International Business

International Business
11e
By Charles W.L. Hill
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 1
Globalization
What Is Globalization?
Globalization - the shift toward a more
integrated and interdependent world
economy
The world is moving away from
self-contained national economies toward
an interdependent, integrated global
economic system
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-3
What Is The
Globalization of Markets?
Historically distinct and separate national
markets are merging
It no longer makes sense to talk about the
“German market” or the “American market”
Instead, there is the “global market”
falling trade barriers make it easier to sell globally
consumers’ tastes and preferences are converging on
some global norm
firms promote the trend by offering the same basic
products worldwide
What Is The
Globalization of Markets?
Firms of all sizes benefit and contribute to
the globalization of markets
97% of all U.S. exporters have less than 500
employees
98% of all small and mid-sized German
companies participate in international markets
What Is The
Globalization of Production?
Firms source goods and services from
locations around the globe to capitalize on
national differences in the cost and quality
of factors of production like land, labor,
energy, and capital
Companies can
lower their overall cost structure
improve the quality or functionality of their
product offering
Benefits of Globalisation
▪ Availability of varieties of goods and services to all, across the
globe
▪ Reduction of poverty
▪ Inclusive growth- bringing marginal sections of people into
main stream
▪ Open economies and open societies
▪ Spreading the spirit of democracy
▪ Minimisation of human rights violations
▪ Only a beginning has been made towards globalisation
benefits will be more when it blows up
Dark side of globalisation
▪ Growing inequalities
▪ Off- shoring of jobs
▪ Low wages to poor country employees
▪ Exploitation of child labour
▪ Women are made to work in inferior working conditions

and glass ceiling are created
▪ Developing countries are worst hit
▪ Penalties imposed on executive in MNC’s
Features of International business
Product presence in markets across the globe
• Production bases across the globe
• Human resource to contain high diversity
• Flow of capital, technology, knowledge and other resources across

the globe
• High visibility
• Typical of modern business
Triggers of International Business
▪ Developing markets have huge markets
▪ Emerging countries offer low cost locational advantage
▪ Demographics are changing
▪ Regional trading blocks boost world business
▪ Trade and investment barriers have crumbled
▪ Advancements in technology
▪ Availability of services all over
▪ International business offers huge money
▪ Firms seek resources through international business
▪ Growing richness adding presume for quality and new
products and services
▪ World bodies and institutions are playing facilitating roles
Why Study International Business
▪ To be prepared to accept jobs in multinational corporations with
prior knowledge and understanding of global business
▪ To better understand the products of international brands that we
consume on a day-to-day basis
▪ To operate effectively as international managers who must
understand the various facets of global business
▪ To get a proper and appropriate perspective about the role of
political environment on global business.
▪ To be able to play and execute powerful role in MNCs in
determining the relative competitiveness of various countries in
the global arena
▪ To be able to face the challenges of global opportunities
/assignments that are being made available with globalisation.
Why Do We Need
Global Institutions?
Global institutions
help manage, regulate, and police the global
marketplace
promote the establishment of multinational
treaties to govern the global business system
Why Do We Need
Global Institutions?
Examples include
the General Agreement on Tariffs and Trade
(GATT)
the World Trade Organization (WTO)
the International Monetary Fund (IMF)
the World Bank
the United Nations (UN)
the G20
What Do Global
Institutions Do?
The World Trade Organization (like its
predecessor GATT)
polices the world trading system
makes sure that nation-states adhere to the
rules laid down in trade treaties
promotes lower barriers to trade and
investment
159 members in 2013
What Do Global
Institutions Do?
The International Monetary Fund (1944)
maintains order in the international monetary
system
lender of last resort for countries in crisis
Argentina, Indonesia, Mexico, Russia, South
Korea, Thailand, Turkey, Ireland, and Greece
The World Bank (1944)
promotes economic development via low
interest loans for infrastructure projects
What Do Global
Institutions Do?
The United Nations (1945)
maintains international peace and security
develops friendly relations among nations
cooperates in solving international problems
and in promoting respect for human rights
is a center for harmonizing the actions of
nations
The G20
forum through which major nations tried to
launch a coordinated policy response to the
2008-2009 global financial crisis
What Is Driving
Globalization?
Declining barriers to the free flow of goods,
services, and capital
average tariffs are now at just 4%
more favorable environment for FDI
global stock of FDI was $20.4 trillion in 2011
facilitates global production
Technological change
microprocessors and telecommunications
Internet: information backbone of the global economy
transportation technology
What Does Globalization
Mean For Firms?
Lower barriers to trade and investment
mean firms can
view the world, rather than a single country, as
their market
base production in the optimal location for that
activity
But, firms may also find their home
markets under attack by foreign firms
Declining Trade And
Investment Barriers
Average Tariff Rates on Manufactured Products as Percent of Value
What Does Globalization
Mean For Firms?
Technological change means
lower transportation costs
help create global markets and allow firms to
disperse production to economical, geographically
separate locations
low cost information processing and communication
firms can create and manage globally dispersed
production
low cost global communications networks
help create an electronic global marketplace
global communication networks and global media
create a worldwide culture and a global consumer
product market
The Changing Demographics
Of The Global Economy
Four trends are important:
1. The changing world output and world
trade picture
2. The changing foreign direct investment
picture
3. The changing nature of the multinational
enterprise
4. The changing world order
How Has World Output And
World Trade Changed?
In 1960, the U.S. accounted for almost
40% of world economic activity, but by
2012, the U.S. accounted for just 23%
a similar trend occurred in other developed
countries
In contrast, the share of world output
accounted for by developing nations is
rising
expected to account for more than 60% of
world economic activity by 2020
How Has World Output And
World Trade Changed?
The Changing Demographics of World Output and Trade
How Has Foreign Direct
Investment Changed Over Time?
In the 1960s, U.S. firms accounted for
about two-thirds of worldwide FDI flows
Today, the United States accounts for less
than one-fifth of worldwide FDI flows
Other developed countries have followed a
similar pattern
In contrast, the share of FDI accounted for
by developing countries has risen
Developing countries, especially China, have
also become popular destinations for FDI
Percentage Share of Total FDI Stock 1980-2013
FDI Inflows 1980-2013
What Is A
Multinational Enterprise?
Multinational enterprise (MNE) - any
business that has productive activities in
two or more countries
Since the 1960s
the number of non-U.S. multinationals has
risen
the number of mini-multinationals has risen
The Changing World Order
Many former Communist nations in Europe and
Asia are now committed to democratic politics
and free market economies
creates new opportunities for international businesses
but, there are signs of growing unrest and totalitarian
tendencies in some countries
China and Latin America are also moving toward
greater free market reforms
between 1983 and 2010, FDI in China increased from
less than $2 billion to $100 billion annually
but, China also has many new strong companies that
could threaten Western firms
Think Like a Manager
Hisense CEO Zhou Houjian led his company to become
one of China’s top-selling electronics manufacturers by
using a strategy of rapid innovation and low-cost
manufacturing.
If you were given the chance to run a leading

electronics company, would you use a similar approach
to grow your brand? Or would you devote more time to
research and development and produce fewer products
at a higher price point?
How Will The Global Economy
Of The 21st Century Look?
The world is moving toward a more global
economic system…
But globalization is not inevitable
there are signs of a retreat from liberal economic
ideology in Russia
Globalization brings risks
the financial crisis that swept through South East Asia
in the late 1990s
the recent financial crisis that started in the U.S. in
2008-2009, and moved around the world
Is An Interdependent Global
Economy A Good Thing?
Supporters believe that increased trade and
cross-border investment mean
lower prices for goods and services
greater economic growth
higher consumer income, and more jobs
Critics worry that globalization will cause
job losses
environmental degradation
the cultural imperialism of global media and MNEs
Anti-globalization protesters now regularly show
up at most major meetings of global institutions
How Does Globalization
Affect Jobs And Income?
Critics argue that falling barriers to trade
are destroying manufacturing jobs in
advanced countries
Supporters contend that the benefits of
this trend outweigh the costs
countries will specialize in what they do most
efficiently and trade for other goods—and all
countries will benefit
How Does Globalization Affect Labor
Policies And The Environment?
Critics argue that firms avoid the cost of
adhering to labor and environmental regulations
by moving production to countries where such
regulations do not exist, or are not enforced
Supporters claim that tougher environmental and
labor standards are associated with economic
progress
as countries get richer from free trade, they
implement tougher environmental and labor
regulations
How Does Globalization
Affect National Sovereignty?
Is today’s global economy shifting economic power away
from national governments toward supranational
organizations like the WTO, the EU, and the UN?
Critics argue that unelected bureaucrats have the power
to impose policies on the democratically elected
governments of nation-states
Supporters claim that the power of these organizations is
limited to what nation-states agree to grant
the power of the organizations lies in their ability to
get countries to agree to follow certain actions
How Is Globalization
Affecting The World’s Poor?
Is the gap between rich nations and poor nations
getting wider?
Critics believe that if globalization was beneficial
there should not be a divergence between rich
and poor nations
Supporters claim that the best way for the poor
nations to improve their situation is to
reduce barriers to trade and investment
implement economic policies based on free market
economies
receive debt forgiveness for debts incurred under
totalitarian regimes
How Does The Global
Marketplace Affect Managers?
Managing an international business differs from
managing a domestic business because
countries are different
the range of problems confronted in an international
business is wider and the problems more complex
than those in a domestic business
firms have to find ways to work within the limits
imposed by government intervention in the
international trade and investment system
international transactions involve converting money
into different currencies
Gated Globalisation
▪ Since 2008 financial crisis, both developed and
developing countries have been resorting to
protectionist measures
▪ World exports have fallen, capital flows slowed down
and FOI flows fallen
International summits have been besieged by
protesters and Doha round negotiators went unsung
and unheard
▪ No country is assuming the role of a hegemon.
Hegemony of a strong country is a central
requirement for globalization
11e
Chapter 2
National Differences in
Political, Economic, and
Legal Systems
What Is A Political Economy?
Political economy of a nation - how the
political, economic, and legal systems of a
country are interdependent
they interact and influence each other
they affect the level of economic well-being in
the nation
2-3
What Is A Political System?
Political system - the system of
government in a nation
Assessed according to
the degree to which the country emphasizes
collectivism as opposed to individualism
the degree to which the country is democratic
or totalitarian
2-4
What Is Collectivism?
Collectivism stresses the primacy of
collective goals over individual goals
can be traced to the Greek philosopher, Plato
(427-347 BC)
Today, collectivism is equated with
socialists (Karl Marx 1818-1883)
advocate state ownership of the basic means
of production, distribution, and exchange
manage to benefit society as a whole, rather
than individual capitalists
2-5
How Does Modern-Day
Socialism Look?
In the early 20th century, socialism split into
1. Communism – socialism can only be achieved
through violent revolution and totalitarian
dictatorship
in retreat worldwide by mid-1990s
2. Social democrats – socialism is achieved
through democratic means
retreating as many countries move toward free
market economies
state-owned enterprises have been privatized
2-6
What Is Individualism?
Individualism refers to philosophy that an
individual should have freedom in his own
economic and political pursuits
can be traced to Greek philosopher, Aristotle (384-322
BC)
individual diversity and private ownership are
desirable
individual economic and political freedoms are the
ground rules on which a society should be based
implies democratic political systems and free market
economies
2-7
What Is Democracy?
Democracy - a political system in which
government is by the people, exercised either
directly or through elected representatives
usually associated with individualism
pure democracy is based on the belief that citizens
should be directly involved in decision making
most modern democratic states practice
representative democracy where citizens periodically
elect individuals to represent them
2-8
What Is Totalitarianism?
Totalitarianism - form of government in
which one person or political party
exercises absolute control over all
spheres of human life and prohibits
opposing political parties
2-9
What Is Totalitarianism?
Four major forms of totalitarianism exist today
1. Communist totalitarianism – found in states where
the communist party monopolizes power
2. Theocratic totalitarianism - found in states where
political power is monopolized by a party, group, or
individual that governs according to religious
principles
3. Tribal totalitarianism - found in states where a
political party that represents the interests of a
particular tribe monopolizes power
4. Right-wing totalitarianism - permits some individual
economic freedom, but restricts individual political
freedom
2-10
What Is The Link Between Political
Ideology and Economic Systems?
Political ideology and economic systems
are connected
countries that stress individual goals are
likely to have market based economies
in countries where state-ownership is
common, collective goals are dominant
2-11
What Is An Economic System?
There are three types of economic
systems
1. Market economies - all productive
activities are privately owned and
production is determined by the
interaction of supply and demand
government encourages free and fair
competition between private producers
2-12
2. Command economies - government plans the
goods and services that a country produces,
the quantity that is produced, and the prices as
which they are sold
all businesses are state-owned, and
governments allocate resources for “the
good of society”
because there is little incentive to control
costs and be efficient, command economies
tend to stagnate
2-13
3. Mixed economies - certain sectors of the
economy are left to private ownership
and free market mechanisms while other
sectors have significant state ownership
and government planning
governments tend to own firms that are
considered important to national security
2-14
What Is A Legal System?
Legal system - the rules that regulate behavior
along with the processes by which the laws are
enforced and through which redress for
grievances is obtained
the system in a country is influenced by the
prevailing political system
Legal systems are important for business
because they
define how business transactions are executed
identify the rights and obligations of parties involved
in business transactions
2-15
What Are The
Different Legal Systems?
There are three types of legal systems
1. Common law - based on tradition, precedent,
and custom
2. Civil law - based on detailed set of laws
organized into codes
3. Theocratic law - law is based on religious
teachings
2-16
How Are Contracts Enforced In
Different Legal Systems?
Contract - document that specifies the conditions
under which an exchange is to occur and details
the rights and obligations of the parties involved
Contract law is the body of law that governs
contract enforcement
under a common law system, contracts tend to be
very detailed with all contingencies spelled out
under a civil law system, contracts tend to be much
shorter and less specific because many issues are
already covered in the civil code
2-17
Which Country’s Laws Should
Apply In A Contract Dispute?
The United Nations Convention on Contracts for
the International Sale of Goods (CIGS)
establishes a uniform set of rules governing certain
aspects of the making and performance of everyday
commercial contracts between buyers and sellers
who have their places of business in different nations
Ratified by the U.S. and about 70 countries
but, many larger trading nations including Japan and
the U.K. have not agreed to the provisions of CIGS
and opt for arbitration instead
2-18
How Are Property Rights
And Corruption Related?
Property rights - the legal rights over the
use to which a resource is put and over
the use made of any income that may be
derived from that resource
2-19
Property rights can be violated through
1. Private action – theft, piracy, blackmail
2. Public action - legally - ex. excessive
taxation or illegally - ex. bribes or
blackmailing
high levels of corruption reduce foreign direct
investment, the level of international trade, and
the economic growth rate in a country
2-20
The Foreign Corrupt Practices Act makes it
illegal for U.S. companies to bribe foreign
government officials to obtain or maintain
business over which that foreign official has
authority
facilitating or expediting payments to secure or
expedite routine government action are permitted
2-21
Which Countries Are
Most Corrupt?
Rankings of Corruption by Country 2014
2-22
How Can Intellectual
Property Be Protected?
Intellectual property - property that is the product of
intellectual activity
Can be protected using
1. Patents – exclusive rights for a defined period to the
manufacture, use, or sale of that invention
2. Copyrights – the exclusive legal rights of authors,
composers, playwrights, artists, and publishers to
publish and disperse their work as they see fit
3. Trademarks – design and names by which merchants
or manufacturers designate and differentiate their
products
2-23
How Can Intellectual
Property Be Protected?
Protection of intellectual property rights differs
from country to country
World Intellectual Property Organization
Paris Convention for the Protection of Industrial
Property
To avoid piracy, firms can
stay away from countries where intellectual property
laws are lax
file lawsuits
lobby governments for international property rights
agreements and enforcement
2-24
Intellectual property theft is a major issue in the global
software industry. One method that software companies
use to avoid the threat of piracy is to develop “open
source” software – software that is distributed free of
charge and with part or all of the source code available to
other programmers. Users may alter or improve the
program as they see fit, so long as they share their
improvements with the rest of the open source community.
What are some potential advantages and disadvantages to

developing open source software? As the head of a
promising software startup, would you consider developing
an open source product?
2-25
What Is Product Safety
And Liability?
Product safety laws set certain standards to
which a product must adhere
Product liability involves holding a firm and its
officers responsible when a product causes
injury, death, or damage
liability laws tend to be less extensive in less
developed nations
2-26
Why Is Product Safety And
Product Liability Important?
Question:
Does the high cost of liability insurance in the
U.S. make American companies less
competitive?
Question:
Is it ethical to follow host country standards
when product safety laws are stricter in a
firm’s home country than in a foreign country?
Question:
Is it ethical to follow host country standards
when liability laws are more lax in the host
country?
2-27
How Can Managers Determine A
Market’s Overall Attractiveness?
The overall attractiveness of a country as a
potential market and/or investment site for an
international business depends on balancing the
benefits, costs, and risks associated with doing
business in that country
Other things being equal, more attractive countries
have democratic political institutions, market based
economies, and strong legal systems that protect
property rights and limit corruption
2-28
11e
Chapter 3
National Differences in
Economic Development
What Determines A Country’s Level
Of Economic Development?
Gross national income (GNI) per person
measures the total annual income
received by residents of a nation
Japan, Sweden, Switzerland, and the U.S.
have high GNI
China and India have low GNI
GNI can be misleading because it does
not consider differences in the cost of
living
need to adjust GNI figures using
purchasing power parity (PPP)
How Do Countries
Compare On GNI?
Economic Data for Select Countries
Official figures can also be misleading
because they do not account for black
economy transactions
In addition, GNI and PPP data are static
and do not consider economic growth
rates
So, while China and India are currently
categorized as being poor they are growing
more rapidly than many developed nations
and are expected to become among the
largest economies in the world
How Do Countries
Compare On Growth Rates?
Average Annual Growth Rate in GDP, 2004--2013
Nobel-prize winner Amartya Sen argues
economic development should be seen as a
process of expanding the real freedoms that
people experience
the removal of major impediments to freedom like
poverty, tyranny, and neglect of public facilities
the presence of basic health care and basic
education
Amartya Sen also claims that economic
progress requires the democratization of
political communities to give citizens a voice
The United Nations used Sen’s ideas to
develop the Human Development Index
(HDI) which is based on
life expectancy at birth
educational attainment
whether average incomes are sufficient to
meet the basic needs of life in a country
How Do Countries Compare on
Economic Development?
Human Development Index, 2013
How Does Political Economy
Influence Economic Progress?
Innovation and entrepreneurship are the engines
of long-run economic growth
innovation includes new products, new processes,
new organizations, new management practices, and
new strategies
entrepreneurs commercialize innovative new products
and processes
Innovation and entrepreneurship help increase
economic activity by creating new markets and
products that did not previously exist
innovation in production and business processes
result in more productive labor and capital further
boosting economic growth rates
Innovation and entrepreneurship require a
market economy
there is little incentive to develop new innovations in
planned economies because the state owns all
means production and therefore, the gains
There is a strong relationship between economic
freedom and economic growth
the six countries with the highest ratings of economic
freedom from 1975 to 1995 were also among the
highest for economic growth
Hong Kong, Switzerland, Singapore, the United States,
Canada, and Germany
Innovation and entrepreneurship require
strong property rights
without strong property rights, individuals and
businesses risk having their innovations and
potential profits stolen
Economist Hernando de Soto claims that
inadequate property protection in many
developing nations limits economic growth
Democratic regimes are probably more
conducive to long-term economic growth than
dictatorships, even the benevolent kind
property rights are only secure in well-functioning,
mature democracies
Subsequent economic growth leads to the
establishment of democratic regimes
South Korea
Taiwan
How Does Geography Influence
Countries with favorable geography are more
likely to engage in trade, and so, be more open
to market-based economic systems, and the
economic growth they promote
Jeffrey Sachs studied economic growth rates
between 1965 and 1990 and found that
landlocked countries grew more slowly than coastal
economies
being totally landlocked reduced a country’s growth
rate by 0.7% per year
tropical countries grew more slowly than countries in
temperate zones
How Does Education Influence
Countries that invest in education have
higher growth rates because the workforce
is more productive
countries in Southeast Asia have offset their
geographical disadvantages by investing in
education
Indonesia, Malaysia, and Singapore
How Is The Political
Economy Changing?
Since the late 1980s, two trends have emerged
1. Democratic revolution (late 1980s and early
1990s)
democratically elected governments replaced
totalitarian regimes
more committed to free market capitalism
2. A move away from centrally planned and mixed
economies
more countries have shifted toward the
market-based model
Economy Changing?
Trend 1: Democracy has spread over the last
two decades
many totalitarian regimes failed to deliver economic
progress to the vast bulk of their populations
new information and communication technologies
have broken down the ability of the state to control
access to uncensored information
economic advances of the last 25 years have led to
increasingly prosperous middle and working classes
who have pushed for democratic reforms
How Free Are
Countries Politically?
Freedom in the World in 2015
Economy Changing?
Author Francis Fukuyama argues that the new
world order will be characterized by democratic
regimes and free market capitalism
But, political scientist Samuel Huntington
argues that while many societies are
modernizing they are not becoming more
Western
predicts a world split into different civilizations
these civilizations will be in conflict with each
other
Economy Changing?
Trend 2: The spread of market-based
systems
more countries have moved away from
centrally planned and mixed economies
toward the market-based model
Command and mixed economies failed
to deliver the sustained economic growth
achieved in market-based countries
How Free Are
Countries Economically?
Distribution of Economic Freedom, 2015
What Is The Nature Of
Economic Transformation?
The shift toward a market-based system
involves
deregulation – removing legal restrictions to
the free play of markets, the establishment of
private enterprises, and the manner in which
private enterprises operate
privatization - transfers the ownership of state
property into the hands of private investors
the creation of a legal system to safeguard
property rights
What Does The Changing
Economy Mean For Managers?
Markets that were formerly off-limits to Western
business are now open
firms need to explore opportunities in these markets
Despite being underdeveloped and poor, some
markets have huge potential
China -1.3 billion people
India – 1.2 billion people
Latin America – 600 million potential consumers
What Does The Changing
Economy Mean For Managers?
However, the potential risks are large
will democracy thrive especially in difficult
economic times?
will totalitarian regimes return?
will a multi-polar world of different civilizations
emerge?
will China’s financial system be stable?
What Are The Implications Of Political
Economy Differences For Managers?
Countries with democratic regimes, market
based economic policies, and strong property
rights protection are more likely to have higher
sustained rates of economic growth
these markets are more attractive to international
businesses
the benefits, costs, and risks of doing business in a
country are a function of the country’s political,
economic, and legal systems
The benefits of doing business in a country are a
function of
the market’s size
the purchasing power of its consumers
their likely future wealth
By identifying and investing early in potential
future economic stars, firms may be able to gain
first mover advantages (advantages that accrue
to early entrants into a market) and establish
loyalty and experience in a country
China
The costs of doing business in a country
are a function of its
political system
is it necessary to pay bribes to get market access?
economic level
are the necessary supporting business and
infrastructure in place?
legal system
it can be more costly to do business in countries
with dramatically different product, workplace, and
pollution standards, or where there is poor legal
protection for property rights
The risks of doing business in a country are a
function of
Political risk - the likelihood that political forces will
cause drastic changes in a country's business
environment that adversely affects the profit and
other goals of a business enterprise
Economic risk - the likelihood that economic
mismanagement will cause drastic changes in a
country's business environment that adversely
affects the profit and other goals of a business
enterprise
Legal risk - the likelihood that a trading partner will
opportunistically break a contract or expropriate
property rights
The overall attractiveness of a country as a
potential market and/or investment site for an
international business depends on balancing the
benefits, costs, and risks associated with doing
business in that country
Other things being equal, the benefit-cost-risk
trade-off is likely to be most favorable in
politically stable developed and developing
nations that have free market systems and no
dramatic upsurge in either inflation rates or
private sector debt
Country Attractiveness
Before investing in a foreign location, a firm must take three
things into consideration: the costs, benefits, and risks
(political, economic, or legal) associated with entering into
a business venture there.
Imagine you are the manager of a foreign company

considering an investment in your home town. What would
be some of the expected costs, benefits, or risks of starting
a new business where you live? How high would you rate
your location on its overall attractiveness to investors?
11e
Chapter 4
Differences
in Culture
How Do Cultural Differences
Affect International Business?
Understanding and adapting to the local cultural
is important international companies
cross-cultural literacy - an understanding of how
cultural differences across and within nations can
affect the way in which business is practiced
cross-cultural literacy is important for business
success
A relationship may exist between culture and the
costs of doing business in a country or region
MNEs can be agents of cultural change
McDonald’s
What Is Culture?
Culture - a system of values and norms that are
shared among a group of people and that when
taken together constitute a design for living
where
values are abstract ideas about what a group believes
to be good, right, and desirable
norms are the social rules and guidelines that
prescribe appropriate behavior in particular situations
Society - a group of people who share a
common set of values and norms
What Are Values And Norms?
Values provide the context within which a
society’s norms are established and
justified and form the bedrock of a culture
Norms include
folkways - the routine conventions of everyday
life
mores - norms that are seen as central to the
functioning of a society and to its social life
How Are Culture, Society,
And The Nation-State Related?
The relationship between a society and a
nation state is not strictly one-to-one
Nation-states are political creations
can contain one or more cultures
A culture can embrace several nations
What Determines Culture?
The values and norms of a culture evolve
over time
Determinants include
religion
political and economic philosophies
education
language
social structure
What Determines Culture?
Determinants of Culture
What Is A Social Structure?
Social structure - a society’s basic social
organization
Consider
the degree to which the basic unit of social
organization is the individual, as opposed to
the group
the degree to which a society is stratified into
classes or castes
How Are Individuals
And Groups Different?
A group is an association of two or more
people who have a shared sense of
identity and who interact with each other in
structured ways on the basis of a common
set of expectations about each other’s
behavior
individuals are involved in families, work
groups, social groups, recreational groups,
etc.
Societies place different values on groups
How Are Individuals
In Western societies, there is a focus on the
individual
individual achievement is common
dynamism of the U.S. economy
high level of entrepreneurship
But, creates a lack of company loyalty and
failure to gain company specific knowledge
competition between individuals in a company instead
of than team building
less ability to develop a strong network of contacts
within a firm
How Are Individuals
In many Asian societies, the group is the
primary unit of social organization
discourages job switching between firms
encourages lifetime employment systems
leads to cooperation in solving business
problems
But, might also suppress individual
creativity and initiative
What Is Social Stratification?
All societies are stratified on a
hierarchical basis into social categories,
or social strata
individuals are born into a particular stratum
Must consider
1. mobility between strata
2. the significance placed on social strata in
business contexts
1. Social mobility - the extent to which individuals
can move out of the strata into which they are
born
caste system - closed system of stratification in
which social position is determined by the family into
which a person is born
change is usually not possible during an
individual's lifetime
class system - form of open social stratification
position a person has by birth can be changed
through achievement or luck
2. The significance attached to social strata
in business contacts
class consciousness - a condition where people
tend to perceive themselves in terms of their class
background, and this shapes their relationships with
others
an antagonistic relationship between management
and labor raises the cost of production in countries
with significant class differences
How Do Religious And
Ethical Systems Differ?
Religion - a system of shared beliefs and
rituals that are concerned with the realm of the
sacred
Four religions dominate society
1. Christianity
2. Islam
3. Hinduism
4. Buddhism
5. Confucianism is also important in influencing
behavior and culture in many parts of Asia
World Religions
Ethical systems - a set of moral
principles, or values, that are used to
guide and shape behavior
Religion and ethics are often closely
intertwined
Example: Christian or Islamic ethics
What Is Christianity?
Christianity
the world’s largest religion
found throughout Europe, the Americas, and
other countries settled by Europeans
the Protestant work ethic (Max Weber, 1804)
hard work, wealth creation, and frugality is the
driving force of capitalism
What Is Islam?
Islam
the world’s second largest religion dating to AD 610
there is only one true omnipotent God
an all-embracing way of life that governs one's being
associated in the Western media with militants,
terrorists, and violent upheavals
but, in fact teaches peace, justice, and tolerance
fundamentalists have gained political power and
blame the West for many social problems
people do not own property, but only act as stewards
for God
supportive of business, but the way business is
practiced is prescribed
What Is Hinduism?
Hinduism
practiced primarily on the Indian subcontinent
focuses on the importance of achieving
spiritual growth and development, which may
require material and physical self-denial
Hindus are valued by their spiritual rather than
material achievements
promotion and adding new responsibilities
may not be important, or may be infeasible
due to the employee's caste
What Is Buddhism?
Buddhism
has about 350 millions followers
stresses spiritual growth and the afterlife,
rather than achievement while in this world
does not emphasize wealth creation
entrepreneurial behavior is not stressed
does not support the caste system, individuals
do have some mobility and can work with
individuals from different classes
What Is Confucianism?
Confucianism
ideology practiced mainly in China
teaches the importance of attaining personal
salvation through right action
high morals, ethical conduct, and loyalty to
others are stressed
three key teachings of Confucianism - loyalty,
reciprocal obligations, and honesty - may all
lead to a lowering of the cost of doing
business in Confucian societies
What Is The Role
Of Language In Culture?
Language - the spoken and unspoken
(nonverbal communication such as facial
expressions, personal space, and hand
gestures ) means of communication
countries with more than one language often
have more than one culture
Canada, Belgium, Spain
What Is The Role
Of Language In Culture?
Language is one of the defining characteristics
of culture
Chinese is the mother tongue of the largest number of
people
English is the most widely spoken language in the
world
English is also becoming the language of international
business
but, knowledge of the local language is still beneficial,
and in some cases, critical for business success
failing to understand the nonverbal cues of another
culture can lead to communication failure
What Is The Role
Of Education In Culture?
Formal education is the medium through which
individuals learn many of the language,
conceptual, and mathematical skills that are
indispensable in a modern society
important in determining a nation’s competitive
advantage
Japan’s postwar success can be linked to its
excellent education system
general education levels can be a good index for the
kinds of products that might sell in a country
Example: impact of literacy rates
Understanding the culture of a country or region can
provide multinational enterprises with a valuable
competitive advantage and help them to avoid missteps that
could negatively affect their chances at success.
Imagine your school is a country of its own. How would you

describe its culture to a business considering investing
there? What are some values or norms that would be
important for an outsider to understand? Which of the six
determinants of culture play the most significant role in
shaping your school culture?
How Does Culture
Impact The Workplace?
Management processes and practices
must be adapted to culturally determined
work-related values
Geert Hofstede studied culture using
data collected from 1967 to 1973 for
100,000 employees of IBM
Hofstede identified four dimensions that
summarized different cultures
How Does Culture
Hofstede’s dimensions of culture:
1. Power distance - how a society deals with the

fact that people are unequal in physical and
intellectual capabilities
2. Uncertainty avoidance - the relationship
between the individual and his or her fellows
3. Individualism versus collectivism - the extent to
which different cultures socialize their
members into accepting ambiguous situations
and tolerating ambiguity
4. Masculinity versus femininity - the relationship
between gender and work roles
How Does Culture
Work-Related Values for 15 Selected Countries
How Does Culture
Hofstede later expanded added a fifth
dimension called Confucian dynamism or
long-term orientation
captures attitudes toward time, persistence,
ordering by status, protection of face, respect
for tradition, and reciprocation of gifts and
favors
Japan, Hong Kong, and Thailand scored high on
this dimension
the U.S. and Canada scored low
Was Hofstede Right?
Hofstede’s work has been criticized for several
reasons
made the assumption there is a one-to-one
relationship between culture and the nation-state
study may have been culturally bound
used IBM as sole source of information
culture is not static – it evolves
But, it is a starting point for understanding how
cultures differ, and the implications of those
differences for managers
Does Culture Change?
Culture evolves over time
changes in value systems can be slow and
painful for a society
Social turmoil - an inevitable outcome of
cultural change
as countries become economically stronger,
cultural change is particularly common
economic progress encourages a shift from
collectivism to individualism
globalization also brings cultural change
What Do Cultural Differences
Mean For Managers?
1. It is important to develop cross-cultural literacy
companies that are ill informed about the
practices of another culture are unlikely to
succeed in that culture
To avoid being ill-informed
consider hiring local citizens
transfer executives to foreign locations on a
regular basis
Managers must also guard against
ethnocentrism
a belief in the superiority of one's own culture
What Do Cultural Differences
Mean For Managers?
2. There is a connection between culture
and national competitive advantage
suggests which countries are likely to
produce the most viable competitors
has implications for the choice of countries
in which to locate production facilities and
do business
11e
Chapter 5
Ethics, Corporate Social

Responsibility, and
Sustainability
What Is Ethics?
Ethics - accepted principles of right or wrong that
govern
the conduct of a person
the members of a profession
the actions of an organization
Business ethics - accepted principles of right or
wrong governing the conduct of business people
Ethical strategy - a strategy, or course of action,
that does not violate these accepted principles
Which Ethical Issues Are Most
Relevant To International Firms?
The most common ethical issues in
business involve
1. employment practices
2. human rights
3. environmental pollution
4. corruption
5. moral obligations of multinational
companies
How Are Ethics Relevant
To Employment Practices?
Suppose work conditions in a host nation
are clearly inferior to those in the
multinational’s home nation
Which standards should apply?
home country standards
host country standards
something in between
To Employment Practices?
Firms should
establish minimal acceptable standards that
safeguard the basic rights and dignity of
employees
audit foreign subsidiaries and subcontractors
regularly to ensure they are meeting the
standards
take corrective action as necessary
To Human Rights?
Basic human rights are taken for granted
in developed countries
freedom of association
freedom of speech
freedom of assembly
freedom of movement
Question: What are the responsibilities of
firms in countries where basic human
rights are not respected?
To Human Rights?
Question: Is it ethical for companies to do
business with countries with repressive regimes?
Myanmar
Nigeria
Question: Does multinational investment actually
help bring change to these countries and
ultimately improve the rights of citizens?
China
To Environmental Pollution?
Some parts of the environment are a public good that no
one owns, but anyone can despoil
What happens when environmental regulations in host
nations are far inferior to those in the home nation?
Is it permissible for multinationals to pollute in
developing countries simply because there are no
regulations against it?
legal versus ethical behavior
The tragedy of the commons occurs when a resource
held in common by all, but owned by no one, is overused
by individuals, resulting in its degradation
To Corruption?
The U.S. Foreign Corrupt Practices Act outlawed
the practice of paying bribes to foreign
government officials in order to gain business
amended to allow for facilitating payments
The Convention on Combating Bribery of
Foreign Public Officials in International Business
Transactions was adopted by the Organization
for Economic Cooperation and Development
(OECD)
obliges member states to make the bribery of
foreign public officials a criminal offense
To Corruption?
But, is it permissible for multinationals to
pay government officials facilitating
payments if doing so creates local income
and jobs?
is it ok to do a little evil in order to do a greater
good?
does grease money actually improve
efficiency and help growth?
To Moral Obligations?
Social responsibility refers to the idea that
managers should consider the social
consequences of economic actions when
making business decisions
there should be a presumption in favor of
decisions that have both good economic and
good social consequences
it is the right way for a business to behave
To Moral Obligations?
Advocates argue that businesses need to
recognize their noblesse oblige -
honorable and benevolent behavior that is
the responsibility of successful companies
give something back to the societies that have
made their success possible
But, are multinationals morally required to
use their power to enhance local welfare?
What Are Ethical Dilemmas?
Ethical dilemmas - situations in which none of
the available alternatives seems ethically
acceptable
real-world decisions are complex, difficult to frame,
and involve consequences that are difficult to quantify
the ethical obligations of an MNE toward employment
conditions, human rights, corruption, environmental
pollution, and the use of power are not always clear
cut
the right course of action is not always clear
Why Do Managers
Behave Unethically?
Several factors contribute to unethical behavior
including
1. Personal ethics - the generally accepted
principles of right and wrong governing the
conduct of individuals
expatriates may face pressure to violate their
personal ethics because they are away from their
ordinary social context and supporting culture
managers fail to question whether a decision or
action is ethical, and instead rely on economic
analysis when making decisions
Why Do Managers
Behave Unethically?
2. Decision-making processes - the values and
norms that are shared among employees of an
organization
organization culture that does not
emphasize business culture encourages
unethical behavior
3. Organization culture - organization culture can
legitimize unethical behavior or reinforce the
need for ethical behavior
4. Unrealistic performance expectations -
encourage managers to cut corners or act in
an unethical manner
Why Do Managers
Behave Unethically?
5. Leadership - helps establish the culture of an
organization, and set the examples that others
follow
when leaders act unethically, subordinates may act
unethically, too
6. Societal culture – firms headquartered in
cultures where individualism and uncertainty
avoidance are strong are more likely to stress
ethical behavior than firms headquartered in
cultures where masculinity and power distance
rank high
Why Do Managers
Behave Unethically?
Determinants of Ethical Behavior
What Are The Philosophical
Approaches To Ethics?
There are several different approaches to
business ethics
Straw men approaches deny the value of
business ethics or apply the concept in an
unsatisfactory way
Other approaches are favored by moral
philosophers and are the basis for current
models of ethical behavior
What Are The Straw Men
Approaches To Business Ethics?
There are four common straw men approaches
1. Friedman doctrine - the only social responsibility
of business is to increase profits, so long as the
company stays within the rules of law
2. Cultural relativism - ethics are culturally
determined and firms should adopt the ethics of
the cultures in which they operate
“when in Rome, do as the Romans do”
What Are The Straw Men
Approaches To Business Ethics?
3. Righteous moralist - a multinational’s home
country standards of ethics should be followed
in foreign countries
4. Naïve immoralist - if a manager of a
multinational sees that firms from other nations
are not following ethical norms in a host nation,
that manager should not either
All approaches offer inappropriate guidelines
for ethical decision making
What Are Utilitarian And
Kantian Approaches To Ethics?
Utilitarian ethics - (David Hume, Jeremy
Bentham, John Stuart Mill) - the moral worth of
actions or practices is determined by their
consequences
actions are desirable if they lead to the best possible
balance of good consequences over bad
consequences
but, it is difficult to measure the benefits, costs, and
risks of an action
the approach fails to consider justice
What Are Utilitarian And
Kantian Approaches To Ethics?
Kantian ethics - (Immanuel Kant) - people
should be treated as ends and never
purely as means to the ends of others
people have dignity and need to be respected
people are not machines
What Are Rights Theories?
Rights theories - human beings have
fundamental rights and privileges which
transcend national boundaries and cultures
establish a minimum level of morally acceptable
behavior
the Universal Declaration of Human Rights - basic
principles that should always be adhered to
irrespective of the culture in which one is doing
business
Moral theorists argue that fundamental human
rights form the basis for the moral compass that
managers should navigate by when making
decisions which have an ethical component
What Are Justice Theories?
Justice theories focus on the attainment of a just
distribution of economic goods and services
a just distribution is one that is considered fair and
equitable
John Rawls argued that all economic goods and
services should be distributed equally except
when an unequal distribution would work to
everyone’s advantage
impartiality is guaranteed by the veil of ignorance -
everyone is imagined to be ignorant of all his or her
particular characteristics
The job market of the 21st century is often referred to as the “gig
economy.” Employers such as Uber, Amazon, Airbnb, and others are
increasingly relying on short-term freelance employees who work on a
piecemeal basis.
Proponents of the gig economy suggest it offers workers the freedom

to work where and when they want, while employers can reduce labor
costs by avoiding health insurance and payroll taxes. Others suggest
that businesses are simply taking advantage of a tough economy to
cut benefits and offer lower wages to people desperate for work.
If you were the head of a large corporation, would you consider it

ethical to profit from the gig economy?
How Can Managers
Make Ethical Decisions?
1. Hire and promote people with a well-
grounded sense of personal ethics
refrain from promoting individuals who have
acted unethically
try to hire only people with strong ethics
prospective employees should find out as
much as they can about the ethical climate in
an organization prior to taking a position
How Can Managers
2. Build an organizational culture that places a
high value on ethical behavior
articulate values that place a strong
emphasis on ethical behavior
emphasize the importance of a code of
ethics - formal statement of the ethical
priorities a business adheres to
implement a system of incentives and
rewards that recognize people who engage
in ethical behavior and sanction those who
do not
How Can Managers
3. Make sure that leaders within the
business articulate the rhetoric of ethical
behavior and act in a manner that is
consistent with that rhetoric
give life and meaning to words
make sure that leaders emphasize the
importance of ethics verbally and through
their actions
How Can Managers
4. Put decision-making processes in place that
require people to consider the ethical
dimensions of business decisions
Ask whether
decisions fall within the accepted values of
standards that typically apply in the
organizational environment
decisions can be communicated to all
stakeholders affected by it
if colleagues would approve of decisions
How Can Managers
Managers can also use a five-step process to
think through ethical problems:
Step1: Identify which stakeholders (the individuals
or groups who have an interest, stake, or
claim in the actions and overall
performance of a company) a decision
would affect and in what ways
internal stakeholders are people who work for or who own
the business such as employees, the board of directors,
and stockholders
external stakeholders are the individuals or groups who
have some claim on a firm such as customers, suppliers,
and unions
How Can Managers
Step 2: Determine whether a proposed decision
would violate the fundamental rights of any
stakeholders
Step 3: Establish moral intent - place moral
concerns ahead of other concerns in cases
where either the fundamental rights of
stakeholders or key moral principles have
been violated
How Can Managers
Step 4: Engage in ethical behavior
Step 5: Audit decisions and review them to
make sure that they are consistent
with ethical principles
this step is often overlooked even
though it is critical to finding out
whether a decision process is working
What Is An Ethics Officer?
Many firms now have ethics officers to
ensure
all employees are trained in ethics
ethics is considered in the decision-making
process
the company’s code of conduct is followed
How Can Managers
5. Develop moral courage
enables managers to walk away from a decision
that is profitable, but unethical
gives an employee the strength to say no to a
superior who instructs her to pursue actions that are
unethical
gives employees the integrity to go public to the
media and blow the whistle on persistent unethical
behavior in a company
How Can Managers
In the end, there are clearly things that an
international business should do, and
there are things that an international
business should not do
But, it is important to remember that not all
ethical dilemmas have a clean and
obvious solution
in these situations, firms must rely on the
decision-making ability of its managers
11e
Chapter 6
International
Trade Theory
Why Is Free Trade Beneficial?
Free trade - a situation where a
government does not attempt to influence
through quotas or duties what its citizens
can buy from another country or what they
can produce and sell to another country
Trade theory shows why it is beneficial for
a country to engage in international trade
even for products it is able to produce for
itself
Why Is Free Trade Beneficial?
International trade allows a country
to specialize in the manufacture and export of
products and services that it can produce
efficiently
to import products and services that can be
produced more efficiently in other countries
Limits on imports may be beneficial to
producers, but not beneficial for consumers
Why Do Certain
Patterns Of Trade Exist?
Some patterns of trade are fairly easy to
explain
It is obvious why Saudi Arabia exports oil,
Ghana exports cocoa, and Brazil exports
coffee
But, why does Switzerland export
chemicals, pharmaceuticals, watches, and
jewelry?
Why does Japan export automobiles,
consumer electronics, and machine tools?
What Role Does
Government Have In Trade?
The mercantilist philosophy makes a crude case
for government involvement in promoting exports
and limiting imports
Smith, Ricardo, and Heckscher-Ohlin promote
unrestricted free trade
New trade theory and Porter’s theory of national
competitive advantage justify limited and
selective government intervention to support the
development of certain export-oriented industries
What Is Mercantilism?
Mercantilism (mid-16th century) suggests
that it is in a country’s best interest to
maintain a trade surplus—to export more
than it imports
Advocates government intervention to achieve
a surplus in the balance of trade
Mercantilism views trade as a zero-sum
game—one in which a gain by one country
results in a loss by another
What Is Smith’s Theory
Of Absolute Advantage?
Adam Smith (1776) argued that a country
has an absolute advantage in the
production of a product when it is more
efficient than any other country in
producing it
Countries should specialize in the production
of goods for which they have an absolute
advantage and then trade these goods for
goods produced by other countries
How Does The Theory
Of Absolute Advantage Work?
Assume that two countries, Ghana and South
Korea, both have 200 units of resources that
could either be used to produce rice or cocoa
In Ghana, it takes 10 units of resources to
produce one ton of cocoa and 20 units of
resources to produce one ton of rice
Ghana could produce 20 tons of cocoa and no rice,
10 tons of rice and no cocoa, or some combination of
rice and cocoa between the two extremes
How Does The Theory
In South Korea it takes 40 units of
resources to produce one ton of cocoa
and 10 resources to produce one ton of
rice
South Korea could produce 5 tons of cocoa
and no rice, 20 tons of rice and no cocoa, or
some combination in between
How Does The Theory
Without trade
Ghana would produce 10 tons of cocoa and 5
tons of rice
South Korea would produce 10 tons of rice
and 2.5 tons of cocoa
With specialization and trade
Ghana would produce 20 tons of cocoa
South Korea would produce 20 tons of rice
Ghana could trade 6 tons of cocoa to South
Korea for 6 tons of rice
How Does The Theory
After trade
Ghana would have 14 tons of cocoa left and 6
tons of rice
South Korea would have 14 tons of rice left
and 6 tons of cocoa
If each country specializes in the
production of the good in which it has an
absolute advantage and trades for the
other, both countries gain
trade is a positive sum game
How Does The Theory
Absolute Advantage and the Gains from Trade
What Is Ricardo’s Theory
Of Comparative Advantage?
David Ricardo asked what happens when one
country has an absolute advantage in the
production of all goods
The theory of comparative advantage
(1817)—countries should specialize in the
production of those goods they produce most
efficiently and buy goods that they produce less
efficiently from other countries
even if this means buying goods from other
countries that they could produce more
efficiently at home
How Does The Theory Of
Comparative Advantage Work?
Assume Ghana is more efficient in the
production of both cocoa and rice
In Ghana, it takes 10 resources to produce
one ton of cocoa, and 13 1/2 resources to
produce one ton of rice
So, Ghana could produce 20 tons of cocoa
and no rice, 15 tons of rice and no cocoa,
or some combination of the two
In South Korea, it takes 40 resources to
produce one ton of cocoa and 20
resources to produce one ton of rice
So, South Korea could produce 5 tons of
cocoa and no rice, 10 tons of rice and no
cocoa, or some combination of the two
With trade
Ghana could export 4 tons of cocoa to South
Korea in exchange for 4 tons of rice
Ghana will still have 11 tons of cocoa, and 4
additional tons of rice
South Korea still has 6 tons of rice and 4 tons
of cocoa
if each country specializes in the production of
the good in which it has a comparative
advantage and trades for the other, both
countries gain
Comparative advantage theory provides a
strong rationale for encouraging free trade
total output is higher
both countries benefit
Trade is a positive sum game
Comparative Advantage and the Gains from Trade
Is Unrestricted Free Trade
Always Beneficial?
Unrestricted free trade is beneficial, but the gains may
not be as great as the simple model of comparative
advantage would suggest
immobile resources
diminishing returns
dynamic effects and economic growth
the Samuelson critique
But, opening a country to trade could increase
a country's stock of resources as increased supplies become
available from abroad
the efficiency of resource utilization and so free up resources for
other uses
economic growth
Could A Rich Country Be
Worse Off With Free Trade?
Paul Samuelson - the dynamic gains from trade
may not always be beneficial
Free trade may ultimately result in lower
wages in the rich country
The ability to offshore services jobs that were
traditionally not internationally mobile may have
the effect of a mass inward migration into the
United States, where wages would then fall
But, protectionist measures could create a
more harmful situation than free trade
What Is The
Heckscher-Ohlin Theory?
Eli Heckscher (1919) and Bertil Ohlin
(1933) - comparative advantage arises
from differences in national factor
endowments
the extent to which a country is endowed with
resources like land, labor, and capital
The more abundant a factor, the lower its
cost
What Is The
Heckscher-Ohlin Theory?
The pattern of trade is determined by
factor endowments
Heckscher and Ohlin predict that countries will
export goods that make intensive use of
locally abundant factors
import goods that make intensive use of
factors that are locally scarce
Does The Heckscher-Ohlin
Theory Hold?
Wassily Leontief (1953) theorized that since the
U.S. was relatively abundant in capital compared
to other nations, the U.S. would be an exporter
of capital intensive goods and an importer of
labor-intensive goods
However, he found that U.S. exports were less
capital intensive than U.S. imports
Since this result was at variance with the
predictions of trade theory, it became known as
the Leontief Paradox
What Is The
Product Life-Cycle Theory?
The product life-cycle theory - as products
mature both the location of sales and the
optimal production location will change
affecting the flow and direction of trade
proposed by Ray Vernon in the mid-1960s
At this time most of the world’s new products were
developed by U.S. firms and sold first in the U.S.
What Is The
According to the product life-cycle theory
The size and wealth of the U.S. market gave U.S.
firms a strong incentive to develop new products
Initially, the product would be produced and sold in
the U.S.
As demand grew in other developed countries, U.S.
firms would begin to export
Demand for the new product would grow in other
advanced countries over time making it worthwhile for
foreign producers to begin producing for their home
markets
What Is The
U.S. firms might set up production facilities
in advanced countries with growing
demand, limiting exports from the U.S.
As the market in the U.S. and other
advanced nations matured, the product
would become more standardized, and
price would be the main competitive
weapon
What Is The
Producers based in advanced countries where
labor costs were lower than the United States
might now be able to export to the United States
If cost pressures were intense, developing
countries would acquire a production advantage
over advanced countries
Production became concentrated in lower-cost
foreign locations, and the U.S. became an
importer of the product
Does The Product Life-
Cycle Theory Hold?
The product life-cycle theory accurately explains
what has happened for products like
photocopiers and a number of other high
technology products developed in the United
States in the 1960s and 1970s
Mature industries leave the U.S. for low cost
assembly locations
Does The Product Life
Cycle Theory Hold?
But, the globalization and integration of the
world economy has made this theory less
valid today
the theory is ethnocentric
production today is dispersed globally
products today are introduced in multiple
markets simultaneously
What Is New Trade Theory?
New trade theory suggests that the ability of
firms to gain economies of scale (unit cost
reductions associated with a large scale of
output) can have important implications for
international trade
Countries may specialize in the production and
export of particular products because in certain
industries, the world market can only support a
limited number of firms
new trade theory emerged in the 1980s
Paul Krugman won the Nobel prize for his
work in 2008
1. Through its impact on economies of scale, trade
can increase the variety of goods available to
consumers and decrease the average cost of
those goods
without trade, nations might not be able to produce
those products where economies of scale are
important
with trade, markets are large enough to support the
production necessary to achieve economies of scale
so, trade is mutually beneficial because it allows for
the specialization of production, the realization of
scale economies, and the production of a greater
variety of products at lower prices
2. In those industries when output required to
attain economies of scale represents a
significant proportion of total world demand,
the global market may only be able to support
a small number of enterprises
first-mover advantages - the economic and
strategic advantages that accrue to early
entrants into an industry
economies of scale
first movers can gain a scale based cost
advantage that later entrants find difficult to
match
New Trade Theory suggests that a country may become the
dominant exporter of a good because it was the first to
develop large-scale production capabilities for a given
product or industry and thus possessed “first-mover
advantages.”
As the head of a major manufacturing company, what types

of new products, real or imagined, would you start
developing now in order to enjoy first-mover advantages in
the future?
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.6-34
What Are The Implications Of
New Trade Theory For Nations?
Nations may benefit from trade even when they
do not differ in resource endowments or
technology
a country may dominate in the export of a good
simply because it was lucky enough to have one or
more firms among the first to produce that good
Governments should consider strategic trade
policies that nurture and protect firms and
industries where first-mover advantages and
economies of scale are important
What Is Porter’s Diamond Of
Competitive Advantage?
Michael Porter (1990) tried to explain why a
nation achieves international success in a
particular industry
identified four attributes that promote or
impede the creation of competitive
advantage
1. Factor endowments - a nation’s position in
factors of production necessary to compete in
a given industry
can lead to competitive advantage
can be either basic (natural resources, climate,
location) or advanced (skilled labor, infrastructure,
technological know-how)
2. Demand conditions - the nature of home
demand for the industry’s product or service
influences the development of capabilities
sophisticated and demanding customers pressure
firms to be competitive
3. Relating and supporting industries - the
presence or absence of supplier industries and
related industries that are internationally
competitive
can spill over and contribute to other industries
successful industries tend to be grouped in clusters
in countries
4. Firm strategy, structure, and rivalry - the
conditions governing how companies are
created, organized, and managed, and the
nature of domestic rivalry
different management ideologies affect the
development of national competitive advantage
vigorous domestic rivalry creates pressures to
innovate, to improve quality, to reduce costs, and to
invest in upgrading advanced features
Determinants of National Advantage: Porter’s Diamond
Does Porter’s Theory Hold?
Government policy can
affect demand through product standards
influence rivalry through regulation and antitrust laws
impact the availability of highly educated workers and
advanced transportation infrastructure.
The four attributes, government policy, and
chance work as a reinforcing system,
complementing each other and in combination
creating the conditions appropriate for
competitive advantage
So far, Porter’s theory has not been sufficiently
tested to know how well it holds up
What Are The Implications Of
Trade Theory For Managers?
1. Location implications - a firm should disperse its
various productive activities to those countries where
they can be performed most efficiently
firms that do not may be at a competitive
disadvantage
2. First-mover implications - a first-mover advantage can
help a firm dominate global trade in that product
3. Policy implications - firms should work to encourage
governmental policies that support free trade
want policies that have a favorable impact on each
component of the diamond
What Is The
Balance Of Payments?
A country’s balance-of-payments accounts
keep track of the payments to and receipts
from other countries for a particular time period
double entry bookkeeping
sum of the current account balance, the
capital account and the financial account
should be zero
What Is The
There are three main accounts
1. The current account records transactions of goods,
services, and income, receipts and payments
current account deficit - a country imports more
than it exports
current account surplus – a country exports more
than it imports
2. The capital account records one time changes in the
stock of assets
3. The financial account records transactions that involve
the purchase or sale of assets
net change in U.S. assets owned abroad
foreign owned assets in the U.S.
What Is The
United States Balance-of-Payments Accounts, 2013
Is A Current
Account Deficit Bad?
Question: Does current account deficit in the
United States matter?
A current account deficit implies a net debtor
so, a persistent deficit could limit future
economic growth
But, even though capital is flowing out of the
U.S. as payments to foreigners, much of it flows
back in as investments in assets
Yet, suppose foreigners stop buying U.S. assets
and sell their dollars for another currency
a dollar crisis could occur
11e
Chapter 7
Government Policy
and International Trade
What Is The Political Reality
Of International Trade?
Free trade occurs when governments do
not attempt to restrict what citizens can
buy from another country or what they can
sell to another country
many nations are nominally committed to free
trade, but intervene to protect the interests of
politically important groups
How Do Governments
Intervene In Markets?
Governments use various methods to
intervene in markets including
1. Tariffs - taxes levied on imports that
effectively raise the cost of imported
products relative to domestic products
Specific tariffs - levied as a fixed charge
for each unit of a good imported
Ad valorem tariffs - levied as a proportion
of the value of the imported good
How Do Governments
Tariffs
increase government revenues
force consumers to pay more for certain
imports
are pro-producer and anti-consumer
reduce the overall efficiency of the world
economy
How Do Governments
2. Subsidies - government payments to
domestic producers
Subsidies help domestic producers
compete against low-cost foreign imports
gain export markets
Consumers typically absorb the costs of
subsidies
How Do Governments
3. Import Quotas - restrict the quantity of some
good that may be imported into a country
Tariff rate quotas - a hybrid of a quota and a
tariff where a lower tariff is applied to imports
within the quota than to those over the quota
A quota rent - the extra profit that producers
make when supply is artificially limited by an
import quota
How Do Governments
4. Voluntary Export Restraints - quotas on
trade imposed by the exporting country,
typically at the request of the importing
country’s government
Import quotas and voluntary export restraints
benefit domestic producers
raise the prices of imported goods
How Do Governments
5. Local Content Requirements - demand
that some specific fraction of a good be
produced domestically
benefit domestic producers
consumers face higher prices
6. Administrative Policies - bureaucratic
rules designed to make it difficult for
imports to enter a country
polices hurt consumers by limiting choice
How Do Governments
7. Antidumping Policies–also called
countervailing duties–punish foreign firms that
engage in dumping and protect domestic
producers from “unfair” foreign competition
dumping - selling goods in a foreign market below
their costs of production, or selling goods in a
foreign market below their “fair” market value
enables firms to unload excess production in
foreign markets
may be predatory behavior - producers use
profits from their home markets to subsidize
prices in a foreign market to drive competitors out
of that market, and then later raise prices
Why Do Governments
There are two main arguments for government
intervention in the market
1. Political arguments - concerned with protecting
the interests of certain groups within a nation
(normally producers), often at the expense of
other groups (normally consumers)
2. Economic arguments - concerned with boosting
the overall wealth of a nation - benefits both
producers and consumers
What Are The Political Arguments
For Government Intervention?
1. Protecting jobs - the most common
political reason for trade restrictions
results from political pressures by unions or
industries that are "threatened" by more
efficient foreign producers and have more
political clout than consumers
2. Protecting industries deemed important
for national security - industries are often
protected because they are deemed
important for national security
aerospace or semiconductors
3. Retaliation for unfair foreign competition -
when governments take, or threaten to
take, specific actions, other countries
may remove trade barriers
if threatened governments do not back
down, tensions can escalate and new trade
barriers may be enacted
risky strategy
4. Protecting consumers from “dangerous”
products - limit “unsafe” products
5. Furthering the goals of foreign policy -
preferential trade terms can be granted
to countries that a government wants to
build strong relations with
trade policy can also be used to punish
rogue states
6. Protecting the human rights of individuals in
exporting countries - through trade policy
actions
7. Protecting the environment - international trade
is associated with a decline in environmental
quality
concern over global warming
enforcement of environmental regulations
As the Opening Case, “U.S. Tariffs on Chinese Solar Panels
Benefit Malaysia,” shows, government intervention to
protect industries from unfair competition does not always
result in businesses creating jobs in their home countries.
If you were the head of a company protected from foreign

competition via tariffs, import quotas, or subsidies, would
you feel obligated to maintain production facilities in your
home country, even if doing so would mean higher
production costs and lower profit margins? Why or why
not?
What Are The Economic Arguments
1. The infant industry argument - an
industry should be protected until it can
develop and be viable and competitive
internationally
accepted as a justification for temporary
trade restrictions under the WTO
Question: When is an industry “grown up”?
Critics argue that if a country has the potential
to develop a viable competitive position, its
firms should be capable of raising necessary
funds without additional support from the
government
2. Strategic trade policy – first-mover
advantages can be important to success
governments can help firms from their
countries attain these advantages
governments can help firms overcome
barriers to entry into industries where foreign
firms have an initial advantage
When Should Governments
Avoid Using Trade Barriers?
Paul Krugman argues that strategic trade
policies aimed at establishing domestic firms in a
dominant position in a global industry are
beggar-thy-neighbor policies that boost national
income at the expense of other countries
countries that attempt to use such policies will
probably provoke retaliation
Krugman argues that since special interest
groups can influence governments, strategic
trade policy is almost certain to be captured by
such groups who will distort it to their own ends
How Has The Current World
Trading System Emerged?
Until the Great Depression of the 1930s,
most countries had some degree of
protectionism
Smoot-Hawley Act (1930)
After WWII, the U.S. and other nations
realized the value of freer trade
established the General Agreement on Tariffs
and Trade (GATT) - a multilateral agreement
to liberalize trade
In the 1980s and early 1990s protectionist
trends emerged
Japan’s perceived protectionist
(neo-mercantilist) policies created intense
political pressures in other countries
persistent trade deficits by the U.S
use of non-tariff barriers increased
The Uruguay Round of GATT
negotiations began in 1986 focusing on
1. Services and intellectual property
going beyond manufactured goods to address
trade issues related to services and intellectual
property, and agriculture
2. The World Trade Organization
it was hoped that enforcement mechanisms
would make the WTO a more effective policeman
of the global trade rules
The WTO encompassed GATT along with
two sisters organizations
the General Agreement on Trade in Services
(GATS)
working to extend free trade agreements to
services
the Agreement on Trade Related Aspects of
Intellectual Property Rights (TRIPS)
working to develop common international
rules for intellectual property rights
The WTO has emerged as an effective advocate
and facilitator of future trade deals, particularly in
such areas as services
159 members in 2013
so far, the WTO’s policing and enforcement
mechanisms are having a positive effect
most countries have adopted WTO
recommendations for trade disputes
a magnet for various groups protesting free
trade
What Is The Future Of The
World Trade Organization?
The current agenda of the WTO focuses
on
the rise of anti-dumping policies
the high level of protectionism in agriculture
the lack of strong protection for intellectual
property rights in many nations
continued high tariffs on nonagricultural goods
and services in many nations
What Is The Future Of The
World Trade Organization?
The WTO launched a new round of talks
at Doha, Qatar in 2001 that have already
gone on for 12 years and are currently
stalled.
The agenda includes
cutting tariffs on industrial goods and services
phasing out subsidies to agricultural
producers
reducing barriers to cross-border investment
limiting the use of anti-dumping laws
What Do Trade Barriers
Mean For Managers?
Managers need to consider how trade
barriers affect the strategy of the firm and
the implications of government policy on
the firm
1. Trade barriers raise the cost of exporting
products to a country
2. Voluntary export restraints (VERs) may
limit a firm’s ability to serve a country
from locations outside that country
What Do Trade Barriers
Mean For Managers?
3. To conform to local content
requirements, a firm may have to locate
more production activities in a given
market than it would otherwise
Managers have an incentive to lobby for
free trade, and keep protectionist
pressures from causing them to have to
change strategies
11e
Chapter 8
Foreign Direct
Investment
What Is FDI?
Foreign direct investment (FDI) occurs
when a firm invests directly in new
facilities to produce and/or market in a
foreign country
the firm becomes a multinational enterprise
FDI can be in the form of
greenfield investments - the establishment of
a wholly new operation in a foreign country
acquisitions or mergers with existing firms in
the foreign country
What Is FDI?
The flow of FDI - the amount of FDI
undertaken over a given time period
Outflows of FDI are the flows of FDI out of a
country
Inflows of FDI are the flows of FDI into a
country
The stock of FDI - the total accumulated
value of foreign-owned assets at a given
time
What Are The Patterns Of FDI?
Both the flow and stock of FDI have
increased over the last 35 years
Most FDI is still targeted towards developed
nations
United States, Japan, and the EU
but, other destinations are emerging
South, East, and South East Asia
especially China
Latin America
FDI Outflows 1982-2012 ($ billions)
FDI Inflows by Region 1995-2013 ($ billion)
The growth of FDI is a result of
1. a fear of protectionism
want to circumvent trade barriers
2. political and economic changes
deregulation, privatization, fewer restrictions on
FDI
3. new bilateral investment treaties
designed to facilitate investment
4. the globalization of the world economy
many companies now view the world as their
market
need to be closer to their customers
Gross fixed capital formation - the total
amount of capital invested in factories,
stores, office buildings, and the like
the greater the capital investment in an
economy, the more favorable its future
prospects are likely to be
So, FDI is an important source of capital
investment and a determinant of the future
growth rate of an economy
What Is The Source Of FDI?
Since World War II, the U.S. has been the
largest source country for FDI
the United Kingdom, the Netherlands, France,
Germany, and Japan are other important
source countries
together, these countries account for 60% of
all FDI outflows from 1998-2011
What Is The Source Of FDI?
Cumulative FDI outflows, 1998–2012 ($ billions)
Why Do Firms Choose Acquisition
Versus Greenfield Investments?
Most cross-border investment is in the
form of mergers and acquisitions rather
than greenfield investments
between 40-80% of all FDI inflows per annum
from 1998 to 2011 were in the form of mergers
and acquisitions
but in developing countries two-thirds of
FDI is greenfield investment
fewer target companies
Why Do Firms Choose Acquisition
Versus Greenfield Investments?
Firms prefer to acquire existing assets
because
mergers and acquisitions are quicker to
execute than greenfield investments
it is easier and perhaps less risky for a firm to
acquire desired assets than build them from
the ground up
firms believe that they can increase the
efficiency of an acquired unit by transferring
capital, technology, or management skills
Why Choose FDI?
Question: Why does FDI occur instead of
exporting or licensing?
1. Exporting - producing goods at home
and then shipping them to the receiving
country for sale
exports can be limited by transportation
costs and trade barriers
FDI may be a response to actual or
threatened trade barriers such as import
tariffs or quotas
Why Choose FDI?
2. Licensing - granting a foreign entity the right to
produce and sell the firm’s product in return for
a royalty fee on every unit that the foreign
entity sells
Internalization theory (aka market imperfections
theory) - compared to FDI licensing is less attractive
firm could give away valuable technological
know-how to a potential foreign competitor
does not give a firm the control over
manufacturing, marketing, and strategy in the
foreign country
the firm’s competitive advantage may be based
on its management, marketing, and
manufacturing capabilities
Foreign direct investment (FDI) in a developing economy,
such as Russia or the countries of sub-Saharan Africa, can
be extremely profitable for multinational enterprises. It can
also result in substantial losses if economic conditions in the
host country deteriorate.
If you were the head of a major manufacturer of household

goods seeking entry into the market of a country
experiencing strong economic growth due to its oil and gas
exports, which entry strategy would you pursue: exporting,
licensing, or foreign direct investment? If FDI, would you
seek to acquire an existing firm, or build entirely new
facilities (a greenfield investment)?
What Is The Pattern Of FDI?
Question: Why do firms in the same industry
undertake FDI at about the same time and the
same locations?
Knickerbocker - FDI flows are a reflection of
strategic rivalry between firms in the global
marketplace
multipoint competition - when two or more enterprises
encounter each other in different regional markets,
national markets, or industries
What Is The Pattern Of FDI?
Question: Why is it profitable for firms to
undertake FDI rather than continuing to export
from a home base, or licensing a foreign firm?
Dunning’s eclectic paradigm - it is important to
consider
location-specific advantages - that arise from using
resource endowments or assets that are tied to a
particular location and that a firm finds valuable to
combine with its own unique assets
externalities - knowledge spillovers that occur when
companies in the same industry locate in the same
area
What Are The Theoretical
Approaches To FDI?
The radical view - the multinational enterprise
(MNE) is an instrument of imperialist domination
and a tool for exploiting host countries to the
exclusive benefit of their capitalist-imperialist
home countries
in retreat almost everywhere
The free market view - international production
should be distributed among countries according
to the theory of comparative advantage
embraced by advanced and developing nations
including the United States and Britain, but no country
has adopted it in its purest form
What Are The Theoretical
Approaches To FDI?
Pragmatic nationalism - FDI has both benefits
(inflows of capital, technology, skills, and jobs)
and costs (repatriation of profits to the home
country and a negative balance of payments
effect)
FDI should be allowed only if the benefits outweigh
the costs
Recently, there has been a strong shift toward
the free market stance creating
a surge in FDI worldwide
an increase in the volume of FDI in countries with
newly liberalized regimes
How Does FDI Benefit
The Host Country?
There are four main benefits of inward
FDI for a host country
1. Resource transfer effects - FDI brings
capital, technology, and management
resources
2. Employment effects - FDI can bring jobs
The Host Country?
3. Balance of payments effects - FDI can help a
country to achieve a current account surplus
4. Effects on competition and economic growth -
greenfield investments increase the level of
competition in a market, driving down prices
and improving the welfare of consumers
can lead to increased productivity growth, product
and process innovation, and greater economic
growth
What Are The Costs Of
FDI To The Host Country?
Inward FDI has three main costs:
1. Adverse effects of FDI on competition
within the host nation
subsidiaries of foreign MNEs may have
greater economic power than indigenous
competitors because they may be part of
a larger international organization
FDI To The Host Country?
2. Adverse effects on the balance of payments
when a foreign subsidiary imports a substantial
number of its inputs from abroad, there is a debit on
the current account of the host country’s balance of
payments
3. Perceived loss of national sovereignty and
autonomy
decisions that affect the host country will be made
by a foreign parent that has no real commitment to
the host country, and over which the host country’s
government has no real control
The Home Country?
The benefits of FDI for the home country
include
1. The effect on the capital account of the home
country’s balance of payments from the inward
flow of foreign earnings
2. The employment effects that arise from outward
FDI
3. The gains from learning valuable skills from
foreign markets that can subsequently be
transferred back to the home country
FDI To The Home Country?
1. The home-country’s balance of payments
can suffer
from the initial capital outflow required to
finance the FDI
if the purpose of the FDI is to serve the home
market from a low cost labor location
if the FDI is a substitute for direct exports
FDI To The Home Country?
2. Employment may also be negatively affected if
the FDI is a substitute for domestic production
But, international trade theory suggests that
home-country concerns about the negative
economic effects of offshore production (FDI
undertaken to serve the home market) may not
be valid
may stimulate economic growth and employment
in the home country by freeing resources to
specialize in activities where the home country
has a comparative advantage
How Does Government
Influence FDI?
Governments can encourage outward FDI
government-backed insurance programs to
cover major types of foreign investment risk
Governments can restrict outward FDI
limit capital outflows, manipulate tax rules, or
outright prohibit FDI
How Does Government
Influence FDI?
Governments can encourage inward FDI
offer incentives to foreign firms to invest in
their countries
gain from the resource-transfer and employment
effects of FDI, and capture FDI away from other
potential host countries
Governments can restrict inward FDI
use ownership restraints and performance
requirements
How Do International
Institutions Influence FDI?
Until the 1990s, there was no consistent
involvement by multinational institutions in
the governing of FDI
Today, the World Trade Organization is
changing this by trying to establish a
universal set of rules designed to promote
the liberalization of FDI
What Does FDI
Mean For Managers?
Managers need to consider what trade
theory implies about FDI, and the link
between government policy and FDI
The direction of FDI can be explained
through the location-specific advantages
argument associated with John Dunning
however, it does not explain why FDI is
preferable to exporting or licensing, must
consider internalization theory
What Does FDI
Mean For Managers?
A Decision Framework
What Does FDI
Mean For Managers?
A host government’s attitude toward FDI is
important in decisions about where to
locate foreign production facilities and
where to make a foreign direct investment
firms have the most bargaining power when
the host government values what the firm has
to offer, when the firm has multiple
comparable alternatives, and when the firm
has a long time to complete negotiations
11e
Chapter 9
Regional Economic
Integration
What Is Regional
Economic Integration?
Regional economic integration - agreements
between countries in a geographic region to
reduce tariff and non-tariff barriers to the free
flow of goods, services, and factors of production
between each other
Question: Do regional trade agreements
promote free trade?
In theory, yes, but the world may be moving toward a
situation in which a number of regional trade blocks
compete against each other
What Are The Levels Of
Regional Economic Integration?
1. A free trade area eliminates all barriers to
the trade of goods and services among
member countries
European Free Trade Association (EFTA) -
Norway, Iceland, Liechtenstein, and
Switzerland
North American Free Trade Agreement
(NAFTA) - U.S., Canada, and Mexico
2. A customs union eliminates trade barriers
between member countries and adopts a
common external trade policy
Andean Community (Bolivia, Colombia, Ecuador,
and Peru)
3. A common market has no barriers to trade
between member countries, a common external
trade policy, and the free movement of the
factors of production
Mercosur (Brazil, Argentina, Paraguay, and Uruguay)
4. An economic union has the free flow of
products and factors of production between
members, a common external trade policy, a
common currency, a harmonized tax rate, and
a common monetary and fiscal policy
European Union (EU)
5. A political union involves a central political
apparatus that coordinates the economic,
social, and foreign policy of member states
the EU is headed toward at least partial political
union, and the U.S. is an example of even closer
political union
Levels of Economic Integration
Why Should Countries
Integrate Their Economies?
All countries gain from free trade and investment
regional economic integration is an attempt to exploit
the gains from free trade and investment
Linking countries together, making them more
dependent on each other
creates incentives for political cooperation and
reduces the likelihood of violent conflict
gives countries greater political clout when dealing
with other nations
What Limits Efforts
At Integration?
Economic integration can be difficult because
while a nation as a whole may benefit from a regional
free trade agreement, certain groups may lose
it implies a loss of national sovereignty
Regional economic integration is only beneficial
if the amount of trade it creates exceeds the
amount it diverts
trade creation occurs when low cost producers within
the free trade area replace high cost domestic
producers
trade diversion occurs when higher cost suppliers
within the free trade area replace lower cost external
suppliers
What Is The Status Of Regional
Economic Integration In Europe?
Europe has two trade blocs
1. The European Union (EU) with 27
members
2. The European Free Trade Area (EFTA)
with 4 members
The EU is seen as the world’s next
economic and political superpower
What Is The Status Of Regional
Economic Integration In Europe?
Member States of The European Union in 2013
What Is The European Union?
The devastation of two world wars on Western
Europe prompted the formation of the EU
Members wanted lasting peace and to hold their own
on the world’s political and economic stage
Forerunner was the European Coal and Steel
Community (1951)
The European Economic Community (1957) was
formed at the Treaty of Rome with the goal of
becoming a common market
What Is The European Union?
The Single European Act (1987)
committed the EC countries to work toward
establishment of a single market by December 31,
1992
was born out of frustration among EC members that
the community was not living up to its promise
provided the impetus for the restructuring of
substantial sections of European industry allowing for
faster economic growth than would otherwise have
been the case
What Is The Political Structure
Of The European Union?
The main institutions in the EU include:
1. The European Council - the ultimate controlling
authority within the EU
2. The European Commission - responsible for proposing
EU legislation, implementing it, and monitoring
compliance with EU laws by member states
3. The European Parliament - debates legislation
proposed by the commission and forwarded to it by the
council
4. The Court of Justice - the supreme appeals court for EU
law
What Is The Euro?
The Maastricht Treaty committed the EU
to adopt a single currency
created the second largest currency zone in
the world after that of the U.S. dollar
used by 17 of the 27 member states
Britain, Denmark, and Sweden opted out
since its establishment January 1, 1999,
the euro has had a volatile trading history
with the U.S. dollar
Is The Euro A Good Thing?
Benefits of the euro
savings from having to handle one currency, rather
than many
it is easier to compare prices across Europe, so firms
are forced to be more competitive
gives a strong boost to the development of highly
liquid pan-European capital market
increases the range of investment options open both
to individuals and institutions
Costs of the euro
loss of control over national monetary policy
EU is not an optimal currency area
Should The EU
Continue To Expand?
Many countries have applied for EU
membership
Ten countries joined in 2004 expanding
the EU to 25 states
In 2007, Bulgaria and Romania joined
bringing membership to 27 countries
Turkey has been denied full membership
because of concerns over human rights
What Is The Status Of Economic
Integration In The Americas?
There is a move toward greater regional
economic integration in the Americas
The biggest effort is the North American
Free Trade Area (NAFTA)
Other efforts include the Andean
Community and Mercosur
A hemisphere-wide Free Trade of the
Americas is under discussion
What Is The Status Of Economic
Integration In The Americas?
Economic Integration in the Americas
What Is The North American
Free Trade Agreement?
The North American Free Trade Area includes the United
States, Canada, and Mexico
abolished tariffs on 99% of the goods traded between
members
removed barriers on the cross-border flow of services
protects intellectual property rights
removes most restrictions on FDI between members
allows each country to apply its own environmental
standards
establishes two commissions to impose fines and
remove trade privileges when environmental
standards or legislation involving health and safety,
minimum wages, or child labor are ignored
Is The North American
Free Trade Area Beneficial?
Supporters of NAFTA claimed that
Mexico would benefit
from increased jobs as low cost production moves
south and will see more rapid economic growth as a
result
the U.S. and Canada would benefit from
access to a large and increasingly prosperous market
the lower prices for consumers from goods produced
in Mexico
low cost labor and the ability to be more competitive
on world markets
increased imports by Mexico
Is The North American
Free Trade Area Beneficial?
Critics of NAFTA claimed that
jobs would be lost and wage levels would
decline in the U.S. and Canada
pollution would increase due to Mexico's more
lax standards
Mexico would lose its sovereignty
Who Was Right?
Research indicates that NAFTA’s early
impact was subtle, and both advocates
and detractors may have been guilty of
exaggeration
NAFTA is credited with helping create
increased political stability in Mexico
Other Latin American countries would like
to join NAFTA
The establishment of the North American Free Trade
Agreement (NAFTA) in 1994 was an important, if
controversial, moment in the economic histories of
Canada, the United States, and Mexico.
As the head of a major industrial machinery

manufacturer in the United States, would you have
welcomed economic integration with Canada and
Mexico? What advantages or disadvantages would you
expect to experience? How might your business
operations be different today if NAFTA had not been
passed?
What Is
The Andean Community?
The Andean Pact
formed in 1969 using the EU model
had more or less failed by the mid-1980s
was re-launched in 1990, and now operates
as a customs union
renamed the Andean Community in 1997
signed an agreement in 2003 with Mercosur to
restart negotiations towards the creation of a
free trade area
What Is Mercosur?
Mercosur
originated in 1988 as a free trade pact between Brazil
and Argentina
was expanded in 1990 to include Paraguay and
Uruguay and in 2005 with the addition of Venezuela
may be diverting trade rather than creating trade, and
local firms are investing in industries that are not
competitive on a worldwide basis
initially made progress on reducing trade barriers
between member states, but more recently efforts
have stalled
What Is The Central American
Trade Agreement And CARICOM?
There are two other trade pacts in the Americas
the Central American Trade Agreement – (CAFTA,
2005) - to lower trade barriers between the U.S. and
members
CARICOM (1973) - to establish a customs union
Neither pact has achieved its goals yet
In 2006, six CARICOM members formed the
Caribbean Single Market and Economy (CSME)
- to lower trade barriers and harmonize
macro-economic and monetary policy between
members
What Is Free Trade
Of The Americas?
Talks began in April 1998 to establish a Free Trade of
The Americas (FTAA) by 2005
The FTAA was not established and now support from the
U.S. and Brazil is mixed
the U.S. wants stricter enforcement if intellectual
property rights
Brazil and Argentina want the U.S. to eliminate
agricultural subsidies and tariffs
If the FTAA is established, it will have major implications
for cross-border trade and investment flows within the
hemisphere
would create a free trade area of 850 million people
who accounted for nearly $18 trillion in GDP in 2008
What Is The Status Of
Economic Integration In Asia?
Various efforts at integration have been
attempted in Asia, but most exist in name
only
Association of Southeast Asian Nations
(ASEAN)
Asia-Pacific Economic Cooperation (APEC)
What Is The Association Of
Southeast Asian Nations?
The Association of Southeast Asian Nations
(ASEAN, 1967)
currently includes Brunei, Indonesia, Malaysia, the
Philippines, Singapore, Thailand, Vietnam, Myanmar,
Laos, and Cambodia
wants to foster freer trade between member countries
and to achieve some cooperation in their industrial
policies
An ASEAN Free Trade Area (AFTA) between the
six original members of ASEAN came into effect
in 2003
ASEAN and AFTA are moving towards establishing a
free trade zone
What Is The Association Of
Southeast Asian Nations?
ASEAN Countries
What Is The Asia-Pacific
Economic Cooperation?
The Asia-Pacific Economic Cooperation
(APEC)
has 21 members including the United States,
Japan, and China
wants to increase multilateral cooperation
member states account for 55% of world’s
GNP, and 49% of world trade
What Is The Asia-Pacific
Economic Cooperation?
APEC Members
What Is The Status Of
Economic Integration In Africa?
Many countries are members of more than
one of the nine blocs in the region
but, since many countries support the use of
trade barriers to protect their economies from
foreign competition, meaningful progress is
slow
The East African Community (EAC) was
re-launched in 2001, however, the effort so
far appears futile
What Does Economic
Integration Mean For Managers?
Regional economic integration
opens new markets
allows firms to realize cost economies by centralizing
production in those locations where the mix of factor
costs and skills is optimal
But
within each grouping, the business environment
becomes competitive
there is a risk of being shut out of the single market by
the creation of a “trade fortress”
11e
Chapter 10
The Foreign
Exchange Market
Why Is The Foreign
Exchange Market Important?
The foreign exchange market
1. is used to convert the currency of one country
into the currency of another
2. provides some insurance against foreign
exchange risk - the adverse consequences of
unpredictable changes in exchange rates
The exchange rate is the rate at which
one currency is converted into another
events in the foreign exchange market affect
firm sales, profits, and strategy
When Do Firms Use The
Foreign Exchange Market?
International companies use the foreign
exchange market when
the payments they receive for exports, the income
they receive from foreign investments, or the income
they receive from licensing agreements with foreign
firms are in foreign currencies
they must pay a foreign company for its products or
services in its country’s currency
they have spare cash that they wish to invest for short
terms in money markets
they are involved in currency speculation - the
short-term movement of funds from one currency to
another in the hopes of profiting from shifts in
exchange rates
How Can Firms Hedge Against
Foreign Exchange Risk?
The foreign exchange market provides
insurance to protect against foreign
exchange risk
the possibility that unpredicted changes in
future exchange rates will have adverse
consequences for the firm
A firm that insures itself against foreign
exchange risk is hedging
What Is The Difference Between
Spot Rates And Forward Rates?
The spot exchange rate is the rate at which a
foreign exchange dealer converts one currency
into another currency on a particular day
spot rates change continually depending on the
supply and demand for that currency and other
currencies
Spot exchange rates can be quoted as the
amount of foreign currency one U.S. dollar can
buy, or as the value of a dollar for one unit of
foreign currency
What Is The Difference Between
Spot Rates And Forward Rates?
To insure or hedge against a possible
adverse foreign exchange rate movement,
firms engage in forward exchanges
two parties agree to exchange currency and
execute the deal at some specific date in the
future
A forward exchange rate is the rate used
for these transactions
rates for currency exchange are typically
quoted for 30, 90, or 180 days into the future
What Is A Currency Swap?
A currency swap is the simultaneous purchase
and sale of a given amount of foreign exchange
for two different value dates
Swaps are transacted
between international businesses and their banks
between banks
between governments when it is desirable to move
out of one currency into another for a limited period
without incurring foreign exchange rate risk
What Is The Nature Of The
Foreign Exchange Market?
The foreign exchange market is a global network
of banks, brokers, and foreign exchange dealers
connected by electronic communications
systems
the average total value of global foreign exchange
trading in March, 1986 was just $200 billion, in April,
2010 it hit $4 trillion per day
the most important trading centers are London, New
York, Zurich, Tokyo, and Singapore
the market is always open somewhere in the world—it
never sleeps
Do Exchange Rates Differ
Between Markets?
High-speed computer linkages between
trading centers mean there is no
significant difference between exchange
rates in the differing trading centers
If exchange rates quoted in different
markets were not essentially the same,
there would be an opportunity for arbitrage
the process of buying a currency low
and selling it high
Do Exchange Rates Differ
Between Markets?
Most transactions involve dollars on one
side—it is a vehicle currency
85% of all foreign exchange transactions
involve the U.S. dollar
other vehicle currencies are the euro, the
Japanese yen, and the British pound
China’s renminbi is still only used for about
0.3% of foreign exchange transactions
How Are Exchange Rates
Determined?
Exchange rates are determined by the
demand and supply for different
currencies
Three factors impact future exchange
rate movements
1. A country’s price inflation
2. A country’s interest rate
3. Market psychology
How Do Prices
Influence Exchange Rates?
The law of one price states that in
competitive markets free of transportation
costs and barriers to trade, identical
products sold in different countries must
sell for the same price when their price is
expressed in terms of the same currency
otherwise there is an opportunity for arbitrage
until prices equalize between the two markets
How Do Prices
Purchasing power parity theory (PPP)
argues that given relatively efficient
markets (a market with no impediments to
the free flow of goods and services) the
price of a “basket of goods” should be
roughly equivalent in each country
predicts that changes in relative prices will
result in a change in exchange rates
How Do Prices
A positive relationship exists between the
inflation rate and the level of money supply
when the growth in the money supply is greater than
the growth in output, inflation will occur
PPP theory suggests that changes in relative
prices between countries will lead to exchange
rate changes, at least in the short run
a country with high inflation should see its currency
depreciate relative to others
How Do Prices
Macroeconomic Data for Bolivia, April 1984 to October 1985
How Do Prices
Question: How well does PPP work?
Empirical testing of PPP theory suggests that
it is most accurate in the long run, and for countries
with high inflation and underdeveloped capital
markets
it is less useful for predicting short term exchange rate
movements between the currencies of advanced
industrialized nations that have relatively small
differentials in inflation rates
How Do Interest Rates
The International Fisher Effect states that for any
two countries the spot exchange rate should
change in an equal amount but in the opposite
direction to the difference in nominal interest
rates between two countries
In other words:
[(S1 - S2) / S2 ] x 100 = i $ - i ¥
where i$ and i¥ are the respective nominal
interest rates in two countries (in this case the
U.S. and Japan), S1 is the spot exchange rate at
the beginning of the period and S2 is the spot
exchange rate at the end of the period
How Does Investor Psychology
The bandwagon effect occurs when expectations
on the part of traders turn into self-fulfilling
prophecies - traders can join the bandwagon and
move exchange rates based on group
expectations
investor psychology and bandwagon effects
greatly influence short term exchange rate
movements
government intervention can prevent the
bandwagon from starting, but is not always
effective
Should Companies Use Exchange
Rate Forecasting Services?
There are two schools of thought
1. The efficient market school - forward exchange
rates do the best possible job of forecasting
future spot exchange rates, and, therefore,
investing in forecasting services would be a
waste of money
2. The inefficient market school - companies can
improve the foreign exchange market’s
estimate of future exchange rates by investing
in forecasting services
1. An efficient market is one in which prices
reflect all available information
if the foreign exchange market is efficient,
then forward exchange rates should be
unbiased predictors of future spot rates
Most empirical tests confirm the efficient
market hypothesis suggesting that
companies should not waste their money
on forecasting services
2. An inefficient market is one in which
prices do not reflect all available
information
in an inefficient market, forward exchange
rates will not be the best possible predictors
of future spot exchange rates and it may be
worthwhile for international businesses to
invest in forecasting services
However, the track record of forecasting
services is not good
How Are Exchange
Rates Predicted?
Two schools of thought on forecasting:
1. Fundamental analysis draws upon economic
factors like interest rates, monetary policy,
inflation rates, or balance of payments
information to predict exchange rates
2. Technical analysis charts trends with the
assumption that past trends and waves are
reasonable predictors of future trends and
waves
Are All Currencies
Freely Convertible?
A currency is freely convertible when a government of a
country allows both residents and non-residents to
purchase unlimited amounts of foreign currency with the
domestic currency
A currency is externally convertible when non-residents
can convert their holdings of domestic currency into a
foreign currency, but when the ability of residents to
convert currency is limited in some way
A currency is nonconvertible when both residents and
non-residents are prohibited from converting their
holdings of domestic currency into a foreign currency
Are All Currencies
Freely Convertible?
Most countries today practice free convertibility
but many countries impose restrictions on the
amount of money that can be converted
Countries limit convertibility to preserve foreign
exchange reserves and prevent capital flight
when residents and nonresidents rush to
convert their holdings of domestic currency
into a foreign currency
most likely to occur in times of hyperinflation
or economic crisis
Are All Currencies
Freely Convertible?
When a currency is nonconvertible, firms may
turn to countertrade
barter-like agreements where goods and
services are traded for other goods and
services
was more common in the past when more
currencies were nonconvertible, but today
involves less than 10% of world trade
Imagine that you are the CEO of a major consumer
electronics manufacturer based in the United States.
Over the past decade, your company has seen a sharp
rise in demand from consumers in oil-exporting nations
in South America, Africa, and Eastern Europe. As such, a
significant portion of your revenues are in foreign
currencies.
Evaluate your exposure to foreign exchange risk. What

factors might influence the profits you receive from
foreign sales? How might you hedge against these risks?
What Do Exchange Rates
Mean For Managers?
Managers need to consider three types
of foreign exchange risk
1. Transaction exposure - the extent to
which the income from individual
transactions is affected by fluctuations in
foreign exchange values
includes obligations for the purchase or sale
of goods and services at previously agreed
prices and the borrowing or lending of funds
in foreign currencies
Mean For Managers?
2. Translation exposure - the impact of
currency exchange rate changes on the
reported financial statements of a
company
concerned with the present measurement of
past events
gains or losses are “paper losses”
they are unrealized
Mean For Managers?
3. Economic exposure - the extent to which
a firm’s future international earning
power is affected by changes in
exchange rates
concerned with the long-term effect of
changes in exchange rates on future prices,
sales, and costs
How Can Managers
Minimize Exchange Rate Risk?
To minimize transaction and translation
exposure, managers should
1. buy forward
2. use swaps
3. lead and lag payables and receivables
lead and lag strategies can be difficult to
implement
How Can Managers
Lead strategy - attempt to collect foreign
currency receivables early when a foreign
currency is expected to depreciate and pay
foreign currency payables before they are due
when a currency is expected to appreciate
Lag strategy - delay collection of foreign
currency receivables if that currency is
expected to appreciate and delay payables if
the currency is expected to depreciate
How Can Managers
To reduce economic exposure, managers
should
1. Distribute productive assets to various locations
so the firm’s long-term financial well-being is
not severely affected by changes in exchange
rates
2. Ensure assets are not too concentrated in
countries where likely rises in currency values
will lead to increases in the foreign prices of the
goods and services the firm produces
How Can Managers
In general, managers should
1. Have central control of exposure to protect resources
efficiently and ensure that each subunit adopts the
correct mix of tactics and strategies
2. Distinguish between transaction and translation
exposure on the one hand, and economic exposure on
the other hand
3. Attempt to forecast future exchange rates
4. Establish good reporting systems so the central finance
function can regularly monitor the firm’s exposure
position
5. Produce monthly foreign exchange exposure reports
11e
Chapter 11
The International
Monetary System
What Is The International
Monetary System?
The international monetary system refers to the
institutional arrangements that countries adopt to
govern exchange rates
A floating exchange rate system exists when a
country allows the foreign exchange market to
determine the relative value of a currency
the U.S. dollar, the EU euro, the Japanese yen, and
the British pound all float freely against each other
their values are determined by market forces and
fluctuate day to day
Monetary System?
A pegged exchange rate system exists when a
country fixes the value of its currency relative to
a reference currency
Many Gulf states peg their currencies to the U.S.
dollar
A dirty float exists when a country tries to hold
the value of its currency within some range of a
reference currency such as the U.S. dollar
China pegs the yuan to a basket of other currencies
Monetary System?
A fixed exchange rate system exists when
countries fix their currencies against each
other at some mutually agreed on
exchange rate
European Monetary System (EMS) prior to
1999
What Was The Gold Standard?
The gold standard refers to a system in
which countries peg currencies to gold and
guarantee their convertibility
The gold standard dates back to ancient times
when gold coins were a medium of exchange,
unit of account, and store of value
payment for imports was made in gold or silver
What Was The Gold Standard?
Later, payment was made in paper currency
which was linked to gold at a fixed rate
In the 1880s, most nations followed the gold
standard
$1 = 23.22 grains of “fine” (pure) gold
The gold par value refers to the amount of a
currency needed to purchase one ounce of
gold
Why Did The
Gold Standard Make Sense?
The great strength of the gold standard was that
it contained a powerful mechanism for achieving
balance-of-trade equilibrium by all countries
when the income a country’s residents earn from its
exports is equal to the money its residents pay for
imports
It is this feature that continues to prompt calls to
return to a gold standard
Why Did The
Gold Standard Make Sense?
The gold standard worked well from the 1870s
until 1914
but, many governments financed their World War I
expenditures by printing money and so, created
inflation
People lost confidence in the system
the demand on gold for their currency put pressure on
countries' gold reserves and forced them to suspend
gold convertibility
By 1939, the gold standard was dead
What Was The
Bretton Woods System?
In 1944, representatives from 44 countries met
at Bretton Woods, New Hampshire, to design a
new international monetary system that would
facilitate postwar economic growth
Under the new agreement
a fixed exchange rate system was established
all currencies were fixed to gold, but only the U.S.
dollar was directly convertible to gold
devaluations could not to be used for competitive
purposes
a country could not devalue its currency by more than
10% without IMF approval
What Institutions Were
Established At Bretton Woods?
The Bretton Woods agreement also
established two multinational institutions
1. The International Monetary Fund (IMF) to
maintain order in the international monetary
system through a combination of discipline and
flexibility
2. The World Bank to promote general economic
development
also called the International Bank for
Reconstruction and Development (IBRD)
1. The International Monetary Fund (IMF)
fixed exchange rates stopped competitive
devaluations and brought stability to the world trade
environment
fixed exchange rates imposed monetary discipline
on countries, limiting price inflation
in cases of fundamental disequilibrium, devaluations
were permitted
the IMF lent foreign currencies to members during
short periods of balance-of-payments deficit, when a
rapid tightening of monetary or fiscal policy would
hurt domestic employment
2. The World Bank
Countries can borrow from the World Bank in two
ways
1. Under the IBRD scheme, money is raised through
bond sales in the international capital market
borrowers pay a market rate of interest - the
bank's cost of funds plus a margin for
expenses.
2. Through the International Development Agency, an
arm of the bank created in 1960
IDA loans go only to the poorest countries
Why Did The Fixed Exchange
Rate System Collapse?
Bretton Woods worked well until the late 1960s
It collapsed when huge increases in welfare programs
and the Vietnam War were financed by increasing the
money supply and causing significant inflation
other countries increased the value of their currencies
relative to the U.S. dollar in response to speculation
the dollar would be devalued
However, because the system relied on an economically
well managed U.S., when the U.S. began to print money,
run high trade deficits, and experience high inflation, the
system was strained to the breaking point
the U.S. dollar came under speculative attack
What Was The
Jamaica Agreement?
A new exchange rate system was established in
1976 at a meeting in Jamaica
The rules that were agreed on then are still in
place today
Under the Jamaican agreement
floating rates were declared acceptable
gold was abandoned as a reserve asset
total annual IMF quotas - the amount member
countries contribute to the IMF - were increased to
$41 billion – today they are about $767 billion
What Has Happened To
Exchange Rates Since 1973?
Since 1973, exchange rates have been
more volatile and less predictable than
they were between 1945 and 1973
because of
the 1971 and 1979 oil crises
the loss of confidence in the dollar after U.S.
inflation in 1977-78
the rise in the dollar between 1980 and 1985
the partial collapse of the EMS in 1992
the 1997 Asian currency crisis
the global financial crisis of 2008–2010;
sovereign debt crisis of 2010–2011
What Has Happened To
Exchange Rates Since 1973?
Major Currencies Dollar Index, 1973-2015
The current system of floating exchange rates exposes firms
to a high degree of foreign exchange risk. Strategies to
hedge against this risk include entering into forward
exchange contracts, diversifying locations of production,
and contracting out production to different suppliers based
on changes in foreign exchange rates.
Imagine that you are the head of a Chinese electronics firm

with significant sales and several production facilities in the
United States. Given the recent rise in the value of the U.S.
dollar and China’s ongoing efforts to devalue the renminbi,
what strategy, if any, would you pursue to hedge against
foreign exchange risk? What events would encourage you to
pursue a different strategy?
Which Is Better – Fixed
Rates Or Floating Rates?
Floating exchange rates provide
1. Monetary policy autonomy
removing the obligation to maintain exchange
rate parity restores monetary control to a
government
2. Automatic trade balance adjustments
under Bretton Woods, if a country developed a
permanent deficit in its balance of trade that
could not be corrected by domestic policy, the
IMF would have to agree to a currency
devaluation
3. Help countries recover from financial crises
Which Is Better – Fixed Rates
Or Floating Rates?
But, a fixed exchange rate system
1. Provides monetary discipline
ensures that governments do not expand
their money supplies at inflationary rates
2. Minimizes speculation
causes uncertainty
3. Reduces uncertainty
promotes growth of international trade
and investment
Who Is Right?
There is no real agreement as to which
system is better
We know that a Bretton Woods-style fixed
exchange rate regime will not work
But a different kind of fixed exchange rate
system might be more enduring
could encourage stability that would facilitate
more rapid growth in international trade and
investment
What Type of Exchange Rate
System Is In Practice Today?
Various exchange rate regimes are followed
today
21% of IMF members follow a free float policy
23% of IMF members follow a managed float system
5% of IMF members have no legal tender of their own
excludes Euro Zone countries
the remaining countries use less flexible systems
such as pegged arrangements, or adjustable pegs
What Type of Exchange Rate
System Is In Practice Today?
Exchange Rate Policies of IMF Members
What Is A Pegged Rate
System?
A country following a pegged exchange
rate system pegs the value of its currency
to that of another major currency
popular among the world’s smaller nations
imposes monetary discipline and leads to low
inflation
adopting a pegged exchange rate regime can
moderate inflationary pressures in a country
What Is A Currency Board?
Countries using a currency board commit
to converting their domestic currency on
demand into another currency at a fixed
exchange rate
the currency board holds reserves of foreign
currency equal at the fixed exchange rate to at
least 100% of the domestic currency issued
the currency board can issue additional
domestic notes and coins only when there are
foreign exchange reserves to back them
What Is The Role
Of The IMF Today?
Today, the IMF focuses on lending
money to countries in financial crisis
There are three main types of financial
crises:
1. Currency crisis
2. Banking crisis
3. Foreign debt crisis
What Is The Role
Of The IMF Today?
A currency crisis
occurs when a speculative attack on the
exchange value of a currency results in a
sharp depreciation in the value of the
currency, or forces authorities to expend large
volumes of international currency reserves
and sharply increase interest rates in order to
defend prevailing exchange rates
Brazil 2002
What Is The Role
Of The IMF Today?
A banking crisis refers to a situation in which a
loss of confidence in the banking system leads
to a run on the banks, as individuals and
companies withdraw their deposits
A foreign debt crisis is a situation in which a
country cannot service its foreign debt
obligations, whether private sector or
government debt
Greece and Ireland 2010
What Was The Mexican
Currency Crisis Of 1995?
The Mexican currency crisis of 1995 was a
result of
high Mexican debts
a pegged exchange rate that did not allow for
a natural adjustment of prices
To keep Mexico from defaulting on its
debt, the IMF created a $50 billion aid
package
required tight monetary policy and cuts in
public spending
What Was The
Asian Currency Crisis?
The 1997 Southeast Asian financial crisis was
caused by events that took place in the
previous decade including
1. An investment boom - fueled by huge increases in
exports
2. Excess capacity - investments were based on
projections of future demand conditions
3. High debt - investments were supported by
dollar-based debts
4. Expanding imports – caused current account deficits
What Was The
By mid-1997, several key Thai financial
institutions were on the verge of default
speculation against the baht
Thailand abandoned the baht peg and allowed
the currency to float
The IMF provided a $17 billion bailout loan
package
required higher taxes, public spending cuts,
privatization of state-owned businesses, and higher
interest rates
What Was The
Speculation caused other Asian currencies
including the Malaysian Ringgit, the Indonesian
Rupaih and the Singapore Dollar to fall
These devaluations were mainly driven by
excess investment and high borrowings, much of it in
dollar-denominated debt
a deteriorating balance of payments position
What Was The
The IMF provided a $37 billion aid package for
Indonesia
required public spending cuts, closure of troubled
banks, a balanced budget, and an end to crony
capitalism
The IMF provided a $55 billion aid package to
South Korea
required a more open banking system and economy,
and restraint by chaebol
How Has The IMF Done?
By 2012, the IMF was committing loans to 52
countries in economic and currency crisis
All IMF loan packages require tight
macroeconomic and monetary policy
However, critics worry
the “one-size-fits-all” approach to macroeconomic
policy is inappropriate for many countries
the IMF is exacerbating moral hazard - when people
behave recklessly because they know they will be
saved if things go wrong
the IMF has become too powerful for an institution
without any real mechanism for accountability
How Has The IMF Done?
But, as with many debates about international
economics, it is not clear who is right
However, in recent years, the IMF has started to
change its policies and be more flexible
urged countries to adopt fiscal stimulus and monetary
easing policies in response to the 2008-2010 global
financial crisis
What Does The Monetary
System Mean For Managers?
Managers need to understand how the
international monetary system affects
1. Currency management - the current system is
a managed float - government intervention can
influence exchange rates
speculation can also create volatile movements
in exchange rates
What Does The Monetary
System Mean For Managers?
2. Business strategy - exchange rate movements
can have a major impact on the competitive
position of businesses
need strategic flexibility
3. Corporate-government relations - businesses
can influence government policy towards the
international monetary system
companies should promote a system that facilitates
international growth and development
11e
Chapter 12
The Global Capital

Market
Why Do
Capital Markets Exist?
Capital markets bring together investors and
borrowers
investors - corporations with surplus cash,
individuals, and non-bank financial institutions
borrowers - individuals, companies, and governments
markets makers - the financial service companies
that connect investors and borrowers, either directly
(investment banks) or indirectly (commercial banks)
capital market loans can be equity or debt
Who Are the Main Players
in Capital Markets?
The Main Players in the Generic Capital Market
What Makes the Global
Capital Market Attractive?
Today’s capital markets are highly
interconnected and facilitate the free flow
of money around the world
Borrowers benefit from the additional
supply of funds global capital markets
provide
lowers the cost of capital
the price of borrowing money or the rate of
return that borrowers pay investors
Market Liquidity and the Cost of Capital
Investors benefit from the wider range of
investment opportunities
diversify portfolios and lower risk
But, volatile exchange rates can make
what would otherwise be profitable
investments, unprofitable
How Have Global Capital
Markets Changed Since 1990?
Global capital markets have grown rapidly
the stock of cross-border bank loans was just
$3,600 billion in 1990, $7,859 billion in 2000,
$33,913 billion in 2012
the international bond market has grown from
$3,515 billion in 1997, $5,908 billion in 2000,
$21,979 billion in 2012
Why Is the Global Capital
Market Growing?
Two factors are responsible for the
growth of capital markets
1. Advances in information technology
the growth of international communications
technology and advances in data processing
capabilities
24-hour-a-day trading
so, shocks that occur in one financial market
spread around the globe very quickly
Market Growing?
2. Deregulation by governments
has facilitated growth in international capital markets
governments have traditionally limited foreign
investment in domestic companies, and the
amount of foreign investment citizens could make
since the 1980s, these restrictions have been
falling
Market Growing?
Deregulation began in the U.S., then moved to
Great Britain, Japan, and France
Many countries have dismantled capital controls
making it easier for both inward and outward
investment to occur
The 2008-2009 global financial crisis raised
questions as to whether deregulation had gone
too far
Question: Are new regulations for the financial
services industry needed?
What Are the Risks of the
Global Capital Markets?
Question: Could deregulation of capital markets
and fewer controls on cross-border capital flows
make nations more vulnerable to the effects of
speculative capital flows?
can have a destabilizing effect on economies
Speculative capital flows may be the result of
inaccurate information about investment
opportunities
if global capital markets continue to grow, better
quality information is likely to be available from
financial intermediaries
What Is a Eurocurrency?
A Eurocurrency is any currency banked outside
its country of origin
About two-thirds of all Eurocurrencies are Eurodollars
dollars banked outside the U.S.
Other important Eurocurrencies are the euro-yen, the
euro-pound, and the euro-euro
The Eurocurrency market is an important
source of low-cost funds for international
companies
Why Has the Eurocurrency
Market Grown?
The Eurocurrency market began in the
1950s when the Eastern bloc countries
feared that the United States might seize
their dollars
so, they deposited them in Europe
additional dollar deposits came from Western
European central banks and companies that
exported to the U.S.
could earn a higher rate of interest in London
Market Grown?
In 1957, the market surged again after
changes in British laws
under the new laws, British banks had to
attract dollar deposits and loan dollars rather
pounds to finance non-British trade
London became the leading center of the
Eurocurrency market
continues to hold this position today
Market Grown?
In the 1960s, the market grew once again
Changes in U.S. regulations discouraged
U.S. banks from lending to non-U.S.
residents
would-be borrowers of dollars outside the
U.S. turned to the Euromarket as a source of
dollars
Market Grown?
The next big increase came after the
1973-74 and 1979-80 oil price increases
Arab members of OPEC accumulated
huge amounts of dollars
avoided potential confiscation of their dollars
by the U.S. by depositing them in banks in
London
What Makes the Eurocurrency
Market Attractive?
The Eurocurrency market is attractive
because it is not regulated by the
government
banks can offer higher interest rates on
Eurocurrency deposits than on deposits
made in the home currency
banks can charge lower interest rates to
Eurocurrency borrowers than to those who
borrow the home currency
Market Attractive?
The spread between the Eurocurrency
deposit and lending rates is less than the
spread between the domestic deposit and
lending rates
Gives Eurocurrency banks a competitive
edge over domestic banks
Market Attractive?
Interest Rate Spreads in Domestic and Eurocurrency Markets
Market Unattractive?
The Eurocurrency market has two significant
drawbacks:
1. Because the Eurocurrency market is
unregulated, there is a higher risk that bank
failure could cause depositors to lose funds
can avoid this risk by accepting a lower return on a
home-country deposit
2. Companies borrowing Eurocurrencies can be
exposed to foreign exchange risk
can minimize this risk through forward market
hedges
What Is the
Global Bond Market?
Bonds are an important means of
financing for many companies
the most common bond is a fixed rate which
gives investors fixed cash payoffs
The global bond market grew rapidly
during the 1980s and 1990s and
continues to do so in the 20th century
What Is the
Global Bond Market?
There are two types of international bonds
1. Foreign bonds are sold outside the borrower’s
country and are denominated in the currency of
the country in which they are issued
used by companies when they think they will reduce
the cost of capital
2. Eurobonds are underwritten by a syndicate of
banks and placed in countries other than the
one in whose currency the bond is
denominated
What Makes the Eurobond
Market Attractive?
The Eurobond market is attractive because
1. It lacks regulatory interference
since companies do not have to adhere to strict
regulations, the cost of issuing bonds is lower
2. It has less stringent disclosure requirements
than domestic bond markets
it can be cheaper and less time-consuming to offer
Eurobonds than dollar-denominated bonds
3. It is more favorable from a tax perspective
Eurobonds can be sold directly to foreign investors
What Is the
Global Equity Market?
The global equity market allows firms to
1. Attract capital from international investors
many investors buy foreign equities to
diversify their portfolios
2. List their stock on multiple exchanges
this type of trend may result in an
internationalization of corporate ownership
What Is the
Global Equity Market?
3. Raise funds by issuing debt or equity
around the world
by issuing stock in other countries, firms
open the door to raising capital in the foreign
market
gives the firm the option of compensating
local managers and employees with stock
provides for local ownership
increases visibility with local stakeholders
How Do Exchange Rates
Affect the Cost of Capital?
Adverse exchange rates can increase the cost
of foreign currency loans
Although it may initially seem attractive to
borrow foreign currencies, it may be less
attractive when exchange-rate risk is factored in
firms can hedge their risk by entering into forward
contracts
but this will also raise costs
Firms must weigh the benefits of a lower
interest rate against the risk of an increase in
the real cost of capital
Imagine that you are the owner of a promising, privately
owned U.S.-based tech startup with projected sales of
$1 billion over the next 10 years. In order to expand your
company’s infrastructure, you wish to borrow $5 million,
but interest rates in the United States are unfavorable to
borrowers. To lower your cost of capital, you turn to the
global capital market.
Given your current need for capital and your projected

future earnings, do you source your funds from the
Eurocurrency market, the global bond market, or the
global equity market? Explain your reasoning.
What Do Global Capital
Markets Mean for Managers?
Growth in global capital markets has
created opportunities for firms to borrow
or invest internationally
firms can often borrow at a lower cost than in
the domestic capital market
firms must balance the cost savings against
the foreign-exchange risk associated with
borrowing in foreign currencies
What Do Global Capital
Markets Mean for Managers?
Growth in capital markets offers
opportunities for firms, institutions, and
individuals to diversify their investments
and reduce risk
again though, investors must consider
foreign exchange rate risk
Capital markets are likely to continue to
integrate, providing more opportunities for
business
11e
Chapter 13
The Strategy of International

Business
What Is Strategy?
A firm’s strategy refers to the actions that
managers take to attain the goals of the
firm
Firms need to pursue strategies that
increase profitability and profit growth
Profitability is the rate of return the firm makes
on its invested capital
Profit growth is the percentage increase in net
profits over time
What Is Strategy?
To increase profitability and profit growth,
firms can
add value
lower costs
sell more in existing markets
expand internationally
What Is Strategy?
Determinants of Enterprise Value
How Is Value Created?
To increase profitability, a firm needs to
create more value
The firm’s value creation is the difference
between V (the price that the firm can
charge for a product given competitive
pressures) and C (the costs of producing
that product)
a firm has high profits when it creates more
value for its customers and does so at a
lower cost
Value Creation
Profits can be increased by
1. Using a differentiation strategy
adding value to a product so that customers
are willing to pay more for it
2. Using a low cost strategy
lowering costs
Why Is Strategic
Positioning Important?
Michael Porter argues that firms need to choose
either differentiation or low cost, and then
configure internal operations to support the
choice
So, to maximize long run return on invested
capital, firms must
pick a viable position on the efficiency frontier
configure internal operations to support that position
have the right organization structure in place to
execute the strategy
Why Is Strategic
Positioning Important?
Strategic Choice in the International Hotel Industry
How Are a Firm’s
Operations Configured?
A firm’s operations are like a value chain
composed of a series of distinct value
creation activities:
production, marketing, materials
management, R&D, human resources,
information systems, and the firm
infrastructure
All of these activities must be managed
effectively and be consistent with firm
strategy
How Are a Firm’s
Value creation activities can be categorized as
1. Primary activities
R&D
Production
marketing and sales
customer service
2. Support activities
information systems
logistics
human resources
How Are a Firm’s
The Value Chain
How Can Firms Increase Profits
Through International Expansion?
International firms can
1. Expand their market
sell in international markets
2. Realize location economies
disperse value creation activities to locations
where they can be performed most efficiently
and effectively
How Can Firms Increase Profits
Through International Expansion?
3. Realize greater cost economies from
experience effects
serve an expanded global market from a
central location
4. Earn a greater return
leverage skills developed in foreign
operations and transfer them elsewhere in
the firm
How Can Firms Leverage Their
Products and Competencies?
Firms can increase growth by selling
internationally goods or services
developed at home
The success of firms that expand
internationally depends on
the goods or services sold
the firm’s core competencies
How Can Firms Leverage Their
Products and Competencies?
Core competencies - skills within the firm
that competitors cannot easily match or
imitate
can exist in any value creation activity
Core competencies allow firms to reduce
the costs of value creation and/or to
create perceived value so that premium
pricing is possible
Why Are Location
Economies Important?
Location economies are economies that arise
from performing a value creation activity in the
optimal location for that activity, wherever in the
world that might be
By achieving location economies, firms can
lower the costs of value creation and achieve a low
cost position
differentiate their product offering
Why Are Location
Economies Important?
Firms that take advantage of location
economies in different parts of the world,
create a global web of value creation
activities
different stages of the value chain are
dispersed to locations where perceived value
is maximized or where the costs of value
creation are minimized
Why Are Experience
Effects Important?
The experience curve refers to the
systematic reductions in production costs
that occur over the life of a product
by moving down the experience curve, firms
reduce the cost of creating value
to get down the experience curve quickly,
firms can use a single plant to serve global
markets
Why Are Experience
Effects Important?
Learning effects are cost savings that
come from learning by doing
When labor productivity increases
individuals learn the most efficient ways to
perform particular tasks
managers learn how to manage the new
operation more efficiently
Why Are Experience
Effects Important?
The Experience Curve
Why Are Experience
Effects Important?
Economies of scale - the reductions in
unit cost achieved by producing a large
volume of a product
Sources of economies of scale include
spreading fixed costs over a large volume
utilizing production facilities more intensively
increasing bargaining power with suppliers
How Can Managers
Leverage Subsidiary Skills?
Managers should
1. Recognize that valuable skills that could be
applied elsewhere in the firm can arise
anywhere within the firm’s global network - not
just at the corporate center
2. Establish an incentive system that encourages
local employees to acquire new skills
3. Have a process for identifying when valuable
new skills have been created in a subsidiary
4. Act as facilitators to help transfer skills within
the firm
What Types of Competitive Pressures
Exist in the Global Marketplace?
Firms that compete in the global
marketplace face two conflicting types of
competitive pressures
the pressures limit the ability of firms to
realize location economies and experience
effects, leverage products, and transfer skills
within the firm
Dealing with both pressures is challenging
Two competitive pressures:
1. Pressures for cost reductions
force the firm to lower unit costs
2. Pressures to be locally responsive
require the firm to adapt its product to meet
local demands in each market
but, this strategy can raise costs
Pressures for Cost Reductions and Local Responsiveness
When Are Pressures for
Cost Reductions Greatest?
Pressures for cost reductions are greatest
1. In industries producing commodity-type products that fill
universal needs (needs that exist when the tastes and
preferences of consumers in different nations are
similar if not identical) where price is the main
competitive weapon
2. When major competitors are based in low cost
locations
3. Where there is persistent excess capacity
4. Where consumers are powerful and face low switching
costs
Local Responsiveness Greatest?
Pressures for local responsiveness arise
from
1. Differences in consumer tastes and
preferences
strong pressure emerges when consumer tastes and
preferences differ significantly between countries
2. Differences in traditional practices and
infrastructure
strong pressure emerges when there are significant
differences in infrastructure and/or traditional
practices between countries
Local Responsiveness Greatest?
3. Differences in distribution channels
need to be responsive to differences in
distribution channels between countries
4. Host government demands
economic and political demands imposed by
host country governments may require local
responsiveness
Which Strategy
Should a Firm Choose?
There are four basic strategies to
compete in international markets
the appropriateness of each strategy
depends on the pressures for cost
reduction and local responsiveness in
the industry
Which Strategy
Four Basic Strategies
Imagine that you are the manager of a foreign subsidiary
of a major U.S. apparel company. Consumer tastes in your
location require a high degree of local responsiveness,
while declining sales in the United States require
significant cost reductions.
Which of the four main strategic postures (global

standardization, localization, transnational, or
international) would you adopt to address these
pressures? What advantages or disadvantages would that
strategy provide?
Which Strategy
1. Global standardization - increase
profitability and profit growth by reaping
the cost reductions from economies of
scale, learning effects, and location
economies
goal is to pursue a low-cost strategy on a
global scale
This strategy makes sense when
there are strong pressures for cost
reductions and demands for local
responsiveness are minimal
Which Strategy
2. Localization - increase profitability by
customizing goods or services so that
they match tastes and preferences in
different national markets
there are substantial differences across
nations with regard to consumer tastes and
preferences and cost pressures are not too
intense
Which Strategy
3. Transnational - tries to simultaneously achieve
low costs through location economies,
economies of scale, and learning effects
firms differentiate their product across geographic
markets to account for local differences and foster a
multidirectional flow of skills between different
subsidiaries in the firm’s global network of
operations
both cost pressures and pressures for local
responsiveness are intense
Which Strategy
4. International – take products first
produced for the domestic market and
sell them internationally with only
minimal local customization
there are low cost pressures and low
pressures for local responsiveness
How Does Strategy Evolve?
An international strategy may not be viable in
the long term
to survive, firms may need to shift to a global
standardization strategy or a transnational strategy in
advance of competitors
Localization may give a firm a competitive edge,
but if the firm is simultaneously facing
aggressive competitors, the company will also
have to reduce its cost structures
would require a shift toward a transnational strategy
How Does Strategy Evolve?
Changes in Strategy over Time
11e
Chapter 14
The Organization of
What Is
Organizational Architecture?
Organizational architecture is the totality of a
firm’s organization, including
1. Organizational structure
the formal division of the organization into subunits
the location of decision-making responsibilities within
that structure
centralized versus decentralized
the establishment of integrating mechanisms to
coordinate the activities of subunits including
cross-functional teams or pan-regional committees
What Is
2. Control systems and incentives
control systems - the metrics used to
measure performance of subunits
incentives - the devices used to
reward managerial behavior
What Is
3. Processes, organizational culture, and people
processes - how decisions are made and
work is performed within the organization
organizational culture - norms and values
that are shared among the employees of an
organization
people - the employees and the strategy
used to recruit, compensate, and retain
employees for their skills, values, and
orientation
What Is
To be the most profitable
the elements of the organizational
architecture must be internally consistent
the organizational architecture must fit the
strategy
the strategy and architecture must be
consistent with each other, and consistent
with competitive conditions
What Is
Organizational Architecture
What Are the Dimensions of
Organizational Structure?
Organizational structure has three
dimensions
1. Vertical differentiation - the location of
decision-making responsibilities within a
structure
2. Horizontal differentiation - the formal
division of the organization into subunits
3. Integrating mechanisms - the
mechanisms for coordinating subunits
Why Is Vertical
Differentiation Important?
Vertical differentiation determines where
decision-making power is concentrated
Centralized decision making
facilitates coordination
ensures decisions are consistent with the
organization’s objectives
gives managers the means to bring about
organizational change
avoids duplication of activities
Why Is Vertical
Decentralized decision making
relieves the burden of centralized decision
making
has been shown to motivate individuals
permits greater flexibility
can result in better decisions
can increase control
Why Is Horizontal
Horizontal differentiation refers to how the firm
divides into subunits
usually based on function, type of business, or
geographical area
Most firms begin with no formal structure but
later split into functions reflecting the firm’s
value creation activities - functional structure
functions are coordinated and controlled by top
management
decision making is centralized
product-line diversification requires further horizontal
differentiation
What Is a
Functional Structure?
A Typical Functional Structure
Why Is Horizontal
Firms may switch to a product divisional
structure
each division is responsible for a distinct
product line
headquarters retains control for the overall
strategic direction of the firm and for the
financial control of each division
What Is a
Product Divisional Structure?
A Typical Product Divisional Structure
What Happens When Firms
Expand Globally?
When firms expand internationally, they often
group all of their international activities into an
international division
Over time, manufacturing may shift to foreign
markets
firms with a functional structure at home would
replicate the functional structure in the foreign market
firms with a divisional structure would replicate the
divisional structure in the foreign market
In either case, there is the potential for conflict
and coordination problems between domestic
and foreign operations
What Is an International
Division Structure?
One Company’s International Division Structure
How Does Organizational
Structure Change over Time?
The International Structural Stages Model
What Happens Next?
Firms that continue to expand will move to
either a
1. Worldwide product division structure - adopted
by firms that are reasonably diversified
allows for worldwide coordination of value creation
activities of each product division
helps realize location and experience curve
economies
facilitates the transfer of core competencies
does not allow for local responsiveness
What Is a Worldwide Product
Division Structure?
A Worldwide Product Divisional Structure
What Happens Next?
2. Worldwide area structure - favored by firms
with low degree of diversification and a
domestic structure based on function
divides the world into autonomous geographic areas
decentralizes operational authority
facilitates local responsiveness
can result in a fragmentation of the organization
is consistent with a localization strategy
What Is a
Worldwide Area Structure?
A Worldwide Area Structure
What Is the
Global Matrix Structure?
The global matrix structure – tries to minimize
the limitations of the worldwide area structure
and the worldwide product divisional structure
allows for differentiation along two dimensions -
product division and geographic area
has dual decision making - product division and
geographic area have equal responsibility for
operating decisions
can be bureaucratic and slow
can result in conflict between areas and product
divisions
can result in finger-pointing between divisions when
something goes wrong
What Is the
Global Matrix Structure?
A Global Matrix Structure
How Can Subunits
Be Integrated?
Regardless of the type of structure, firms need a
mechanism to integrate subunits
need for coordination is lowest in firms with a
localization strategy and highest in transnational firms
coordination can be complicated by differences in
subunit orientation and goals
simplest formal integrating mechanism is direct
contact between subunit managers, followed by
liaisons
temporary or permanent teams composed of
individuals from each subunit is the next level of
formal integration
the matrix structure allows for all roles to be
integrating roles
How Can Subunits
Be Integrated?
Formal Integrating Mechanisms
How Can Subunits
Be Integrated?
Many firms use informal integrating mechanisms
A knowledge network - network for transmitting
information within an organization that is based
not on informal contacts between managers and
on distributed information systems
a non-bureaucratic conduit for knowledge flows
must embrace as many managers as possible and
managers must adhere to a common set of norms and
values that override differing subunit orientations
How Can Subunits
Be Integrated?
A Simple Management Network
What Are the Different
Types of Control Systems?
1. Personal controls –personal contact with
subordinates
most widely used in small firms
2. Bureaucratic controls –a system of rules
and procedures that directs the actions
of subunits
budgets and capital spending rules
What Are the Different
Types of Control Systems?
3. Output controls – setting goals for subunits to
achieve and expressing those goals in terms of
objective performance metrics
compare actual performance against targets and
intervene selectively to take corrective action
4. Cultural controls – exist when employees “buy
into” the norms and value systems of the firm
strong culture implies less need for other forms of
control
What Are Incentive Systems?
Incentives - devices used to reward behavior
usually closely tied to performance metrics used for
output controls
should vary depending on the employee and the
nature of the work being performed
should promote cooperation between managers in
sub-units
should reflect national differences in institutions and
culture
can have unintended consequences
What Is
Performance Ambiguity?
Performance ambiguity exists when the causes
of a subunit’s poor performance are not clear
is common when a subunit’s performance is
dependent on the performance of other subunits
is lowest in firms with a localization strategy
is higher in international firms
is still higher in firms with a global standardization
strategy
is highest in transnational firms
What Is the Link Between Control,
Incentives, And Strategy?
Interdependence, Performance Ambiguity, and the Costs of Control for the Four
International Business Strategies
What Are Processes?
Processes refer to the manner in which
decisions are made and work is performed
many processes cut across national
boundaries as well as organizational
boundaries
processes can be developed anywhere within
a firm’s global operations network
formal and informal integrating mechanisms
can help firms leverage processes
What Is
Organizational Culture?
Organizational culture - the values and
norms that employees are encouraged to
follow
Evolves from
founders and important leaders
national social culture
the history of the enterprise
decisions that resulted in high performance
What Is
Organizational culture can be maintained
through
hiring and promotional practices
reward strategies
socialization processes
communication strategies
Organizational culture tends to change
very slowly
What Is
Managers in companies with a “strong” culture
share a relatively consistent set of values and
norms that have a clear impact on the way work
is performed
A “strong” culture
is not always good
may not lead to high performance
could be beneficial at one point, but not at another
Companies with adaptive cultures have the
highest performance
The case of Lincoln Electric’s difficult international
expansion illustrates some of the problems that can arise
when attempting to transmit a company culture to foreign
subsidiaries.
Imagine that you are the head of a profitable Silicon Valley

software company seeking to expand into the Chinese
market by acquiring an existing Chinese firm. Like Lincoln
Electric, your company culture is highly decentralized and
unbureaucratic. Performance incentives include extra
vacation time. What difficulties do you anticipate with
transmitting your company culture to your Chinese
subsidiary? What strategies might you use to make the
process less painful and costly?
What Is the Link Between
Strategy And Architecture?
A Synthesis of Strategy, Structure, and Control Systems
1. Firms pursuing a localization strategy
focus on local responsiveness
they do not have a high need for integrating
mechanisms
performance ambiguity and the cost of
control tend to be low
the worldwide area structure is common
2. Firms pursuing an international strategy create
value by transferring core competencies from
home to foreign subsidiaries
the need for control is moderate
the need for integrating mechanisms is moderate
performance ambiguity is relatively low and so is the
cost of control
the worldwide product division structure is common
3. Firms pursuing a global standardization
strategy focus on the realization of
location and experience curve economies
headquarters maintains control over most
decisions
the need for integrating mechanisms is high
strong organizational cultures are
encouraged
the worldwide product division is common
4. Firms pursuing a transnational strategy focus
on simultaneously attaining location and
experience curve economies, local
responsiveness, and global learning
some decisions are centralized and others are
decentralized
the need for coordination and cost of control is high
an array of formal and informal integrating
mechanism are used
a strong culture is encouraged
matrix structures are common
How Are the Environment, Strategy,
Architecture, and Performance Related?
For a firm to succeed
1. The firm’s strategy must be consistent with the
environment in which the firm operates
2. The firm’s organization architecture must be
consistent with its strategy
firms need to change their architecture to reflect
changes in the environment in which they are
operating and the strategy they are pursuing
How Can Firms Implement
Organizational Change?
To implement organization change
1. Unfreeze the organization through shock therapy
requires taking bold actions like plant closures or
dramatic structural reorganizations
2. Move the organization to a new state through proactive
change in architecture
requires a substantial and quick change in
organizational architecture so that it matches the
desired new strategic posture
3. Refreeze the organization in its new state
requires that employees be socialized into the new
way of doing things
How Can Firms Implement
Organizational Change?
Organizations can be difficult to change
because of
the existing distribution of power and
influence
the current culture
managers’ preconceptions about the
appropriate business model or paradigm
institutional constraints
11e
Chapter 15
Entry Strategy and

Strategic Alliances
What Are the Basic Decisions Firms
Make When Expanding Globally?
Firms expanding internationally must decide
1. Which markets to enter
2. When to enter them and on what scale
3. Which entry mode to use
exporting
licensing or franchising to a company in the host
nation
establishing a joint venture with a local company
establishing a new wholly owned subsidiary
acquiring an established enterprise
What Influences
the Choice of Entry Mode?
Several factors affect the choice of entry mode
including
transport costs
trade barriers
political risks
economic risks
costs
firm strategy
The optimal mode varies by situation – what
makes sense for one company might not make
sense for another
Which Foreign Markets
Should Firms Enter?
The choice of foreign markets will depend
on their long-run profit potential
Favorable markets
are politically stable
have free market systems
have relatively low inflation rates
have low private sector debt
Which Foreign Markets
Should Firms Enter?
Less desirable markets
are politically unstable
have mixed or command economies
have excessive levels of borrowing
Markets are also more attractive when the
product in question is not widely available
and satisfies an unmet need
When Should a Firm
Enter a Foreign Market?
Once attractive markets are identified,
the firm must consider the timing of entry
1. Entry is early when the firm enters a
foreign market before other foreign firms
2. Entry is late when the firm enters the
market after firms have already
established themselves in the market
Why Enter a
Foreign Market Early?
First-mover advantages include
the ability to preempt rivals by establishing a
strong brand name
the ability to build up sales volume and ride
down the experience curve ahead of rivals
and gain a cost advantage over later
entrants
the ability to create switching costs that tie
customers into products or services making
it difficult for later entrants to win business
Why Enter a
Foreign Market Late?
First-mover disadvantages include
pioneering costs - arise when the foreign
business system is so different from that in
the home market that the firm must devote
considerable time, effort, and expense to
learning the rules of the game
the costs of business failure if the firm,
due to its ignorance of the foreign
environment, makes some major mistakes
the costs of promoting and establishing a
product offering, including the cost of
educating customers
On What Scale Should a Firm
Enter Foreign Markets?
After choosing which market to enter and the
timing of entry, firms need to decide on the
scale of market entry
firms that enter a market on a significant scale make
a strategic commitment to the market
the decision has a long term impact and is difficult
to reverse
small-scale entry has the advantage of allowing a
firm to learn about a foreign market while
simultaneously limiting the firm’s exposure to that
market
Is There a “Right” Way to Enter
Foreign Markets?
No, there are no “right” decisions when
deciding which markets to enter and the
timing and scale of entry – they are just
decisions that are associated with
different levels of risk and reward
The Jollibee Foods Corporation was able to withstand
competition from McDonald’s in the Philippines and
later found success in an already-saturated U.S. fast
food market by localizing its menu to Filipino tastes and
entering foreign markets with a large number of
Filipino expatriates.
What are the risks and potential rewards of such a

strategy? If you were the head of a successful apparel
company based in a developing nation, would you
choose a similar strategy to enter into the U.S. market,
or would you pursue a different option, such as
licensing or forming a joint venture with an established
U.S. brand?
How Can Firms
These are six different ways to enter a foreign
market
1. Exporting – a common first step for many
manufacturing firms
later, firms may switch to another mode
2. Turnkey projects - the contractor handles every
detail of the project for a foreign client, including
the training of operating personnel
at completion of the contract, the foreign client is
handed the "key" to a plant that is ready for full
operation
How Can Firms
3. Licensing - a licensor grants the rights to
intangible property to the licensee for a
specified time period, and in return, receives a
royalty fee from the licensee
patents, inventions, formulas, processes, designs,
copyrights, trademarks
4. Franchising - a specialized form of licensing in
which the franchisor not only sells intangible
property to the franchisee but also insists that
the franchisee agree to abide by strict rules as
to how it does business
used primarily by service firms
How Can Firms
5. Joint ventures with a host country firm - a
firm that is jointly owned by two or more
otherwise independent firms
most joint ventures are 50–50 partnerships
6. Wholly owned subsidiary - the firm owns
100 percent of the stock
set up a new operation
acquire an established firm
Why Choose Exporting?
Exporting is attractive because
it avoids the costs of establishing local manufacturing
operations
it helps the firm achieve experience curve and
location economies
Exporting is unattractive because
there may be lower-cost manufacturing locations
high transport costs and tariffs can make it
uneconomical
agents in a foreign country may not act in exporter’s
best interest
Why Choose a
Turnkey Arrangement?
Turnkey projects are attractive because
they are a way of earning economic returns from the
know-how required to assemble and run a
technologically complex process
they can be less risky than conventional FDI
Turnkey projects are unattractive because
the firm has no long-term interest in the foreign
country
the firm may create a competitor
if the firm's process technology is a source of
competitive advantage, then selling this technology
through a turnkey project is also selling competitive
advantage to potential and/or actual competitors
Why Choose Licensing?
Licensing is attractive because
the firm avoids development costs and risks
associated with opening a foreign market
the firm avoids barriers to investment
the firm can capitalize on market opportunities
without developing those applications itself
Licensing is unattractive because
the firm doesn’t have the tight control required for
realizing experience curve and location economies
the firm’s ability to coordinate strategic moves across
countries is limited
proprietary (or intangible) assets could be lost
to reduce this risk, use cross-licensing agreements
Why Choose Franchising?
Franchising is attractive because
it avoids the costs and risks of opening up a foreign
market
firms can quickly build a global presence
Franchising is unattractive because
it inhibits the firm's ability to take profits out of one
country to support competitive attacks in another
the geographic distance of the firm from its
franchisees can make it difficult to detect poor quality
Why Choose Joint Ventures?
Joint ventures are attractive because
firms benefit from a local partner's knowledge
of the local market, culture, language, political
systems, and business systems
the costs and risks of opening a foreign
market are shared
they satisfy political considerations for market
entry
Why Choose Joint Ventures?
Joint ventures are unattractive because
the firm risks giving control of its technology
to its partner
the firm may not have the tight control to
realize experience curve or location
economies
shared ownership can lead to conflicts and
battles for control if goals and objectives
differ or change over time
Why Choose a
Wholly Owned Subsidiary?
Wholly owned subsidiaries are attractive
because
they reduce the risk of losing control over core
competencies
they give a firm the tight control in different countries
necessary for global strategic coordination
they may be required in order to realize location and
experience curve economies
Wholly owned subsidiaries are unattractive
because
the firm bears the full cost and risk of setting up
overseas operations
Which Entry Mode Is Best?
Advantages and Disadvantages of Entry Modes
How Do Core Competencies
Influence Entry Mode?
The optimal entry mode depends on the nature
of a firm’s core competencies
When competitive advantage is based on
proprietary technological know-how
avoid licensing and joint ventures unless the
technological advantage is only transitory, or can be
established as the dominant design
When competitive advantage is based on
management know-how
the risk of losing control over the management skills
is not high, and the benefits from getting greater use
of brand names is significant
How Do Pressures for Cost
Reductions Influence Entry Mode?
When pressure for cost reductions is high,
firms are more likely to pursue some
combination of exporting and wholly
owned subsidiaries
allows the firm to achieve location and scale
economies and retain some control over
product manufacturing and distribution
firms pursuing global standardization or
transnational strategies prefer wholly owned
subsidiaries
Which Is Better –
Greenfield or Acquisition?
The choice depends on the situation
confronting the firm
1. A greenfield strategy - build a subsidiary
from the ground up
a greenfield venture may be better when the
firm needs to transfer organizationally
embedded competencies, skills, routines,
and culture
Which Is Better –
Greenfield or Acquisition?
2. An acquisition strategy – acquire an
existing company
acquisition may be better when there are
well-established competitors or global
competitors interested in expanding
The volume of cross-border acquisitions
has been rising for the last two decades
Why Choose Acquisition?
Acquisitions are attractive because
they are quick to execute
they enable firms to preempt their competitors
they may be less risky than greenfield ventures
Acquisitions can fail when
the acquiring firm overpays for the acquired firm
the cultures of the acquiring and acquired firm clash
anticipated synergies are slow and difficult to achieve
there is inadequate pre-acquisition screening
To avoid these problems, firms should
carefully screen the firm to be acquired
move rapidly to implement an integration plan
Why Choose Greenfield?
The main advantage of a greenfield
venture is that it gives the firm a greater
ability to build the kind of subsidiary
company that it wants
But, greenfield ventures take longer to
establish
Greenfield ventures are also risky
What Are Strategic Alliances?
Strategic alliances refer to cooperative
agreements between potential or actual
competitors
range from formal joint ventures to short-term
contractual agreements
the number of strategic alliances has
exploded in recent decades
Why Choose
Strategic Alliances?
Strategic alliances are attractive because they
facilitate entry into a foreign market
allow firms to share the fixed costs and risks of
developing new products or processes
bring together complementary skills and assets that
neither partner could easily develop on its own
help a firm establish technological standards for the
industry that will benefit the firm
But, the firm needs to be careful not to give
away more than it receives
What Makes
Strategic Alliances Successful?
The success of an alliance is a function of
1. Partner selection
A good partner
helps the firm achieve its strategic goals and
has the capabilities the firm lacks and that it
values
shares the firm’s vision for the purpose of the
alliance
will not exploit the alliance for its own ends
What Makes
2. Alliance structure
The alliance should
make it difficult to transfer technology not
meant to be transferred
have contractual safeguards to guard
against the risk of opportunism by a partner
allow for skills and technology swaps with
equitable gains
minimize the risk of opportunism by an
alliance partner
What Makes
3. The manner in which the alliance is
managed
Requires
interpersonal relationships between
managers
cultural sensitivity is important
learning from alliance partners
knowledge must then be diffused through
the organization
11e
Chapter 16
Exporting, Importing,
and Countertrade
Why Export?
Exporting is a way to increase market size
and profits
lower trade barriers under the WTO and
regional economic agreements, such as the
EU and NAFTA, make it easier than ever
Large firms often proactively seek new
export opportunities, but many smaller
firms export reactively
often intimidated by the complexities of
exporting
Why Export?
Exporting firms need to
identify market opportunities
deal with foreign-exchange risk
navigate import and export financing
understand the challenges of doing business
in a foreign market
What Are the
Pitfalls of Exporting?
Common pitfalls include
poor market analysis
poor understanding of competitive conditions
a lack of customization for local markets
a poor distribution program
poorly executed promotional campaigns
problems securing financing
a general underestimation of the differences and
expertise required for foreign market penetration
an underestimation of the amount of paperwork and
formalities involved
How Can Firms Improve
Export Performance?
Many firms are unaware of export opportunities
available
Firms need to collect information
Firms can get direct assistance from some
countries and/or use an export management
companies
both Germany and Japan have developed extensive
institutional structures for promoting exports
Japanese exporters can use knowledge and contacts
of sogo shosha - great trading houses
U.S. firms have far fewer resources available
Where Can U.S. Firms Get
Export Information?
The U.S. Department of Commerce
the most comprehensive source of export information
for U.S. firms
The International Trade Administration and the
United States and Foreign Commercial Service
“best prospects” lists for firms
The Department of Commerce
organizes various trade events to help firms make
foreign contacts and explore export opportunities
The Small Business Administration
Local and state governments
What Are Export
Management Companies?
Export management companies (EMCs) are
export specialists that act as the export
marketing department or international
department for client firms
Two types of assignments are common:
1. EMCs start export operations with the
understanding that the firm will take over after
they are established
not all EMCs are equal—some do a better job than
others
What Are Export
Management Companies?
2. EMCs start services with the
understanding that the EMC will have
continuing responsibility for selling the
firm’s products
but, firms that use EMCs may not develop
their own export capabilities
How Can Firms Reduce
the Risks of Exporting?
To reduce the risks of exporting, firms should
hire an EMC or export consultant to identify
opportunities and handle paperwork and regulations
focus on one or a few markets at first
enter a foreign market on a small scale in order to
reduce the costs of any subsequent failures
recognize the time and managerial commitment
involved
develop a good relationship with local distributors and
customers
hire locals to help establish a presence in the market
be proactive
consider local production
3M, a manufacturer of household and office products, bases
its export strategy on four principles: FIDO (First In Defeats
Others), enter on a small scale to reduce risks, add additional
product lines once the exporting operations start to become
successful, and hire locals to promote the firm’s products.
If you were competing with 3M for market share in a foreign

country, how might you counter their strategy? Would you
flood the market with similarly priced goods? Wait for 3M to
develop local demand and then export competing products at
a lower price point? Immediately establish local production
facilities? Launch a viral web campaign tailored to the target
market to promote your products?
How Can Firms Overcome the Lack
of Trust in Export Financing?
Because trade implies parties from different
countries exchanging goods and payment, the
issue of trust is important
exporters prefer to receive payment prior to shipping
goods, but importers prefer to receive goods prior to
making payments
To get around this difference of preference,
many international transactions are facilitated
by a third party - normally a reputable bank
adds an element of trust to the relationship
How Can Firms Overcome The Lack
Of Trust in Export Financing?
The Use of a Third Party
What Is a Letter of Credit?
A letter of credit is issued by a bank at the
request of an importer
states the bank will pay a specified sum of
money to a beneficiary, normally the exporter,
on presentation of particular, specified
documents
main advantage is that both parties are likely
to trust a reputable bank even if they do not
trust each other
What Is a Draft?
A draft
an order written by an exporter instructing an
importer, or an importer's agent, to pay a
specified amount of money at a specified time
the instrument normally used in international
commerce for payment
also called a bill of exchange
What Is a Draft?
A sight draft is payable on presentation to
the drawee
A time draft allows for a delay in payment
normally 30, 60, 90, or 120 days
once a time draft has been “accepted” it
becomes a negotiable instrument that can be
sold at a discount from its face value
What Is a Bill of Lading?
The bill of lading is issued to the exporter by
the common carrier transporting the
merchandise
It serves three purposes
1. It is a receipt - merchandise described on document
has been received by carrier
2. It is a contract - carrier is obligated to provide
transportation service in return for a certain charge
3. It is a document of title - can be used to obtain
payment or a written promise before the
merchandise is released to the importer
How Does an International
Trade Transaction Work?
A Typical International Trade Transaction
Where Can U.S. Firms
Get Export Assistance?
1. Financing aid is available from the
Export-Import Bank (Ex-Im Bank)
an independent agency of the U.S.
government
provides financing aid to facilitate exports,
imports, and the exchange of commodities
between the U.S. and other countries
achieves its goals though loan and loan
guarantee programs
Where Can U.S. Firms
Get Export Assistance?
2. Export credit insurance is available from
the Foreign Credit Insurance Association
(FCIA)
provides coverage against commercial risks
and political risks
protects exporters against the risk that the
importer will default on payment
What Is Countertrade?
Countertrade - a range of barter-like
agreements that facilitate the trade of goods
and services for other goods and services when
they cannot be traded for money
emerged as a means purchasing imports during
the1960s when the USSR and the Communist states
of Eastern Europe had nonconvertible currencies
grew in popularity in the 1980s among many
developing nations that lacked the foreign exchange
reserves required to purchase necessary imports
notable increase after the 1997 Asian financial crisis
What Are the Forms
of Countertrade?
There are five distinct versions of
countertrade
1. Barter - a direct exchange of goods
and/or services between two parties
without a cash transaction
the most restrictive countertrade arrangement
used primarily for one-time-only deals in
transactions with trading partners who are not
creditworthy or trustworthy
What Are the Forms
of Countertrade?
2. Counterpurchase - a reciprocal buying
agreement
occurs when a firm agrees to purchase a certain
amount of materials back from a country to which a
sale is made
3. Offset - similar to counterpurchase - one party
agrees to purchase goods and services with a
specified percentage of the proceeds from the
original sale
difference is that this party can fulfill the obligation
with any firm in the country to which the sale is being
made
What Are the Forms
of Countertrade?
4. A buyback occurs when a firm builds a
plant in a country or supplies technology,
equipment, training, or other services to
the country
agrees to take a certain percentage of the
plant’s output as a partial payment for the
contract
What Are the Forms
of Countertrade?
5. Switch trading - the use of a specialized
third-party trading house in a countertrade
arrangement
when a firm enters a counterpurchase or offset
agreement with a country, it often ends up with
counterpurchase credits which can be used to
purchase goods from that country
switch trading occurs when a third-party trading
house buys the firm’s counterpurchase credits and
sells them to another firm that can better use them
What Are the
Pros of Countertrade?
Countertrade is attractive because
it gives a firm a way to finance an export deal
when other means are not available
it give a firm a competitive edge over a firm
that is unwilling to enter a countertrade
agreement
Countertrade arrangements may be
required by the government of a country to
which a firm is exporting goods or services
What Are the
Cons of Countertrade?
Countertrade is unattractive because
it may involve the exchange of unusable or
poor-quality goods that the firm cannot dispose of
profitably
it requires the firm to establish an in-house trading
department to handle countertrade deals
Countertrade is most attractive to large, diverse
multinational enterprises that can use their
worldwide network of contacts to dispose of
goods acquired in countertrade deals
sogo shosha
11e
Chapter 17
Global Production
and Supply Chain
Management
What Are the Main
Production Issues for Firms?
International firms must answer five interrelated
questions
1. Where should production activities be located?
2. What should be the long-term strategic role of foreign
production sites?
3. Should the firm own foreign production activities or
outsource those activities to independent vendors?
4. How should a globally dispersed supply chain be
managed, and what is the role of Internet-based
information technology in the management of global
logistics?
5. Should the firm manage global logistics itself, or should it
outsource the management to enterprises that specialize
in this activity?
How Are Strategy, Production, and
Supply Chain Management Related?
Production - activities involved in
creating a product
Supply Chain Management - the
integration and coordination of logistics,
purchasing, operations, and market
channel activities from raw material to
the end-customer
How Are Strategy, Production, and
Supply Chain Management Related?
Questions: How can production and supply
chain management
1. Lower the costs of value creation?
disperse production to the most efficient locations
manage the global supply chain efficiently to better
match supply and demand
2. Add value by better serving customer needs?
eliminate defective products from the supply chain
and the manufacturing process
How Can Quality Be
Improved?
Most firms use the Six Sigma program - a
direct descendant of total quality
management (TQM)
aims to reduce defects, boost productivity,
eliminate waste, and cut costs throughout the
company
in the EU, firms must meet ISO 9000
standards before gaining access to the EU
marketplace
Improved quality reduces costs
How Can Quality Be
Improved?
The Relationship Between Quality and Costs
Where Should
Production Be Located?
Firms should locate production so that
production and logistics can be locally
responsive
production and logistics can respond quickly
to shifts in customer demand
Firms should consider
1. Country factors
2. Technological factors
3. Production factors
Why Are
Country Factors Important?
Manufacturing should be located where
economic, political, and cultural conditions are
most conducive to the performance of that
activity
create a global web of activities
global concentrations of activities at certain locations
Why Are
Country Factors Important?
the availability of skilled labor and supporting
industries
formal and informal trade barriers
expectations about future exchange rate changes
transportation costs
regulations affecting FDI
Koninklijke Philips NV has faced criticism for relocating much of its
product design and manufacturing to China, with some observers
warning that political upheaval or an economic downturn in China
would result in a very costly slowdown in Philips’ core business
activities.
Imagine you are the head of a successful US-based information

technology company that has offshored your customer service
department to India. Many of your Indian support engineers are also
capable web developers who could significantly reduce your labor
costs by taking over certain product development responsibilities.
Would you consider moving product development to India? What are
some potential costs and benefits?
Why Are Technological
Factors Important?
1. The level of fixed costs
if fixed costs are high, produce in a single
location or a few locations
when fixed costs are low, multiple production
plants may be possible
allows firms to respond to local demands
Factors Important?
2. The minimum efficient scale
the level of output at which most plant-level
scale economies are exhausted
when minimum efficient scale is high, choose
centralized production in a single location or a
limited number of locations
when minimum efficient scale is low, respond to
local market demands and hedge against
currency risk by operating in multiple locations
Factors Important?
3. The flexibility of the technology
flexible manufacturing technology or lean
production
reduces set-up times for complex equipment
increases the utilization of individual machines
improves quality control
allows firms to produce a wide variety of end
products at a relatively low unit cost
– mass customization
– flexible machine cells
What Should a Firm Do?
Production should be concentrated in a few
locations when
fixed costs are substantial
the minimum efficient scale of production is high
flexible manufacturing technologies are available
Production in multiple locations makes sense
when
both fixed costs and the minimum efficient scale of
production are relatively low
appropriate flexible manufacturing technologies are
not available
Why Are Production Factors
Important to Location Decisions?
Two product factors impact location decisions
1. The product's value-to-weight ratio
if the value-to-weight ratio is high, produce the
product in a single location and export to other parts
of the world
if the value-to-weight ratio is low, there is greater
pressure to manufacture the product in multiple
locations across the world
2. Whether the product serves universal needs
when products serve universal needs, the need for
local responsiveness falls, and concentrating
manufacturing in a central location makes sense
How Are Location, Strategy,
and Production Related?
Location, Strategy, and Production
What Are the Strategic Roles
for Foreign Factories?
Many companies now see foreign
factories as globally dispersed centers of
excellence
supports the development of a transnational
strategy
global learning - valuable knowledge can be
found in foreign subsidiaries
implies that firms are less likely to switch
production to new locations when an underlying
variable, such as wage rates, changes
What Are the Strategic Roles
for Foreign Factories?
Foreign factories can have one of a
number of strategic roles or designations,
including:
1. offshore factory
2. source factory
3. server factory
4. contributor
5. outpost factory
6. lead factory
What Are the Hidden Costs of
Foreign Production Locations?
There may be hidden costs associated
with foreign production
Before making the decision to locate
production in a foreign location, firms
must consider the potential for
high employee turnover
poor workmanship
poor product quality
low productivity
Should a Firm
Outsource Production?
Question: Should a firm make or buy the
component parts to go into its final
product?
Make-or-buy decisions are important to
firms' manufacturing strategies
service firms also face make-or-buy decisions
decisions involving international markets are
more complex than those involving domestic
markets
Why Make?
Vertical integration - making component parts
in-house
1. Lowers costs
if a firm is more efficient at that production activity
than any other enterprise, manufacturing in-house
makes sense
2. Facilitates investments in highly specialized
assets
internal production makes sense when substantial
investments in specialized assets are required
Why Make?
3. Protects proprietary technology
in-house production makes sense when
component parts contain proprietary
technology
4. Facilitates the scheduling of adjacent
processes
planning, coordination, and scheduling of
adjacent processes can be easier with
in-house production
Why Buy?
Buying component parts from
independent suppliers
1. Gives the firm greater flexibility
important when changes in exchange rates
and trade barriers alter the attractiveness of
various supply sources over time
Why Buy?
2. Helps drive down the firm's cost structure
avoids challenges of coordination and control of
additional subunits
avoids the lack of incentive associated with internal
suppliers
avoids the difficulties with setting appropriate
transfer prices
3. Helps the firm capture orders from international
customers
can help firms gain orders from suppliers’ countries
Make-or-Buy Decisions
Operationally Favoring a Make Decision Operationally Favoring a Buy Decision
Functions of the
Global Supply Chain
Logistics is the part of the supply chain that plans,
implements, and controls the effective flows and
inventory of raw material, component parts, and
products used in manufacturing.
The core activities performed in logistics
are:
1. Global distribution center management
2. Inventory management
3. Packaging and materials handling
4. Transportation
5. Reverse logistics
Functions of the
Global Supply Chain
Purchasing is the part of the supply chain that
involves worldwide buying of raw material,
component parts, and products used in
manufacturing of the company’s products and
services.
The core activities performed in purchasing

include development of an appropriate strategy
for global purchasing and selecting the type of
purchasing strategy best suited for the company.
Functions of the
Global Supply Chain
Outsourcing Terms and Options
What Is the Role of
Just-In-Time Inventory?
Just-in-time (JIT) systems economize on
inventory holding costs by having materials
arrive at a manufacturing plant just in time to
enter the production process
JIT systems
generate major cost savings from reduced
warehousing and inventory holding costs
can help the firm spot defective parts and take them
out of the manufacturing process
But, a JIT system leaves the firm with no buffer
stock of inventory to meet unexpected demand
or supply changes
What Is the Role of Information
Technology?
Web-based information systems play a crucial role in
materials management
allow firms to optimize production scheduling according to when
components are expected to arrive
Options for global supply chains:

Electronic data interchange (EDI)
Enterprise resource planning (ERP)
Collaborative planning, forecasting, and replenishment (CPFR)
Vendor management of inventory (VMI)
warehouse management system (WMS)
Coordinating Global Supply
Chains
Global supply chain coordination refers to
shared decision-making opportunities and
operational collaboration of key global supply
chain activities.
To achieve operational integration and collaboration, six

operational objectives should be addressed:
1. Responsiveness
2. Variance reduction
3. Inventory reduction
4. Shipment consolidation
Ø Quality
Ø Life-cycle support
Interorganizational Relationships
Upstream/Inbound Relationships
Interorganizational Relationships
Downstream/Outbound Relationships
Interorganizational Relationships:
Vendors and Buyers
Benefits of relationships with vendors

(upstream) and buyers (downstream)
include those typical of a transactional
exchange: costs equal to quality for the
goods bought, but not necessarily for the
best goods in the marketplace
Suppliers and Customers
Benefits of relationships with suppliers

(upstream) and customers (downstream)
is that the firm will receive all the favorable
characteristics that the raw materials,
component parts, and/or products have
relative to the next best alternative in the
global marketplace.
Partners and Clients
Benefits of relationships with partners

(upstream) and clients (downstream)
include the one or two points of higher
quality for the raw materials, component
parts, and/or products whose improvement
will yield the greatest value to the
customer for the foreseeable future
(quality greater than cost).
11e
Chapter 18
Global Marketing
and R&D
What Is the Marketing Mix?
The marketing mix (the choices the firm
offers to its targeted market) is comprised
of
1. Product attributes
2. Distribution strategy
3. Communication strategy
4. Pricing strategy
Should the Marketing Mix Be
Changed for Each Market?
Question: Are markets and brands
becoming global?
Theodore Levitt argued that world markets
were becoming increasingly similar, making it
unnecessary to localize the marketing mix
Question: Is Levitt right? Probably not!
Levitt’s theory has become a lightening rod in
the debate about globalization
Should the Marketing Mix Be
Changed for Each Market?
The current consensus is that while the
world is moving towards global markets,
global standardization is not possible
because of
cultural differences among nations
economic differences among nations
trade barriers
differences in product and technical
standards
What Is Market Segmentation?
Market segmentation - identifying distinct
groups of consumers whose purchasing
behavior differs from others in important
ways
Markets can be segmented by
geography
demography
sociocultural factors
psychological factors
What Is Market Segmentation?
Two key market segmentation issues
1. The differences between countries in the
structure of market segments
may have to develop a unique marketing
mix to appeal to a certain segment in a
given country
2. The existence of segments that transcend
national borders
when segments transcend national
borders (known as intermarket segments),
a global strategy is possible
How Do Product Attributes
Influence Marketing Strategy?
A product is like a bundle of attributes
Products sell well when their attributes
match consumer needs
if consumer needs were the same
everywhere, a firm could sell the same
product worldwide
But, consumer needs depend on
1. Culture
tradition, social structure, language, religion,
education
How Do Product Attributes
2. Level of economic development
consumers in highly developed countries
tend to demand a lot of extra performance
attributes
consumers in less-developed nations tend to
prefer more basic products
3. Product and technical standards
national differences can force firms to
customize the marketing mix
How Does Distribution
Distribution strategy - the means the firm
chooses for delivering the product to the
consumer
How a product is delivered depends on the
firm’s market-entry strategy
firms that produce locally can sell directly to the
consumer, to the retailer, or to the wholesaler
firms that produce outside the country have the same
options plus the option of selling to an import agent
How Does Distribution
A Typical Distribution Strategy
How Do Distribution
Systems Differ?
There are four main differences in distribution
systems
1. Retail concentration – concentrated or
fragmented
concentrated retail system has a few retailers who
supply most of the market
common in developed countries
fragmented retail system has many retailers, none of
which has a major share of the market
common in developing countries
How Do Distribution
Systems Differ?
2. Channel length - the number of
intermediaries between the producer and
the consumer
short channel - when the producer sells
directly to the consumer
common with concentrated systems
long channel - when the producer sells
through an import agent, a wholesaler, and a
retailer
common with fragmented retail systems
How Do Distribution
Systems Differ?
3. Channel exclusivity – how difficult it is for
outsiders to access the channel
Japan's system is a very exclusive system
4. Channel quality - the expertise, competencies,
and skills of established retailers in a nation
and their ability to sell and support the products
of international businesses
good quality in most developed countries, but
variable in emerging markets and elsewhere
firms may have to devote considerable resources to
upgrading channel quality
Which Distribution Strategy
The optimal strategy depends on the relative
costs and benefits of each alternative
When price is important, a shorter channel is
better
each intermediary in a channel adds its own markup
to the product
When the retail sector is very fragmented, a
long channel can be beneficial
economizes on selling costs
can offer access to exclusive channels
Why Is Communication
Strategy Important?
Communicating product attributes to
prospective customers is a critical element in
the marketing mix
How a firm communicates with customers
depends partly on the choice of channel
Communication channels available to a firm
include
direct selling
sales promotion
direct marketing
advertising
What Are the Barriers to
International Communication?
The effectiveness of a firm's international
communication can be jeopardized by
1. Cultural barriers - it can be difficult to
communicate messages across cultures
a message that means one thing in one
country may mean something quite different
in another
firms need to develop cross-cultural literacy
and use local input when developing
marketing messages
2. Source and country of origin effects –
source effects occur when the receiver of the
message evaluates the message on the
basis of status or image of the sender
can counter negative source effects by
deemphasizing their foreign origins
country of origin effects - the extent to which
the place of manufacturing influences
product evaluations
3. Noise levels - the amount of other
messages competing for a potential
consumer’s attention
in highly developed countries, noise is very
high
in developing countries, noise levels tend to
be lower
How Do Firms Communicate
with Customers?
Firms have to choose between two types
of communication strategies
1. A push strategy emphasizes personal
selling
2. A pull strategy emphasizes mass media
advertising
Which Is Better –
Push or Pull?
The choice between strategies depends on
1. Product type and consumer sophistication
a pull strategy works well for firms in consumer
goods selling to a large market segment
a push strategy works well for industrial products
2. Channel length
a pull strategy works better with longer distribution
channels
3. Media availability
a pull strategy relies on access to advertising media
a push strategy may be better when media is not
easily available
What Is the Optimal Mix?
In general, a push strategy is better
for industrial products and/or complex new products
when distribution channels are short
when few print or electronic media are available
A pull strategy is better
for consumer goods
when distribution channels are long
when sufficient print and electronic media are
available to carry the marketing message
Should a Firm Use
Standardized Advertising?
Standardized advertising makes sense
when
it has significant economic advantages
creative talent is scarce and one large effort
to develop a campaign will be more
successful than numerous smaller efforts
brand names are global
Should a Firm Use
Standardized Advertising?
Standardized advertising does not make sense
when
cultural differences among nations are significant
advertising regulations limit standardized advertising
Some firms standardize parts of a campaign to
capture the benefits of global standardization
but customize others to respond to local cultural
and legal environments
What Pricing Strategy
Should Firms Use?
Firms need to consider:
1. Price discrimination
2. Strategic pricing
3. Regulations that affect pricing decisions
What Is Price Discrimination?
Price discrimination - occurs when firms
charge consumers in different countries
different prices for the same product
For price discrimination to work
firms must be able to keep national markets
separate
countries must have different price elasticity
of demand
Price elasticity of demand – a measure of
the responsiveness of demand for a
product to changes in price
demand is elastic when a small change in price
produces a large change in demand
demand is inelastic when a large change in price
produces only a small change in demand
Typically, price elasticity is greater in
countries with lower income levels and larger
numbers of competitors
Elastic and Inelastic Demand Curves
What Is Strategic Pricing?
Strategic pricing has three aspects
1. Predatory pricing - use profit gained in
one market to support aggressive pricing
designed to drive competitors out in
another market
after competitors have left, the firm will raise
prices and earn higher profits
What Is Strategic Pricing?
2. Multipoint pricing - a firm’s pricing strategy in
one market may have an impact on a rival’s
pricing strategy in another market
managers should centrally monitor pricing decisions
3. Experience curve pricing - price low worldwide
in an attempt to build global sales volume as
rapidly as possible, even if this means taking
large losses initially
firms that are further along the experience curve
have a cost advantage relative to firms further up
the curve
How Do Regulations
Influence Pricing?
A firm’s ability to set prices may be limited by
1. Antidumping regulations –
dumping occurs when a firm sells a product for a
price that is less than the cost of producing it
antidumping rules set a floor under export prices
and limit a firm’s ability to pursue strategic
pricing
2. Competition policy –
most industrialized nations have regulations
designed to promote competition and restrict
monopoly practices
can limit the prices that a firm charges
How Should Firms Configure
the Marketing Mix?
Standardization versus customization is
not an all-or-nothing concept
most firms standardize some things and
customize others
Firms should consider the costs and
benefits of standardizing and customizing
each element of the marketing mix
Levi Strauss experienced a significant financial turnaround
in the second half of the 2000s by customizing its product
attributes, distribution, pricing, and communications
strategies to the needs of its regional markets.
Consider a product that is currently struggling for market

share in your home town, be it a particular technological
gadget, item of clothing, type of beverage, or something
else. If you were hired as a consultant by the product
marketing manager, how would you adjust the marketing
mix to improve sales? What are the expected costs and
benefits of doing so?
The Role of International Market
Research
International market research is defined as the
systematic collection, recording, analysis, and
interpretation of data to provide knowledge that is useful
for decision making in a global company.
International market research may be performed

in-house or by external companies. Leading market
research firms include:
• Nielsen
• Kantar
• Ipsos
• NPD Group
Research
The basic data that companies want
collected in international market research
include:
1. Data on the country and potential market segments
(geography, demography, sociocultural factors, and
psychological factors)
2. Data to forecast customer demands within specific
country or world region (social, economic, consumer, and
industry trends)
3. Data to make marketing mix decisions (product,
distribution, communication, and price)
Research
International Market Research Steps
Why Is New Product
Development Important?
Product innovation should be a strategic priority
today, competition is as much about
technological innovation as anything else
The pace of technological change is faster than
ever and product life cycles are often very short
new innovations can make existing products
obsolete, but at the same time, open the door
to a host of new opportunities
Firms need close links between R&D,
marketing, and manufacturing
Where Should
R&D Be Located?
New product ideas come from the interactions
of scientific research, demand conditions, and
competitive conditions
The rate of new product development is greater
in countries where
more money is spent on basic and applied research
and development
demand is strong
consumers are affluent
competition is intense
How Can R&D, Marketing, and
Production Be Integrated?
Since new product development has a high
failure rate, new product development efforts
should involve close coordination between
R&D, marketing, and production
Integration will ensure that
customer needs drive product development
new products are designed for ease of manufacture
development costs are kept in check
time to market is minimized
Why Are Cross-Functional
Teams Important?
Cross-functional integration is facilitated by
cross-functional product development teams
Effective cross-functional teams should
be led by a heavyweight project manager with status
in the organization
include members from all the critical functional areas
have members located together
establish clear goals
develop an effective conflict-resolution process
How Can Firms Build
Global R&D Capabilities?
To adequately commercialize new technologies,
firms need to integrate R&D and marketing
To successfully commercialize new
technologies, firms may need to develop
different versions for different countries
So, a firm may need R&D centers in North America,
Asia, and Europe that are closely linked by formal
and informal integrating mechanisms with marketing
operations in each country of their respective regions
and with their various manufacturing facilities
11e
Chapter 19
Global Human
Resource Management
What Is Human
Resource Management?
Human resource management (HRM) - the
activities an organization carries out to utilize its
human resources effectively
These activities include
determining human resource strategy
staffing
performance evaluation
management development
compensation
labor relations
Firms need to ensure that there is a fit between
their human resources practices and strategy
What Is the Strategic Role of
HRM in International Firms?
HRM can help the firm reduce the costs of
value creation and add value by better
serving customer needs
more complex in an international business
differences between countries in labor
markets, culture, legal systems, economic
systems, etc.
HRM must also determine when to use
expatriate managers
citizens of one country working abroad
who should be sent on foreign
assignments
how they should be compensated
how they should be trained
how they should be reoriented when they
return home
The Role of Human Resources in Shaping Organizational Architecture
What Is a Staffing Policy?
Staffing policy is concerned with the
selection of employees who have the
skills required to perform a particular job
can be a tool for developing an promoting the
firm’s corporate culture
the organization’s norms and value
system
a strong corporate culture can help the firm
implement its strategy
What Is a Staffing Policy?
Three main approaches to staffing policy:
1. The ethnocentric approach - fill key
management positions with parent-country
nationals
2. The polycentric approach - recruit host-country
nationals to manage subsidiaries in their own
country, and parent-country nationals for
positions at headquarters
3. The geocentric approach - seek the best
people, regardless of nationality, for key jobs
Why Choose an Ethnocentric
Staffing Policy?
Firms that pursue an ethnocentric policy believe that
there is a lack of qualified individuals in the host
country to fill senior management positions
it is the best way to maintain a unified corporate
culture
value can be created by transferring core
competencies to a foreign operation via parent
country nationals
it makes sense with an international strategy
But
it limits advancement opportunities for host country
nationals
it can lead to "cultural myopia"
Why Choose a Polycentric
Staffing Policy?
The polycentric approach
makes sense for firms pursuing a localization
strategy
can minimize cultural myopia
may be less expensive to implement than an
ethnocentric policy
But
host-country nationals have limited opportunities to
gain experience outside their own country and so
cannot progress beyond senior positions in their own
subsidiaries
a gap can form between host-country managers and
parent-country managers
Why Choose a Geocentric
Staffing Policy?
The geocentric approach
is consistent with building a strong unifying culture
and informal management network
makes sense for firms pursuing a global or
transnational strategy
enables the firm to make the best use of its human
resources
builds a cadre of international executives who feel at
home working in a number of different cultures
But
can be limited by immigration laws
is costly to implement
Which Staffing Policy
Is Best?
Comparison of Staffing Approaches
What Is Expatriate Failure?
Firms using an ethnocentric or geocentric
staffing strategy will have expatriate managers
Expatriate failure is the premature return of an
expatriate manager to the home country
each expatriate failure can cost between $40,000
and $1 million
between 16% and 40% of all American expatriates in
developed countries fail and almost 70% of
Americans assigned to developing countries fail
What Is the Rate of
Expatriate Failure?
Expatriate Failure Rates
Why Do Expatriate
Managers Fail?
The main reasons for U.S. expatriate
failure are
the inability of an expatriate's spouse to
adapt
the manager’s inability to adjust
other family-related reasons
the manager’s personal or emotional maturity
the manager’s inability to cope with larger
overseas responsibilities
Why Do Expatriate
Managers Fail?
The reason for European expatriate failure is
the inability of the manager’s spouse to adjust
The main reasons for Japanese expatriate
failure are
the inability to cope with larger overseas
responsibility
difficulties with the new environment
personal or emotional problems
a lack of technical competence
the inability of spouse to adjust
How Can Firms Reduce
Expatriate Failure?
Firms can reduce expatriate failure through improved
selection procedures
Four dimensions that predict expatriate success are
1. Self-orientation - the expatriate's self-esteem,
self-confidence, and mental well-being
2. Others-orientation - the ability to interact effectively with
host-country nationals
3. Perceptual ability - the ability to understand why people
of other countries behave the way they do
4. Cultural toughness – the ability to adjust to the posting
Expatriate failures can be a costly problem for multinational
enterprises. As such, expatriate selection is an important
role for global human resource managers.
If you were an HR manager for a London-based

multinational enterprise that was launching a subsidiary in
your home town, what are some challenges that you would
expect an expatriate manager to face, and how might you
seek to minimize those challenges and reduce the chance of
failure? How would your response change if your company
was based in Japan, India, or South Africa?
Why Is a
Global Mindset Important?
A global mindset may be the fundamental
attribute of a global manager
cognitive complexity
cosmopolitan outlook
A global mindset is often acquired early in life
from
a family that is bicultural
living in foreign countries
learning foreign languages as a regular part of family
life
What Is Training and
Management Development?
After selecting a manager for a position, training
and development programs should be
implemented
Training focuses upon preparing the manager
for a specific job
Management development is concerned with
developing the skills of the manager over time
gives the manager a skill set and reinforces
organizational culture
Historically, most firms focus more on training
than on management development
Why Is Training Important for
Expatriate Managers?
Training can reduce expatriate failure
Cultural training - fosters an appreciation for the host
country's culture
Language training - an exclusive reliance on English
diminishes an expatriate's ability to interact with host
country nationals
Practical training - helps the expatriate and expatriate’s
family ease into day-to-day life in the host country
But, studies show that only about 30% of managers sent
on one- to five-year expatriate assignments received
training before their departure
What Happens When
Expatriates Return Home?
Training and development should include
preparing and developing expatriate
managers for reentry into their home
country organization
need good programs for
re-integrating expatriates back into work life
within their home-country organization
utilizing the knowledge they acquired while
abroad
Why Is Management Development
Important to Firm Strategy?
Management development programs increase
the overall skill levels of managers through
ongoing management education
rotations of managers through jobs within the firm to
give them varied experiences
Management development can be a strategic
tool to build a strong unifying culture and
informal management network
support both transnational and global strategy
How Should
Expatriates Be Evaluated?
Evaluating expatriates can be especially
complex
typically, both host-nation managers and home-office
managers evaluate the performance of expatriate
managers
But, both types of managers are subject to
unintentional bias
home-country managers tend to rely on hard data
when evaluating expatriates
host-country managers can be biased towards their
own frame of reference
How Can Performance
Appraisal Bias Be Reduced?
To reduce bias in performance appraisal
more weight should be given to an on-site
manager's appraisal than to an off-site
manager's appraisal
a former expatriate who has served in the
same location should be involved in the
process
Home-office managers should be consulted
before an on-site manager completes a
formal termination evaluation
What Are the Key Issues in
Compensating Expatriates?
Two key issues on compensation
1. How to adjust compensation to reflect
differences in economic circumstances
and compensation practices
2. How to pay expatriate managers
How Should National Differences
in Compensation Be Treated?
Currently, there are substantial
differences in executive compensation
across countries
Research shows
a top U.S. executive made an average of
$525,923 in the 2005-2006 period,
compared to $278,697 in Japan, and
$158,146 in Taiwan
How Should National Differences
in Compensation Be Treated?
Question: Should pay be equalized
across countries?
Many firms have recently moved toward a
compensation structure that is based on
global standards
especially important in firms with a geocentric
staffing policy
But, most firms still set pay according to
the prevailing standards in each country
How Should
Expatriates Be Paid?
Most firms use the balance sheet
approach
equalizes purchasing power across countries
so employees have the same living standard
in their foreign posting as at home
and adds a financial incentive to take the
position
How Should
A compensation package has five components
1. Base salary - normally in the same range as the
base salary for a similar position in the home
country
can be paid either in the home currency or in the
local currency
2. Foreign service premium - extra pay the
expatriate receives for working outside his
country of origin
generally offered as an incentive to accept foreign
assignments
How Should
3. Various allowances - hardship, housing,
cost-of-living, education
4. Tax differentials - may have to pay income tax
to both the home-country and host-country
governments when no reciprocal tax treaty
exists
company usually covers extra tax assessments
5. Benefits – many firms provide the same level of
medical and pension benefits abroad that
employees receive at home
Why Are International Labor
Relations Important?
Question: Can organized labor limit the
choices available to an international
business?
Labor unions can limit a firm's ability to
pursue a transnational or global strategy
HRM needs to foster harmony and minimize
conflict between management and organized
labor
What Are the Concerns of
Organized Labor?
Organized labor is concerned that
1. Multinationals can counter union bargaining power
by threatening to move production to another
country
2. Multinationals will farm out only low-skilled jobs to
foreign plants making it easier to switch production
locations
3. Multinationals will import employment practices and
contractual agreements from their home countries
and reduce the influence of unions
How Does Organized Labor
Respond to MNC Power?
Organized labor has responded to the
increased bargaining power of multinational
corporations by
1. Trying to set-up their own international organizations
2. Lobbying for national legislation to restrict
multinationals
3. Trying to achieve regulation of multinationals through
international organizations, such as the United
Nations
So far, these efforts have had only limited
success
How Are MNCs Responding
to Organized Labor?
Many firms are centralizing labor relations to
enhance the bargaining power of the
multinational vis-à-vis organized labor
in the past, labor relations were usually
decentralized to individual subsidiaries
The way in which work is organized within a
plant can be a major source of competitive
advantage, so it is important for management to
have a good relationship with labor
11e
Chapter 20
Accounting and Finance

in the International
Business
What Is
Financial Management?
Financial management involves
1. Investment decisions – what to finance
2. Financing decisions – how to finance those
decisions
3. Money management decisions – how to
manage the firm’s financial resources most
efficiently
What Is Accounting?
Accounting is the language of business
it is the way firms communicate their financial
positions
Accounting is more complex for international
firms because of differences in accounting
standards from country to country
differences make it difficult for investors, creditors,
and governments to evaluate firms
It is difficult to compare financial reports from
country to country because of national
differences in accounting and auditing
standards
What Determines National
Accounting Standards?
Several variables influence the
development of a country’s accounting
system, including
the relationship between business and the
providers of capital
political and economic ties with other
countries
the level of inflation
the level of a country’s economic
development
the prevailing culture in a country
How Do Providers of Capital
Influence Accounting?
A country’s accounting system reflects the
relative importance of each constituency
as a provider of capital
accounting systems in the United States and
Great Britain are oriented toward individual
investors
Switzerland and Germany focus on providing
information to banks
How Do Political and Economic
Ties Influence Accounting?
Similarities in accounting systems across
countries can reflect political or economic
ties
the U.S. accounting system influences the
systems in the Philippines
in the European Union, countries are moving
toward common standards
the British system of accounting is used by
many former colonies
How Do Levels of Development
Influence Accounting?
Developed nations tend to have more
sophisticated accounting systems than
developing countries
larger, more complex firms create accounting
challenges
providers of capital require detailed reports
Many developing nations have accounting
systems that were inherited from former colonial
powers
lack of trained accountants
What Are Accounting and
Auditing Standards?
Accounting standards are rules for
preparing financial statements
they define useful accounting information
Auditing standards specify the rules for
performing an audit
the technical process by which an
independent person gathers evidence for
determining if financial accounts conform to
required accounting standards and if they are
also reliable
Why Are International
Accounting Standards Important?
The growth of transnational financing and
transnational investment has created a need for
transnational financial reporting
many companies obtain capital from foreign
providers who are demanding greater consistency
Standardization of accounting practices across
national borders is probably in the best interests
of the world economy
will facilitate the development of global capital
markets
Why Are International
Accounting Standards Important?
The International Accounting Standards Board
(IASB) is a major proponent of standardization
of accounting standards
most IASB standards are consistent with standards
already in place in the U.S.
by 2012, 100 nations had adopted IASB standards
or permitted their use in reporting financial results
the EU has mandated harmonization of accounting
principles for members
there soon could be only two major accounting
bodies with substantial influence on global reporting
FASB in the U.S. and IASB elsewhere
How Does Accounting
Influence Control Systems?
The control process in most firms is
usually conducted annually and involves
three steps
1. Subunit goals are jointly determined by the
head office and subunit management
2. The head office monitors subunit
performance throughout the year
3. The head office intervenes if the subsidiary
fails to achieve its goal and takes corrective
actions if necessary
Influence Control?
Budgets and performance data are
usually expressed in the corporate
currency
normally the home currency
facilitates comparisons between
subsidiaries
but, can create distortions in financial
statements
Influence Control?
The Lessard-Lorange Model
firms can deal with the problems of exchange
rates and control in three ways
1. The initial rate
the spot exchange rate when the budget is adopted
2. The projected rate
the spot exchange rate forecast for the end of the
budget picture
3. The ending rate
the spot exchange rate when the budget and
performance are being compared
What Is the
Lessard-Lorange Model?
Possible Combinations of Exchange Rates in the Control Process
Why Separate Subsidiary and
Managerial Performance?
Subsidiaries operate in different
environments, which influence profitability
the evaluation of a subsidiary should be kept
separate from the evaluation of its manager
A manager’s evaluation should
consider the country’s environment for
business
take place after making allowances for those
items over which managers have no control
What Is
Financial Management?
Good financial management can create a
competitive advantage
reduces the costs of creating value and
adds value by improving customer service
Decisions are more complex in
international business
different currencies, tax regimes, regulations
on capital flows, economic and political risk,
etc.
How Do Managers Make
Investment Decisions?
Financial managers must quantify the benefits,
costs, and risks associated with an investment
in a foreign country
To do this, managers use capital budgeting
involves estimating the cash flows associated with
the project over time, and then discounting them to
determine their net present value
If the net present value of the discounted cash
flows is greater than zero, the firm should go
ahead with the project
Why Is Capital Budgeting More
Difficult for International Firms?
Capital budgeting is more complicated in
international business
because a distinction must be made between
cash flows to the project and cash flows to
the parent company
because of political and economic risk
because the connection between cash flows
to the parent and the source of financing
must be recognized
What Is the Difference Between
Project and Parent Cash Flows?
Cash flows to the project and cash flows to the
parent company can be quite different
Parent companies are interested in the cash
flows they will receive, not the cash flows the
project generates
received cash flows are the basis for dividends,
other investments, repayment of debt, and so on
Cash flows to the parent may be lower because
of host country limits on the repatriation of
profits, host country local reinvestment
requirements, etc.
How Does Political Risk
Influence Investment Decisions?
Political risk - the likelihood that political forces
will cause drastic changes in a country’s
business environment that hurt the profit and
other goals of a business
higher in countries with social unrest or disorder, or
where the nature of the society increases the chance
for social unrest
Political change can result in the expropriation
of a firm’s assets, or complete economic
collapse that renders a firm’s assets worthless
How Does Economic Risk
Influence Investment Decisions?
Economic risk - the likelihood that
economic mismanagement will cause
drastic changes in a country’s business
environment that hurt the profit and other
goals of a business
The biggest economic risk is inflation
reflected in falling currency values and lower
project cash flows
How Can Firms Adjust for
Political And Economic Risk?
Firms analyzing foreign investment
opportunities can adjust for risk
1. By raising the discount rate in countries
where political and economic risk is high
2. By lowering future cash flow estimates to
account for adverse political or economic
changes that could occur in the future
How Do Firms Make
Financing Decisions?
Firms must consider two factors
1. How the foreign investment will be
financed
the cost of capital is usually lowest in the
global capital market
but, some governments require local debt or
equity financing
firms that anticipate a depreciation of the
local currency, may prefer local debt
financing
How Do Firms Make
Financing Decisions?
2. How the financial structure (debt vs.
equity) of the foreign affiliate should be
configured
need to decide whether to adopt local capital
structure norms or maintain the structure
used in the home country
Most experts suggest that firms adopt the
structure that minimizes the cost of
capital, whatever that may be
What Is Global
Money Management?
Money management decisions attempt to
manage global cash resources efficiently
Firms need to
1. Minimize cash balances - need cash balances
on hand for notes payable and unexpected
demands
cash reserves are usually invested in money market
accounts that offer low rates of interest
when firms invest in money market accounts they
have unlimited liquidity, but low interest rates
when they invest in long-term instruments they have
higher interest rates, but low liquidity
What Is Global
Money Management?
2. Reduce transaction costs - the cost of
exchange
every time a firm changes cash from one currency
to another, they face transaction costs
Most banks also charge a transfer fee for
moving cash from one location to another
Multilateral netting can reduce the number of
transactions between subsidiaries and the
number of transaction costs
How Can Firms Limit
Their Tax Liability?
Every country has its own tax policies
most countries feel that they have the right
to tax the foreign-earned income of
companies based in the country
Double taxation occurs when the income
of a foreign subsidiary is taxed by the
host-country government and by the
home-country government
How Can Firms Limit
Their Tax Liability?
Taxes can be minimized through
1. Tax credits - allow the firm to reduce the taxes paid to
the home government by the amount of taxes paid to
the foreign government
2. Tax treaties - agreements specifying what items of
income will be taxed by the authorities of the country
where the income is earned
3. Deferral principle - specifies that parent companies
are not taxed on foreign source income until they
actually receive a dividend
4. Tax havens - countries with a very low, or no, income
tax – firms can avoid income taxes by establishing a
wholly-owned, non-operating subsidiary in the
country
Some of today’s top companies, including Apple, Google,
and Microsoft, seek to minimize their tax burden by storing
significant amounts of cash in foreign countries with low
corporate tax rates. Some view this as a shrewd business
practice, while others call it unethical tax avoidance.
As the chief financial officer of a multinational enterprise

with an expected $10 billion in profits for the upcoming
fiscal year, would you advise that the company follow
Apple, Google, Microsoft, and others in storing cash in
Ireland, the Cayman Islands, or another tax haven? Why or
why not?
How Do Firms Move
Money Across Borders?
Firms can transfer liquid funds across
border via
1. Dividend remittances
2. Royalty payments and fees
3. Transfer prices
4. Fronting loans
What Are
Dividend Remittances?
Paying dividends is the most common method
of transferring funds from subsidiaries to the
parent
The relative attractiveness of paying dividends
varies according to
tax regulations – high tax rates reduce attractiveness
foreign exchange risk – dividends might be sped up
in risky countries
the age of the subsidiary – older subsidiaries remit a
higher proportion of their earning in dividends
the extent of local equity participation – local owners’
demands for dividends come into play
What Are
Royalty Payments and Fees?
Royalties - the remuneration paid to the owners
of technology, patents, or trade names for the
use of that technology or the right to
manufacture and/or sell products under those
patents or trade names
can be levied as a fixed amount per unit or as a
percentage of gross revenues
most parent companies charge subsidiaries royalties
for the technology, patents, or trade names
transferred to them
What Are
Royalty Payments and Fees?
A fee is compensation for professional
services or expertise supplied to a foreign
subsidiary by the parent company or
another subsidiary
royalties and fees are often tax-deductible
locally
What Are Transfer Prices?
Transfer prices - the price at which goods and
services are transferred between entities within
the firm
Transfer prices can be manipulated to
1. reduce tax liabilities by shifting earnings from
high-tax countries to low-tax countries
2. move funds out of a country where a significant
currency devaluation is expected
3. move funds from a subsidiary to the parent when
dividends are restricted by the host government
4. reduce import duties when ad valorem tariffs are in
effect
What Makes
Transfer Prices Unattractive?
Using transfer pricing can be problematic
because
1. governments think they are being cheated out
of legitimate income
2. governments believe firms are breaking the
spirit of the law when transfer prices are used
to circumvent restrictions of capital flows
3. it complicates management incentives and
performance evaluation
What Are Fronting Loans?
Fronting loans are loans between a
parent and its subsidiary channeled
through a financial intermediary, usually a
large international bank
Firms use fronting loans
to circumvent host-country restrictions on
the remittance of funds from a foreign
subsidiary to the parent company
to gain tax advantages
What Are Fronting Loans?
An Example of the Tax Aspects of a Fronting Loan
International business
Screenshots
S.R.A.N Framework
Strategy — How to compete — 3 A’s — Aggregation

/ Arbitrage / Adaptability
Presence — Where to compete — CAGE Risks
Architecture — Centralization Vs Decentralization
operations ( Unilever/ P&G —Nestle case study)
Non-Market Strategies — Geo-political issues ,
International tensions, Public anger, Inclusiveness
/ Win-Win, Collaborations, PPP, Societal issues
Click to add title
ae exploits similarities across countries to create Value
orm scale and scope economies .This is the primary international
strategy for most incumbent MNC from advanced economies
Arbitrage exploits differences such as when a Company sources
where its inputs are in abundance and sells where they are scarce.
This is the primary international strategy for most insurgent MNCs
from emerging economies
Adaptation adjusts to differences to expand the scope over which
aggregation and arbitrage strategies can be successfully employed .
Incumbent MNCs have stronger capabilities than insurgents for
managing adaptation
Companies have to manage AAA in a flexible manner
Aggregation and Arbitrage benefits MNCs over local rivals and
Adaptation mitigates MNCs disadvantages
Adaptation
“When in Rome , do as the Romans do”
Product variation/modification/tweaking to specific market /
customer requirements/ realities
Examples : Panasonic — washing machines for India
Unilever — hundred’s of variants of its global Lux brand soap;
Cadbury chocolate flavor in India;
IKEA low cost home furnishings / flat pack design GE Healthcare -
Medical devices innovated and sold in India
Suzuki / Maruti-Suzuki — India specifications / Exports
Haier — Selling compact fridges popular in college dorms
Mahindra — Selling tractors to “hobby farmers”/ gentlemen farmers
owning small plots of land in USA
MNC’s — International Corporations
Transnational/Global Corporations.
¢ U.N defines MNC’s as “ Enterprises which own
or control production or facilities outside the
country in which they are based”
¢ According to ILO: “The essential nature of the
multinational enterprises lies in the fact that
its managerial headquarters are located in one
country , while the enterprise carries out
operations in a number of other countries”
Some of the criteria used to define
“Multinationality”...a Company must...
¢ Produce ( rather than just “distribute”) abroad as well
as home country
* Operate in certain minimum number of countries/
control equity
* Derive some minimum percentage of income from
foreign operations — say 25%
¢ Have a certain number of foreign employees / assets
* Possess a global management team
¢ Supply chain linkages
¢ Global “Brand” and emphasis on R&D
Merits / Positives of MNC’s
MNC’s help increase Investments and Incomes and
generate Economic activity and Employment
Vehicle for transfer of technology especially to developing
countries
Breeding ground for managerial talent
Promote intra-firm trade
Generate global trade / global presence
Help optimize production / manufacturing
Promote innovation / R&D/ pioneer new business models
Help increase competition / Break domestic monopolies
Develop robust supply chain , logistics, distribution
Build brands / Inspire local companies
Bane / Negatives of MNC’s
Business model designed for profit maximization
and not for developing local economies
Use clout / influence and financial muscle to
evade / undermine national economic autonomy
Destroy domestic competition / indulge in
dumping and acquire monopoly status
Manipulate selling price in intra-company deals
Undue influence on local culture
Trigger labour problems via discriminatory wages
UN Code of Conduct for MNC’s
Respect national sovereignty of home country

Adhere to host country’s economic goals ,
development objectives , social values etc
Respect human rights and domestic laws
Non — interference in politics
Not to engage in corrupt practices
Be a good corporate citizen — payment of taxes,
fair wages, environmental protection , not to
indulge in unfair trade practices / anti-
competitive practices
OECD Code of Practice for MNC’s
Contribute to socio-economic development
Transfer latest technology
Encourage local talent / leadership
Consider host countries economic circumstances / BOP
etc
Practice fair trade
Encourage Corporate Governance / CSR
Transfer best practices
Leverage host country opportunities
Promote trade of host country
Not to scuttle local competition
Case Study
Strategies adopted by EU MNC’s for Market

Entry in India
The India Opportunity
¢ India presents a remarkable business opportunity by virtue
of its size / growth
— Large / Growing domestic market
— Increasing purchasing power / consumerism
— Competitive advantage (low cost sourcing , exceptional skill
levels )
— Off-shoring opportunity — India accounts for roughly 65% of the
global off-shoring market and is expected to grow exponentially
— Largest English speaking assets
— Second largest scientific pool — cost savings in terms of wages -
> $ USD 40 per hour in USA/EU < SUSD 20 per hour in India
— India’s human capital — over 100 MNC’s in India have R&D
facilities
— Manufacturing / Sourcing location — Auto components etc
India - Key Challenges
* Difficult Operating Environment
— Government policies / processes
— Procedural bottlenecks
— Reform process
— Restrictions in FDI / Tax / Tariff regimes
— Cumbersome labor laws
— Socio-Economic Challenges
— Poverty ( 25% population earn < 1 USD per day)
— Illiteracy (40% of the population)
— Health care concerns
— Education at the bottom of the pyramid
~ Weak Infrastructure
— Road / Power / Telecom / Airport-Seaport
— Societal
— Cast polarisation and religious divide
— Highly dispersed population/Low average disposable incomes
Defining Success for EU based MNC’s
in India
* Two key dimensions
Capturing domestic market opportunity — positioned as mass
market players — localization of operations
Leveraging India’s resource base to drive additional value for
their Company — R&D, manufacturing , BPO , sourcing from
India
Examples : India Business / Leveraging India
ABN AMRO — Full product range — BPO
ABB — Cutting edge products — First IT centre / Exports
CADBURY — Industry leader/Innovator — Exports ideas
ERICSSON — End to end / Collaboration with WIPRO
GLAXO SMITHKLINE — Pharma leader / R&D, Clinical trials
PIAGGIO — Superior technology / India as global hub
Key Success Factor No. 1
* View India as a key focus area
— Parent Company / Board’s focus on India ( ABB,
Ericsson, Siemens, Glaxo , Philips , Piaggio)
— “India Champions”
— Board level appointments
— Group CEO visit to India / India CEO presentations
— Importance of India to their global portfolio
— Attention / Raise profile
— Prioritize
— Resource commitments
— High level facilitation of major decisions
Key Success Factor No.3
* Create processes that accelerate the Integration
as well as Localization of the Organization
— Local Teams / Global Teams — Transfers and Postings /
Focus Groups / Workshops / Assignments / CEO — Dr
Leadership visits
Examples — Wartsila ( Power Generation solutions )
— India — Finland Management Group
— Streamlining Communication and creating
Organizational alignment
— Creating mutual understanding of prevailing systems
constrains and cross learnings
Key Success Factor No 4
* Change the Rules — Global metrics and standards to fit
Indian realities
* Examples
— Cadbury — Targets calibrated to Indian market challenges —
Create right product-price propositions — High penetration
will compensate for reduced margins — Invested In
distribution network / product localization
— GlaxoSmithKline — Indian team given longer time frame to
achieve targets — Investment in distribution network
— HUL— Define metrics which would highlight operating
efficiencies / top-line growth — Investment in market
reach especially Tier 2 /3 cities and rural markets
* Creating a High Quality Local team — Focus on

HR
— Expatriate managers are expensive, cultural misfits
and discontinuity of tenures
— Local managers are grounded and have deep
understanding of local issues and can manage
local work-force, supply chain and regulators
MNC’s adopt strong HR Processes
Recruitment-Selection / Investment in T&D /
Objective Evaluation — PMS / Career path mapping
Key Success factor No 6
* Establish Local Team Credibility
* 3 ways in which local management creates credibility
— Results — Meeting and exceeding financial targets — (Siemens)
— Innovation / Knowledge transfer — Local innovation — product
adaptations , pricing models ( Glaxo, Cadbury etc )
— Standards — Commitment to global quality standards ( Lafarge)
How MNC HO’s delegate Powers
Stage 1 — Limited independence / Approvals by HO
Stage 2 — Freedom in local operational issues
Stage 3 — Freedom to invest in localization- sourcing /assembly
Stage 4 — Freedom to innovate / Introduce new products/channels
Stage 5 — Complete operational freedom within approved ABP
* Define Value added role for Country
Management
— Importance / Recognition
— Integration of Indian operations to the world
Specific Areas
Leverage Cross — Divisional synergies
Identify opportunities for new business in India
India Brand building
Adoption of best practices
Value — add to Parent
* Leverage India Opportunities beyond Product /
Market
— R&D: Cost savings, Product development, Indian
Bearings)
— Software Development/ Engineering — Global Product
range / cost savings in software development (Philips ,
Warsila)
— Shared Services / BPO — Shifting Support functions to India
/ back office ( ABN Amro, Bayer)
— Manufacturing and Sourcing — Local manufacturing , cost
leverage , labour arbitrage, manufacture products for India
and the Global markets ( Siemens , ABB)
* Localize parts of the Value Chain to obtain

India Costs and Capability Benefits
— Labour intensive processes for wage advantage
— Brand building for India specific products
— Global scale / Quality — Seamless integration of
Quality processes
— Government Incentives — Subsidies , Tax holidays ,
Fiscal benefits etc
What is Globalization ?
¢ An economic phenomenon involving

increasing interactions or integration of
national economic systems through growth in
international trade, investments and capital
flows
* Rapid increase in cross border Social , human
capital and Technological exchange
* Geographical distances becoming irrelevant/
factor of diminishing importance
Message of Globalization — Change
¢ Nations
¢ Political Systems
¢ Organizations
¢ Households and Customers
¢ Competitors
¢ Citizens and Stakeholders
Driving Forces of Globalization :

Technology
Markets
Competition
Bane of Globalization
Global corporations responsible for global

warning, depletion of natural resources ,
production of harmful chemicals , destruction of
organic agriculture
Creating dominance in market place by
organizations ( supported by their host
governments) — monopolies, duopolies, cartels,
price rigging , unfair and restrictive trade
practices
Global trade in toxic material, GM foods etc
Undue influence on native culture / lifestyles
| LO Report — Agenda for equitable
and fair Globalization
Distance between rich and poor
Dissonance between the voice of “haves” and ‘Have-nots”
Focus on poverty line rather than bottom-line
Equitable growth in development
Focus on people — Human Development Index
Sustainable development
Fair rules of Trade
Greater accountability to citizens
Strong partnerships — Developed and Developing/ LDC’s —
PPP Model
Effective oversight by Global organizations — UN , UNCTAD,
WTO, International Court of Justice etc
Why Globalize ?
Entering new markets / geographies
Introduce new products / service for customers
Create new business models
Create new revenue models
Create new distribution models
Adhere to market needs / demands
Gives nations / businesses a competitive edge
Characteristics of Global Company
|. Leadership and management & Vision
Il. Global presence in terms of reach, brand and customer base
Ill. Workforce Diversity
IV. Seamless process
V. Global assets , capabilities and brands
VI. Access resources (material and HR)
VII. Market domination ( always Innovative)
VII.Global standards of product/ service quality
IX. Raise resources
X. Strong on strategic thinking
XI. Strong Value Chain
XII. Management of Alliances
XIIl.Strong in Knowledge Assets ( Legal and Regulatory)
XIV.Adoptability
XV. Strong Business Model
Modes of Entering Foreign Markets
* Pure Exports — Direct , Trading House , Buying House , Counter Trade
* Branch / Trading Offices
* Licensing and Franchising ( Earning Royalty fees ) License to foreign entity to
manufacture / use Brand name / logo, patents , trade marks , technology —
Granting rights to conduct business in a set prescribed manner ( McDonald, Adidas
etc)
* Contract Manufacturing — Contract with a foreign entity to manufacture /
assemble
* Assembly Operations
* Management Consultancy Contracts — Impart know how , managerial financial
and technological know-how
* Turnkey Contracts — EPC model, Prime / Sub-contractor
* Fully -owned Manufacturing operations
* Wholly-owned subsidiaries / Joint — Ventures
* Mergers & Acquisitions
* Strategic Alliances/ Investments / Distribution / Logistics / Warehousing
SELECTION OF MARKETS
PESTLE inputs > Competition
Political scenario — India’s trade ties => Trade Support — Trade fairs /
Me EVM
M
Economic scenario/ Purchasing power / BORrade associations

Market access issues - EODB > Banking system
Demand analysis / Consumption patterns
Legal System
Documentation issues
> Channel partners — Mode of
Local Government regulations
a:
VMN
Shipping and Logistics

Hedin and Safety issues
Customer buying habits / segments / agmogtap
rms of trade / payment /
promotion practices
> International Relations / Trade
Blocks / Trade practices
SELECTION OF PRODUCTS
Trade data and direction of exports
Product identification / selection process — Product strength , Customer
preference and demand, scope for modification, production capacity
and availability sourcing ease
Trade restrictions / import duties
Packaging norms
Ease of shipments / Logistic issues
Nature of competition
Pricing challenges
Incentives available
Understanding Industry trends
Value chain involvement
Product Evaluation Model
¢ Criterion — 1— Capability Conditions

— Technology — Capability for product manufacturing
, quality parameters , packaging
— Cost Advantage — Economies of scale, cost of raw
material , cost of conversion
— Skills and Competences — Requirement of
knowledge resources
— Raw Material — Availability , Reliability , Quality
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* Criterion — 3 — Export Market Attractiveness

— Growth in World Trade — Increase in demand
signifies opportunities for new entrants
— Trade Barriers — Tariff/ Non-Tariff
— Sunset Industries’ / Product —phase outs in Buyer
Countries
— Penetration by Like Countries
— Strategic Alliances / Partnerships
— Trade Blocks — Preference for Product specs /
Quality
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* Product Introduction
— Offer identical products sold in domestic market
— Adapt the domestic product
— Offer entirely new product
Product Mix
— Solo Vs Range
— Appropriate mix
— Add/Drop decisions
Product Positioning
— Projecting desired image
— Competitive differences
— Positioning Strategy — Price , Quality, Product features ,
Commercial terms , Country specific offerings
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— Brand Label, Descriptive label , Grade label

— Relevant information , Appropriate language / color/
shape
— Marking — Shipping Marks ( Export container / Transport
documentation)
— Information Marks (Buyer code, Quantity , Storage)
— Handling Marks ( Pictorial instructions)
Product Warranty — “Assurance” of free replacement /
replacement / compensation / refunds
After Sales Service
— Repair and maintenance , replacement, Technical
assistance , On site technical support etc
What is PESTLE ?
P — Political
E — Economic
S — Social /Cultural
T — Technological
L — Legal / Regulatory
E — Ecological/Environmental
Why should we undertake PESTLE analysis ?
— Global Scenario— Regulations, Customers, Competitors , Technology
etc
— Company performance impacted by local , national and global events
— Realistic strategic planning to capture product/market needs etc
— “Change” - an inevitable aspect of human activities
— International Business Environment — Internal and External factors
— Impact of Globalisation
Political Environment
Political factors are critical for taking business decisions more so in global
operations
Political systems impact how Government functions and how economic
and trade polices evolve — Protectionism Vs Free Trade
Role of Ideologies in human societies
Pluralistic societies in modern times — Dilemmas of Political parties
impact of Religion , Language , Ethnicity etc
Political Spectrum
Democracy — Origins, Forms, Characteristics
Freedom and Liberty , Civil Liberties , Free Press and Judiciary, Equality under
Law, Adult franchise
Citizens to participate in the political processes
Constitutional mechanism for transfer of power
Control Structure in Democratic Countries — Canada / USA ( Decentralized
provinces)
Japan / France ( Centralized Centre )
Theocracy/Totalitarianism
Communism/Dictatorships/ Monarchy
* Single party , individual or groups wield total power over people
and demand complete subservience
* No dissent tolerated and no room for opposition
* State is all powerful , Individual wants has no place
* State controls human minds and souls — no freedoms
* Political and economic systems are inseparable — Total State control
over resources & ownership
* Theocratic state blends religion and governance — Clergy rule
¢ “Fatwa” of a Ruler
* Features of the System
— State Trading/ Monopoly
— Opaque Judicial system
— Influence of the State
— Role of Middlemen / Corrupt apparatus
Key Political Risks
Uncertainty / Instability of the Government
Breach of Contracts by the Government
Restriction on Currency transfers and Convertibility
Expropriation / Nationalization ( Hugo Chevaz —
Venezuela)
Political Violence — War , Civil disturbance , Terrorism
etc
Non-honouring of Government guarantees and
financial obligations
Adverse regulatory changes
Restrictions on In-bound/Out-bound investments
Impact of Political Systems on
Managerial decisions — Political Risks
Government take-over of assets ( with or without
compensation)
Discriminatory trade / tax laws
Breach of Contracts — Enforceability issues
Operational restrictions
Remittance/Repatriation restrictions
Human Rights abuse
Labour militancy
Shipment delays
Law and order issues
Civil Unrest
Political Risk Framework — Condolezza
Rice — Former US Secretary of State —
2005-09
¢ Ten Types of Political Risks
— Geopolitics — Wars, power shifts , multilateral economic
sanctions
— Internal conflicts — Social unrest , ethnic violence ,
migration, nationalism, separatism, civil wars , coup,
revolutions
— Laws, Regulations , Policies — Changes in foreign
ownership rules , taxation, environmental regulations
— Breach of Contract — Government reneging on contracts,
expropriations and politically motivated credit defaults
— Corruption — Systemic bribery and other frauds
— Extra-territorial reach — Unilateral sanctions, investigations
| — Natural resource manipulation — Energy, Rare minerals
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* Social activism — Events or opinions that go

viral , facilitating collective actions across
* Terrorism — State / Non-state actors resorting
to violence , sabotage and destruction
* Cyber-threats — Theft, destruction of
intellectual property, espionage, extortion,
massive disruption of business operations of
companies, governments and societies ,
installing spyware in machinery / networks
Political Risk Framework - 4 fold Steps
* Step 1 - Understand
— What is my organization’s Political Risk appetite —
Investment horizons / Countries / Sectors like Oil and
Gas operating in distant geographies , risk of asset
protection / hostile government takeover
— Is there a shared understanding of our risk appetite —
Promoters / Investors / Board / Management /
Employees / Workers on Site — Examples : BP, Mobil,
Gulf, ARAMCO, Disney
— How can we reduce the blind spots — scenario
planning, Plan -B
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* Step-—2 Analyze
— How can we get good information about the Political risks
we face — When looking at M&A — Example — GE
acquisition process of Honeywell in 2001 — CEO Jack Welch
“assumed” EU regulators would approve the deal . They
did NOT. EU authorities philosophy about anti-trust issues
different — focus potential impact on competitors , not
consumers ! GE did not consult European Anti-Trust
Attorneys in Brussels
— How can we ensure rigorous analysis ? Selection of tools
for analysis — Probability / Outcome studies Examples —
FedEx , Marriott ...
— How can we integrate political risk analysis in business
decisions ? — Business opportunities — VaR Model
Economic Factors
Economic Systems — Open - Private sector / State

Control/Mixed
Economic Development — Rich, Poor, Emerging nations ,
Market economies, Developing , HIPC
Standard of living - Demographics, distribution of income ,
purchasing power, Disposal of incomes, purchasing
decisions
Industry / Agriculture/Services — Share in GDP
Balance of Payments — Exports/Imports
Fiscal/Monetary polices — Currency , Inflation , Deficits
Debt / Borrowings / Aid / Grants

International Business Entities Vs Host
Government - Compulsions
Political/Economic — market expansion , Investment climate ,Freedom to
manufacture/sell Vs National Soverignty, Laws to limit foreign controls
Raising Capital — Flexibility and cost of borrowings Vs Local sourcing
Profits/Tax — Freedom to repatriate/re-invest /Tax planning Vs
Repatriation restrictions
R&D/New Products — Locational advantages, Human resources ,
Competitior behaviour Vs Product launch in host country
Manufacturing — Competitive advantage Vs Local content/backward area
development
Marketing — Strategic opportunities Vs Restrict imports/Encourage
exports /Local skill transfers
Pricing — Differential pricing / market dynamics Vs Prevent dumping
Staffing — Labour arbitrage Vs Local employment opportunities
Exit / Termination — Consequences of international rationalization /
Relocation / Exit options Vs Full employment / Layoff consequences, Rigid
closure norms
10 fold criteria
Starting a business — Procedures , costs, fees,time frame etc
Dealing with Licences — Permissions / time lines
Employing workers — labour regulations , social security , Dismissals
Registering property — rights, title, transfer procedures, mortgage
processes
Getting Credit — Access, costs, securities , defaults
Protecting Investors — Governance , Disclosures
Paying Taxes — Collection, Evasion , Enforcement
Trading across Borders — Export / Import trade procedures
Enforcement of Contracts — Alternatives
Closing of Business — Voluntary closures, Bankruptcy laws, Recovery
processes
World Bank — 12 “C” Framework
COUNTRY
Country Profile
PESTLE analysis
CURRENCY
Stability
Restrictions
Exchange Control Regulations
CHOICE
Analysis of Supplies
Competition — Domestic / Global — SWOT
Export — Import Trade
CONCENTRATION
Market Structure
Geographic spread
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CHANNELS
Purchasing practices of Customer
Capabilities of channel partners
Coverage / Distribution costs
Size / Grade of products
Logistic support
COMMITMENT
Access to market
Trade Incentives / Barriers
Customs Tariff
Government Regulations
CULTURE /CUTOMER BEHAVIOUR
Social influences of Society
Diversity
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COMMUNICATION
Promotion methods
Media availability
Media effectiveness
Cost of promotion
Common selling practices
CONSUMPTION
Demand trends
Market Break up — Product wise/ Price wise
Growth Patterns
Threat of Substitute products
CONTRACTUAL OBLGATIONS
Business / Trade practices
Legal and Insurance systems
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CUSTOMER DUE DILIGENCE

Customer payment track record
Payment methods
Competitor / Trade practices
CAVEAT
“Be aware” factors
Social / Cultural Factors
Cultural Forces — Family, Religion, Education,
Language , Social factors etc
Cultural Messages — Morality, Behavioural
role , Ethical values etc
Consumer decision process — Determine
wants and needs , consumption patterns
Cultural Synopsis — Impact of Language,
Religion , Education , Attitudes and values ,
cultural influences etc
Cultural Environment
* Effect of Culture on Buying : What people Buy (Taboos ,
local tastes, traditions , prejudices) When do people
Buy (Seasons , events , festival )Who does the Buying (
Men/Women)
¢ Culture Influence on Attitude towards :
— Work , Wealth , Morality, Upbringing, Education , Role of
Women , Respect for Law, Politics and Risk taking abilities
— Meetings , Negotiation styles, Greetings, Relationships and
Body language
— Customer behaviour , Use of models , Ad language etc
— Business Environment — Communication, Decision making
Role of Government, Employment and Unions
Why / How / Why of the decisions to
invest in Manufacturing ventures
Political and Economic advantages
Legal framework
Costs / Operational advantages
Tax benefits — DTAA, Tax benefits/concessions
Labour and Skills — Expatriates vs Local , Social
security
Exchange Control — Repatriation / Remittance
restrictions etc
Trompenaars Seven Cultural
dimensions
* Universalism Vs Particularism
— U — Ideas can be applied any place, Distinction
between right and wrong , Standards and Values are
important
— P —Circumstances decide how ideas can be applied ,
Personal relationships / obligations play important
role when making ethical decisions , Status is
important
Individualism Vs Communitarinism
| — Individuals influenced by ideas of Western world
C — Culture linked to non-western world , cultures
change continuously
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* Neutral Vs Emotional
— N= Emotions are controlled — Japanese , Koreans, Chinese
— E-Open, expressive, demonstrative — laughing loudly, gesturing , loud
emotional outbursts — Spain , Mexico
Specific Vs Diffused
$ — individuals have personal space to express
D- Individuals are more formal
Achievement Vs Ascription
A- Self worth, status, career position ( US / EU )
A- Age and experience matters ( Japanese)
Sequencial
Vs Synchronous time
S$ — Time is money , Focus on time lines
$— Rhythm, Body language , emotional alignment , feelings
Internal direction Vs External direction
1— Threat perception, Inward orientation
E- Western world outward orientation
MIGA STANDARDS ON
ENVIRONMENTAL AND SOCIAL
SUSTAINABILITY
1 -Assessment and Management of
Environmental and Social Risks and Impacts
2. — Labour and Working Conditions
3. — Resource Efficiency and Pollution prevention
4.— Community Health , Safety and Security
5.— Land Acquisition and Resettlement
6. — Biodiversity Conservation
7.- Indigenous People
8- Cultural heritage
Technological Factors
Technology climate — Skill levels , Literacy,
Institutional support
Manufacturing capabilities —- R&D, Knowledge,
Assimilation , Training and Quality culture
other bank credit

Cost of manufacturing
Innovation
Competence — Patents , patnerships , technology
transfers etc
Challenges of Technology
The Speed of change — shorter planning cycles
& faster product innovations
E-markets
High start — up and Innovation costs
Risk of failure
Competitor moves
Piracy / cyber crimes
System break-down
International Business Cultures
Japanese — Religion, Family values, Loyalty, Group
thinking, Long- term view, “Trust” , Participative
decision making, Training, Learning , “Zero” error,
Quality processes
USA — Democracy , Social and political freedoms,
Governance, Social accountability, Innovations ,
Meritocracy
European — Capitalism, Trade Unions, Manufacturing
Skills, Culture and tastes
Chinese — Strategy and tactics driven, emotionless,
pragmatic , secretive , ideology driven, the “ends” are
key
Impact of Culture on Business
Negotiations — American/Japanese
Basic approach — Transactional / Strategic — trust
Central purpose — Contract / Long term relations
Selection criteria — Technical skills/Rank
No. of Negotiators — Few / Many for learnings
Role of Lawyers — Key/ None
Decision making — Delegation / Consensus
Dialogue — Formal / Indirect
Feelings — Neutral / Rapport building
Socialising — Loss of control / Ritualistic
Time management — Time is money / Patience
Impact of Culture on Business
Practices
Addressing — Malaysia / France — Title , USA—-
First name , Japan — Exchange of card
Gender sensibility — Greetings , body language
Gesturing — Sole of feet an offence to Arabs,
Fingering pointing impolite
Dressing — Business suits, casuals etc
Eating — Host, Seating , Gifting etc
Time — Signs of impatience, improper behaviour ,
lengthy introductions etc
Talking — Tone , verbosity, silence, gestures etc
Legal Environment - Overview
¢ All nations regulate business activities to some

degree . Companies are subject to laws of the
country from where they operate.
* Some nations have “hands off” policies .
Companies are free to pursue their legitimate
commercial interests.
* Most countries have detailed legislation covering:
Permissions/Licenses/Health & Safety/ Labour/
Tariffs/ Taxes/ Forex /IP laws / Environment
Global Examples .....
France — Large entities to earmark turnover for
employee training
UK — Importance to trade union rights
Germany / Norway — Strict environmental norms —
emission / forest sustainability
Sweden / Netherlands — Social welfare
Canada — Diversification and unrelated businesses by
foreign entities
Industrialized nations — Fewer controls on capital flows
local borrowings, dividend repatriation ,ownership
laws etc
Kinds of Legal Systems
Common Law -— Based on tradition, precedent,
custom/usage like UK/USA . Courts interpret laws as
per events . Contracts have to be detailed in nature
Civil Law — Codified legal system, detailed rule making
for transacting business . Over 70 countries including
Germany, France operate on this system.
Theocratic Law — System of law based on religious
percepts — Islamic Law (Shariat) Koran, decisions of
Islamic jurists/ scholars , consensus of muslim
countries’ legal communities. “Fatwa” of the sheikhs
Martial Law — Dictator rule
Legal aspects of Exports — India
context
Capacity of parties to contract — Void and Legal contracts
Terms of sale — INCO terms
Regulatory framework — Foreign Trade (Development &
Regulation) Act , FEMA, Income tax, UCPD — Credits and
Collections
Banking Laws — Negotiable instruments , Guarantees ,
mortgage laws etc
Law of Insurance
Carriage of goods by sea/air
Customs/ Excise / Service tax
Intellectual property laws
Labour and Environment laws
Elements of a Model Export Contract
Customer description
Product description — Generic/Technical Standards
specifications / Buyer specified
Quantity — Weight / Volume / Unit of measurement
Value of Contract — Currency / Terms of contract
Inspection — Pre-shipment / Venue / Validity / Agency —
Customer
Delivery — Destination of cargo / mode of transport /
Full — Partial shipments / Transhipment / INCOTERMS
Terms of Payment — Mode — Advance / Barter / LC /
Usance — Open Delivery terms / Consignment sale
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Warranty Clause
Force majeure conditions — Act of GOD , SRCC
Clauses
Termination of Contract
Arbitration — Applicable Law / Venue
Dispute settlement
Signature Clause — Authorizations
Criteria for Successful Alliances
Individual Excellence — Both partners strong , positive

mind-set , What is brought to the table?
Importance — Strategic fit , Long-term view
Interdependence — Complementaries , Nobody can
“Go it alone”
Investment — Financial commitment and soundness
Information — Openness and Transparency
Integration — Operational , Learning and sharing
Institutionalisation — Decision making process
Integrity — Loyalty and Trust
Environmental Factors
Global Warming / Climate Change Challenges |

Global Regulations / Accords — UN dictated
Carbon Footprint capture
“Cradle to Grave” Model — Holistic Value Chain
Circular Economy
Technological leverage in Waste - Recycling /
Reprocessing/ Reuse
Carbon Credits
Carbon dictated Business Models
BASIC PRINCIPLES — Sun Tzu — Art of
War
* If you know your Enemy as you know Yourszlf
— You need not fear the results
° If you know Yourself .. But not your Enemy,
For every victory you gain .. You will also suffer
a defeat
* If you know neither your Enemy or Yourself ..
You will succumb n every battle !!
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* Competitors b
— Who are current Competitors .Why do Customers
choose them ?
— Competitor SWOT — Their strategies and future
— What is the basis of Competition — Pricing ,
Product range, Geographic reach , Innovation,
Customisation, Commercial terms , Customer care
— How is the Competitive environment and external
environment suiting the Company / Competitor
— What is Competitors’ USP ?
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* Customers
— Customer database
— Segments/ Preferences/ Engagement processes
— Listening and Learning processes
— Are we sure we would continue to serve existing
Customers in the future .If not how is tomorrow’s
Customer going to be?
— Why do Consumers deal with rivals?
— Channels for reaching the future Customer
— Customer who does not exist ??
Why Competitor Analysis
Helps management to appreciate relative SWOT
of the Company and that of competitors
Understand the future projections / strategies of
Competitors
How does the Company develop a competitive
advantage and provide a Differentiated value
Proposition to the existing/potential Customers
How would a rival respond to a Company’s new
product launch or new market entry or a new
promotion
What information do you require of
Competitor ?
Sales — Turnover / margins / Geography reach I
Cost structures
Customer satisfaction levels
Technology / R&D / Innovations
Distribution methods
New product pipeline
Advertising effectiveness
Future business projections
Contractual terms with channel partners
Strategic partnerships
Market pulse
Joint Ventures
Meaning — Fusion of two or more parties in one

entity for a common business goal and for
common profit
Aim — Sharing with a long-term view
Modes — Technology sharing , Resource sharing,
Profit sharing, Risk sharing, R&D sharing ,
Marketing and Distribution sharing etc
JV Architecture — Strategic fit / Cultural fit /
Capabilities fit / Organisation fit
Joint Venture Agreement structure
* Scope — Activity , Product mix , Geography

* Contribution — Equity , Loans, Technology,
Brand, Distribution , Financing
* Management — Board composition , Decision
making , Recruitments , Remuneration
* Protection — Technology , Brands, JV products
* Conflict Resolution
¢ Valuation — Assets, valuation formula etc
HR Issues
Organization Design
VMV/ Leadership
Business Model
Organization Culture — Ethics / Compliance template
Core Competencies
Business Environment / Industry / Strategic
Opportunities / Strategic Challenges
Domestic / International footprint
HR function / HR mandate
Organogram — Function / Business vertical / Area-
Geography
HR Agenda — Creating a “Future Ready
Organization”
¢ HR/Workforce Capability/ Capacity as per Business
requirement
— Skills, Competencies as per Products/ Market needs
— Recruitment process — “Cultural and Values fit”
— On Boarding process / Work Permit / Labour laws
— Cultural sensitivity before placement / postings
— Articulation of reporting / accountability — KRA’s
Understanding Global Social and Cultural environment
— Diversity
— Social / Religious issues
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Training , Learning / Training effectiveness

Change Management Issues
Employee Assessment / PMS
Career Progression path
Employee Integrity
High Performance culture
Employee Benefits
Merger / Acquisition challenges — Integration
Leadership development / Succession Planning
Performance Parameters in Global
Business — F&A’s enhanced role
¢ Strategic function at Leadership level
— Comprehending the VUCA world — Emphasis on F&A, Treasury,
Global Business models and International Accounting standards
( US/EU/Indian) and Taxation — Stand alone / Consolidation
— Strategic Investments
— Raising Capital , Managing working capital , Borrowings
— Data Analytics and Business Intelligence
— Global Risk Processes — Financial Risks / Frauds / IP Risks
— International contracting procedures / SOP compliances
— Transfer Pricing
— Merger and Acquisition issues / Business restructuring / JVs
— Reporting to Board , Governance and Regulatory compliances
— Investor Relations
The Journey from GATT to WTO
* The World Trade Organization (WTO) was born on 1*
January,1995 as a result of the Uruguay Round of Trade
Negotiations.
* The Genesis of WTO is in General Agreements on Tariffs
and Trade (GATT) , a negotiation process which began in
early 1900’s with a handful countries ... india being one of
them !
* The WTO system now consists of the following key
substantive agreements:
— Multilateral Agreements on Trade in Goods as included in GATT
— General Agreement on Trade in Services ( GATS)
— Agreement on Trade related aspects of Intellectual Property
Rights ( TRIPS)
The Key Mandate/ Functions of
WTO.....
It is the highest body for setting rules for International Trade
The mandate is to promote Free, Fair and Equitable Trade between
Member Nations
Overseeing implementation of its rules by providing a forum to
Members for Dispute Settlement under its Dispute Settlement
mechanism ( Appellate Body’s decisions are final and binding)
Conduct Trade Policy reviews of Member Countrids under its TPR
mechanism
Bring uniformity, certainty , transparency , non —discrimination and
promote competition in the Global Trading system
Aim for progressive liberalization of trade and reduce restrictions
Assist / create capabilities in Trade matters for Poor and Developing
countries , especially LDC , for fair share of benefits accruing from
world trade by reducing barriers / giving market access
Nine basic Principles of the WTO
Trading System .....
Transparency — Member countries obligated to intimate trade
related rules / regulations well in advance
MEN Treatment — Non — discrimination between Countries —
Granting “Most —Favoured Nation” status to Members — lowering
tariffs, barriers and giving market access
National Treatment — Non — discrimination within the Country —
Imported and locally procured goods should be treated equally
Free Trade Principle — Optimum Utilization of World Resources —
Lower trade barriers — tariff and non —tariff
Dismantling Trade Barriers — Removal of QR’s and judicious use of
Tariffs
Rule Based Trading System — Certainty and Predictability — Speeder
dispute settlement mechanism
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¢ Special and Differentiated Treatment for Developing
and LDC — Help for Poor Countries — Special
concessions for LDC’s — transfer of technology, market
access at zero duty, flexibility in application of technical
and phyto —sanitary standards by developing countries
* The Competition Principle — Restricting Monopolies
and promoting Consumer interests — Promote market
competition
¢ Environment Protection — Promotion of Sustainable
development address issues like Climate Change and
mitigation
WTO System — Key Agreements
GATT
Customs Valuation
Pre-Shipment Inspection
Technical Barriers to Trade
Application of Sanitary and Phytosanitary Measures
Import Licensing Procedures
Safeguards
Government Procurement
Subsidies and Countervailing Measures
Implementation of Anti-Dumping Duties
Trade related Investment Measures (TRIMS)
Textiles and Clothing
Agriculture
Rules of Origin
Trade in — SERVICES , INTELLECTUAL PROPERTY RIGHTS ( TRIPS)
DISPUTE SETTLEMENT
Key features of Regional Groupings
* Gain economies of scale

* Compete with bigger nations — US, EU, China
¢ Maintain better Political, Economic, Social ties
* Reduce/Eliminate trade barriers among members
of production
* Impose common external tariff and non — tariff
barriers on non — members
Advantages of Regional Groupings
* Improvement of Welfare — The economic integration
can affect the economic welfare of the community by
changing its total production , total trade and
distribution of income
¢ Effective Employment — Leveraging employment
opportunities, skills and productivity and align with
other factors production in a complementary manner
* Improvement in Productivity — Re-allocation of factors
of production and resources, economies of scale, easy
movement of factors of production , influence
investment, harness technology and competitiveness
Types of Economic Groupings
Free Trade Agreement (FTA) - Member countries conduct free trade
amongst them.
Customs Union (CU) — It is more stronger form of co-operation.
Internal barriers and custom duties are abolished amongst
members. They impose a common external tariff against non —
members.
Common Markets (CM) — Higher form of integration in which
restrictions are removed not only for trade but also on all factors of
production movements
harmonize taxes , adopt common monetary measures — same

currency — Euro — 2002 , Fixed exchange rate between members
Economic Union — Final stage of economic integration — common
economic polices , common passport and citizenship, seamless
movement of citizens , single unified market, — Examples — EU
Some Key Economic Groupings
European Union (EU)
The Association of South East Asian Nations (ASEAN)
North American Free Trade Agreement (NAFTA)
Asia — Pacific Economic Co-operation (APEC)
The South Asian Association for Regional Co-operation
(SAARC ) - South Asian Free Trade Area (SAFTA)
Southern African Customs Union (SACU)
African Continent FTA
Common Market for Eastern and Southern Africa
(COMESA)
South American Trade Grouping ( MERCUSOR ) / Caribbean
Basin Initiative
Economic Diplomacy
International Geo-political environment
Foreign Policy
Trade Policy
Bilateral relations / Multilateral relations ( BRICS , India-
Japan Industrial Corridor, QUAD )
Trade and Commerce/ Investments / Movement of people
Leveraging political / friendly relations for safety, security ,
mutual interests in trade and commerce
Challenges from hostile nations / different political
ideologies — Cold War ( Birth of NATO)
Trade Wars/ Protectionism / Safeguard measures
Role of UN , WTO, WB, IMF ......
Geo-Political and Economic Diplomacy
* QUAD Group —|-— India, USA, Japan and Australia — Maritime Security —
counter move to Chinese ambitions
* QUAD Group — II ( Proposed) — India, USA, Israel and UAE ( Game changer)
The Abraham Accord pioneered by Donald Trump facilitated normalization of
relations between Israel and UAE, Bahrain, Morocco and Sudan, resulting in
realignment of strategic interests in the ME region
India has separately cultivated close strategic — security ties with Israel and
Gulf Arab nations
India has another alliance with US to counter China
US has re-oriented its focus on Indo-Pacific and powerful Arab countries
India has lot of soft power in ME — 8 million + huge Indian diaspora
ME is a an important foreign market for Indian exporters , which will grow
given the youth dominated demography
Israel’s high tech economy , Arab nations bid to diversify away from oil , India’s
contribution in Big Data , Al, Quantum computing and other technologies in
the future
Risk Factor — Israel — Arab compact falling apart, thus equations would change

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International Business

By Charles W.L. Hill

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