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1) a) Explain why and how governments impose trade restrictions to improve their

economic relationships with other countries. b) What problems might result from these

a) Trade controls are used to improve economic relations with other countries. Their objectives

Balance of Payments Adjustments: The trade account (the current account) is a major part of
the balance of payments for most countries. If balance-of-payments difficulties persist, a
government may restrict imports and/or encourage exports in order to balance its trade account.
If it chooses to devalue its currency, the value of all transactions will be affected. If, however, it
wishes to target certain products, then protectionist measures (both tariffs and nontariff barriers)
will be more effective.

Comparable Access or “Fairness.”: The comparable access argument promotes the idea that
a country’s firms are entitled to the same access to foreign markets as foreign firms have to its
market. Economic theory reasons that producers operating in industries where increased
production leads to economies of scale but which lack equal access to foreign competitors’
markets will struggle to become cost-competitive.

Restrictions as a Bargaining Tool: A country’s trade restrictions may coerce governments to

follow certain political actions or punish companies whose governments do not. Import
restrictions may be levied as a means to try to persuade other countries to lower their import
barriers. The danger, however, is that each country will, in turn, retaliate by escalating its own

Price-Control Objectives: Countries may withhold products from international markets in an

effort to raise world prices and thus improve export earnings and/or favor domestic customers.
(Organization of Petroleum Exporting Companies (OPEC) is a case in point.) The practice of
pricing exports below cost, or below their home-country prices, i.e., below their “fair market
value,” is known as dumping. Most countries prohibit imports of “dumped” products, but
enforcement usually occurs only if the product disrupts domestic production.

Government imposes trade restrictions by:

 tariffs
 subsidies
 customs-valuation methods
 special fees
 quotas
 voluntary export restraint (VERs)
 “buy local” legislation
 standards and labels
 specific permission requirements
 administrative delays
 reciprocal requirements
b) A country’s trade restrictions may coerce governments to follow certain political actions or
punish companies whose governments do not. The danger, however, is that each country will, in
turn, retaliate by escalating its own restrictions. Tariffs affect both domestic and foreign special
interest groups. For e.g. If government imposes trade restrictions on import of minivans, foreign
producer will be forced to raise their U.S. prices thereby reducing their U.S. sales. Demand for
domestic made minivan will rise thereby raising their prices too. Domestic consumers will be
loser because they will pay higher prices for both domestic and foreign minivans.

2) a) Why is geographic proximity an important reason for economic integration? b)

What are the major considerations in developing an overall location strategy? c) What are
the major indicators/variables that are important in comparing countries for sales

a) Geographic Proximity is considered to be one of the major factors for economic integration.
Geographic proximity enables companies from neighboring countries to engage in international
business activities more frequently than their physically distant counterparts. For example, the
largest and fourth largest trading partners of the US, viz. Canada and Mexico, are located on its
borders. Many American plants are located on the Mexican side of the common border These
business arrangements incur relatively lower transactions costs, in that they confront fewer major
changes of socio-cultural environments. Because of the geographic proximity of Australia to
New Zealand, their relationship in terms of each other’s political, economic and security interests
is more critical than Australia’s relationship with many other countries. For a firm operating
internationally, geographic proximity may be categorized as a component of location-specific
advantage as enunciated by Dunning in Dunning’s Eclectic Theory.

b) Formulating a location strategy typically involves the following factors:

1. Facilities. Facilities planning involve determining what kind of space a company will need
given its short-term and long-term goals.
2. Feasibility. Feasibility analysis is an assessment of the different operating costs and other
factors associated with different locations.
3. Logistics. Logistics evaluation is the appraisal of the transportation options and costs for the
prospective manufacturing and warehousing facilities.
4. Labor. Labor analysis determines whether prospective locations can meet a company's labor
needs given its short-term and long-term goals.
5. Community and site. Community and site evaluation involves examining whether a
company and a prospective community and site will be compatible in the long-term.
6. Trade zones. Companies may want to consider the benefits offered by free-trade zones,
which are closed facilities monitored by customs services where goods can be brought
without the usual customs requirements. The United States has about 170 free-trade zones
and other countries have them as well.
7. Political risk. Companies considering expanding into other countries must take political risk
into consideration when developing a location strategy. Since some countries have unstable
political environments, companies must be prepared for upheaval and turmoil if they plan
long-term operations in such countries.
8. Governmental regulation. Companies also may face government barriers and heavy
restrictions and regulation if they intend to expand into other countries. Therefore, companies
must examine governmental—as well as cultural—obstacles in other countries when
developing location strategies.
9. Environmental regulation. Companies should consider the various environmental
regulations that might affect their operations in different locations. Environmental regulation
also may have an impact on the relationship between a company and the community around a
prospective location.
10. Incentives. Incentive negotiation is the process by which a company and a community
negotiate property and any benefits the company will receive, such as tax breaks. Incentives
may place a significant role in a company's selection of a site.

c) Most important variables are

1. Market size
 Expectation of a large market and sales growth are probably a potential location=s major

 Very difficult to project: Use GNP, per capita GNP, growth rates, size of the middle
class, or levels or industrialization

2. Ease and compatibility of operations: Geographic, Language, and Market Similarities

Companies are highly attracted to countries that are located nearby, that share the same language,
that have market conditions similar to those in their home countries. Managers are initially
attracted to similar countries because they feel more comfortable doing business in their own
language and in a similar legal system, Language and cultural similarities may have lower
operating costs and Market similarity tends to exert considerable influence on the locations of
initial foreign operations.

3. Costs and Resource Availability: Costs especially labor costs are an important factor in the
production-location decision. It is important to be near suppliers and customers and to be where
the infrastructure will allow the efficient flow of goods. Corporate tax rates on income also affect
location decisions by MNEs.

3) a) Why are regional trading groups important for MNEs' strategies? b) Compare
and contrast the WTO and its predecessor, GATT.

a) Regional trading groups are an important influence on MNEs’ strategies. Such groups can
define the size of the regional market and the rules under which companies must operate.
Companies in the initial stages of foreign expansion must be aware of the regional economic
groups that encompass countries with good manufacturing locations or market opportunities. As
companies expand internationally, they must change their organizational structure and operating
strategies to take advantage of regional trading groups. As noted in the opening case, Ford
changed from being a multi-domestic to a regional company in Europe; then it centralized its
operations worldwide, and more recently it decentralized back to Europe in order to be
responsive to national differences. The development of European integration forced Ford to look
at its operations more carefully so that it could operate successfully in the market.
b) Comparison and contrast of the WTO and its predecessor, GATT:

Nature: The GATT was a set of rules, with no institutional foundation, applied on a provisional
basis. The WTO is a permanent institution with a permanent framework and its own secretariat.

Scope: The GATT rules applied to trade in goods. The WTO Agreement covers trade in goods,
trade in services and trade-related aspects of intellectual property rights.

Approach: Whilst the GATT was a multilateral instrument, a series of new agreements were
adopted during the Tokyo Round on a plurilateral-that is, selective-basis, causing a
fragmentation of the multilateral trading system. The WTO has been adopted, and accepted by its
Members, as a single undertaking: the agreements which constitute the WTO are all multilateral,
and therefore involve commitments for the entire membership of the organization.

Dispute settlement: The WTO dispute settlement system has specific time limits and is
therefore faster than the GATT system; it operates more automatically, thus ensuring fewer
blockages than in the old GATT; and it has a permanent appellate body to review findings by
dispute settlement panels. There are also more detailed rules on the process of the
implementation of findings.

GATT was Ad Hoc and provisional. WTO and its agreements are permanent.
GATT has contracting parties. WTO has members.
GATT system allowed existing domestic WTO does not permit this.
legislation to continue even if it violated a
GATT agreement.
GATT was less powerful, dispute settlement WTO is more powerful; dispute settlement
system was slow and less efficient, its ruling mechanism is faster & efficient, very difficult
could be easily blocked. to block the rulings.
4) a) What are the major considerations in developing an overall location strategy? b)
How may risk, especially political risk, affect companies’ location decisions? c) What risks
other than property damage and expropriation do companies consider when making
international location decisions?

a) Major considerations in developing an overall location strategy are:

 Proximity to customers: helps ensure that customer needs are incorporated into products
being developed and built.
 Business climate: may include the presence of similar size business, presence of companies
in the same industry etc.
 Total costs: the objective is to select a site with the lowest total cost
 Infrastructure: Adequate road, rail and sea transports are vital. Energy and telecom
requirements must be met and local govt’s willingness to invest in such plans.
 Quality of labor: The educational& skills levels of the labor pool must match the company’s
 Suppliers: A high-quality & competitive supplier base makes a given location suitable.
 Political Risk: the fast changing geopolitical scenes in numerous nations present exciting,
challenging opportunities. Political risks in both the country of location & the host country
influence the location decisions.
 Environmental Regulations: These regulations influence the relationship with the local
 Host Community: the host community’s interest in having the plant in its midst is required.
Local educational facilities and the broader issue of quality of life are also important.

b) Political environment in which a firm may operate will affect the firm’s location decisions.
Laws and regulations passed by any level of government can affect the viability of a firm’s
operations in the host country. Minimum wage laws affect the price a firm must pay for labor;
Zoning regulations affect the way it can use its property: and environmental protection laws
affect the production technology it can use as well as the costs of disposing of waste materials.
Adverse changes in tax laws can slowly destroy the firm’s profitability. Civil wars,
assassinations or kidnappings of foreign business people and expropriation of a firm’s property
are equally dangerous to the firm’s viability of a firm’s operations. Thus risks, especially
political risks affect a firm’s location decisions because all these risks threatens the firms
profitability, ownership, sales, public image, repatriated earnings etc.

c) Other than property damage and expropriation other risks may include:
Operating risks: in which a firms ongoing operations or the safety of its empkoyees are
threatened through: Campaigns against foreign goods, Mandatory labor benefits legislations,
kidnappings, terrorist threats and other forms of violence, civil wars, inflation, currency
devaluation and increased taxation.
Transfer risks: in which the government interferes with the firm’s ability to shift funds into
and out of the country by repatriation.
5. A) what are the particular types of foreign alliances? b) What are the
motives/advantages for companies to enter into collaborative arrangements? c) What are
the major problems that can occur in collaborative arrangements?

a) International firms may choose to do business in a variety of ways. Some of the most common
include exports, licenses, contracts and turnkey operations, franchises, joint ventures, wholly
owned subsidiaries, and strategic alliances.

Exporting is often the first international choice for firms, and many firms rely substantially on
exports throughout their history. Exporting is the sale of goods and services produced in one
country in another country.

Licenses are granted from a licensor to a licensee for the rights to some intangible property (e.g.
patents, processes, copyrights, trademarks) for agreed on compensation (a royalty payment). The
licensing agreement gives access to foreign markets through foreign production without the
necessity of investing in the foreign location.

Contracts are used frequently by firms that provide specialized services, such as management,
technical knowledge, engineering, information technology, education, and so on, in a foreign
location for a specified time period and fee. Contracts are attractive for firms that have talents
not being fully utilized at home and in demand in foreign locations.

Turnkey contracts are a specific kind of contract where a firm constructs a facility, starts
operations, trains local personnel, then transfers the facility (turns over the keys) to the foreign
owner. These contracts are usually for very large infrastructure projects, such as dams, railways,
and airports, and involve substantial financing; thus they are often financed by international
financial institutions such as the World Bank.

Franchises involve the sale of the right to operate a complete business operation. Well-known
examples include independently owned fast-food restaurants like McDonald's and Pizza Hut.

Joint ventures involve shared ownership in a subsidiary company. A joint venture allows a firm
to take an investment position in a foreign location without taking on the complete responsibility
for the foreign investment.

Wholly-owned subsidiaries involve the establishment of businesses in foreign locations which

are owned entirely by the investing firm. This entry choice puts the investor parent in full control
of operations but also requires the ability to provide the needed capital and management, and to
take on all of the risk.

Strategic alliances are arrangements among companies to cooperate for strategic purposes.
Licenses and joint ventures are forms of strategic alliances, but are often differentiated from
them. Strategic alliances can involve no joint ownership or specific license agreement, but rather
two companies working together to develop a synergy. Joint advertising programs are a form of
strategic alliance, as are joint research and development programs
b) Companies collaborate with other firms in either their domestic or foreign operations in order
to spread and reduce costs, to specialize in particular competencies, to avoid or counter
competition, to secure vertical and/or horizontal linkages and to learn from other companies.

Spread and Reduce Costs. When the volume of business is small, or one partner has excess
capacity, it may be less expensive to collaborate with another firm.

Specialize in Competencies. The resource-based view of the firm holds that each firm has a
unique combination of competencies. Thus, a firm can maximize its performance by
concentrating on those activities that best fit its competencies and relying on partners to supply
other products, services, or support activities.

Avoid or Counter Competition. When markets are not large enough for numerous competitors,
or when firms need to confront a market leader, they may band together in ways to avoid
competing with one another or combine resources to increase their market presence.

Secure Vertical and Horizontal Links. If a firm lacks the competence and/or resources to own
and manage all of the activities of the value-added chain, a collaborative arrangement may yield
greater vertical access and control. At the horizontal level, economies of scope in distribution, a
better smoothing of sales and earnings through diversification and an ability to pursue projects
too large for any single firm can all be realized through collaboration.

Gain Knowledge. Many firms pursue collaborative arrangements in order to learn about their
partners’ technology, operating methods, or home markets and thus broaden their own
competencies and competitiveness over time.

Gain Location-Specific Assets. Cultural, political, competitive, and economic differences

among countries create challenges for companies that operate abroad. To overcome such barriers
and gain access to location-specific assets (e.g., distribution access or a competent workforce),
firms may pursue collaborative arrangements.

Overcome Governmental Constraints. Countries may prohibit or limit the participation of

foreign firms in certain industries, or discriminate against foreign firms via tax rates and profit
repatriation. Firms may be able to overcome such barriers via collaboration with a local partner.
Diversify Geographically. By operating in a variety of countries, a firm can smooth its sales and
earnings; collaborative arrangements may also offer a faster initial means of entering multiple
markets or establishing multiple sources of supply.

Minimize Exposure in Risky Environments. The higher the risk managers perceive with
respect to a foreign operation, the greater their desire to form a collaborative arrangement.
c) Major problems that can occur in collaborative arrangements:

Collaboration’s Importance to Partners

One partner may give more attention to the collaboration than the other—often because of a
difference in size. An active partner will blame the less active partner for its lack of attention,
while the less active partner will blame the other for poor decisions.

Differing Objectives: Although firms may enter into collaborative arrangements with
complementary capabilities and objectives, their views regarding such things as reinvestment vs.
profit repatriation and desirable performance standards may evolve quite differently over time.

Control Problems: When no single party has control of a collaborative arrangement, the venture
may lack direction; if one party dominates, it must still consider the interests of the other. By
sharing assets with another firm, a company may lose some control over the extent and/or quality
of the assets’ use. Further, even when control is ceded to one of the partners, both may be held
responsible for problems.

Partners’ Contributions and Appropriations: One partner’s ability to contribute technology,

capital and other assets may diminish (at least on a relative basis) over time. Further, in almost
all collaborations the danger exists that one partner will use the others’ contributed assets, or take
more than its fair share from the operation, thus enabling it to become a direct competitor. Such
weaknesses may cause a drag on a venture and even lead to the dissolution of the agreement.

Differences in Culture: Differences in both national and corporate cultures may cause problems
with collaborative arrangements, especially joint ventures. Firms differ by nationality in terms of
how they evaluate the success of an operation (e.g., profitability, strategic market position and/or
social objectives). Nonetheless, joint ventures from culturally distant countries tend to survive at
least as well as those between partners from similar cultures.
6) a) What factors may limit the feasibility of exporting to sell abroad? b) Explain the
primary reasons for companies to want a controlling interest in foreign operations. c)
Compare the advantages of making a foreign direct investment by buying a facility versus
starting up a new facility abroad.

a) Why Exporting May Not Be Feasible:

Companies may find more advantages by producing in foreign countries rather than by exporting
to them due to a variety of reasons.

Cheaper to Produce Abroad: Competition requires companies to control their costs and to
choose production locations with this factor in mind.

Transportation Costs: Some products and services become impractical to export after the cost
of transportation is added to production costs. In general, the farther the target market is from
the home country, the higher the transportation costs. Also, the higher transportation costs are
relative to production costs, the more difficult it is to be competitive through exporting. Some
services are impossible to export and require establishing operations in the target country.

Lack of Domestic Capacity: As long as a company has excess capacity, it can service foreign
markets and price on the basis of variable rather than full costs. When demand exceeds capacity,
however, new facilities are needed and are often located nearer to the end consumers in other

Need to Alter Products and Services: Special requirements for products in some markets may
require additional investments that are often better made in the country the company intends to
sell to. The more that products must be altered for foreign markets, the more likely production
will shift to those foreign markets.

Trade Restrictions: Although import barriers have been on the decline, some significant tariffs
continue to exist. In these situations, avoiding barriers through production in the target country
must be weighed against other considerations such as the market size of the country and the scale
of technology used in production. When barriers fall within a group of countries, companies
may be attracted to make direct investments to serve the entire region since the expanded market
may justify scale economies.

Country of Origin Effects: Consumers may prefer goods produced in their own country over
imports because of nationalistic feelings. For some products, consumers may prefer imported
goods from specific countries due to a perception that those products are superior. Other
considerations like the availability of service and replacement parts for imported products, or
adoption of just-in-time manufacturing systems may influence production locations.
b) Three primary reasons that spur companies to want a controlling interest:

 Internalization theory: Control is advantageous for a firm, for example when monitoring
and enforcing the contractual performance of local companies is expensive, when the
local company may misappropriate proprietary technology or when the firm’s reputation
and brand name could be jeopardized by poor behavior by the local company.

 appropriability theory: Explains FDI as a way for firms to appropriate the potential gains
from firm-specific advantages; a firm seeks to earn returns from key productive inputs.

 Freedom to pursue global objectives

c) By acquiring a going concern the firm quickly obtains control over the acquired firm’s
factories, employees, technologies, brand names and distribution networks. The acquired firm
may continue to generate revenues as the purchaser integrates it into its overall international
strategy. Unlike the Greenfield strategy, the acquisition strategy adds no new capacity to the
industry. In times of overcapacity this is an obvious benefit. In contrast in Greenfield strategy
successful implementation takes time and patience. For another, Land and other resources may
be unavailable in the desired location. In building the new plant, the firm may face strong
barriers of various local and national regulations. It may be strongly perceived as a foreign
enterprise. For eg. Disney managers faced several of these difficulties in building Disneyland

Acquisitions are also undertaken by firms to implement a major strategic change. For eg. The
state owned Saudi-Arabian Oil Co. has tried to reduce its independence on crude oil production

7) a) What factors are most important in determining the form of operation to use
abroad? b) Explain the different types of licensing arrangements. c) What are the
major problems that can occur in collaborative arrangements?-Repeated
a) Factors that are very important to determine the modes of entry are

 Ownership Advantages:

 Location Advantages

 Internalization Advantages

o Other Factors

o Need for Control

o Resource Availability
o Global Strategy

b) Different types of licensing arrangements are:

Exclusive: where only the licensee will market/manufacture/operate the product itself.

Sole: where the licensor agrees not to grant any other liscenses but retains the right to
market/manufacture/operate the product itself.

Non-exclusive: where the licensor can grant any number of licenses and may
market/manufacture/operate the product itself.

8) a) Explain the controversies concerning international companies' marketing in

developing countries. b) What factors influence companies to alter versus standardize their
products internationally?

In this particular case, the issue was that Nestle Alimentana, one of the world’s
largest food-processing companies had been the subject of an international boycott
as a result of the accusations that the company was directly or indirectly
responsible for the death of Third World infants. The charges were based on the
sale of infant feeding formula, which supposedly caused the mass deaths of babies
in the Third World

b) A company that alters their products internationally a company views itself as a collection of
relatively independent operating subsidiaries, each of which focuses on a specific domestic
segment. Each of these subsidiaries is free to customize its products, its marketing campaigns, its
marketing strategies and its operations techniques to meet best the needs of its customers. This
approach is effective when there are clear differences among national markets; when economies
of scale for production, distribution and marketing are low: and when the cost of coordination
between the parent corporation and its various foreign subsidiaries is high.

Firms standardize their products internationally tries to capture economies of scale in production
and marketing by concentrating its production activities in a handful of highly efficient factories
and then creating global advertising.

9) a) Explain what are meant by sales orientations, customer orientations, strategic

marketing orientations, and societal marketing orientations for international marketing. b)
What are the controversies concerning international companies' marketing in developing
a) Sales orientation: A firm using a sales orientation focuses primarily on the selling/promotion
of a particular product, and not determining new consumer desires as such. Consequently, this
entails simply selling an already existing product, and using promotion techniques to attain the
highest sales possible. Such an orientation may suit scenarios in which a firm holds dead stock,
or otherwise sells a product that is in high demand, with little likelihood of changes in consumer
tastes diminishing demand.

Customer orientation: Many companies today have a customer focus (or market orientation).
This implies that the company focuses its activities and products on consumer demands.
Generally, there are three ways of doing this: the customer-driven approach, the market change
identification approach and the product innovation approach.

In the consumer-driven approach, consumer wants are the drivers of all strategic marketing
decisions. No strategy is pursued until it passes the test of consumer research.

Strategic marketing orientation: Strategic marketing orientation derives its framework from
strategic orientation where organizations develop relatively enduring patterns of strategic
behavior that actively co-align the organization with its environment.

Societal marketing orientation: The societal marketing concept deals with the needs, wants and
demands of customers: how to satisfy them by producing superior value that should satisfy the
customers and promote the well-being of society. The producer should not produce products
deemed hazardous to society.