 percent of its total annual operating income is typically generated outside the United States. Source: corporate information; http://www.corporateinformation.com; corporate world: www.kotra.co.kr/e_main/links/bizlink/. Click on "biz_corp1.html." A. Anatomy of a corporation: The composition of industry differs. It differs in the domestic market vs. the international market and it differs among businesses. We will use Ohio as the home state of incorporation. A domestic corporation is any business that is incorporated

within the state of Ohio. A foreign corporation is any business outside the state of Ohio (for example, California). An international corporation is any business outside of the United States. B. Definitions of multinationals: An understanding of international financial management is crucial to not only the large MNCs with numerous foreign subsidiaries but also to the small firms that conduct international business. Many small U.S. firms generate more than 20 percent of their sales in foreign markets, for example, Ferro and BPL International (Ohio). The small U.S. firms that conduct international business tend to focus on the niches that have made them successful in the United States. They tend to penetrate specialty markets where they will not have to compete with large firms that could capitalize on economies of scale, for example, specialized computer chips and products for small markets such as computers for disable consumers. While some of the small firms have established subsidiaries, many of them use exporting to penetrate foreign markets. Seventy-five percent of U.S. firms that export have fewer than 100 employees. This s more prominent today with e-commerce. International business is even important to companies that have no intention of engaging in international business, since these companies must recognize how their foreign competitors will be affected by movements in exchange rates, foreign interest rates, labor costs, and any other type of short run macroeconomic fluctuations such as inflation. Such economic characteristics can affect the foreign competitors' cost of production and pricing policy. Companies must also recognize how domestic competitors that obtain foreign supplies or foreign financing will be affected by economic conditions in foreign countries. If these domestic competitors are able to reduce their costs by capitalizing on opportunities in international markets, they may be able to reduce their prices without reducing their profit margins. This could allow them to increase market share at the expense of the purely domestic companies. MNC: (Multinational Corporation) is a firm having operations in more than one country, international sales and a multinational mix of managers and owners. (e.g., Ford, Toyota, GE, IBM, Intel, Sony with headquarters both in N.Y. and Tokyo). A MNE ordinarily consists of a parent company and at least six subsidiaries typically with a high degree of strategic interaction among the units. Some MNC have more than a hundred subsidiaries and follow absolute and comparative advantages policies. MNC also have different number of foreign production sites and thus different numbers of international markets. This company earns profits in different markets and not only operates in different countries but, owns alliances in other countries and has no allegiance to a particular country. MNC are based and owned in one country with manufacturing facilities in two or more countries in which profits are not invested. The company is owned by stockholders in several countries and is based in two or more countries. Multi-domestic corporations: are corporations that operate production facilities in different countries but make no attempt to integrate overall operations. Global Corporation: operates beyond national borders and in more than one country, sees the globe as one single market without borders, and earns profits in a global basis. It pursues integrated activities on a worldwide scale, sees the whole

there was a rise of non U. and Hyundai. Centers and senior executives are from different countries. Singapore. it should . managerial skills. orchestras easily make contracts for one performance for over $150. and exploit opportunities beyond the domestic market. For example. capital and even personnel wherever they can gain advantages. the companies have “on retainer” to help with sales. industrial know how.5%.5% were U. Multinationals do extensive overseas operations including manufacturing in different countries. hotels. 2002. or they hire one internal person for international business. but in 2000. Brazil and Mexico with medium to small size companies such as Lubricating Systems of Kent. Countries with mini multinationals in 2000's are Israel. Other countries with MNEs are: France. In the 1980's. MNE is an efficient agent for transferring capital. health.S.S. airlines. ? (Indirect exporting of indirect investment). tourism. Corporations of approximately $120 million who want to enter the international market (mid-size corporations). Texas Instruments. brokerage houses. and Latin America had 5%. and accounting are the growing multinationals of the 21th. Ohio. owned multinationals. Service Companies: such as banks. Switzerland. MNEs and the growth of the mini multinationals in the 1990's. Hong Kong.000 affiliates with more than $318 trillion in investment. ICI British Chemical. Canada. Swan Optical and Cardiac Science. If a company's volume of sales is more10% but less 20% of total sales. Japan had 3. and EU. United States. MNEs account for 2/3 of all direct investment. product design.00 per performance). travel agencies.8%.globe as one market and moves products. Daewoo. Netherlands.g. MNE can bear the risks of ventures great size and financial strengths better than the domestic company can do. Century. The Cleveland Orchestra with $350. Products are developed for the entire globe market and the company gives changes in order to be able to move from regional to product line based on profits.000 MNE have about 378.. For example. For example. should be considered an international organization (Business should be handled internally). Hitachi. The UNCTAD ( United Nations Conference on Trade and Development) in 1999 reported that about 40. entertainment. NAFTA. only 48. Source: UNCTAD Economic Report. Not profitable. MNE also transfers information such as its superior information gathering ability. of the 260 largest MNE. MNE: (Multinational enterprise) is any business which has productive activities in two or more countries and manufactures and markets products and services in different countries. legal. and goods and services across countries. headquarters’ discoveries. culture. technology. Germany. investment financial companies. United States. GE. Whereby international sales are considered as an expansion of domestic sales. They sell the commodity the same way everywhere that is a standardized commodity.000. They operate with resolute consistency with relative price as if the whole world or large areas are single ones.00 ( e. Australia. Germany. Sweden. line and brand name. Italy.000.Garcia’s Rule of Thumb which covers all small firms engaged in international business. They usually have strong base on economic regions such as the Pacific Rim. Great Britain had 18. Internationally oriented firms . manufacturing. and export less10% of sales.

One reason is because it transcends national boundaries and allows firms to compete in a borderless world. and Trade Areas. They must transform themselves into learning organizations. Their world competitiveness is through learning. in today's environment. Custom Unions. so on. creativity. a subsidiary is formed. Other organizations which affect the corporation are: International Organizations. anywhere. and in the long run even survive. There are several major pillars that form the basis for WCOs: customerbased focus. it will have an international division. Total quality has become just the cost of entry into today's highly competitive world economy. Fluid. consistent in elements of finance. Today. Egalitarian climate 7. and only the most effective MNCs succeed. If its volume of sales is more 20%. an egalitarian climate. flexible. and technological support. Another is because.Department of Commerce . Continuous improvements 3. Export Traffic Publications . 4.helps with international corporations. Honda. more and more firms are adopting the characteristics of WCOs. ? (Direct investment). because they realize this is the only way of ensuring that they can compete. . Now. in form of a joint venture. The larger the firm. and self-efficacy. Free Trade Zones. Three of the major characteristics of learning organizations are openness. engineering. There is a separate plant. internally controlled. flexible or virtual organizations. Financial and Investment Institutions. Distributors. exportations. they must anticipate and even create change. accounting. The facility is separate physically and it has more control over the production schedules. Constituency. GE. outsource or partner 5. Global outsourcing: use of worldwide suppliers regardless of where they are geographically able to conduct business as if it were a very large corporate enterprise when in fact small. This emphasis on quality is leading MNCs to become increasingly more competitive in terms of both products and services. Hewlett-Packard. Trade and Professional Organizations. as technology increases. Customer based focus 2. but able to make competencies. and even increase. Examples of WCO are: IBM. creative human resource management practices. This department will specialize in handling the international sales. continuous improvement. World-class organizations (WCOs) are able to compete with anybody. General Public. and. One way in which successful MNCs are going beyond total quality to sustain. Ritz-Carlton and Walt-Mart. Sony. If sales continue over 40%. the more variables involved. marketing. paradoxically. anytime. Xerox. Common Markets. Media. MNCs not only must adapt. costs tend to be driven down. Creative human resources 6. Alliances and Partners.have a separate department within the company. and virtual organization. ? (Direct exporting of indirect investment). Technological support. Main Characteristics of WCO: 1. World Class Organizations (WCO): Quality is having a major impact on international operations.

Most of the concepts are generally transferable to MNCs that are based in other countries. Thus. The issue of control is important.-based MNCs. MNEs have depth in management ranks. whose parents completely own any foreign subsidiaries. if successful. Transnational corporations also tend to view the world as one giant market for purpose of business. However. Rationalized Production and Global Sourcing: MNEs are able to produce different components in different markets and sell their products in different markets. MNCs can afford to employ individuals with specialized business skills to enhance company’s profits and/or effectiveness. Product Development: It can capitalize in development of products in one market. some MNCs based outside the United States tend to focus more on satisfying the respective goals of their respective governments. The focus is also on MNCs. but MNEs do business in many different sovereignties and therefore. 2. at lower costs. (g. 6. Advance Technology: It has better access to advance technological levels which makes them extremely competitive when entering new foreign markets. This is the most common form of ownership of U. 3. and geographic designs. Developing a goal is necessary since all decisions should contribute to its accomplishment. and it enables . They do not have to be a large corporation. This implies that the U. Less Interdependence: Because of regionalization and because of realignments at the macro and micro levels. 5. The focus of this course is on U. while relying on network arrangements to link worldwide subsidiaries. GM is larger than fifty countries. Transnational corporations (TNCs) are corporations owned and managed by the United States in different countries. 7. based MNCs.Multinational Enterprise (MNE): This company conducts business in more than one country or market area. TNCs combine elements of function. they are able to spread the risk over many other locations. Learning Curve: Productivity of the MNE in manufacturing industries increases through the experience production. Reduction of Political Risk: Because there are different political and economic systems in existence there is more risk involve for the MNCs. the firm's policies would be different than if the objective were to maximize shareholders' wealth.S. but there are several exceptions that would have to be considered if the focus was not on MNCs based in the United States. 4. than local foreign companies.S. uses that success to exploit other foreign markets. parent is the sole owner of the subsidiaries. but it is also a partnership. product. and. They are able to capitalize easier. if the objective were to maximize earnings in the near future. Management: Being large organizations. Peat-Marwick is an MNE. Financial Strength: Because of its sheer size. Advantages of MNE: 1. or employees. 8. even a general statement about the goal of the MNC might be questioned when considering MNCs based in other countries. MNEs can be larger than governments of countries in which they operate. GOAL OF THE MNC The commonly accepted goal of an MNC is to maximize shareholder's wealth. banks. For example. MNEs are generally large firms whose operations and functions expand beyond the spectrum of national boundaries.S.

The manager estimated the costs and benefits of the project from the subsidiary's perspective and determined that the project was feasible. for corporations with shareholders who differ from their managers. in order to receive more responsibility and compensation. some nonU. the sheer size of the larger MNCs can also create large agency problems. First. If financial managers are to maximize the wealth of their MNC's shareholders. Second. This objective will not necessarily coincide with maximizing the value of the overall MNC. they face a different set of problems than corporations with a purely domestic operations. they must implement policies that maximize the value of the overall MNC rather than the value of their respective subsidiaries. For many MNCs. Financial managers of an MNC with several subsidiaries may be tempted to make decisions that maximize the values of their respective subsidiaries. However. for the following reasons. managers tend to downplay the short-term effects of decisions. The costs of ensuring that managers maximize shareholders' wealth (referred to as agency costs) are normally larger for MNCs than for purely domestic firms. Financial Management of the Multinational Corporation Since multinational corporations are involved in payables and receivables denominated in different currencies. a conflict of goals can exist. This conflict is often referred to as the agency problem. which may result in decisions for foreign subsidiaries of the U. The estimated after-tax benefits received by the parent were more than offset by the cost of financing the project. product shipments across national borders.S. MNCs that have subsidiaries scattered around the world may experience larger agency problems because monitoring managers of distant subsidiaries in foreign countries is more difficult. it is difficult for the parent to monitor all decisions made by subsidiary managers. However. However.S. The corporate treasurer and other financial decision makers of the multinational corporations operate in a cosmopolitan setting that offers profit and loss opportunities never .-based MNCs that are inconsistent with maximizing shareholder wealth. Third. Conflicts Against the Goals of MNC: It has often been argued that managers of a firm may make decisions that conflict with the firm's goal to maximize shareholders' wealth. major decisions by subsidiary managers must be approved by the parent. Fourth. the MNC's overall value was reduced. Decisions to expand may be determined by the desires of managers to make their respective divisions grow. a decision to establish a subsidiary in one location versus another may be base on the location's appeal to a particular manager rather than on its potential benefits to shareholders. and subsidiaries operating in different sovereignties. If a firm were composed of only one owner who was also the sole manager (sole proprietorship). For example. foreign subsidiary managers raised in different cultures may not follow uniform goals. Consider a subsidiary manager who obtained financing from the parent firm (headquarters) to develop and sell a new product. a conflict of goals would not occur. While the subsidiary's individual value was enhanced.financial managers throughout the MNC to have a single goal of maximizing the value of the entire MNC instead of maximizing the value of any particular foreign subsidiary. the manager neglected to realize that any earnings from this project remitted to the parent would be taxed heavily by the host government.

If top management wants foreign managers to be involved in currency management and international financing issues. However. and goals as conditions change. then the foreign currency would be the appropriate currency for evaluation. In this management setting. The basic issues such as control. Typical control systems are based on setting standards with regard the to sales. Therefore. The responsible individuals at the parent office or headquarters review financial reports from foreign subsidiaries with a view toward modifying operations and assessing the performance of foreign managers. All methods have the common goal of providing management with a means of monitoring the performance of the corporation's operations. There is no "correct" system of control.considered by the executives of purely domestic corporations. new strategies. establishing a useful control system is more difficult for a multinational corporation than for a purely domestic corporation. They choose to move funds among divisions based on a system wide view rather than what is best for a single subsidiary. Other corporations prefer more centralized management in which financial managers at the parent make most of the decisions. or other specific variables and then examining many financial statements and reports to evaluate the achievement of such goals. Some multinational corporations prefer a decentralized management structure in which each subsidiary has a great deal of autonomy and makes most financing and production decisions subject only to general parent company guidelines. the attributes of financial management in the multinational corporation are very unique. Methods vary across industries and even across corporations in a single industry. The parent-corporation managers assume responsibility for maximizing the value of the corporation. and capital budgeting. intra-corporation transfers. inventory. A highly centralized system would have foreign managers evaluated on their ability to meet goals established by the parent for key variables like sales or labor costs. and behave as other managers (managers not themselves a part of a foreign multinational) in the foreign country would. On the other hand. the foreign manager may be expected to operate and think as the stockholders of the parent corporation would want obtain goals and objectives. cash management. and capital budgeting are face by all corporations. with foreign managers basically responding to directives from the . The problems particular to the internationally oriented corporation are more complex than those of the domestic corporations such as financial controls. profits. should foreign subsidiary profits be measured and evaluated in foreign currency or the domestic currency of the parent corporation? The answer to this question depends on whether foreign managers are to be held responsible for currency translation gains or losses. The financial management of a multinational corporation involves exercising control over foreign operations. intra-corporation transfers. so the foreign manager makes decisions aimed at increasing the parent's domestic currency value of the subsidiary. cash management. Financial Control Any business corporation must evaluate its operations and functions periodically to better allocate resources and increase income and in general to acquire its goals and objectives. then the domestic currency of the parent would be a reasonable choice. For instance. The control mechanism in such corporations is to evaluate foreign managers based on a their ability to increase that value. if top management wants foreign managers to concern themselves with production operations and functions.

we might invest the colons in Costa Rica for 30 days if the subsidiary faces a large payment in 30 days and we have no need for the funds in another area of the corporation. Should the colons be converted to dollars and invested in the United States. banking. The message to parent company managers is to place blame fairly where the blame lies. The corporate treasurer is concerned with maintaining the correct level of liquidity at the minimum possible cost.S. Considering the discussion to this point. suppose a U. if there exists a significant threat that the government or Central Bank could . In a dynamic world. Actions of the parent that lower a subsidiary's profit should not result in a negative view of the foreign manager. corporations must maintain some liquid resources. or placed in Costa Rican colons investments. The multinational faces the challenge of managing liquid assets denominated in different currencies. we would never let the funds sit idly in the bank for 30 days. The challenge is compounded by the fact that subsidiaries operate in foreign countries where financial market regulations. Liquid assets are those that are readily spent. foreign exchange controls. Cash is the most liquid asset. When a subsidiary receives a payment and the funds are not needed immediately by this subsidiary. other actions beyond the foreign manager's control such as changing tax laws. monetary policies. Even without legal restrictions on foreign exchange movements. the 500 million colons may have to be kept in Costa Rica and invested there until a future time when the Costa Rican subsidiary will need them to make a payment. and if the return on the Costa Rican investment is comparable to what we could earn in another country on a similar investment (which interest rate parity would suggest). or inflation rates that could result in reducing foreign profits through no fault of the foreign manager. or converted into any other currency in the world? The answer depends on the current needs of the corporation as well as the current regulations in Costa Rica. legal. Cash Management Cash management involves utilizing the corporation's cash as efficiently as possible. Foreign managers often may be asked by the parent corporation to follow policies and relations with other subsidiaries of the corporation that the managers would never follow if they sought solely to maximize their subsidiary's profit. the appropriate control system is largely determined by the management style of the parent. Therefore. There are highly liquid short-term securities that serve as good substitutes for actual cash balances and yet pay interest. accounting. Given the daily uncertainties of economics and business. it is clear that managers at foreign subsidiaries should be evaluated only on the basis of things they control. If Costa Rica has strict foreign exchange controls in place. In any case.top. There are times when the political. In addition. multinational's Costa Rican subsidiary receives 500 million colons. or economic situation in a country is so unstable that we keep only the minimum possible level of assets in that country. and institutions differ. the corporation has a strong incentive to minimize its holdings of cash. corporate fortunes may rise and fall because of events entirely beyond any manager's control. the managers at the parent headquarters must decide what to do with the funds. For instance. Even when we will need colons in 30 days for the Costa Rican subsidiary's payables. But since cash (and traditional checking accounts) earns no interest. By leaving the funds in colons we do not incur any transaction costs for converting colons to another currency now and then going back to colons in 30 days.

Multinational cash management involves centralized management. the corporation will have goods and services and resources moving between subsidiaries. Netting involves the consolidation of payables and receivables for one currency so that only the difference between them must be bought or sold. For instance. Through such centralized coordination. The parent financial managers determine the net payer or receiver position of each subsidiary for the weekly netting. the overall cash needs of the corporation are lower. If each subsidiary operated independently.confiscate or freeze bank deposits or other financial assets. but require excellent information flows between all divisions and headquarters. buying or selling only the net amount of any currency required after aggregating the receivables and payables of all subsidiaries over all currencies. then the $2 million receivable can be used to fund the $3 million payable. transferring funds among divisions of the corporation often depends on what governments will allow. The parent corporation always has an incentive to minimize taxes by pricing transfers in order to keep profits low in high-tax countries and by shifting profits to subsidiaries in low-tax countries. there would be more cash held in the family of multinational foreign units than if the parent headquarters directed the surplus funds of one subsidiary to the subsidiary facing the payable. This occurs because subsidiaries do not all have the same pattern of cash flows. If the payment and receivable both are due on the same day. Had the two European operations not been subsidiaries. but they are managed from the home office of the parent corporation. The setting of transfer prices can be a sensitive internal corporate issue because it helps to determine how total corporation profits are allocated across divisions. and only $l million must be bought in the foreign exchange market. This is done by having intra-corporation purchases . Rather than buy $3 million to settle the payable and sell the $2 million to convert the receivable into dollars. suppose Ohio Instruments in the United States sells $2 million worth of car phones to its European sales subsidiary and buys $3 million worth of computer frames from its European manufacturing subsidiary. Governments are also interested in transfer pricing since the prices at which goods are transferred will determine tariff and tax revenues in those economies. incurring transaction costs twice on the full $5 million. Beyond the transfer of cash. Centralization of cash management allows the parent to offset subsidiary payments and receivables in a process called netting. Subsidiaries and liquid assets may be spread around the world. the corporation has one foreign exchange transaction for $l million. Effective netting requires accurate and timely reporting of transactions by all divisions of the corporation. one subsidiary may receive a dollar payment and finds itself with surplus cash. we would incur the transaction costs of currency conversion to avoid the political risk associated with leaving the money in Costa Rica. the financial managers would still practice netting but on a corporate wide basis. Leads and lags increase the flexibility of parent financial managers. Only these net amounts are transferred within the corporation. The price that one subsidiary charges another subsidiary for internal goods transfers is called a transfer price. while another subsidiary faces a dollar payment and must obtain dollars. Intra-corporation Transfers Since the multinational corporation is made up of subsidiaries located in different political and economic jurisdictions. Netting could still occur by leading or lagging currency flows. For example.

Plans for capital expenditures are usually summarized in a capital budget. Governments often restrict the ability of multinationals to use transfer pricing to minimize taxes. we must discount future cash flows to reflect the fact that the value today will fall depending on how long it takes before the cash flows are realized. Comparing projects in different countries requires a consideration of how all factors will change over countries. that is. The corporation that uses transfer pricing to shift profits from one subsidiary to another introduces an additional problem for financial control.by the high-tax subsidiary made at artificially high prices. Customs officials may determine that a shipment is being "under-invoiced" and may assign a value that more truly reflects the market value of the goods. the adjusted present value approach is presented here as an appropriate tool for capital budgeting decisions.term commitments of funds expected to provide cash flows extending beyond one year are called capital expenditures. This may be done to allow the subsidiary to borrow at more favorable terms. The adjusted present value (APV) measures total present value as the sum of the present values of the basic cash flows estimated to result from the investment (operations flows) plus all financial effects related to the investment. There are several alternative approaches to capital budgeting. for example. For multinational corporations. like machines or factories or whole companies. When tariffs are collected on the value of trade. Long. Capital budgeting is an imprecise science. Since such long-term commitments often involve large sums of money. The U. Internal Revenue Code.S. It is important that the corporation be able to evaluate each subsidiary on the basis of its contribution to corporate income. The higher profits can be created by paying the subsidiary artificially high prices for its products in intra-corporation transactions. the multinational has the incentive to assign artificially low prices to goods moving between subsidiaries. We work with present value because the value Qf a dollar to be received today is worth more than a dollar to be received in the future. A useful approach for multinational corporations is the adjusted present value approach. while intra-corporation sales by the high-tax subsidiary are made at artificially low prices. say one year from now. Multinational corporations considering foreign investment opportunities face a more complex problem than do corporations considering only domestic investments. to improve the apparent profitability of a subsidiary. and foreign tax regulations. Capital Budgeting Capital budgeting refers to the evaluation of prospective investment alternatives and the commitment of funds to preferred projects. The typical corporation experiments with several alternative scenarios to test the sensitivity of the budgeting decision to . since its credit rating will be upgraded as a result of the increased profitability. Multinational corporations are frequently called upon by tax authorities to justify the prices they use for internal transfers. Foreign projects involve foreign exchange risk. control. political risk. Any artificial distortion of profits should be accounted for so that corporate resources are efficiently allocated. and forecasting future cash flows is sometimes viewed as more art than science. Capital expenditures are made to acquire capital assets. requires “arm 's-length pricing” between subsidiaries charging prices that an unrelated buyer and seller would willingly pay. Transfer pricing may also be used for "window-dressing". As a result. careful planning is required to determine which capital assets to acquire.

To the extent that subsidiary managers recognize the goal of maximizing the value of the overall MNC and are compensated in accordance with that goal. the MNC may partially compensate its board members and its executives with its stock. governments have recently recognized that such protectionism may promote inefficiencies and they are now more willing to accept takeovers and the subsequent layoffs that occur in following takeovers. this style gives more control to those managers who are closer to the subsidiary's operations and environment. they allow subsidiary managers to make the key decisions about their respective operations. this threat is supposed to encourage managers to make decisions that enhance the MNC's value. However. First. Impact of Management Control The magnitude of agency costs can vary with the management style of the MNC. One of the key assumptions in projects considered for unstable countries is the level of political risk that must be accounted for. A second form of corporate control is the threat of a hostile takeover if the MNC is inefficiently managed. United States based MNCs are commonly monitored by mutual funds and pension funds because a large proportion of their outstanding shares are held by these institutions. Impact of Corporate Control The MNC is subject to various forms of corporate control that can be used to reduce agency problems. Yet. since other types of decisions would cause the MNC's stock price to decline. this may only effectively control decisions by managers and board members who receive stock as compensation. The alternative style of organizing an MNC's management is a decentralized management style. This style is more likely to result in higher agency costs because subsidiary managers may make decisions that do not focus on maximizing the value of the entire MNC. However. which can encourage them to make decisions that maximize the MNC's stock price. However. the decentralized management style may be more effective. In theory. the parent's managers may make poor decisions for the subsidiary if they are not as informed as subsidiary managers about financial characteristics of the subsidiary. therefore. In addition. some MNCs attempt to achieve the advantages of both styles. Their monitoring tends to focus on broad issues to ensure that the MNC uses a compensation system that motivates managers or board members to make . Cash flows should be adjusted for the threat of loss resulting from government expropriation or regulation. Given the obvious tradeoff between centralized and decentralized management styles. Other firms would be more likely to acquire the MNC at such a low price and might terminate the existing managers. That is. but the decisions are monitored by the parent's management to ensure that they are in the best interests of the entire MNC. A centralized management style can reduce agency costs because it allows managers of the parent to control foreign subsidiaries and therefore reduces the power of subsidiary managers. some managers may still make decisions that conflict with the MNC's goal if they do not expect their decisions to have much of an impact on the stock price. the potential benefits from a takeover were effectively eliminated. this threat was not very imposing for managers of subsidiaries in foreign countries because foreign governments commonly protected the employees.different assumptions. In the past. A third form of corporate control is monitoring by large shareholders.

The foreign banks are large and hold a sufficient proportion of shares of numerous firms (including some United States based MNCs) to have some influence on key corporate policies. Corporate control on MNCs based in the United States has increased and is sometimes cited as the reason for the unusually strong stock price performance of U. currency convertibility rules. Some countries may enforce more of these restrictions on a subsidiary whose parent is based in a different country. they do not attempt to intervene unless a particular firm is experiencing major financial problems. For example. disposal of production waste materials. and Sears Roebuck were subjected to various forms of shareholder activism. For example. since corporate policies are now undertaken with more awareness about their impact on the stock price. firms during the 1990's. Because these regulations can influence cash flows. earnings remittance restrictions. and pollution controls are examples of the restrictions that force subsidiaries to incur additional costs. to use excess cash for repurchasing shares of stock rather than investing in questionable projects. they are confronted with various constraints that can be classified as environmental. and to ensure that the MNC does not insulate itself from the threat of a takeover (by implementing antitakeover amendments. or ethical in nature. Ethical Constraints: There is no consensus standard of business conduct that applies to all countries. for example). IBM. which do not use deposited funds to purchase stocks). regulatory.decisions to maximize the MNC's value. A business practice that is perceived to be unethical in one country may be totally ethical in another. In general.S.S.S. Also. Their additional role as a tender to many of these firms enhances their ability to monitor corporate policies. and other regulations that can affect cash flows of a subsidiary established there. Environmental Constraints: Each country enforces its own environmental constraints. Regulatory Constraints: Each country also enforces its own regulatory constraints pertaining to taxes. Those MNCs that tend to make decisions that appear inconsistent with maximizing shareholder wealth are subjected to shareholder activism in which pension funds and other large institutional shareholders lobby for management changes or other changes. corporate control practices as a means of forcing local firms to make decisions that satisfy their respective shareholders. foreign-owned banks also maintain large stock portfolios (unlike United States commercial banks. they must be recognized by financial managers when assessing policies. Many European countries have recently imposed tougher anti-pollution laws as a result of severe pollution problems. MNCs such as Eastman Kodak. Other countries are adopting U. However. Ford. Building codes. these banks have not played a major role in corporate control. Like U. Constraints Interfering with the MNC's Goals When financial managers of MNCs attempt to maximize their firm's value. mutual funds and pension funds. any change in these regulations may require revision of existing financial policies. the United States-based MNCs are well aware of common business practices in some less developed countries that would be declared illegal in the United States. Bribes to governments in order to . so financial managers should not only recognize the regulatory restrictions that exist in a given country but also monitor them for any potential changes over time.

Global is where the firm views the entire world as one market and standardizes its products.S. Performance is the percentage of total revenues. production. Four main criteria to identifying a MNE: 1. That is. Structure refers to the number of countries in which the MNE operates. personnel and product plants. even though they might list shares of stock and have ownership in different countries. 66%-Japan. 4. The corporation is really a collection of subsidiaries. 96%-Switzerland. .html. dumping chemicals such as fertilizers. assets and employees coming from abroad. corporations to engage in this type of behavior. 65%-U.S. A recent report presented to Congress by the Justice Department.S. This may enhance their worldwide credibility.receive special tax breaks or other favors are common.(e. Some United States-based MNCs have made the costly choice to refrain from business practices that are legal in certain foreign countries but not legal in the United States. profits. 98% of business is done abroad-Switzerland is home country. they may be at a competitive disadvantage. Behavior 3.. Lucky Star and Daewoo. Behavior is the attitude of top management toward the role of international operations within the total corporate strategy. 2. For example: Kereitsus in Japan. If they do not participate in such practices. 78%-France. Coordination is how the firm looks at its worldwide operations. the ownership of the corporation is maintained in the parent country. See: Country Reports on Economic Policy and Trade Practices (United States Department of State) www. is an exception. Michelin. owned. estimated that U. Examples: Suzuki owned by GM.S. 3. For the majority of MNEs. they receive poor reputations in countries that do not approve of such practices. The U.g.S. multi-domestic or global. Structure of Corporation 2. and food not approved by the FDA in the United States). an Mitsubishi is owned by Japan. The United States Foreign Corruption Practices Act forbids U. otudated medicines. Performance 4. In most of the European corporations. Gillette. The MNCs face a dilemma. Coordination 1. Gillette is U. firms lost out on billions of dollars of international business transactions because of bribes provided by foreign competitors. Also refers to the nature of corporate ownership.gov/www/issues/economic/trade_reports/index. The greater the reliance of the corporation on foreign materials.S. and mergers in the U. they follow a worldwide code of ethics. the more global the corporation is. Yet. Sony. even though GM owns a large percentage. Chaebols in South Korea such as Samsung. the majority of CEOs are from foreign countries. If they derive 40% or more from outside the home country. which can increase global demand for the products they produce. Multi-domestic is where each country is considered a different market (Japan uses the term multi-cultural corporation). if they do participate. the MNE is considered Stateless Corporation.state. Hoffman La Roche. At Nestle.

and beliefs about how to manage operations. Regiocentric MNE: relies on local managers from particular geographic areas to handle operations in and around the area. 3. information booklets. (e. and market research. International specialization can be: Horizontal Specialization: which is the assignment of jobs so that individuals are given a particular function to perform and tend to stay within the confines of the area. in common markets or trade . Objective Formalization: refers to the number of documents. For example. Japanese Keiretsu such as Mazda and Mitsubishi. organizational charts. Formalization: is define as the use of structures and systems in decision making. 2.S. g. and more cultural induced values. employee’s attitudes. East Asia. informal controls. Level of hierarchy (principle/ agent). and centralization. and programs. written policies. Keiretsus. Ethnocentric MNE: put home office people in charge of key international management positions. Philosophical Positions Influencing the Training Process of a MNE: 1. traditional suppliers. operational instructions. specialization. Factors: strategies of multinational. Decentralization is moving down to the lower level personnel. United States of America and Germany. for example.. 1. for example. workers and Taiwan sees more objective as opposed to subjective formalization. procedure manuals.Globalization Effect Forces Organizational Characteristics of a Multinational: Formalization. ( principle-agent). attitudes. Specification: are the organizational characteristics that assign individuals to specific well define tasks. purchasing. For example. communicating and controlling. written job schedules and descriptions. For example. recruiting. Australia and in general. risk takers and risk avoidance. jobs in customer service. It will do all training at headquarters. 3. (e. It will do the training of employees relying on local management to assure responsibility of seeing that the training function is carried out. Vertical Specialization: is the assignment of work to groups or departments where individuals are collectively responsible to perform.g. Centralization: Is a management system under which important decisions are made at the top of the pyramid. Subjective Formalization: tends to be vague and with less specific goals and procedures. schedules. All important decisions are taken by individuals or private institutions and the function of the government is simply to provide a framework and stability within which the market operates. Polycentric MNE: is an MNE that places local nationals in key positions and allows these managers to appoint and develop their own people as long as the operations are sufficiently profitable. sales. Chaebols in South Korea. Korea and Japan respond more to formalization than U. The multinational headquarters group and the affiliated world company managers all have the same basic experiences. markets where the expatriates tend to be not expensive for the corporations. and mergers in Taiwan.. in Japan. and market. and local market conditions. training. and chaebols in Korean firms). 2. run corporations. Korean firms with better working environments when workers expect their jobs to be set forth more strictly and formally.

while another may be at the peak of its growth cycle. Japan. It often relies on regional group operation and cooperation of local managers... Indonesia and Honduras are examples of a labor cost country. 200 years). Gillette corporation). For example. They enhance the smoothing process by their involvement in other countries. Japan sacrificed profit in the short term for many years to build a large market share in the long run (e. Sales expansion: The larger the sales. for example. tariffs. Political risk is not only the threat of political upheaval but also the likelihood of arbitrary and discriminatory governmental policies and actions that will result on financial loss or competitive disadvantage.) Employee training helps smooth the situation. 4. Income and sales smoothing 4. This helps to minimize risk. minimization of costs 2. for example has sales growth. quotas. but in order to capture a greater market share. Rationalization of production is where a firm will produce different components of a product in different markets to take advantage of lower costs. C. Corporations that have the advantage of cost differentials have leadership advantages over other markets. it offered a variety of carbonated juices to Latin America. another is to go to different countries and train them. (e. Then they were introduced to the United Staes and other lines such as frozen juice and “Fruitopia”. called “Fanta. because different countries are in different economies and business cycles. the more profitable the company is in the long run. Advantages for the corporation to operate in the international arena from a micro economic point of view: 1. Greater variety Cost reduction: Corporations go to different markets to take advantage of the production components and their costs.” It was successful. China. Income and sales smoothing: Advantages accrue to corporations that can minimize the year-to-year swing in sales and income and short run fluctuations such as unemployment and inflation. increase prices. for example. price controls. Sales expansion 3. IBM and John Deere. These corporations maintain R&D and technology at home. Latin America likes fruit juices. An example: Coca Cola. Geocentric MNE: seeks to integrate diverse regions of the world through a global approach to decision making.zones). content . (One country may be coming out of a recession. Companies produce for the larger market to reduce costs by increasing efficiency and using machines to full capacity. The United States is more concerned with short term profits. Greater variety: Offer as many varieties as possible. Political Risk: any change in the political environment that may adversely affect the value of the firm’s business activities. Different products and processes are introduced to different markets.. Cost reduction.g. Coca Cola sales were good.g.

remittance restrictions. Good corporate citizen to build domestic support 4. pharmaceuticals -. and limitations on export requirements. Plant closing (shut down) laws on severance pay – India. product must have high percentage of materials bought in China -.e.South Korea.oil should be accrued only by citizen -. increased security costs. Kidnap .Greece. in order to sell product. Mandatory labor benefits legislation ? increase in operating costs 5. -.Mexico.S. lower productivity. lost sales 6. impact on loss of sales and increase in cost of public relations 4. Ways of Overcoming Political Risk 1. reduced value of repatriated earnings 8.Terrorism . local content. revolutions and foreign export changes. Congo. Sell shares of subsidiary to host citizens such as 10%. Middle East. subsidization. Somalia. Civil Wars. Purchase inputs from local suppliers 5. limited ownership of domestic business in order to avoid control by foreigners . subsidiary of World Bank (1988). abatements and dumping. investments from nationalization. Expropriation. insurrections. 1970's oil embargo. U. Employ and train host country citizens in key management and administrative decisions 6. impact on loss of future profits and assets 3. Euro-currency. energy industry .China. although it is really expensive. foreigners (banks) have difficulty obtaining Korean currency thus making it harder to compete with Korean banks.10% and 80%.e. and measures directly to the MNE such as partial divestment of ownership. Bosnia. Macro political.Portugal.Government can funnel credit at preferential interest -. Tax. impact on loss of future profits 2.i. and currency inconvertibility. restricts ownership on TV (25%) -.Flemish (Dutch-speaking) in Belgium must own 51% of commercial broadcast . expatriate employment. Inflation. Support local charities -. higher operating cost 7. Confiscation. Chinese operations Decrease Political Risk: Match risks with rewards (profits) Overseas Private Investment Corp..Civil Wars and disruption of production. Currency Devaluations and currency risks. Banking policies. decreased in Rwanda in 90's. Short-term lease in new equipment 3. Examples of political risk: 1. destructions of supplies. i. Campaigns against foreign goods. Lloyds of London underwrites political risk. Financial crash of ‘89. decreased profits.Spain.S. Euro-Disney by French farmers. (OPIC).requirements. Zaire Micro political. government sponsored which insures U. 15% . 2. Multilateral Investment Guarantee Agency (MIGA). increased management costs..

9. Copyrights) International Convention for the Protection (Paris Convention) of Industrial Property Rights. Concentration of research and development in home country. residents don’t have control over operations of company within borders. EU. Reduction on barriers of international trade by government host.S.000 MNE with $316 trillion. 12. 6. 4. 10. Privatization. which group several markets into a single market 5. 2. 2. Increased flow of ideas and information across borders . 8. Lack of contribution to host exports and balance of payments. 3. dominance. Literary and artistic works (Beune Convention). such as preferential trade arrangements. Worsen Y ( income) distribution. research facilities and sale facilities. they do not contribute in the “learning by doing” process of host country. 11. 13. Rise of interest rates because capital needed locally. 8. 14.3% to 43%. Disregard to employer/employee safety and environment.S. Universal Copyright Convention. Create alliances with corrupt host country elites. Transportation.cable. increase in new markets by international firms which are exporting to them or building production facilities for local manufacturer. Majority of ownership (by shareholders) of subsidiary are owned by parent company.S. 4. They recruit best personnel and managers from host at the expense of local entrepreneurs. Host country educates and trains employer/employees. Commerce Department. NAFTA. Source: U. Europe 40% to 43%. therefore. repatriation of profits -. 5. 9. Dominate major industrial sector. Disregard culture and social impact Globalization Effect Forces: 1. Little training to host employer/employees. ASEAN. U. www. Key managerial and technical positions are held by expatriates. particularly monopoly power. 7.Japan with its administrative delays -. Poland. Contribute to inflation by stimulating D (demand) for scarce resources. e-mail.Latin America with its administrative delays and briberies MNC have been criticized by host countries for many reasons: 1. -. 3. Earn excessive profits and fees due to their goals. 7. . Advances in computer and communication technology. Lessening of U. as a result. Japan from 3% to 13%. 15. Unification and socialization of global community. They do not adapt technology to host country’s needs. 2001. Tend to be more accountable to home country. Globalization of market economic system.East European. DI 25. 17. Explosive growth in DI in the trillions of dollars. Mini nationals ? small and medium size firms with exporting.Intellectual Property Rights: (Patents. There are 37. 6. 16.

by foreign of other countries. (i) Those that branch plants of established enterprises may enjoy over de novo firms. finance. production shifting and global sourcing of inputs. Massive deregulation. know-how. 2. 5. information).. and creation of options and/or political and cultural scenarios). for information. Property right and/or intangible asset advantages . Product innovations. finance. Exclusive or favored access to product markets. The integration of worldwide operations of flexibility. 3. Access to resources of parent company at marginal cost. economies of scope and specialization). 'bank' of human capital experience. natural resources. marketing. Ability of parent company to conclude productive and cooperative inter-firm relationships. etc.A. Degree of internationalization/globalization of the U.S. (ii) Those that specifically arise because of multi-nationality. Hierarchical-Related Advantages a.g. Collapse of Communism and end of Cold War. and speed. organizational and marketing systems. (e. 4. Synergistic economies (not only in production. The jettisoning of statist policies and their replacement by the free market policies in the Third World countries. government intervention. production management.e. etc. economy. i.g. multinationals in the 1980's and 90's: 1. acquisitions and leveraged bought outs. and so forth. adaptability. Ability to obtain inputs on favored terms due to size or monopsonistic influence. non-modifiable knowledge. b. 10. of organizing with complementary assets.). The revolution of information technology. 7. Alliance or Network-Related Advantages .. More favored access to and/or better knowledge about international markets. Ownership-Specific Advantages (of enterprise of one nationality or affiliates of same) over those of another.Globalization forces which changed U. Exclusive or favored access to inputs. (e.S. finance. Multi-nationality enhances operational flexibility by offering wider opportunities for arbitraging. The rise in the market for corporate control with its waves of takeovers. Those due mainly to size. but in purchasing. 6.g. as between Japanese auto assemblers and their suppliers.S. The Limited with 3.g. in different currency areas.200 stores but headquartered in Columbus. (e. markets. Increase of foreign direct investment in the U. innovator capacity. Advantages of common governance. Ability to take advantage of geographic differences in factor endowments. Ohio). labor.. product diversity and learning experiences of enterprise. 9. mergers. Ability to learn from societal differences in organizational and managerial processes and systems. Sale of hundreds of billions of dollars of state owned firms around the world in massive privatization efforts designed to shrink the public sector. 8... The unprecedented number of nations submitting themselves to the exacting regions and standards of the global market place. marketing. Balancing economies of integration with ability to respond to differences in country-specific needs and advantages. labor etc. (e. finance arrangements. THE ECLECTIC PARADIGM OF INTERNATIONAL PRODUCTION 1. Ability to diversify or reduce risks.

and linkages with knowledgebased institutions. Access to embedded knowledge of members of networks. technological spill-over). developments in materials. and monitoring of. universities. information asymmetries and adverse selection. labor market pooling).. shared learning and training experiences. etc. Encapsulation of learning and development times. inputs into innovative developments and exploitation of new markets. price controls. tax differences.e. New insights into. tariffs. above). (e. new markets. To avoid cost of broken contracts and ensuing litigation. Such inter-firm interaction often generates its own knowledge feedback mechanisms and path dependencies. When market does not permit price discrimination. c. Multiple. as in the case of cooperative research associations. and to protect reputation of internalizing firm. To control market outlets (including those which might be used by competitors). . and how they might impact on existing products and production processes. quotas. particularly in unfamiliar locations or where products need to be adapted to meet local supply capabilities and markets. Improved knowledge about process and product development and markets. and from mutual support and cooperation between members of network. Need of seller to protect quality of intermediate or final products. Vertical Alliances (i) Backward access to R&D. marketing techniques and distribution channels. Opportunities to develop 'niche' R&D strategies. (ii) Forward access to industrial customers.. Regular input by them on problem solving and product innovation on the consequences of projected new production processes for component design and manufacturing. technology) being sold). Advice by customers on product design and performance. Buyer uncertainty (about nature and value of inputs (e. (e. To capture economies of interdependent activities (see b. and to identify new uses for related technologies. Access to additional capabilities to capture benefits of technology fusion. Internalization Incentive Advantages (i. Horizontal Alliances Access to complementary technologies and innovative capacity. To control supplies and conditions of sale of inputs (including technology)..). Networks may also help promote uniform product standards and other collective advantages. b.. Help in strategic market positioning. To avoid costs of moral hazard.. Networks (i) Similar firms Reduced transaction and coordination costs arising from better dissemination and interpretation of knowledge and information.g. To avoid or exploit government intervention (e. 2. to circumvent or exploit market failure) Hierarchical-Related Advantages Alliance or Network-Related Advantages Avoidance of search and negotiating costs.a.g.g.g. design engineering and training facilities of suppliers. yet complementary. (ii) Business districts As per (i) plus spatial agglomerative economies. To compensate for absence of future markets. Access to clusters of specialized intermediate inputs.

the comparative technological and organizational advantages of host countries. and consensus politics are at a premium. It suggests that firms are more appropriately likened to archipelagos linked by causeways rather than self-contained 'islands' of conscious power. transfer pricing. Cross-country ideological. Input prices. Societal and infrastructure provisions (commercial.g. Economic system and policies of government: the institutional framework for resource allocation. etc.. Networks may also help reduce the information asymmetries and likelihood of opportunism in imperfect markets. etc. educational.g. differences.To be able to engage in practices. components. etc. over time. Economies of centralization of R&D production and marketing. may allow foreign affiliates and cross-border alliances and network relationships to better tap into. semi-finished goods). labor.g. (e. and exploit. which. quality and productivity.) as a competitive (or anti-competitive) strategy. they also allow many of the advantages of internalization without the inflexibility. legal. flagship or lead MNCS. forbearance. industrial or science parks and the external economies they offer participating firms are examples of these advantages which. 475-76. R&D alliances and networking which may help strengthen the overall competitiveness of the participating firms. import controls) to trade in goods. particularly where intangible assets are tacit and need to speedily adapt competitive enhancing strategies to structural change. Source: Dunning. energy. reciprocity. While. they may add to the incentive advantages of the participating hierarchies. enhance their role as arbitragers of complementary cross-border valueadded activities. “Reappraising Eclectic International Business Studies”. cross-subsidization. p. Alliances or network related advantages are those which prompt a voice rather than an 'exit' response to market failure. Such quasi-internalization is likely to be most successful in cultures in which trust. leads and lags. produce a stimulating and productive industrial atmosphere. 3. materials. John. The extent and type of business districts. time. language.). International transport and communication costs. They may also create local institutional . political. At the same time. transport. Artificial barriers (e. predatory pricing. (e.. (2001). Investment incentives and disincentives (including performance requirements. cultural.limited inter-firm cooperative relationships may be a substitute for FDI. and communication). the growing structural integration of the world economy is requiring firms to go outside their immediate boundaries to capture the complex realities of know-how trading and knowledge exchange in innovation. by orchestrating the use of mobile 0 advantages and immobile advantages. Location-Specific Variables (these may favor home or host countries) Hierarchical-Related Advantages Spatial distribution of natural and created resource endowments and markets. in others. when organized within a framework of alliances and networks. in some cases. The L-specific advantages of alliances arise essentially from the presence of a portfolio of immobile local complementary assets. business. bureaucratic or risk-related costs associated with it. Moreover.

tax and other incentives To ensure stability of supplies at right price. economies of scope. aftersales servicing. some R&D (b) Consumer electronics. economies of scale. ability to generate brand loyalty Material and labor costs. government policy (e. information. etc. cocoa. complementary assets. to gain new product lines or markets Industries that record a high ratio of fixed to overhead costs and which offer substantial economies of scale or synergy Trade and distribution (import and export merchanting) Market access. processed foods. intelligent regions and social embedded-ness. need to ensure sales outlets and to avoid underperformance or misrepresentation by foreign agents Either as entry to new markets or as part of regional or global marketing strategy A variety of goods. markets and other assets in which firm is deficient Economies of common governance. pineapples. buyer ignorance or uncertainty. Need to protect quality of inputs. copper. geographical diversification and international sourcing of inputs (a) Economies of product specialization and concentration (b) Low labor costs: incentives to local production by host governments (a) As for second category plus gains from economies of common governance (b) The economies of vertical integration and horizontal diversification As part of regional or global product rationalization and/or to gain advantages of process specialization (a) Motor vehicles electrical appliances.thickness. pharmaceuticals Strategic asset seeking Any of first three that offer opportunities for synergy with existing assets Any of first three that offer technology. airline services Efficiency seeking (a) of product (b) of processes As above. size and negotiating strengths Possession of natural resources and related transport and communications infrastructure. control markets To gain privileged access to resources vis-à-vis competitors (a) Oil. cameras.g. access to markets. need to be near customers. technology. to reduce or spread risks To strengthen global innovatory or production competitiveness. business services. airlines and shipping) .) Wish to reduce transaction or information costs. 1999. surplus R&D and other capacity. particularly those of ‘lead’ clients Various (see above categories) As part of regional or global product or geographical diversification (a) Accounting advertising. products to distribute Source of inputs and local markets. labor-intensive products or processes Market seeking Capital. management and organizational skills. motor vehicles. Source: “Paragism in an Age of Alliance Capitalism”. etc. cigarettes. to protect property rights To protect existing markets. counteract behavior or competitors. improved competitive or strategic advantage.g. particularly those requiring contact with subcontractors and final consumers Support services Experience of clients in home countries Availability of markets. Journal of International Business Studies. textiles and clothing. market size and characteristics. Illustration of types of activity that favor MNEs Natural resource seeking Capital. investment incentives. banking. bananas.. pharmaceuticals. bauxite. producer goods (b) Where spatial linkages are essential (e. technology. to preclude rivals or potential rivals from gaining new markets Computers. with respect to regulations and to import controls. etc. but also access to markets. hotels (b) Export processing.

geographic. 5. when companies go international. higher sales internationally.) Competitive environment varies from country to country because the number and strength of competitors. Check population and income as determinants of market size. fixed vs. The next four are very important (items 6-9): . production possibilities.C. Corporations will obtain greater profits from abroad than from being merely domestic companies. 1. and partial or total ownership. minimized competitive risk. and increase in global competition. United States's GDP is less than the World’s GDP. The corporation can accomplish this because its leadership in innovation 9technology intensive industries). Dynamic vs. variable resources. market power. Optimization of resources. Keep the same share of market. More people. and suppliers and customers have become international. so for domestic companies to compete. suppliers and customers and because of regulations on how a company can compete. structure. 3. or markets a new product abroad. and image of company during the course of internationalization? Nine reasons: 1. they must go international. Does the company have an idea or use which will give a niche or advantage internationally? 2. but increase market space. 4. Larger market. Therefore. product or both. The corporation will attain greater profits from foreign markets than those received locally. The corporation watches competitors’ actions. Why should a company go international? There are three important questions that the corporation must answer and there are several reasons to the above question. protect investment sand cost smoothing. spread the risk. control. 2. others follow in order to minimized the risks. Utilize idle materials. What happen to the character. privatization. static equilibrium. (Leadership advantage vs. keep up with the competition. access to foreign markets. domestic companies as new competitors. following the leader. companies can now produce in different markets. Growth and expansion to secure future market or deal with future competitors. International when foreigners come to the United States. companies take immediate actions in order not to lose market shares. liberalization of government policies. What causes the firm to go internationally and succeed in a foreign environment against competitors from both domestic firms and other MNE’s? 3. Factors of growth are: rapid increasing expansion of technology. If a company sets operations in new markets. development of institutions encouraging growth. Therefore. Competition has become global via new products becoming global quickly. Corporations need to compete. Corporations need to maximize profits. there are economic reasons to go international such as direct investment.

Horizontal integration may be difficult culturally when the rules of the game are different or you have trouble acquiring or operating. 7. when firms are not efficient internally than external suppliers at the performing activity. in transportation costs. improve scheduling. Eastern Europe (Hungary) exporting or licensing is unavailable. however. Xerox manufactured and sold copiers in Mexico. Alcoa’s control over supplies that it needs for its aluminum production in United States). This is extremely important in centralization or decentralization of operating activities in the global market and global production. Downstream or Backward Vertical. For example. Vertical integration.. avoid dependence on others (suppliers) and to deny such suppliers to the competition. control market and control customers. monopoly competitor . following the costumers. Control where production is sold: price. which otherwise may fall in the hands of competitors. Vertical integration gives the corporation control and assurance of supply and distribution without owning them. the auto industry has more than ten thousand components and the company needs to make decisions as to make or use these components. (i. Reebok and Nike also have to make these type of decisions and all their production has been out source primarily in low wage markets.6. human. geographic distribution).e. control of key resources and operations. planning. coordination and inventory systems. When making these decisions always look at the trade-offs. Forward or upstream integration.e. Problems with vertical integration are that the economies and their exchange rates are volatile. facilitation of specialized investment but creates interdependence. market imperfections. This gives corporations superior size . Alcoa’s participation in ownership of bauxite production facilities in Australia). geography. there is change in relative factors of production. There are advantages. Advantages of vertical integration are: protection of technology. customer.ownership and control: Colluding. product life cycles. costs of negotiations. Companies become vertically integrated to assure sources of supply. corroborating and coordinating. need for financial. for example.. (i. and location. Horizontal integration occurs when the company integrates its own operations and avoid buying and selling to other companies in the same area or industry or licensing technology to them i. (wholesales to retailer. dominate distribution channels. cooperating. proprietary products enable firm to produce a product containing superior features and comparative advantage. Alcoa acquires a Central American plant to make aluminum cans from its United States-made aluminum. Reasons for vertical => protect secrecy or minimize effects of government restrictions. lower costs. the firm must discern against competition. Horizontal expansion occurs when a company goes abroad at the same level in the value chain as its domestic operation. Example: GM attempts to control ore mines in Venezuela to guarantee the ore for GM only. and distribution downstream.e.. and technical resources to undertake projects. To maximize profits. The Vertical approach involves movement along the value chain. and. cost of involvement. Oligopoly. It allows a company to control the upswing (upstream) or downswing (downstream) of the market without actual ownership in the decision to buy or make component parts that go in their final product. Component parts in house ( vertical).

consumers can not postpone purchase. In the Short Run . Companies jostle with each other for larger shares of the world market. there are not outputs produced in the very short run. c.S. Monopoly or oligopoly position gives the company size and ability to operate and produce in foreign markets. Change all resources.Recession cartel such as The Ministry of International trade and Industry (MITI). As the firm produces more units. diamonds. Costs decrease. magnesium. except technology. Long Run.. The Corporation cannot change any of the factors of production.) This is the main reason for going international. (Whirlpool produces 50% of all washers in United States. and the market can only afford one producer. and develop markets. cooperate and coordinate. Economies of Scale . They collude. allocate market territories (OPEC). The only way to recuperate high costs is to sell the product worldwide or to manufacture it worldwide. Example: Oil. sunk costs. It deals with how corporations use the factors of production efficiently to minimize cost. 8. Cartels offer unique products not found outside of the cartel. Eventually. They control the supply and/or price.various companies producing similar product or service work together to control markets for the type of products they produce involve more than a partner. Regulated or natural monopolies are where the governments allow a company to manufacture the product and control the price. Very Short Run.Cost advantages associated with large scale of production. Four stages of factors of production: a. Economies of Scale and Economies of Scope. All factors of production are fixed except one. It is the reduction of the unit’s costs as a producer that makes larger quantities of the product by changing more than one factor of production. b. benefits of quantity purchase or economies of mass production. amounts changed in quantity produced. Short Run. Daimler-Chrysler. If factors of production are added. Japan . the cost per unit falls because fixed costs (plant. the use of capital equipment. Formal agreements to set prices. The costs are variable in the long run supply of labor . the cost increases. Such a production results from reduction of the marginal cost due to increased specialization. Short run supply of labor is fixed. Increase variable input to fixed inputs. sales. Ford. the costs then increase. Oligopolies (cartels) . Examples of foreign oligopolies are cartels. If continue to add inputs. because they are all fixed. equipment and supervisory personnel) are spread out over more units of production. develop a new product lines. Fixed costs are the costs of setting up production facilities in foreign markets. no substitutes.and larger scope of operations. Examples of oligopolies: GM. and small percentage of consumer’s budget compared to the benefits obtained.The Law of Diminishing Marginal Returns. coffee. establish levels of production. etc. All member countries in the cartel must work together for the cartel to be successful and control a particular commodity or resource. In the U. the cost per unit might increase or firm incurs more fixed costs to produce additional units. There is manipulation of price only when the demand is inelastic. even if free. One reason why companies go international. capital or labor is a factor more able to change.

peanut butter and jelly slices. there is decreasing returns or diseconomies of scale or scope. If all inputs are changed for only one output or one industry. therefore. For example. mass customization and. maturity. If inputs increase 40% and outputs increase less than 40%. For example. With the international market. Economies of scale source is the ability to spread fixed costs over large volume. and decline over time.Economies of Scale . Thus. If inputs increase 40% and outputs increase more than 40%. 9. flexibility in manufacturing technology. greater profitability. floating exchange rates. Fuji in Japan and Rank X in Great Britain. Being too dependent on one location makes the firm too risky. The same firm that pioneers the production in the domestic market undertakes production for consumption in foreign markets. Economies of Scale: is the reduction of unit costs achieved by producing large volume of product as plant output increases unit costs decrease. If inputs increase 40% and outputs increase 40% (they are equal). and Smuckers with squeezable jelly bottles. short term economic cycles. Xerox in the United States.same as the Law of Diminishing Returns. Experience Curve: is the systematic reduction in production costs that have been observed to occur over the life of the product. For example. There is an increasing production by single plants as rapidly as possible and since international marketing is larger than domestic. The PLC was given to us by Raymond Vernon in 1966. Product Life Cycle (introduction. The ability of the MNE to employ increasing specialized equipment and personnel. a firm that serves different markets from different locations is capable of accumulating larger volumes. then increasing returns to scale or scope. The PLC in the international market is shorter. Greater levels of production result in the lower cost per unit. d. including technology. Economies of scale is when production occurs in only one industry while economies of scope is producing in more than one industry. a decrease in cost by setting up manufacturing in different locations at once and accommodate demands for local responsiveness manufacturing in different locations makes the company less dependent on locations. there is constant returns to scale or scope. and decline). growth. maturity. growth. Very Long Run. Heinz with purple and green squeezable ketchup bottles. Investment on those markets where local production grows larger to support local . Firms that use economies of scale have competitive advantage to spreading fixed costs of building productive capacity over large output and markets. PLC includes birth. An MNE can have lower cost for the production. Change all factors of production. Adam Smith’s division of labor is for the MNE to expand if able to utilize and make full use of specialized equipment and produce large amounts of output required to justify the hiring of specialized personnel. For example. For example metal stamping machinery in the auto industry. in the semiconductor companies. the life of the product is prolonged without too much more expense. because MNE can produce large quantities of output and fully utilize equipment and personnel. Long Run . Each time accumulated output doubles. then we are working under Economies of Scale. except it is in the long run. the product’s production costs decrease.(wages and salaries).

For example. and methods of entry and entry strategies. but for the competitors. it must have international appeal and use. F. Three key economic indicators of countries same as ours to check into are: a. geocentric. yet somewhat difficult to achieve. expanding inputs for more outputs. World economy. . Some considerations include moral codes and customer operational variables. a piece of cake. Economies of Scale/Scope. and increase profits. Choose products and markets for international market. decrease costs. Production. Is there a demand for my product or idea? How can the demand be increased or changed? Will the company be able to supply the demand--produce enough to serve the market? Legal systems are weak in the international market. One can minimize risk with countries that have the same economic system as ours. and entry strategies. Economic growth and economic development. GDP (per capita income). department or branch. product and customers. What a company wants to do.e. Start with a small market and expand. There are five steps in the decision making process. Stretch the goals of the corporation. TRANSITIONAL STAGE FOR THE CORPORATION DECISIONAL AND OPERATIONAL VARIABLES A. How to organize internationally. 2. 3. How a corporation converts inputs into outputs efficiently. One can make things happen by making an active decision. 1. functions. Must decide which world economy to participate in. methods of entry. finance. Are there substitutes to the product? What poses a threat to the product in the international market? Do your competitors or customers sell overseas? E. A product must be “sellable" on the international market. it must be a challenge). Managerial organization. D. A division or branch has more influence over production schedules and allocation than an export department. Marketing allocation. Set up objectives. and which is more successful. Look at how to handle intercorporate research and analysis. and whether to enter or not. subsequently shifts production to developing countries when product standardization and market saturation give rise to price competition and cost pressures. investment in third world countries or developing countries where labor costs are low. Economic efficiency and technology efficiency. Does my product have an international appeal and use? The economy of the country must be studied.production or marketing. Expatriates vs. homocentric and heterocentric. local. PHASE II. (i. Personnel management. 4. for your corporation. Know the capabilities and competitors. The objectives must be practical and attainable. logistics (warehousing and transportation). The Corporation needs to review and analyse the operations.

Even though they are not socialists.how wealth is distributed within the country. Inferior. Third World or Developing Economies: These countries are middle and/or low income and newly industrialized. Distribution of income . Canada.3 million. and GDP is less than $410. Products to sell and produce with regards to the level of income and distribution of income. The country must have a GDP per capita of $3.00. short life expectancy (of 40 years or less). they are still not a market economy . and are moving from agricultural to industrialization. Non-socialist.S.00. Argentina. Brazil. and average McDonald’s worker was $12. no place to invest the income by individuals.00. Brunei is the wealthiest with a GDP per capita of $2. now 12% own about 74% of wealth.00. The low income countries are the developing countries.b.A.00. Chile. Decisions and operational variables.00..somewhat in-between.000.600.wb.000. Quality of life . Source: World Bank web site. 42% of the wealth is owned by 68% of the people.00 or more. heavily industrialized. The level of income determines how wealth is distributed among the countries of the world. c. The middle income countries have one or two of the economic indicators. Saudi Arabia.00.00. such as African and Latin American countries. example: Oil. GDP is less than $3. Centrally planned. 5.00 The newly industrialized countries are no longer mainly agricultural but also extractive.measured by life expectancy.wb.S. The U. superior or normal goods and services. GDP less $3. 2002. percentage of GDP generated from services and manufacturing.000. but no credit. or formally centrally planned economies.00. Switzerland. with about $6. average per capita income family of four is $38.600.00. World Bank classification of countries First World: High income countries.600. but also some European countries such as Moldavia with a GDP per capita of $120. high purchasing power.600.000.00. Includes the European community. Examples: South Korea. . high educational level. Income distribution is unfair and uneven.000. In the U. northern hemisphere of the world. Israel. Costa Rica. Average for individuals is $30. high quality of life. and now. CEO was $2.org Second World or Economies in Transition: (Eastern European nations) Advanced industrialized with former socialist system. and South Africa. European non-market economies. is considered de-industrialized and service oriented. minerals (extractive) vs. Percentage of GDP generated from agriculture.000. Japan has more purchasing power than the United States. United States.000.00 per capita..00 but greater than $490. In Latin America. Politically unstable. They have a high per capita income. Source: http://www. In the U. Scandinavian countries. college professor was $84.S.S. They own resources that are exported to industrialized countries.00 and greater than $490. as well as New Zealand and Australia which are part of the British Commonwealth system. For current statistics check on http://www. Same as European former Socialist countries. Undergoing rapid changes.00. lawyer was $110. 2% owned 90% of the wealth in past decades.org The U. low purchasing power.300. In 2002 the average doctor salary was $156.600. There is low percapita income. better quality of life. and one is considered indigent when income is $8. no taxes are paid when income is $12. low quality of life.000. Japan in the southern hemisphere.

Preference aggregation.laws governing how the market will be run 2. the government has absolute control over the businesses through the MITI ( Minister of Trade and Industry). Mass media. Preference articulation. (2) how to produce. Outputs Outputs of the Government: 1.with the new economic systems. Legislative . sales expansion. Republicans . and (4) how can flexibility be maintained through the changes over time. forward capital. government operated businesses are inefficient. Political communications. utility. colleting and paying late. The outputs in a market economy are: (1) What to produce.opportunity costs. If one assumes the government doesn't exist. Economic communications. With superior (YE is +) products. International Firm's Operations and Political Conditions. exporting and importing. In Japan. the demand increases.Democrats. Citizens input into government (Example: Lobbyist. television. comparative risk minimization. degree of competition. How buyer and seller interact. acquisition.edu/~jgarcia/comparative 1. Examples of these products: Bread. Every market has two sectors: Private and public. leads and lags of inter-corporate payments. What type of commodities? With inferior products (YE is -). adjudicate 3. From country to country. the distribution is about 18% of the population owing 43% of wealth. The power of the public sector over the market depends on the country. radio. diversification. articulate and communicate economic decisions. these categories change. then the market controls the country's inputs. accounting. the consumption decreases as income increases (Giffin goods). newspapers. and degree of integration to efficiently coordinate the economic activities. With normal (YE = 1) products. See. and factors of production. consumption remains unchanged as income increases and decreases. Operations and functions are directly related to politics and other environmental variables. accounting. hedging. interest groups). 2.ashland. An example: What is inferior in the U. as the income increase. http://www. They must also look at functional variables. such as marketing.parties. Scandinavian and German governments own private businesses. Judicial . . and politics.enforces Corporations must look at the operational variables. Inputs and outputs are based on government interactions. Preference articulation. The allocation of economic resources . chain management. Political idealist . global manufacturing and supply. Executive . currency availability.S. hay and sometimes gas. furniture. communications.interpret.. human resources. Other variables include exchange rates. 2. absolute advantage.S. 3. (3) for whom to produce. Inputs to the government: 1. And in the U. such as finance. may be normal in Japan and superior in Rwanda or Moldavia. technology.

centralized. such as labor and raw materials 5. they are risky because they grow too quickly.00 Five key economic factors that influence economic growth and development: 1. or in partnership with its public or local enterprises? How much should it be submissive to the private sector? Key economic characteristics: 1. crowd-out risks and possibilities. Factors of production seekers. the economic system. In Chile the growth is phenomenal. Efficiency and Economic Development and Circular Flow. Capital accumulation . A privately owned company should be concerned about the tendency for public ownership. Stock prices of 50 common stocks 9. measured as a percentage of companies reporting slower deliveries from suppliers 5. inflation 4. Economic growth. social or command markets. Average weekly claims for unemployed insurance 3. transportation. Corporations must consider the political structure. communication 7. New orders from non defense capital goods 7. International interactions and trade patterns . and the growth is not risky. There is also the issue of whether a private company can survive in a country where most of the industries are publicly owned. Interest rate spread in ten year bond less federal fund rates 10.balance of payments Leading Indicators: Indicators that tell us what is likely to happen within twelve to fifteen months. Does government view foreign capital as being in competition.larger markets are harder to enter 6. Factor endowment . A public company has the concern of crowd-in.Key economic characteristics and issues that corporations must consider. Politically and financially. Institutions compatible with incentives to grow 2. Extent of social overhead capital . planned. Degree of equality . Average workweek for production workers on manufacturing 2. Market size and structure .000. Index of Consumer expectations 6. Vendor performance. Money supply as M2 = currency and demand deposits plus time deposits of less than $1.Investment in productive capacity . General framework . Net orders for consumer goods and materials 4. Causes of Growth: 1. Number of new building permits issued for private housing units 8. Developing countries have strong economic growth.growth. East and South Asia and Chile have especially strong growth.electrical. Elections 3. gas power.raw materials: Quality and quantity. Availability of resources 4. and whether the industry is in the public or private sector of that international market.capitalistic.000. 4. Technological developments 3. ownership of resources 2.

services. Balance of payments . which to privatize. Full employment is not necessarily at 100% utilization of all factors of production but their practical utilization not necessarily at a 100% capacity. software . Germany. parts of Russia and France to a lesser degree. U. Need capital b. Other products partially displace products through substitution c. and who can participate is determined by the country.what we owe to the rest of the world with respect to what the rest of the world owes us.5. education. and living standards 7. External debt .K. prolonged. and Brazil). it increases the average aggregate prices of all commodities and goods and services in the market. gold. was a creditor nation. Full production is 100% full utilization of all factors of production.S. are all going towards more privatization. and stagflation which affect interest rates.changes over time. Entrepreneurship 6. Categories in balance of payments: current accounts. In volatile countries. France has neither privatization nor nationalization. The trend is towards privatization of enterprises. How it is done. and sustained. 2. 4. errors and omissions. Market might not be ready d. economic or technologic efficiency . Factors that influence technology: ? PRODUCTION X TECHNOLOGY = PROFIT a. cost push. If it is rapid. This influences us the most. 5. balance of trade. Inflation such as demand pull. and management 2. but became a debtor nation in the 1970's. Technological conditions. Technology changes from market to market and week to week. and Africa nations are debtor nations. and structural inflation. International firms must check changes in investment patterns due to: 1. know-how. Mexico. hyperinflation. (element of risk). 3. Privatization. Argentina.Latin American nations (Mexico. and it favors keeping insiders in control of the business. Infrastructure such as transportation 2. Eastern Europe. Health.. No gain in demand of product due to changes Two types of technology: 1.human skills. Large portions of export earnings go toward servicing debt. foreigners are less willing to invest. Russian privatization is decentralization. cost of living and consumer confidence. information.machines and equipment Technology may be dynamic or static Dynamic . Economic conditions. The U. Private ownership. however it still has the highest productivity in the world.observable changes Static . capital (short term and long term) accounts. hardware .

Market opportunities 6. 3. Where and who are they? 2. Study its prospective buyers. 7. . Creates shortages. Intra-corporate and inter-corporate factors all impact market entry. Corporate strengths and competitive position Inter-corporate factors: 1. Legal and political factors 3. There are seven tasks firms have to perform in order to be successful in selecting the market or country: 1. create organizations which influence the way countries do business. Set prices and terms on the product . Distribution of product in the market 5. Political and legal environment 5. Monitor the market activity of competitors (domestic and international) and develop long term strategies Firms need information systems to identify factors in the international market. To win with the product. Inform the market about the product and persuade the buyers to get interested. Economic development and performance Marketing is the collection of factors undertaken by the corporation related to its goals and objections for profit. Geo-cultural environment 4. 4. GATT. Can cause transportation as well as communication difficulties. give implied warranties and after-sales services.3. Marketing management is the planning and coordinating of all activities and tasks in order to have a successful marketing program. Political and Economic organizations. 4. Marketing research gives us marketing entry conditions. They need to consider: 1. Wars and insurrections. W. During WWII. Develop products and services that satisfy the customers' needs and wants. International economic factors 2. Domestic governmental policies 2.O. Direct investment allows for more control.N. which is different in developing and developed countries.T. and U. Degree of competition In making decisions.to get a reasonable profit and be reasonable to the buyers. A firm's success is determined by how it relates to the market place. 6. They need to rank the markets in making the decisions. Stimulate international business. The emphasis is changed from one type of goods to another. With indirect investment there is less control. corporations need to study the international studies and cultural research. Intra-corporate factors: 1. Product characteristics 2. There is a decrease in resources and control of natural resources. Corporate policies and structure 3. world trade volume went back to what it was in 1938. Comparative host country's cost 3. There are different patterns of investment.

Direct entry has high investment requirements. Channels of distribution 3. Penetration of that particular market. 5. 2. Company needs to have an ability to change with the changing market. the more political vulnerability there is. With direct entry. Risk is a function of the methods and amount of involvement in the market. With a more direct entry. 8. Investment requirements. indirect exporting. Costs. One of the most important criteria. such as labor. objectives and goals change. 11. 4. 9. Foreign markets are riskier than the domestic markets. incur higher costs. Must meet the company's goals and objectives 2. It is a small percentage in the balance of payments. Capital is needed to finance inventories and expand credit. profit margins are more important than profit possibilities. Incremental Marketing costs. With direct. advertising. or an export company? 6. The number of markets covered and the quality of coverage. Control. Companies differ as to the number of countries they would like to enter. there are more problems. red tape. Coordination of global logistics 4. the more feedback that one can get. Size of the company with respect to sales and assets 3. the more experience one gets in the market. The more directly involved. The competitors (with respect to product life cycle) Criteria of selecting methods of entry 1. licensing. Profit possibilities. Choose the method of entry that gives the desired feedback. 10. regulations and other country peculiarities. Forms of financing Selection of the market/country depends on these factors: 1. 12. 7. Number of markets/countries. It is the most inexpensive investment strategy in . If the company expects to stay in the foreign market in the long run. companies maintain control over the product. Administrative requirements. Exporting is a generic name for indirect investment. Market feedback. Example: Should it be the whole market or just the capital. With exporting. How much exposure to foreign problems. Market changes. Selection process 2. currency. Indirect entry has low investment requirements. it must be flexible. This gives the market coverage they desire. company situations. 3. Company's product line 4. Accounting. Risk analysis needs to be done. 13. The more direct the investment. Is it a wholly-owned subsidiary.How to enter the country/market: There are four stages: 1. Flexibility. Learning experience. Vary by entry modes. The more direct entry and the more visible the company. Less costs with indirect entry. Management/share holders control from all to nothing. Element of Risk. Personnel requirements. Indirect Methods of Entry The corporation supplies the product from the production in the domestic market and sells in the foreign market. need more skilled internal personnel.

the United States supplies 4758% of the whole world production. Distributor has exclusiveness for a foreign market.the long run. Export Manufacturing Companies (EMCs). Direct approach . Intermediaries are used in distribution. 4. which find the customers. warranties. Ascertaining the market Indirect approach to exporting . Selling to the individual firms 2. Direct Investment 1. which have good connections in the international business and know the people to buy from and sell to. It is a separate department or subsidiary. (As does liability. guarantees. Not subject to political risk 5. after sales service. The key is to not let the buyer and seller meet. Many competitors 2. Deals directly with the sales channels. Three stages in the mechanics of Exporting: 1. Indirect exporting is the simplest form of getting involved in the foreign country. wheat. Transportation costs 2. Corporation never parts with the titles or possession of the product until the product reaches the customers. Exporting and shipping may or may not be the responsibility of the manufacturer.selling in the foreign market Indirect approach .selling to an intermediary which takes product abroad. but riskier. Another big export is in the automobile industry. . Excellent way to sell excess capacity. Selection of the product 2. taxes Disadvantages of exporting: 1. Product may lack features desired in the foreign market 3. Disadvantages of indirect exporting: 1. Direct Exporting Manager of the corporation assigns the job of exporting to someone within the company. Competition may grow. It takes longer to establish and more management time is needed to maintain. distribution). Manufacturing may change 3. Foreign or overseas distributors. Middlemen may change manufacturers Distribution may be by: 1. Advantages of exporting: 1. In these. No worries of laws.sales occur in the domestic market. Commission houses 3. Little capital outlay 3. rice. Most convenient way of doing international business 2. In the United States the most important indirect investment is in the form of agriculture: soybeans. excess product 4. Selection of the approach of selling. Two approaches: Direct and indirect 3. corn. Export trading companies. The company handles the business expense of the export. Title and possession of the product pass in the domestic market.

Modifying product 2.2. Direct sellers or users 3. . Revise the product description so it is subject to lower tariffs. Establish own sales office in the foreign market Overcome disadvantages by: 1.

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