International Business and Trade Module

MGT 304: International Business and Trade
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PART ONE
BACKGROUND FOR INTERNATIONAL BUSINESS
Chapter 1
International Business: An Overview
Objectives
1. Define international business and describe how it differs from domestic business.
2. Explain why companies engage in international business and why its growth has
accelerated.
3. Introduce different modes a company can use to accomplish its global objectives.
4. Illustrate the role social science disciplines play in understanding the environment
of international business.
5. Provide an overview of the primary patterns for companies’ international
expansion.
6. Describe the major countervailing forces that affect international business.
Chapter Overview
More and more foreign countries are becoming a source of both production and sales for
many firms. Chapter 1 examines the reasons for this, as well as the various modes used
by firms to engage in international business. The chapter describes the evolution of firm
strategy as part of the internationalization process, plus the countervailing forces that
firms are likely to encounter during that process. In addition, the elements of the external
international business environment are briefly introduced, prior to their being considered
in detail in the following three chapters.
Chapter Outline
OPENING CASE: Star Wars: Episode II —Attack of the Clones
This case sets forth the global mindset of Lucasfilm with respect to the production and
distribution of Star Wars: Episode II—Attack of the Clones. It describes the advantages
gained by using multi-country production locations and an international cast and crew. In
addition, it explains the reasons behind the simultaneous release of the film in nine
countries on the first day, plus another large group of countries the following day. The
case also describes the strategic adjustments that Lucasfilm made to accommodate
national technical and cultural differences, as well as the additional revenue sources
associated with the sales of rights to produce and sell products associated with characters
and scenes from the movie.
I. INTRODUCTION TO THE FIELD OF INTERNATIONAL BUSINESS

International business involves all commercial transactions—private and
governmental (public)—between two or more countries. Global events and
competition affect almost all firms, large or small. However, the international
environment is more complex and diverse than a firm’s domestic environment.
A. Why Companies Engage in International Business
1. Expand Sales. Companies may increase the potential market for
their sales by pursuing international consumer and industrial
markets.
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2. Acquire Resources. Foreign-sourced goods, services, components,

capital, technology and information can make a firm more
competitive both at home and abroad.
3. Minimize Risk. Firms may pursue foreign markets in order to
minimize cyclical effects on sales and profits; they may also wish
to counter the potential advantages that competitors might gain by
participating in foreign market opportunities.
B. Reasons for Recent International Growth—From Carrier Pigeons to
the Internet
1. Expansion of Technology. Vast improvements in transportation
and communication technology have significantly increased the
efficiency of international business operations.
2. Liberalization of Cross-Border Movements. The reduction of
trade barriers via the General Agreement of Tariffs and Trade and
other such mechanisms has provided increased access to many
foreign markets.
3. Development of Supporting Services. Services provided by
governments, banks and other businesses greatly facilitate the
conduct and reduce the risks of doing business internationally.
4. Consumer Pressures. Because of innovations in transportation
and communications technology, consumers are better informed
and thus demand higher-quality, more cost-competitive products.
5. Increase in Global Competition. Companies may choose to
operate internationally in order to gain access to foreign
opportunities and improve their overall operational flexibility and
competitiveness.
II. MODES OF INTERNATIONAL BUSINESS
A firm can engage in international business through various operating modes,

including exporting and importing merchandise and services (see Chapters 5 and
6 regarding international trade), licensing and management contracts (see Chapter
14 regarding collaborative arrangements), foreign direct and portfolio investments
(see Chapters 8 and 11 regarding foreign direct investment) and strategic alliances
with other companies (see Chapter 14 regarding collaborative arrangements).
A. Merchandise Exports and Imports

Merchandise exports consist of tangible (visible) products, i.e., goods,
which are sent to a foreign country for use or resale. Merchandise
imports consist of tangible (visible) products, i.e., goods, brought into a
country for use or resale.
B. Service Exports and Imports
Service exports and imports represent intangible (invisible), i.e.,
non-merchandise, products. The firm or individual “exporting” a service
will receive international earnings; the firm or individual “importing” a
service will make an international payment.
1. Tourism and Transportation. When an American flies
to Germany on Lufthansa (a German airline) and stays in a
German-owned hotel, payments made to Lufthansa and the hotel
represent service export earnings for Germany and service import
payments for the United States.
2. Performance of Services. Some services, such as turnkey
operations (construction of facilities, performed under contract,
that are transferred to the owner when they are ready for operation)
and management contracts (arrangements in which one firm
provides personnel to perform management functions for another),
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yield export earnings to service providers in the form of fees paid

by foreign clients.
3. Use of Assets. Firms may receive export earnings,
i.e., royalties, by allowing foreign clients to use their assets
(trademarks, patents, copyrights and other
expertise). Licensing represents a transaction in which a licensor
(exporter) sells the rights to the use of its intellectual property to a
licensee (importer) in exchange for a fee. Franchising is a special
form of licensing in which the licensor is granted more control
over the licensee in exchange for the provision of additional
support and services.
C. Investments
Foreign investment consists of the direct and portfolio ownership of
assets in a foreign country.
1. Direct Investment. Foreign direct investment (FDI) occurs when
an investor gains a controlling interest in a foreign operation. Sole
ownership represents 100% ownership of an operation; however,
effective control can be realized with just a minority stake if the
remaining ownership is widely dispersed. A joint
venture represents a direct investment in which two or more
partners share ownership. A mixed venture represents a
commercial operation in which ownership is shared by a
government and a business.
2. Portfolio Investment. Portfolio investment is a non-controlling

interest in a venture made in the form of either debt or equity.
D. International Companies and Terms Used to Describe Them
1. There are numerous forms of collaborative arrangements through
which companies work together internationally, such as licensing,
management contracts, or long-term contractual arrangements.
A strategic alliance is more narrowly defined to indicate that the
agreement is of critical importance to the competitive viability of
one or more partners.
2. A multinational enterprise (MNE) is a firm that takes a global
approach to foreign markets and production, i.e., it takes a
corporate perspective in its worldwide selection of markets and
production sites. The terms multinational corporation
(MNC) and transnational company (TNC) may also be used in
this context.
3. A global company (also known as a globally integrated
company) integrates its operations on a worldwide basis.
A multidomestic company (also known as a locally responsive
company) tailors its strategies to national and/or regional
preferences by granting decision-making authority to local
managers.
III. EXTERNAL INFLUENCES ON INTERNATIONAL BUSINESS

A. Understanding a Company’s Physical and Societal Environments
To effectively operate in the external environment, a firm’s managers must
understand not only business operations, but they also must have a
working knowledge of the basic social sciences, such as law, political
science, anthropology, sociology, psychology, economics and geography.
B. The Competitive Environment
The competitive environment varies by industry and country. Likewise, a
company’s competitive situation may differ in terms of its relative strength
and in terms of which competitors it faces from one country to another.
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Thus, a firm’s competitive strategy directly influences how and where it

can best operate.
IV. EVOLUTION OF STRATEGY IN THE INTERNATIONALIZATION

PROCESS
Typically, a firm’s commitment to international operations evolves as part of its
overall growth and operating strategies over time. Nonetheless, more start-up
companies are becoming international very early in their lives because of
advancements in communications and managerial knowledge about foreign
locations.
A. Patterns of Expansion
1. Passive to Active Expansion. Most companies think only of
domestic opportunities until a foreign opportunity presents itself.
2. External to Internal Handling of Operations. After initially
relying on intermediaries, a firm will learn enough about foreign
operations to consider them less risky than at the onset. It then may
choose to handle at least some of those operations internally.
3. Deepening Mode of Commitment. Usually firms begin their

international operations via importing or exporting. Once they
have successfully built export markets, however, they often move
into some type of foreign production to meet foreign demand.
4. Geographic Diversification. Initially companies tend to expand to
those foreign locations that are geographically close and culturally
similar. Later they move to more distant countries perceived to
have less similar environments to their home countries in order to
expand on the one hand, but minimize risk on the other.
B. Leapfrogging of Expansion
Many start-up firms are now beginning with a global focus because of the
international education and experience of their founders. Technological
advances in the Internet and other forms of communication give these
companies access to both worldwide markets and resources.
V. COUNTERVAILING FORCES
Countervailing forces influence the conditions in which companies operate and
their options for operating internationally. Rivalries among countries,
cross-national treaties and agreements and ethical dilemmas can inhibit a firm’s
quest for maximum global profits.
A. Globally Standardized versus Nationally Responsive Practices
Trends that influence the worldwide growth in international business often
favor the use of a global strategy, i.e., standardization, thus capturing
gains from economies of scale. On the other hand, a firm may choose to
use a multidomestic strategy, i.e., to be nationally responsive, thus
increasing its effectiveness by adjusting to the different conditions it
encounters in the various countries in which it operates.
B. Country versus Company Competitiveness
At one time the performance of a country and that of its domestic
companies were considered to be mutually dependent and beneficial.
However, many companies now choose to compete by seeking maximum
production efficiency on a global scale, even if it means moving
production activities abroad. If as a result high-value activities increase
sufficiently in the home country, it will realize an economic gain; if not,
the country’s economic position will deteriorate. Countries continue to
entice both domestic and foreign firms to locate activities within their
borders through regulations, on the one hand, and incentives on the other.
C. Sovereign versus Cross-National Relationships
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Although governments act in their own self-interest, they may choose to

cooperate with one another and even cede limited sovereignty through
treaties and other agreements.
1. Countries enter into a variety of bilateral and multilateral treaties
and agreements with other countries regarding commercial
activities in order to gain reciprocal advantages for themselves and
their domestic firms.
2. Countries enact treaties and agreements to coordinate activities
along their shared borders and deal with problems that a single
country acting alone cannot solve.
3. Countries enact treaties and agreements to deal with areas of
concern that lie outside the territory of all countries, i.e., the
non-coastal areas of the oceans, outer space and Antarctica.
ETHICAL DILEMMAS AND SOCIAL RESPONSIBILITY:
Sorting through the World of Right and Wrong in International Business
Firms take many actions that elicit almost universal agreement about what is right
or wrong. In the international arena, however, religious beliefs, social attitudes, laws,
regulations and policies may vary significantly. No set of workable corporate guidelines
is universally accepted and observed. An MNE may find it has either more or less latitude
in making decisions in the foreign countries in which it operates. Cultural
relativism holds that ethical truths depend upon the groups holding them; thus
intervention in local traditions is seen as unethical. On the other hand, normativism holds
that there are universal standards of behavior everyone should follow, thus making
non-intervention unethical. From a business standpoint, two possible objectives are to (a)
proactively create competitive advantages though socially responsible behavior that leads
to trust and commitment and (b) avoid being perceived as irresponsible.
LOOKING TO THE FUTURE:
Seizing That Window of International Business Opportunity
At this time there is much confusion about the future growth of international
business. Nonetheless, a firm that wants to capitalize on international opportunities must
not wait too long. By envisioning different ways in which the future may evolve, a
company can be better prepared to develop the facilities and people needed to succeed in
an uncertain environment.
Exercises: The Internationalization Process

Exercise 1.1. Ask students to name companies, both domestic and foreign, that
operate internationally. Take time to explore the extent and nature of those firms’
operations. Also discuss a logical pattern of expansion for each type of operation.
Conclude the discussion by examining the list and asking if there are any
particular types of firms that seem to lend themselves to global operations and
strategies more easily than others. Have the students explain why this might be so.
Exercise 1.2. Explore the impact of standardization, containerization and

computerization upon the foreign trade process. Then ask students to discuss the
role technology has played in other areas of the foreign trade, licensing and
foreign direct investment processes.
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PART TWO
COMPARATIVE ENVIRONMENTAL
FRAMEWORKS
Chapter 2
The Cultural Environments Facing Business
Objectives
1. Discuss the problems and methods of learning about cultural environments.
2. Explain the major causes of cultural difference and change.
3. Examine behavioral factors influencing countries’ business practices.
4. Examine cultural guidelines for companies that operate internationally.
Chapter Overview
When companies source, produce, and/or market products in foreign countries,
they encounter fascinating and often challenging cultural environments. Chapter 2
explores the basic concept of culture and its effect on international business operations
and strategy. It explores cultural awareness as well as the causes of cultural differences,
rigidities and changes. In so doing it focuses on the impact of cultural traditions on
business activities, as well as the mutually satisfactory reconciliation of cultural
differences. The chapter concludes with a discussion of the ways in which firms can
maximize their effectiveness while operating in a world of complex, dynamic, cultural
diversities.
Chapter Outline
OPENING CASE: Adjusting to Saudi Arabian Culture
This case provides a striking example of the challenges presented to foreign firms
by a pervasive national culture. It shows why companies have had mixed success
in Saudi Arabia, a modern yet ancient society grounded in Islamic law, religious
convictions and behavioral traditions. The case describes various ways in which firms
have adjusted their products, facilities and operating strategies in order to meet
government requirements and yet satisfy the Saudi consumer. It also discusses numerous
paradoxes encountered regarding legal sanctions, purchasing patterns and attitudes
toward work. It concludes by noting some of the opportunities that exist in Saudi Arabia,
either because of or in spite of the contrasts and paradoxes found there.
I. INTRODUCTION
Culture represents the specific learned norms of a society, based on
attitudes, values and beliefs. Major problems of cultural collision may occur
because a firm implements practices that do not reflect local customs and values
and/or its employees are unable to accept or adjust to foreign behaviors.
II. CULTURAL AWARENESS

Although people agree that cross-cultural differences do exist, they often
disagree on their impact. Are they widespread or exceptional? Are they
deep-seated or superficial? Are they easily discerned or difficult to perceive?
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Nonetheless, firms must develop awareness about those cultures in which they
operate. However, the amount of effort needed to do this depends on the
similarities between or among countries and the types of business operations
undertaken.
III. IDENTIFICATION AND DYNAMICS OF CULTURES

Cultures consist of people who share attitudes, values and beliefs. Cultures
are dynamic; they evolve over time.
A. The Nation as a Point of Reference
Similarity among people is both a cause and an effect of national
boundaries; in addition, laws apply primarily along national lines.
National identity is perpetuated through the rites and symbols of a country
and a common perception of history. At the same time, various subcultures
and ethnic groups may transcend national boundaries. In some instances,
similarities may link groups across different nations more closely than
certain groups within a nation.
B. Cultural Formation and Dynamics
Culture is transmitted in a variety of ways, but by age 10 most children
have their basic value systems firmly in place. Nonetheless, individual and
societal values and customs often evolve in response to changing
economic and social realities. Change brought about by imposition is
known as cultural imperialism. The introduction of certain elements of an
outside culture may be referred to as creolization,
indigenization, or cultural diffusion.
C. Language as a Cultural Stabilizer
While a common language within a country serves as a unifying force,
language diversity may undermine a firm’s ability to conduct business on
a national level. Isolation from other groups, especially because of
language, tends to stabilize cultures. Some countries see language as such
an integral part of their cultures that they attempt to regulate the use or
inclusion of foreign words.
D. Religion as a Cultural Stabilizer

Religion can be a strong shaper of values and beliefs and is a major source
of both cultural imperatives and taboos. Still in all, not all nations that
practice the same basic religion place identical constraints on business.
Historically, violence among religious groups has disrupted local and
international business activities in both home and host country firms.
IV. BEHAVIORAL PRACTICES AFFECTING BUSINESS

Attitudes and values affect all dimensions of business activities, from what
products to sell to how to organize, finance, manage and control operations.
A. Social Stratification Systems
People fall into social stratification systems according to group
memberships that in turn determine a person’s degree of access to
economic resources, prestige, social relations and power. Ascribed group
memberships are defined at birth and are based on characteristics such as
gender, family, age, caste and ethnic, racial, or national origin. Acquired
group memberships are based on one’s choice of affiliations, such as
political party, religion and professional organizations. Social stratification
affects both business strategy and operational practices.
1. Role of Competence. Some nations base a person’s eligibility for
jobs and promotions primarily on competence, but in others,
competence is of secondary importance. In more egalitarian
societies, group membership is less important, but in more closed
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societies, group membership may dictate one’s access to education,

employment, etc.
2. Gender-based Groups. There are strong country-specific
differences in attitudes toward males and females, as well as vast
differences in the types of jobs regarded as male or female.
Nonetheless, barriers to employment based on gender are easing in
many parts of the world.
3. Age-based Groups. Many cultures assume age and wisdom are
correlated; thus, they usually have a seniority-based system of
advancement. In others, there is an emphasis on youth, particularly
in the realm of marketing. All in all, age represents a complex,
dynamic issue.
4. Family-based Groups. In societies where there is low trust

outside the family (e.g., China and southern Italy), small
family-run companies are generally more successful than large
firms. However, this may impede the economic development of the
country if large-scale operations are necessary to compete globally.
5. Occupation. In every society certain occupations are perceived as

having greater economic and social prestige than others. Although
some perceptions are universal, there are significant national and
cultural attitudes about the desirability of specific occupations as
well as the desire to work as an entrepreneur rather than as an
organizational employee.
B. Motivation
Employees who are motivated to work long and hard are generally more
productive than those who are not. On an aggregate basis, this will have a
positive effect on economic development and national competitiveness.
1. Materialism and Leisure. People are motivated to work for

various reasons, including the desire for achievement. In some
societies, people desire less leisure time than others. In 1904
sociologist Max Weber claimed that predominantly Protestant
Western economies were the most economically developed
because of the emphasis on hard work and investment. Weber
identified this view of work as a path to salvation as the Protestant
ethic. In rural India, however, where minimal material
achievement is a desirable end, added productivity will likely be
taken in the form of leisure, rather than income.
2. Expectation of Success and Reward. Although the same tasks

performed in different countries will have different probabilities of
success as well as different rewards for success and different
consequences for failure, people will usually work harder at any
task when the reward for success is greater than the consequence
of failure. The greatest enthusiasm for work exists when high
uncertainty of success is combined with the likelihood of a very
positive reward for success and little or none for failure.
3. Masculinity Index. Hofstede’s study of employees from 50

countries defined a high masculinity index as describing someone
who holds the belief that it is better to live to work than to work to
live. However, such attitudes, as well as a preference for promotion
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and profitability over quality of life and environment, are not

shared by all. Those differences of opinion present major
challenges for international managers.
4. Need Hierarchy. Maslow’s hierarchy of needs states that people

will try to fulfill lower-order physiological needs before satisfying
(in order) their security, social, esteem and self-actualization needs.
People from different countries attach different degrees of
importance to needs and may even rank some of the higher-order
needs differently.
C. Relationship Preferences
In social stratification systems, not everyone within a given reference
group is necessarily an equal. In addition, there may be strong or weak
pressures for conformity within one’s group. Both of these differences
influence management style and marketing behavior.
1. Power Distance. Power distance describes the relationship
between superiors and subordinates. When power distance is high,
the management style is generally distant, i.e., autocratic or
paternalistic; when it is low, managers tend to interact with and
consult subordinates as part of the decision-making process. [For
example, Malaysians typically exhibit high power distance, while
Austrians typically exhibit low power distance.]
2. Individualism vs. Collectivism. Nationalities differ as to whether

they prefer an autocratic or a consultative working relationship,
whether they want set rules and how much they compete or
cooperate with fellow workers. Individualism is the trait that
indicates a person’s desire for personal freedom, time and
challenge and one’s low dependence on the organization;
self-actualization is a prime motivator. On the other
hand, collectivism indicates a person’s desire for training,
collaboration and shared rewards, i.e., one’s high dependence on
and allegiance to the organization. [For example, Americans tend
to be individualistic, while the Japanese tend to be collectivist.]
D. Risk-taking Behavior
Nationalities differ in their attitudes toward risk-taking. Uncertainty
avoidance, trust and fatalism are examined here.
1. Uncertainty Avoidance. Uncertainty avoidance describes one’s
acceptance of risk. When the score is high, people need precise
directions and long-term assurances; when the score is low, people
are willing to accept the risk of trying new products or moving to
new jobs. [For example, Greeks tend to exhibit high uncertainty
avoidance, while Swedes tend to be low on the scale.]
2. Trust. Trust represents one’s belief in the reliability and honesty of

another. Where trust is high, there tends to be a lower cost of doing
business. [For example, Norwegians tend to exhibit a high degree
of trust, whereas Brazilians tend to be skeptical.]
3. Fatalism. Fatalism represents the belief that events are

predestined. Such a belief may discourage people from working
hard to achieve an outcome or accepting responsibility. [Muslim
societies, for example, tend to be fatalistic.]
E. Information and Task Processing
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People from different cultures obtain, perceive, and process information in

different ways; thus, they may also reach different conclusions.
1. Perception of Cues. People identify things by means of their
senses in various ways with each sense. The particular cues used
vary both for physiological and cultural reasons. [For example, the
richer and more precise a language, the better one’s ability to
express subtleties.]
2. Obtaining Information. Language represents a culture’s means

of communication. In a low-context culture, people rely on
first-hand information that bears directly on a decision or situation;
people say what they mean and mean what they say. In
a high-context culture, people also rely on peripheral information
and infer meaning from things communicated indirectly;
relationships are very important. [For example, while Germany is
considered to be a low-context culture, Saudi Arabia is considered
to be a high-context culture.]
3. Information Processing. All cultures categorize, plan and

quantify, but the ordering and classification systems they use often
vary. In monochronic cultures (e.g., northern Europeans) people
prefer to work sequentially, but in polychronic cultures (e.g.,
southern European) people are more comfortable working on
multiple tasks at one time. Likewise, in some cultures people focus
first on the whole and then on the parts; similarly,
in idealistic cultures people will determine principles before they
attempt to resolve issues, but in pragmatic cultures they will focus
more on details than principles.
V. STRATEGIES FOR DEALING WITH CULTURAL DIFFERENCES

Once a company identifies cultural differences in the foreign countries in which it
operates, must it alter its customary practices?
A. Making Little or No Adjustment
Some countries are relatively similar to one another because they share the
same language, religion, geographical location, ethnicity and/or level of
economic development. If products and operations do not run counter to
deep-seated attitudes, or if the host country is willing to accept foreign
customs as a trade-off for other advantages, significant adjustments may
not be required. Generally, a company should expect to have to consider
fewer adjustments when moving within a culturally similar cluster than
when it moves from one distinct cultural cluster to another.
B. Communications
Problems in communications may arise when moving from one country to
another, even though both countries share the same official language, as
well as when moving from one language to another.
1. Spoken and Written Language. Translating one language into
another can be very difficult because (a) some words do translate
directly, (b) the common meaning of words is constantly evolving,
(c) words may mean different things in different contexts and (d) a
slight misuse of vocabulary or word placement may change
meanings substantially. Poor translations may have tragic
consequences.
2. Silent Language. Silent language incorporates the wide variety

of nonverbal cues through which messages are sent—intentionally
or unintentionally. Color associations, the distance between people
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during conversations, the perception of time and punctuality, a

person’s perceived status and kinesics (body language) are all
significant. Misunderstandings in any of these areas can have a
very negative impact.
C. Culture Shock
Culture shock represents the trauma one experiences in a new and
different culture because of having to learn to cope with a vast array of
new cues and expectations. Reverse culture shock occurs when people
return home, having accepted the culture encountered abroad and
discovering that things at home have changed during their absence.
D. Company and Management Orientations

Whether and to what extent a firm and its managers adapt to foreign
cultures depends not only on the conditions within those cultures but also
on the policies of the company and the attitudes of its managers.
1. Polycentrism. Polycentrism represents a managerial approach in
which foreign operations are granted a significant degree of
autonomy in order to be responsive to the uniqueness of local
cultures and other conditions.
2. Ethnocentrism. Ethnocentrism represents a belief that one’s own

culture is superior to others, and that what works at home should
work abroad. Excessive ethnocentrism may lead to costly business
failures.
3. Geocentrism. Geocentrism represents a managerial approach in

which foreign operations are based on an informed knowledge of
both home and host country needs, capabilities and constraints.
E. Strategies for Instituting Change

Companies may need to transfer new products and/or operating methods
from one country to another in order to gain or maintain a competitive
advantage. To maximize the potential benefits of their foreign presence,
firms need to treat learning as a two-way process and transfer knowledge
from host countries back home as well as from home to host countries.
1. Value System. The more change upsets important values, the
more resistance it will encounter. Accommodation is much more
likely when changes do not interfere with deep-seated customs.
2. Cost Benefit of Change. Some adjustments to foreign cultures

are costly to undertake, but their benefits are only marginal. The
expected cost-benefit of any change must be carefully considered.
3. Resistance to Too Much Change. Resistance to change may be

reduced if only a few demands are made at one time; additional
changes may be phased in incrementally.
4. Participation. A proposed change should be discussed with

stakeholders in advance in order to ease their fears of adverse
consequences—and hopefully gain their support.
5. Reward Sharing. A company may choose to provide benefits for

all the stakeholders affected by a proposed change in order to gain
support for it.
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6. Opinion Leaders. Characteristics of opinion leaders often vary

by country. By discovering the local channels of influence, an
international firm may seek the support of opinion leaders to help
speed the acceptance of change.
7. Timing. Many good business changes fail because they are

ill-timed. Attitudes and needs change slowly, but a crisis may
stimulate the acceptance of change.
8. Learning Abroad. The essence for undertaking transnational

practices is to capitalize on diverse capabilities by transferring
learning among all the countries in which a firm operates.

To Intervene or Not to Intervene
Neither international firms nor their employees are always expected to adhere to a
host government’s behavioral norms. Some firms choose not to operate in locales where
objectionable social and political practices are the norm; others may operate in such
places while pressuring the host country to change; still others may rationalize or simply
tolerate the status quo. A difficult question concerns international business practices that
may undermine a host country’s long-term cultural identity. The Society for Applied
Anthropology advises governments and agencies on instituting change in different
cultures; its code of ethics considers whether a project or planned change will actually
benefit the target population. However, the trade-off between economic gains and the loss
of cultural identity and traditions is often very difficult to measure.

The Globalization of Culture
Although some tangibles have become more universal, the ways in which people
cooperate, solve problems and are motivated tend to remain much the same. Language
differences continue to bolster ethnic identities, and religious differences are as strong as
ever. Such disparities fragment the globe into regions and countries into clusters of
subcultures that may in fact transcend national boundaries.
Exercises: Cultural Challenges

Exercise 2.1. Refer students to the end-of-chapter case: John Higgins. Ask them
to compare the apparent relationship preferences of Higgins and Prescott from the
perspectives of (a) power distance and (b) individualism vs. collectivism.
Exercise 2.2. Pop culture can influence the development of global preferences in
a number of ways. Lead students in a discussion of the ways in which movies can
affect the cultural dimensions of a society (select particular movies, examine
various values embedded in them and discuss the nature of their impact upon the
lifestyles of people around the world).
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Chapter 3
The Political and Legal Environments Facing Business
Objectives
1. Discuss the different functions that political systems perform.
2. Compare democratic and totalitarian political regimes and discuss how they can
influence managerial decisions.
3. Describe how management can formulate and implement strategies to deal with
foreign political environments.
4. Study the different types of legal systems and the legal relationships that exist
between countries.
5. Examine the major legal issues in international business.
Chapter Overview
When companies source, produce and/or market products in foreign countries,
they may encounter challenging political and legal environments. Chapter 3 provides a
conceptual foundation for the examination of the political and legal dimensions of
international business operations. It compares major political regimes and discusses their
potential influence upon the development and implementation of appropriate political and
legal strategies. It also explores the major types of legal systems that exist today, as well
as the legal relationships among countries. The chapter concludes with an examination of
major legal issues in international business.
Chapter Outline
OPENING CASE: The Hong Kong Dilemma
Swire Pacific Ltd., a major hong prominent in Hong Kong business circles, is a
subsidiary of British-based John Swire & Sons, which has nearly 90% of its assets
in China. Swire Pacific Ltd. must learn to cope with an unstable regional and global
economic environment and also succeed in the new political environment developing
in Hong Kong. The case discusses Swire’s approach to dealing with the transition
in Hong Kong by establishing a close working relationship with the Chinese. It also
raises Swire’s concerns about the firm’s future in both Hong Kong and China. What will
be the effect on Hong Kong as China continues to position Shanghai as a major center of
international business? Is Swire correct in pegging its future to that of China?
I. INTRODUCTION
For a multinational enterprise to succeed in countries with different
political and legal environments, its management must carefully analyze the fit
between its corporate policies and the political and legal conditions of each
particular nation in which it operates.
II. THE POLITICAL ENVIRONMENT

A country’s political system integrates the various parts of its society into
a viable, functioning whole. It also influences the extent to which government
intervenes in business, and thus the way in which business is conducted both
domestically and internationally.
III. BASIC POLITICAL IDEOLOGIES
13
A political ideology is the body of constructs, theories and aims that constitute
a sociopolitical program (e.g., liberalism or conservatism). Pluralism indicates
the coexistence of a variety of ideologies within a particular society. The ultimate
test of any political system is its ability to hold a society together. While shared
ideologies create bonds within and among countries, differing ideologies tend to
split societies apart.
A. The Impact of Ideological Differences on National Boundaries
History, culture, politics and geography all contribute to the
definition of national boundaries. When a political system collapses, those
under the system often fragment into smaller sociopolitical groups. When
operating in a foreign country, it is very important for managers to
understand feelings that could cause political tension and instability.
B. The Political Spectrum

MNEs may be able to operate effectively in both democratic and
totalitarian regimes, but democracies usually offer greater economic
freedom and enact more legal statutes designed to safeguard individual
and corporate rights.
1. Democracy. A democracy represents a political system in which
citizens participate in the decision-making and governance process,
either directly or through elected representatives. Contemporary
democracies share the following characteristics: freedom of
opinion, expression and the press; freedom to organize; free
elections; an independent and fair court system; a nonpolitical
bureaucracy and defense infrastructure; and access to the
decision-making process. Nonetheless, in decentralized
democracies (e.g., Canada and the USA) companies may still face
different and sometimes even conflicting laws from one state or
province to another.
a. Political Rights and Civil Liberties. Political

rights include fair and competitive elections, the
empowerment of elected representatives, the right to
organize and the protection of minorities. Civil
liberties include freedom of the press, equality under the
law and personal freedoms.
b. Stability in Democracies. Many democracies that have

emerged since the early 1970s are fragile and unstable. At
the same time, confidence in politicians and government
has generally declined in many of the more mature
democracies.
2. Totalitarianism. Totalitarianism represents a political system in

which citizens seldom if ever participate in the decision-making
and governance process; power is monopolized and opposition is
neither recognized nor tolerated. In theocratic
totalitarianism, religious leaders are also the political leaders.
In secular totalitarianism, the government usually imposes order
through military power. Variants of totalitarianism include fascism,
authoritarianism and communism.
IV. THE IMPACT OF THE POLITICAL SYSTEM ON MANAGEMENT

DECISIONS
A. Political Risk
14
Political risk reflects the expectation that the political climate in a

foreign country will change in such a way that a firm’s operating position
will deteriorate.
1. Types and Causes of Political Risk. Political actions that may
adversely affect a firm’s operations would include government
takeovers of property, operational restrictions and damage to
property or personnel. In addition, civil unrest and disorder and
antagonistic external relations (including boycotts and other forms
of protest) may also negatively impact a firm’s operations.
2. Micro and Macro Political Risks. Micro political risks are those
aimed only at specific foreign investments (e.g., a particular
MNE), whereas macro political risks affect a broad spectrum of
foreign investors.
B. Government Intervention in the Economy
When companies move abroad, management must deal with
governments that may have different attitudes about their roles in their
respective economies—attitudes which may be inconsistent over time.
Under an individualistic paradigm the government believes in minimal
interference in the economy; it may intervene to deal with market defects
but generally promotes marketplace competition. Under a communitarian
paradigm, however, whether democratic (Japanese) or authoritarian
(Chinese) in nature, the government defines economic needs and priorities
and partners with business in major ways.
V. FORMULATING AND IMPLEMENTING POLITICAL STRATEGIES

Formulating political strategies may be more complicated than
formulating competitive marketplace strategies. Logical steps include: identifying
the issues, defining the nature of the issues, assessing the potential actions of
others, identifying key players, formulating alternative strategies, assessing the
potential impact of particular activities and selecting and implementing the most
appropriate strategy.
VI. THE LEGAL ENVIRONMENT
Managers must be aware of the legal systems in the countries in which
their firms operate, the basic nature of the legal profession (both domestic and
international) and the legal relationships that exist between and among countries.
Legal systems differ both in terms of the nature of the system and the degree of
independence of the judiciary from the political process.
A. Kinds of Legal Systems
1. Common Law. Common law originated in the United
Kingdom and is based upon tradition, precedent, custom and
usage; therefore, courts play an important role in interpreting the
law.
2. Civil Law. Civil law, also known as codified law, originated with
the Romans and is based upon a detailed set of laws that make up a
detailed code that includes rules for conducting business; courts
play an important role in applying the law.
3. Theocratic Law. Theocratic law is based upon religious precepts.

The best example is Islamic law, or Shair’a. The key for businesses
is to adhere to the constraints of ancient Islamic laws while
maintaining sufficient flexibility to operate in a modern global
economy.
15
B. Consumer Safeguards
Different legal systems provide varying safeguards with respect to
product liability and other legal issues. For example, access to and
assistance from the legal community, legal fees and the ability to use
foreign lawyers all differ across countries.
C. The Legal Profession
Although lawyers and law firms vary in terms of how they practice
law and service clients, MNEs must use lawyers for a variety of services,
such as negotiating contracts, formalizing agent-distributor relationships
and protecting intellectual property. Just as MNEs have expanded abroad
to take advantage of international business opportunities, law firms have
expanded abroad to service their clients. The key for managers doing
business overseas is to choose a law firm with the needed expertise and
overseas connections, whether through the company’s own offices, a
merger, or correspondent relationships.
D. Legal Issues in International Business
National laws may affect the business climate both within and
beyond a country’s borders and pertain to both domestic and foreign firms.
Areas addressed include health and safety standards, employment
practices, antitrust prohibitions, contractual relationships, environmental
practices, intellectual property, cross-border investment flows, tariffs and
non-tariff barriers, to name but a few. In addition, international treaties
among nations may also affect the nature and extent of business
operations.

Is “When in Rome, Do as the Romans Do” the Best Approach for Global Ethics?
Cultural relativism implies that there is no method for deciding whether particular
behavior is really appropriate. However, it is possible to do so by seeking justification for
that behavior; such justification is a function of cultural values (many of which are
universal), legal principles and economic practices. Some people argue the legal
justification for ethical behavior is the only truly important justification. However, that
argument is insufficient because not everything that is unethical is illegal. Moral as well
as legal concepts must be considered. Further, the law tends to be slow to develop in
emerging areas of business concern. In addition, both laws and legal systems vary among
countries. Civil law countries tend to have a large body of laws that specify legal
behaviors, while common law countries tend to rely more on precedent than statutory
regulations.

Will Democracy Survive?
There is a clear link between political and economic freedom and economic
growth. However, democracy does not necessarily mean stability; in fact, in a transition
economy political risk is often quite high. Some people argue if a country is to flourish as
a democracy, certain preconditions such as economic development must be present.
Others feel, however, that democracy is the result of having political leaders who exhibit
both the determination and the skills required to assure democratization occurs.
CLOSING CASE: Newmont Mining in Indonesia
1. What were the key political problems facing Mr. Lahti and Newmont Mining
in Indonesia?
2. How has the legal situation in Indonesia contributed to Newmont Mining’s
dilemma?
16
3. What are the environmental dimensions to gold mining in Indonesia, and whose
responsibility is it to protect the environment?
4. Evaluate Mr. Lahti’s approach to solving Newmont’s problems. Could he have
done anything differently?
Exercises: Political and Legal Factors

Exercise 3.1. Ask students to discuss the difficulties faced when a country
changes from a totalitarian to a democratic political system. Then have the
students compare the political transition of a large country such as Russia to the
transition of a smaller country such as Hungary. Ask whether political transition
has been a smoother process in one of the two countries and examine both the
differences and the similarities in the two processes.
Exercise 3.2. Ask students to identify companies, both domestic and foreign, that
operate internationally. Then ask the students to explore the possible sources of
political risk for each of those firms, given the countries in which they have a
presence and the nature of their products and operations. Be sure to consider both
the micro and macro types of risk.
17
Chapter 4
The Economic Environment
Objectives
1. Learn the criteria for dividing countries into different economic

categories.
2. Learn the differences among the world’s major economic systems.
3. Discuss key economic issues that influence international business.
4. Assess the transition process certain countries are undertaking in
changing to market economies—and how this transition affects
international firms and managers.
Chapter Overview
When companies source, produce and/or market products in foreign

countries, they often encounter challenging economic environments. Chapter 4
first considers the economic environments of countries in which an MNE might
want to operate by describing countries by income level and type of economic
system. Then it examines key macroeconomic indicators, such as economic
growth, inflation and the surpluses and deficits reflected in the balance of
payments. Finally, the process and progress of the transition to a market-based
economy by many former centrally planned and other countries is discussed.
Chapter Outline
OPENING CASE: McDonald’s Corporation in Emerging Markets

This case exemplifies the challenges of global expansion during times of
economic uncertainty as well as the risks of entering emerging markets. Despite
enormous start-up challenges, McDonald’s has done well in Russia and China.
On the other hand, it was forced to closed 163 unproductive stores
in Turkey, Malaysia and the Philippines in 2001 at a cost of $91 million. In
addition, the worldwide economic downturn continued to pressure McDonald’s
18
overall corporate profitability. To counter this trend, McDonald’s refocused its

expansion strategy by dedicating 60 percent of its efforts to the United
States, Canada and Europe, where economies are relatively stable and returns
are strong. Expansion will also continue in China, where growth potential is
enormous. The case concludes by pondering the extent of McDonald’s future
worldwide operations.
I. INTRODUCTION
Understanding the economic environments of foreign countries
and markets is vital to helping managers predict the ways in which
trends and events will likely affect their firms’ future performance there.
Questions to be addressed include both the size and the nature of the
market. Answers are often complex.
II. AN ECONOMIC DESCRIPTION OF COUNTRIES

Companies do business abroad for a variety of reasons. Factor
conditions (production factors) include essential inputs to the production
process such as human resources, physical resources, knowledge
resources, capital resources and infrastructure; they are crucial for
investments made for production purposes. Demand conditions (market
potential) include the composition of local demand (quality of demand),
the size and growth of local demand (quantity of demand) and the
internationalization of basic demand; they are crucial for market-seeking
investments. Location-specific advantages incorporate the combination
of factor and demand conditions, plus other relevant qualities.
A. Countries Classified by Income
Size of national demand is indicated by Gross National
Income (GNI), previously referred to as Gross National Product
(GNP). The broadest measure of economic
activity, GNI represents the market value of final goods and
services newly produced by domestically owned factors of
production. Gross Domestic Product (GDP) represents that value
of production that takes place within a nation’s borders, without
regard to whether the production is carried out by domestic or
foreign factors of production. Per capita GNI is computed by
dividing GNI by a country’s population. Because nominal
exchange rates (unadjusted market rates) do not always reflect
international differences in prices, purchasing power parity
(PPP) is used as an indicator of the number of units of a country’s
currency required to buy the same amounts of goods and services
in its domestic market. The World Bank refers to low- and
middle-income nations as developing countries, which are also
known as emerging countries (a term also used to describe the
capital markets in such countries). While developing countries in
Asia and Latin America are generally moving forward, those
19
in Africa are not making much progress. High-income nations are

referred to as developed or industrialized countries.
B. Countries Classified by Region
MNEs tend of organize their operations along geographic
lines. Major geographic regions of the world include: East Asia
and the Pacific, Europe and Central Asia, Latin America and the
Caribbean, the Middle East and North Africa, and Sub-Saharan
Africa.
C. Countries Classified by Economic System
Every government struggles with the right mix
of ownership and control of its economy. Ownership refers to the
ownership of resources engaged in economic activity—the public
sector (government), the private sector, or both. Control refers to
the allocation and control of resources engaged in economic
activity. Just as there is a relatively high correlation between
economic freedom and political freedom, there is also a relatively
high correlation between economic freedom and economic
growth.
1. Market Economy. A market economy is one in which
resources are primarily owned and controlled by the private
sector. Key factors include consumer sovereignty (the right
to choose what to buy), the freedom of market entry and
exit and the determination of prices according to the laws
of supply and demand.
2. Command Economy. A command economy (often

referred to as a centrally planned economy) is one in which
all dimensions of economy activity, including pricing and
production decisions, are determined by central
government planning authorities.
3. Mixed Economy. A mixed economy describes an

economic system characterized by a mixture of market and
command economies, including a combination of public
and private ownership. Market socialism is characterized
by the state ownership of significant resources, but the
allocation of those resources comes from the market price
mechanism, and prices are determined by the laws of
supply and demand.
III. KEY MACROECONOMIC ISSUES AFFECTING BUSINESS

STRATEGY
Macroeconomic factors can have a major impact on both the profitability
and the operating strategy of MNEs. Three key issues are economic
growth, inflation and surpluses and deficits.
A. Economic Growth
While history is often used to forecast future economic trends, it is
certainly not perfect. Further, there exists significant differences in
growth rates throughout the world. The direct impact of events
such as the Asian financial crisis, terrorist activities such as 9/11
and corporate scandals such as Enron and WorldCom spreads
20
quickly to international markets, but the effects are uneven. Thus,

future growth is bound to be variable by region, even in the
high-income countries.
B. Inflation
The inflation rate represents the percentage increase in the
change in prices from one period to the next, usually a year. A
common indicator of inflation is the consumer price index
(CPI), which measures the cost of a fixed basket of goods and
services and compares the price from one period to the
next. Inflation occurs because aggregate demand is growing faster
than aggregate supply. Ultimately it affects interest rates,
exchange rates, the cost of living and the general confidence in a
country’s political and economic systems.
C. Surpluses and Deficits

Internal and external deficits are important indicators of a
country’s economic strength and stability. Surpluses are rarely a
problem. An internal deficit indicates that a government’s

expenditures exceed its revenues; an external deficit indicates that
a country’s cash outflows (payments) exceed its inflows (receipts).
IV. TRANSITION TO A MARKET ECONOMY

Many countries are undergoing the transition from command
economies to market economies because of the failure of the central
planning process to generate satisfactory economic growth. In
general, transition implies the liberalization of economic activity, the
reallocation of resources to their most efficient use, macroeconomic
stabilization, the privatization of state-owned assets, budgetary
constraints and the development of an institution and legal framework to
protect property and individual rights.
A. The Process of Transition
The transition process can provide significant opportunities for
MNEs as markets are opened and foreign direct investment
opportunities expand. For Russia, the transition to a market
economy has been especially difficult because the government has
been trying to simultaneously change the country’s economic and
political systems. The Chinese transition has been much more
controlled—a change in that country’s political system is not part
of the process.
B. The Future of Transition

In the short-term, major challenges confronting the transition
economies will include continued macro stability, economic
growth, improvement in institutional and structural areas and the
solution of social issues such as poverty, child welfare and
21
HIV/AIDS. In the long-term, however, the challenges to the

transition economies will virtually be the same as those of other
developing economies.

How Much Economic Assistance Is Too Much?
A major issue of economic social responsibility concerns the obligation
of high-income countries to assist developing nations. There are several areas
of concern. First, in order to participate in the trade process, emerging
economies must have access to high-income markets, i.e., discriminatory
barriers should be abolished. Second, foreign aid can be used as a tool for
economic development, but not all people share that view. Third, the
forgiveness of loans to developing countries by high-income governments
could be part of the solution to the debt crisis. Such actions are appropriate for
governments, but it is unlikely that the private sector would participate in these
measures.

A Global Economy in the New Millennium
As the twenty-first century dawned, the global economy seemed to be
strengthening, but then a serious economic downturn in 2001-2002 threatened
continued growth. Because the U.S. accounts for nearly a third of the total
global economic activity, the rest of the world followed it into recession. Most
people are looking for recovery to occur in the U.S. and Europe in the
not-too-distant future, but Asia’s progress is expected to be slower because
of Japan’s recession and banking crisis. Latin American and African countries
look to the IMF for assistance in lowering inflation, reducing government
spending, and reducing their dependence upon foreign capital.
Exercise: Economic Realities
Exercise 4.1. Explain this statement. “As a country’s political system

changes from a more repressive to a more representative form of
government, its economic system will necessarily change as well.” Will
the complete privatization of all state-owned and controlled assets is
necessary for an economic transition to be successful.
22
Chapter 5
Ethics and Social Responsibility in International
Business
Objectives
1. Describe the nature of ethics

2. Discuss ethics in cross-cultural and international contexts
3. Identify the key elements in managing ethical behavior across borders
4. Discuss social responsibility in cross-cultural and international contexts
Chapter Overview
For most businesses, the ultimate goal is to bring in revenue and be the
best in their industry. However, achieving these goals at all costs is not always
ethical. Every business needs to have and uphold business ethics. Business
ethics are how companies conduct themselves in their practices and policies.
Companies that have failed in this area have been subject to losing customers
and bad publicity. Companies need to care about their employees and
customers. The decisions they make regarding ethics can impact not only many
23
people, but the company as well. These decisions are much bigger than trying
to decide whether or not to tell a lie.
Chapter Outline
I. Ethical Behavior
Ethical behavior usually refers to behavior that conforms to
generally accepted social norms.
Ethical Generalizations
▪ Individuals have their own personal belief systems
▪ People from the same cultural context will tend to hold similar beliefs
▪ Behaviors can be rationalized
▪ Circumstances affect adherence to belief systems
▪ National culture is intertwined with ethics
Figure 5.1 Ethics in a Cross-Cultural Context
II. How an organization treats its employees:

● Hiring and firing practices
● Wages and working conditions
● Employee privacy and respect
How employees treat the organization:
● Conflicts of interest
● Secrecy and confidentiality
● Honesty
III. Guidelines and Codes of Ethics

Written statements of the values and ethical standards that guide the firm’s
actions.
Areas of Social Responsibility:
▪ Organizational stakeholders
▪ Natural environment
▪ General social welfare
IV. Approaches to Social Responsibility

▪ Obstructionist Stance- Do as little as possible to address social or environmental
problems. Deny or avoid responsibility
24
▪ Defensive Stance- Do what is required legally, but nothing more. Corporate

responsibility is to generate profits
▪ Accomodative Stance- Meet ethical and legal requirements and more. Agree to
participate in social programs. No proactive behavior to seek such opportunities
▪ Proactive Stance- Strong support of social responsibility. Seek opportunities to
contribute and viewed as citizens of society
V. Managing Social Responsibility
VI. Formal Organizational Dimensions in implementing Social Responsibility

▪Legal Compliance
▪Ethical Compliance
▪Philanthropic Giving
Informal Dimensions of Social Responsibility:

▪ Leadership
▪ Organizational culture
▪ Whistle-blowing
VII. Corporate Social Audit

Tool for the evaluation of social responsibility effectiveness. A formal and
thorough analysis of the firm’s social performance conducted by task force of
high-level managers.
25
Case Digest:
KFC entered India in 1995 and has been in midst of controversies since then. The
regulatory authorities found that KFC's chickens did not adhere to the Prevention of Food
Adulteration Act, 1954. Chickens contained nearly three times more monosodium
glutamate (popularly known as MSG, a flavor enhancing ingredient) as allowed by the
Act. Since the late 1990s, KFC faced severe protests by People for Ethical Treatment of
Animals (PETA), an animal rights protection organization. PETA accused KFC of cruelty
towards chickens and released a video tape showing the ill-treatment of birds in KFC's
poultry farms. However, undeterred by the protests by PETA and other animal rights
organizations, KFC planned a massive expansion program in India.
1. Determine the problem and issues of KFC as it enter the market in India.
2. If you were the manager, how will you address the issues and the problems that
KFC is facing on? Elaborate.
3. Make a SWOT analysis for KFC. Determine which of its strengths or opportuities
could better solved the issues.
Chapter 6
International Trade
Objectives
1. Explain trade theories.
2. Discuss how to increase global efficiency through free trade.
3. Introduce prescriptions for altering trade patterns.
4. Explore how business decisions influence international trade.
Chapter Overview
Foreign trade is an age-old phenomenon. Chapter 5 examines many of the
descriptive and prescriptive theories associated with this process. Beginning with
Mercantilism, the chapter presents the concepts of absolute and comparative advantage,
26
factor proportions theory and country size and country similarity theories. It also
discusses the international product life cycle and Porter’s determinants of national
competitive advantage. The chapter concludes with a discussion of the strategic reasons
firms participate in the international trade process.
Chapter Outline
OPENING CASE: Sri Lankan Trade
This case describes the pivotal role of international trade in the development of
the Sri Lankan economy. An island nation of nearly 20 million people, the country’s trade
activities date back to the middle of the third century. During the colonial period, the
Portuguese sought Ceylonese spices, and then the British developed tea, rubber and
coconut plantations. Since receiving its independence from the UK in 1948, Sri
Lanka has looked to international trade to help solve such interrelated problems as its
shortage of foreign exchange, its overdependence on exports of tea and on the British
market and the insufficient growth of output and employment. Specifically, Sri Lanka has
been guided by four different trade policies: a liberal approach of noninterference in trade
from 1948-1960, a policy of import substitution from 1960-1977, the combination of
strategic trade policy guided by import substitution from 1977-1988 and the
implementation of strategic trade policy combined with an openness to imports from
1988 to the present. The move to establish strategic export industries has accomplished
many of Sri Lanka’s objectives; manufacturing now accounts for 70 percent of its
exports, and tea is increasingly being exported in value-added forms.
I. INTRODUCTION
Foreign trade (importing and exporting activities) is one means by which
countries are linked economically. Two general types of trade theories pertain to
international business. Descriptive theories deal with the natural order of trade;
they examine and explain patterns of trade
under laissez-faire conditions. Prescriptive theories deal with the question of
whether governments should seek to alter the amount, composition and/or
direction of trade.
II. MERCANTILISM
The concept of mercantilism (a zero-sum game) was popular from about
1500-1800; it purports that a country’s wealth is measured by its holdings of
treasure (usually gold). To amass a surplus (a favorable balance of trade) a
country must export more than it imports and then collect gold (and other forms
of wealth) from countries that run a deficit (an unfavorable balance of
trade). Neomercantilism represents the more recent policy of countries that try to
run a favorable balance of trade in order to achieve some particular national
objective via protectionism.
III. ABSOLUTE ADVANTAGE

In 1776 Adam Smith claimed the wealth of a nation consisted of the goods
and services available to its citizens. His theory of absolute advantage holds that
a country can maximize its own economic well being by specializing in the
production of those goods it can produce more efficiently than any other nation
and enhance global efficiency through its participation in (unrestricted) free trade.
A. Natural Advantage
A country may have a natural advantage in the production of particular
products because of given climatic conditions, access to certain natural
resources, the availability of needed labor forces, etc.
27
B. Acquired Advantage
An acquired advantage represents a distinct advantage in skills,
technology and/or capital assets, thus yielding differentiated product
offerings and/or cost-competitive homogeneous products.
C. Resource Efficiency Example

Real income depends on the output of goods as compared to the resources
used to produce them. The production possibilities curve shows that by
specializing and trading, two countries can have more than they would
without trade, thus optimizing global efficiency.
IV. COMPARATIVE ADVANTAGE
In 1817 David Ricardo reasoned there would still be gains from trade if a
country specialized in the production of those things it can produce most
efficiently, even if other countries can produce those things even more efficiently.
Put another way, Ricardo’s theory of comparative advantage holds that a country
can maximize its own economic well-being by specializing in the production of
those goods it can produce relatively efficiently and enhance global efficiency
through its participation in (unrestricted) free trade.
A. An Analogous Explanation of Comparative Advantage
Would it make sense for the best physician in town, who also happens to
be the most talented medical secretary, to handle all of the administrative
duties of an office? No. The physician can maximize both output and
income by working as a physician and employing a secretary. In the same
manner, a country will gain if it concentrates its resources on the
production of those products it can produce most efficiently.
B. Production Possibility Example [See Figure 5.3]

A country can simultaneously have a comparative advantage and
an absolute disadvantage in the production of a given product. Assume
that the United States is more efficient than Sri Lanka in the production of
both wheat and tea. However, the United States has a comparative
advantage in wheat production. By concentrating on the product in which
it has the greater advantage (wheat) and letting Sri Lanka produce the
product in which the U.S. is comparatively less efficient (tea), global
output can be increased, and specialization and trade can benefit both
countries.
V. SOME ASSUMPTIONS AND LIMITATIONS OF THE THEORIES OF

SPECIALIZATION
The theories of absolute and comparative advantage are based upon the
economic gains from specialization, i.e., concentration on the production of a
limited number of products. Each holds that specialization will maximize output
and that subsequent trade will maximize consumer welfare. However, both
theories make certain assumptions that may not always be valid.
A. Full Employment
Both theories assume that resources are fully employed. When countries
have many un- or under-employed resources, they may seek to restrict
imports in order to employ their own available workers and other assets.
B. Economic Efficiency Objective

Countries often pursue objectives other than economic efficiency. For
example, they may intentionally avoid overspecialization because of the
28
vulnerability created by potential changes in technology and price

fluctuations.
C. Division of Gains
Although specialization does maximize output, it is unclear how those
gains will be divided. If one country perceives a trading partner as
receiving too large a share of the benefits, it may choose to forego its
relatively small gains in order to prevent the other country from receiving
large gains.
D. Two Countries, Two Commodities

The world is comprised of multiple countries and multiple commodities.
Nonetheless, the theories are still useful; economists have applied the same
reasoning and demonstrated the economic efficiency advantages in multi-product
and multi-country production and trade relationships.
E. Mobility
Neither the assumption that resources can move domestically from the
production of one good to another and at no cost, nor the assumption that
resources cannot move internationally, is entirely valid. Nonetheless,
domestic mobility is greater than the international mobility of resources.
Clearly, the movement of resources such as labor and capital is an
alternative to trade.
F. Statics and Dynamics

Although the theories of absolute and comparative advantage consider
gains at a given time (a static view), the relative conditions that surround a
country’s advantage or disadvantage are dynamic (constantly changing).
Thus one cannot assume future advantages will remain constant.
E. Services
Although the theories of absolute and comparative advantage were
developed from the perspective of trade in commodities, much of the same
reasoning can be applied to trade in services.
VI. THE THEORY OF COUNTRY SIZE

The theory of country size holds that large countries are more apt to have
varied climates and natural resources, and therefore will generally be more nearly
self-sufficient than small countries. Research based on country size helps explain
the country-by-country differences regarding how much and what products will
be traded through specialization that are not dealt with by the theories
of absolute and comparative advantage.
A. Variety of Resources
Large countries are more apt to have varied climates and a greater
assortment of natural resources than smaller countries, thus making the
large countries more self-sufficient.
B. Transport Costs
Given the same types of terrain and modes of transportation, the greater
the distance, the higher transport costs will be. Thus certain firms in large
countries may face higher transportation costs in terms of serving their
distant national markets than do their closer foreign competitors.
C. The Size of the Economy and Production Scales
29
Countries with large economies and high per capita incomes are more
likely to produce goods that use technologies requiring long production
runs. These countries develop industries to serve their large domestic
markets, which in turn tend to also be competitive in export markets. On
the other hand, given its capacity the technologically intensive company
from a small nation may have a compelling need to sell abroad. In turn,
this need would pull resources from other industries within the firm’s
domestic market, thereby causing more national specialization than in a
larger nation.
VII. THE FACTOR-PROPORTIONS THEORY
The Heckscher-Ohlin theory of factor endowment is useful in extending

the concept of comparative advantage by bringing into consideration a nation’s
endowment and cost of factors of production. The theory holds that a country will
tend to export products that utilize factors of production relatively abundant in
that nation.
A. Land-Labor Relationship
In countries with many people relative to the size of the available land,
labor would be relatively (comparatively) cheap; thus those countries
should concentrate on producing and exporting labor-intensive goods.
B. Labor-Capital Relationship
In countries where little capital is available for investment and where the
amount of investment per worker is low, then low labor rates would also
be expected. Again, those countries should concentrate on producing and
exporting labor-intensive goods. (The fact that labor skills tend to vary
across countries has led to international task specialization with respect to
national production activities.)
C. Technological Complexities
Factor proportions analysis becomes complicated when the same product
can be produced by different methods, such as with different mixes of
labor and capital. Managers must consider the cost in each locale, based
on the type of production that will minimize costs there.
VIII. THE PRODUCT LIFE CYCLE THEORY OF TRADE

Vernon’s international product life cycle (PLC) describes how the location of
production and trade activities shifts as a product moves through its life cycle.
A. Changes through the Cycle
A great majority of the new technology that results in new products and
production methods originates in industrial countries.
1. Introduction. Innovation, production and sales occur in the
domestic (innovating) country. Because the product is not yet
standardized, the production process tends to be relatively labor
intensive, and innovative customers tend to accept relatively high
introductory prices.
2. Growth. As demand grows, competitors enter the market. Foreign
demand, competition, exports and often direct investment activities
also begin to accelerate.
3. Maturity. Global demand begins to peak, production processes
are relatively standardized and global price competition forces
production site relocation to lower cost developing countries.
30
4. Decline. Market factors and cost pressures dictate that almost all
production occur in developing countries. The product is then
imported by the country where it was initially developed.
B. Verification and Limitations of the PLC Theory
Exceptions to the typical pattern of the international product life cycle
would include: products that have very short life cycles, luxury goods,
products that require specialized labor, products that can be differentiated
and products for which transportation costs are relatively high.
IX. COUNTRY SIMILARITY THEORY

Previously examined theories would lead one to conclude that the greater
the dissimilarity among countries, the greater the potential for trade. However,
the country similarity theory states that when a firm develops a new product in
response to observed conditions in the home market, it is likely to turn to those
foreign markets that are most similar to its domestic market when commencing its
initial international expansion activities.
A. The Economic Similarity of Industrial Countries
So much trade takes place among industrialized countries because of the
growing importance of acquired advantage (skills and technology). In
addition, markets in most industrialized countries are large enough to
support new product introductions and their subsequent variants across the
life cycle.
B. The Similarity of Location

Countries that are near to each other enjoy relatively lower transportation
costs than those that are more distant. While the disadvantages of distance
may be overcome through innovative technology and marketing methods,
such gains are difficult to maintain in the long run.
C. Cultural Similarity
Cultural similarity as expressed through language and religion is a major
facilitator of the international trade and investment process.
D. The Similarity of Political and Economic Interests

Countries that agree politically and are economically similar are likely to
encourage trade among themselves. In some circumstances at least, they
may also discourage trade among countries with whom they disagree.
X. DEGREE OF DEPENDENCE
Theories of independence, interdependence and dependence help explain world
trade patterns and countries’ trade policies. Realistically, countries are located
along a continuum between the two extremes.
A. Independence
Under conditions of independence, a country would not rely on other
countries for any goods, services, or technologies.
B. Interdependence
One way a country can limit its vulnerability to foreign changes is
through interdependence, i.e., the development of trade relationships on
the basis of mutual need. Each country depends about equally on the other
as a trading partner, so neither is likely to cut off supplies or markets for
fear of retaliation from the partner nation.
C. Dependence
Many developing countries are dependent (rely on) on the sale of one
primary commodity, or on one country as a primary customer and/or
supplier. In addition, emerging economies largely depend on production
processes that compete on the basis of low-wage inputs.
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XI. STRATEGIC TRADE POLICY

Governments have long debated their roles in affecting the acquired
advantage of production within their borders. From the standpoint of national
competitiveness, the issue revolves around the development of successful
industries. The two basic approaches to strategic trade policy are (a) alter
conditions that will affect industry in general or (b) alter conditions that will affect
a targeted industry.
XII. WHY COMPANIES TRADE INTERNATIONALLY

Regardless of the advantages a country may gain by trading, international
trade will not ordinarily occur unless companies within that country have
competitive advantages and perceive that international opportunities are greater
than domestic ones.
A. The Porter Diamond
In addition to the four determinants of national competitive advantage that
are set forth in the Porter diamond, the roles of chance and government
are also critical. Usually all four determinants need to be favorable if a
given national industry is going to attain global competitiveness.
1. Demand Conditions. The nature and size of demand in the home
market lead to the establishment of production facilities to meet
that demand.
2. Factor Conditions. Resource availability (inputs, labor, capital
and technology) contributes to the competitiveness of both firms
and nations that compete in particular industries.
3. Related and Supporting Industries. The local presence of
internationally competitive suppliers and other related industries
contributes to both the cost effectiveness and strategic
competitiveness of firms.
4. Firm Strategy, Structure and Rivalry. The creation and
persistence of national competitive advantage requires
leading-edge product and process technologies and business
strategies.
B. Points and Limitations of the Porter Diamond
The existence of the four favorable conditions often represents a necessary
but not a sufficient condition for the development of a particular national
industry. Even when abundant, resources are ultimately limited, thus firms
must make choices regarding their pursuit of existing opportunities.
Further, given the ability of firms to gain market information and
production inputs from abroad, the absence of any of the four conditions
within a country may be overcome by their existence internationally.
XIII. COMPANIES’ ROLE IN TRADE

International trade occurs because of the completion of mutually satisfactory
transactions between or among importers and exporters.
A. Strategic Advantages of Exports
The strategic advantages of exports include the utilization of excess
capacity (that in turn leads to improved economies of scale and cost
competitiveness), the potential profitability due to the nature of demand
and government policies found in foreign markets, as well as overall
business risk minimization.
B. Strategic Advantages of Imports
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The strategic advantages of imports include lower-cost, higher-quality

products, product line differentiation and expansion opportunities and
overall business risk minimization.
ETHICAL DILEMMA:
Values, Free Global Trade and Production Standards—A Hard Trio to Mix
The debate over laissez-faire versus activist government trade policies is
generally a heated one because different country values underlie differing views and
government policies. The argument for free trade policy is based on the achievement of
global economic efficiency, but the associated social and environmental values may differ
across countries and cultures. Ethical questions center on whether (a) all countries should
have similar production standards and (b) firms should be permitted to locate production
activities in countries whose lower standards allow them to realize lower costs.

Companies Adjust to Changing Trade Policies and Conditions
Firms have greater opportunities to pursue global strategies and capture economies of
scale by serving markets in more than one country from a single base of production if
those countries have relatively few restrictions on foreign trade and investment activities.
Current issues concern the future of trade relationships between industrialized and
developing countries, as well as the concept of national sovereignty. At least four factors
might cause merchandise trade to become relatively less significant in the future:
● the growing tide of protectionist sentiment
● the possibility of more efficient country-by-country production
● increasingly flexible and efficient small-scale production methods
● the rapid growth of services as a portion of production and consumption within
the industrialized nations.
CLOSING CASE: The Indian Cashew Processing Industry (Link for case:
https://www.oatext.com/Indian-cashew-food.php#gsc.tab=0)
1. What trade theories help to explain where cashew tree products have been
produced historically?
2. What factors threaten India’s future competitive position in cashew nut

production?
3. If you were an Indian cashew producer, what alternatives might you consider to
maintain future competitiveness?
Exercises: The International Trade Process

Exercise 5.1. The concepts of absolute and comparative advantage and
the international product life cycle all deal with the composition of trade, i.e.,
explanations as to what products are traded by given nations. Discuss the
likelihood that (a) an innovating country, (b) another industrialized country and
(c) a developing country would enjoy an absolute advantage, a comparative
advantage, or no particular advantage as a product moves through each of the
stages of the international product life cycle.
Exercise 5.2. The factor proportions theory and the theory of country
similarity both deal with patterns of trade, i.e., national trading partners. Compare
and contrast the two theories, i.e., in what ways are they complementary and in
what ways do they differ?
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Chapter 7
Trade Protectionism
Objectives
1. Explain trade Protectionism.
2. Discuss economic rationale for government intervention and its effect on trade.
3. Determine how protectionism affects the different economic factor on a country
Chapter Overview
Trade protectionism is re-emerging as a controversial tactic among policymakers
and economists in enhancing a nation’s economic well-being. Trade protectionism has
been used with the intent of helping a nation recover from an economic downturn.
However, in many instances the opposite effect occurred in which not just one but many
nations suffered economic setbacks such as a recession or even a depression. In order to
understand trade protectionism, it is necessary to know why it is done and what the
effects are on an economy.
Chapter Outline
I. Protectionism is a policy that affect the ability of foreign producers to

compete in your home market and limit or enhance your company’s ability to
sell abroad or acquire needed foreign supplies. While free trade is beneficial,
in reality all countries regulate the flow of goods and services across their
borders. Governments want to help companies that are struggling, but it’s
difficult to do so without hurting those that are doing well.
II. The Physical and Social Factors Affecting Flow of Goods
III. Conflicting Results of Trade Policies

Government officials use trade policy to try to achieve economic, social,
and political goals. However, their efforts are hampered by uncertain and
conflicting policy outcomes, as well as the goals of special interest groups.
🞐 Governments intervene in trade to achieve economic, social, and political goals
🞐 Policymakers are challenged by:
■ conflicting objectives
■ interest groups
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IV. Governments intervene in trade to achieve economic, social, and political

goals Policymakers are challenged by conflicting objectives interest groups.
The Role of Stakeholders
🞐 Proposed policies on trade spark debate
🞐 Stakeholders include
■ Workers
■ Owners
■ Suppliers
■ Local politicians
🞐 Consumers usually don’t care
V. Economic Rationales for Government Intervention
Why governments intervene in trade
a. Economic rationales
i. Fighting unemployment
ii. Protecting infant industries
iii. Promoting industrialization
iv. Improving comparative position
b. Non-economic rationales
i. Maintaining essential industries
ii. Promoting acceptable practices abroad
iii. Maintaining or extending spheres of influence
iv. Preserving national culture
VI. Fighting Unemployment
Unemployed people are one of the most effective pressure groups for
restrictions on imports. But, trying to fix employment problems using trade
policy can create new challenges. Costs that are often associated with import
restrictions include higher prices and higher taxes. Governments must
balance the potential for these costs with the benefits of creating new jobs.
Fiscal and monetary policies may be more effective at correcting
unemployment problems
🞐 The unemployed are the most effective pressure group
🞐 But, import restrictions
■ can lead to retaliation by other countries
■ are less likely retaliated against effectively by small economies
■ are less likely to be met with retaliation if implemented by small
economies
■ may decrease export jobs because of price increases for components
■ may decrease export jobs because of lower incomes abroad
VII. Protecting ‘Infant Industries’

According to the infant industry argument, production becomes more
competitive over time because of increased economies of scale and greater
work efficiency. Therefore, if an emerging industry is protected during its
infancy it has a greater chance for success. Many developing countries use
this argument as a rationale for implementing protectionist policies. Keep in
mind though that production costs may never fall far enough to make an
industry competitive making it important to clearly identify those industries
with the greatest chance for success. Even then, because of the costs
involved, protectionism may not be automatic.
35
VIII. Developing an Industrial Base

Countries promote industrialization because it:
a. brings faster growth than agriculture
b. brings in investment funds
c. diversifies the economy
d. creates growth in manufactured goods
e. reduces imports and promotes exports
f. helps the nation-building process
Generally, countries with higher per capita GDP have larger manufacturing bases.
So, countries that are trying to develop an industrial base may intervene in trade flows.
The United States for example, has restricted imports to grow its manufacturing base.
IX. Two types of trade controls
1. those that indirectly affect the amount traded by directly influencing prices
of exports or imports
2. those that directly limit the amount of a good that can be traded
X. Tariffs (refer to a government levied tax on goods shipped internationally)

directly influence prices, while nontariff barriers affect either price or quantity.
When a country assesses a tariff on a per unit basis it’s applying a specific
duty. A tariff that’s assessed as a percentage of the item’s value is an ad
valorem tariff. A compound duty is due when both a specific and an ad
valorem tariff are assessed.
Tariffs may be levied:
a. on goods entering, leaving, or passing through a country
b. for protection or revenue
c. on a per unit basis or a value basis
i. export tariffs
ii. transit tariffs
iii. import tariffs
Exercises: Trade Protectionism

Answer the following question.
1. Explain why a certain country should undergo trade protectionism. State a certain
instance wherein trade protectionism is beneficial on a country’s economy.
36
Chapter 8
Country Evaluation and Selection
Objectives
1. Discuss company strategies for sequencing the penetration of countries and for
committing resources.
2. Explain how clues from the environmental climate can help managers limit
geographic alternatives.
3. Examine the major variables a company should consider when deciding whether
and where to expand abroad.
4. Provide an overview of methods and problems when collecting and comparing
information internationally.
5. Describe some simplifying tools for determining a global geographic strategy.
6. Introduce how managers make final investment, reinvestment and divestment
decisions.
Chapter Overview
The country evaluation and selection process determines the geographical
opportunities firms choose to pursue. Chapter 13 first discusses the challenges of
marketing and production site location. It goes on to carefully examine the process by
describing the choice and weighting of variables used for opportunity and risk analysis as
well as the inherent problems associated with data collection and analysis. The chapter
then introduces the use of grids and matrices for country comparison purposes, discusses
resource allocation possibilities and concludes by noting the different factors considered
as part of start-up, acquisition and expansion decisions.
Chapter Outline
OPENING CASE: Carrefour
This case explores the location, pattern and reasons for Carrefour’s international
operations. Carrefour opened its first store in 1960 and is now the largest retailer in
Europe and Latin America and the second largest worldwide. Its stores depend on food
items for nearly 60 percent of sales and on a wide variety of non-food items for the
remainder. Worldwide Carrefour has five different types of outlets: hypermarkets,
supermarkets, hard discount stores, cash-and-carry stores and convenience stores.
Country selection criteria include a country’s economic evolution, sufficient size to
justify additional store locations and the availability of a viable partner. Aside from
financial resources, Carrefour brings to a partnership expertise on store layout, clout in
dealing with global suppliers, highly efficient direct e-mail links with suppliers and the
ability to export unique bargain items from one country to another. Recently, Carrefour
has used acquisition as a way to capture additional scale economies. Carrefour depends
primarily on locally produced goods but also engages in global purchasing when capable
suppliers are found. Whether Carrefour can ultimately succeed as a global competitor
without a significant presence in the U.S. and the U.K. remains to be seen.
I. INTRODUCTION
37
Because companies lack the resources to take advantage of all international

opportunities they identify, they must determine both the order of country entry as
well as the rates of resource allocation across countries.
II. CHOOSING MARKETING AND PRODUCTION SITES, AND

GEOGRAPHIC STRATEGY
In choosing geographic sites, a firm must determine both where to market
and where to produce. The answer can be one and the same place if transportation
costs are high and/or government regulations make local production a necessity.
In many industries, facilities must be located near foreign customers; in others,
market and production sites are continents away. Developing a site location
strategy that helps a firm maximize its resources and competitive position is very
challenging, given that many estimates and assumptions about factors such as
future costs and prices and competitors’ reactions must be made.
III. SCANNING FOR ALTERNATIVE LOCATIONS

Scanning is useful insofar as a company might otherwise consider either
too few or too many possibilities. Through the use of scanning, decision makers
can perform a detailed analysis of a manageable number of geographic locations.
IV. CHOOSING AND WEIGHTING VARIABLES

To evaluate and compare countries, scanning techniques based on broad
environmental variables that identify both opportunities and risks should be used.
Ultimately, variables must be weighed against each other to effectively evaluate
the potential success of a particular venture and to compare various ventures.
A. Opportunities
Opportunities are determined by competitiveness and profitability factors.

Variables weighing heavily on the selection of market and production sites
would include market size, ease and compatibility of operations, costs,
resource availability and red tape.
1. Market Size. Market size is determined by sales potential. In
some instances, past and current sales for either an existing product
or a similar or complementary product are available on a
country-by-country basis. In addition, data such as GNP, per capita
income, population, income distribution, economic growth rates
and levels of economic development will also be useful.
2. Ease and Compatibility of Operations. Companies are naturally
attracted to countries that are located nearby, share the same
language and offer market conditions similar to those in their home
countries. Beyond that, proposals may then be limited to those
countries that offer, among other factors, the appropriate plant size,
the local availability of resources, an acceptable percentage of
ownership and the sufficient repatriation of profits. However, the
more time, money and energy a firm expends in examining a
particular alternative, the more likely it is to accept it, regardless of
its merits. This situation is known as the escalation of
commitment. Feasibility studies should have clear decision points
that prevent such a situation from occurring.
3. Costs and Resource Availability. Costs are a critical factor in
production-location decisions. Productivity-related factors include
the cost of labor, the cost of inputs, tax rates, and available capital,
utilities, real estate and transportation. Often firms need to be
located near suppliers and customers in an area where
infrastructure will allow them to move supplies and finished
products very efficiently. If a given production site will be used to
38
serve multiple markets, the cost and ease of moving materials and
products in and out the country will be especially important.
4. Red Tape. Red tape (disincentives) includes the difficulty of
getting permission to operate, bringing in expatriate personnel,
obtaining licenses to produce and market goods and satisfying
government agencies on matters such as taxes, labor conditions
and environmental compliance. Although not a directly measurable
cost, red tape increases the cost of doing business.
B. Risks
Is it ever rational for a firm to invest in a country with
high economic and political risk ratings? Such questions must be carefully
weighed when making international capital-investment decisions.
1. Risk and Uncertainty. Firms usually experience higher risk and

uncertainty when they operate abroad. In fact, the liability of
foreignness refers to the fact that foreign firms have a lower rate of
survival than local firms for the initial years after the start of
operations. However, those foreign firms that manage to overcome
their initial problems have long-term survival rates comparable to
those of local firms. Firms use a variety of financial techniques to
compare potential investments, including discounted cash flows,
economic value added, payback period, net present value, return on
sales, return on equity, return on assets employed, internal rate of
return and the accounting rate of return. Given the same expected
return, most decision makers prefer a more certain outcome to a
less certain one. Often firms may choose to reduce risk through
some form of insurance. As part of a feasibility study, the degree of
acceptable risk should be determined so a firm does not incur
unacceptable costs.
2. Competitive Risk. A firm’s innovative advantage may be
short-lived, particularly if a country offers little protection with
respect to intellectual property rights. When pursuing a strategy
known as imitation lag, a firm moves first to those countries most
likely to adapt and catch up to the advantage. In some instances
firms may seek those countries where they are least likely to
confront significant competition; in others they may gain
advantages by moving into countries where competitors are
already present. Firms may also seek “clusters” like Silicon
Valley that attract multiple suppliers, customers and highly trained
personnel in order to gain access to new products, technologies and
markets.
3. Monetary Risk. If a firm’s expansion occurs through
foreign-direct investment, foreign-exchange rates and access to
investment capital and earnings are key considerations. Liquidity
preference refers to the theory investors want some of the holdings
to be in highly liquid assets on which they are willing to take a
lower return. Firms must carefully evaluate a country’s present
capital controls, recent exchange-rate stability,
balance-of-payments account, inflation rate and level of
government spending.
4. Political Risk. Political risk reflects the expectation the political
climate in a given country will change in such a way that a firm’s
operating position will deteriorate. It relates to changes in political
leaders’ opinions and policies, civil disorder and animosity
between a home and host country. When evaluating political risk,
decision makers refer to past patterns in a given country, expert
39
opinions and country analysts. They also look for economic and
social conditions that could lead to political instability, but there is
no consensus as to what constitutes dangerous instability or how it
can be predicted.
V. COLLECTING AND ANALYZING DATA

Firms perform research to reduce uncertainties in their decision processes,
to expand or narrow the alternatives they consider and to assess the merits of their
existing programs. The costs of data collection should always be weighed against
the probable payoffs in terms of revenue gains or cost savings.
A. Problems with Research Results and Data
Numerous countries have agreed to standards for collecting and publishing
various categories of national data. However, the lack, obsolescence and
inaccuracy of data on other countries can make research difficult and
expensive to undertake. Further, data discrepancies further increase
uncertainty in decision-making.
1. Reasons for Inaccuracies. For the most part, incomplete or
inaccurate data result from the inability of governments to collect
the needed information. Both economic and educational factors
will affect the quantity and quality of available data. Of equal
concern, however, is the publication of false or purposely
misleading information, as well as the non-reporting or
under-reporting of information people wish to hide or distort.
2. Comparability Problems. Comparability problems result from
definitional differences across countries (e.g., family categories,
literacy levels, accounting rules), differences in base years,
distortions in foreign currency conversions, the measurement of
investment flows, the presence of black market activities, etc.
B. External Sources of Information
Both the specificity and cost of information will vary by source.
1. Individualized Reports. Market research and business consulting
firms conduct country studies for a fee. The fact that a firm can
specify the information it wants may make the cost worthwhile.
2. Specialized Studies. Certain research organizations generate
specific studies about countries, regions, industries, issues, etc.,
that they make available for general purchase. The price is much
lower than for an individualized study.
3. Service Companies. Most international service-related firms
publish reports that are usually geared toward either the conduct of
business in a given country or region or about some specific
subject of general interest, such as tax or trademark legislation.
4. Government Agencies. Governments and their agencies publish
tomes of information designed to stimulate business activity both
at home and abroad.
5. International Organizations and Agencies. The United Nations,
the World Trade Organization, the International Monetary Fund,
the World Bank (IBRD) and the Organization for Economic
Cooperation and Development are but a few of the multilateral
organizations and agencies that collect and disseminate data. Many
of the international development banks even help fund investment
feasibility studies.
6. Trade Associations. Many trade associations collect, evaluate
and disseminate a wide variety of data dealing with competitive
and technical factors in their industries. Their reports may or may
not be available to non-members.
40
7. Information Service Companies. Certain companies offer

information-retrieval services; they maintain databases from
hundreds of sources from which they will access data for a fee.
8. The Internet. The quantity of information available via the
Internet is increasingly extensive. As with other sources, a
researcher must be concerned about the reliability and validity of
information gathered from Internet sources.
C. Internal Generation of Data
When firms have to conduct studies in foreign countries, they may
find traditional data gathering and analytical methods do not reveal critical
insights. In that case, a researcher must be extremely imaginative and
observant. In some instances, useful information may be found by
analyzing indirect or complementary indicators.
C. Environmental Scanning
Environmental scanning provides a systematic assessment of external
conditions that might affect a firm’s operations. For country assessment,
firms will likely collect economic, competitive, societal and political/legal
information.
VII. ALLOCATING AMONG LOCATIONS

Over time, most of the value of a firm’s FDI comes from reinvestment. Thus, in
deciding where to invest, firms must consider whether to reinvest or harvest, to
what degree there is interdependence among their locations and whether they
should diversify or concentrate their activities.
A. Reinvestment vs. Harvesting
Once a firm makes an initial investment, it will then need to decide
whether to continue investing in that operation or to harvest the earnings
(and possibly divest the assets) and use them elsewhere.
1. Reinvestment Decisions. Reinvestment refers to the use of
retained earnings to replace depreciated assets or to add to a firm’s
existing stock of capital. Aside from competitive factors, a
company may need several years of almost total reinvestment (and
often allocation of additional funds) in order to realize its
objectives at a given location.
2. Harvesting. Harvesting refers to the reduction in the amount of an

investment; a firm may choose to simply harvest the earnings of an
operation or divest the assets there as well. If an operation no
longer fits a company’s overall strategy, or if better opportunities
exist elsewhere, it must determine how to exit that operation.
When selling or closing facilities, firms must consider possible
government performance contracts as well as potential adverse
publicity, plus the possible difficulty in re-establishing operations
in that country in the future.
B. Interdependence of Locations
It is often difficult to assess the true impact a particular foreign subsidiary
has on other operations within an MNE if several operations are
interdependent. In the case of intra-firm sales, transfer pricing strategy
will definitely affect the relative profitability of one unit as compared to
another. Likewise, the net value of a particular operation may be similarly
distorted for corporate profit maximization purposes.
C. Geographic Diversification vs. Concentration
A firm may take different paths en route to gaining a sizable presence in
most countries. At one end of the spectrum is geographic
diversification, whereby a firm moves rapidly into many foreign countries
and then gradually builds its presence in each. At the other end of the
41
spectrum is geographic concentration, whereby a firm moves into a

limited number of countries and develops a strong competitive position
there before moving into others. When deciding which strategy, or perhaps
some hybrid of the two, is desirable, a firm must consider a number of
variables.
1. Growth Rate in Each Market. When the growth rate in each
market is high, a firm will likely concentrate on a few markets
because of the cost of keeping up with market expansion.
2. Sales Stability in Each Market. The more stable sales and
profits are within a single market, the less advantageous
a diversification strategy will be.
3. Competitive Lead Time. Sequential entry into multiple markets
is more common than simultaneous entry. If a firm has a long lead
time before competitors can copy or supercede its advantages, then
it may be able to follow a concentration strategy and still beat
competitors to other markets.
4. Spillover Effects. Spillover effects represent situations in which a
marketing program in one country results in the awareness of a
product in other countries. When a single marketing program can
reach many countries (via cross-country media, for example),
a diversification strategy is advantageous.
5. Need for Product, Communication and Distribution
Adaptation. When companies find it necessary to alter products,
promotion and/or distribution strategies in foreign markets,
a concentration strategy will be advantageous because the
associated costs cannot be spread over sales in other countries to
capture economies of scale.
6. Program Control Requirements. The more a company needs
control over a foreign operation, the more appropriate
a concentration strategy because additional resources will be
required to maintain that control.
7. Extent of Constraints. When a firm is constrained by limited
resources, it will likely follow a concentration strategy because
spreading resources too thinly can be a recipe for failure.
VIII. MAKING FINAL COUNTRY SELECTIONS

At some point, firms must make resource allocation decisions. For new
investments they will need to develop detailed estimates of all costs and expenses
and consider whether to enter a particular venture alone or with a partner. For
acquisitions, firms will need to examine financial statements in great detail. For
expansion within countries where they are already operating, country managers
will most likely submit capital budget requests that include details of expected
returns. To maximize expected gains, decisions must be made in a timely fashion.
ETHICAL DILEMMA:
Economic Efficiency, Non-economic Concerns, and Competitive Strategies: Are
They Compatible?
Should countries work toward regulating FDI with global efficiency as their
objective, or should each country continue to serve its own interests by competing for
FDI? MNEs are frequently criticized when they shift their geographic emphasis in
response to changing legal, political and economic environments. In particular, they are
criticized for selling dangerous products abroad when domestic demand is dampened.
MNEs tend to justify their moves on the grounds they promote global efficiency through
low-cost production and high-level sales; they also note they may be responding to trade
restrictions or government incentives, or to competitive conditions. Relativists maintain it
is unethical to prohibit foreign sales because those sales are considered to be ethical in
the countries in which they are made. Normativists, on the other hand, maintain it is
42
unethical for a government to permit its firms to do abroad those things they are
prohibited from doing domestically.

Will Locations and Location-Models Change?
The receptiveness of more countries to FDI and the global move toward
privatization have combined to create even more opportunities for MNEs. However,
international geographic expansion is a two-tiered decision. First, how much of a firm’s
sales and production should be located abroad, and second, how should those activities be
allocated across countries? A further consideration is the location of managers. Although
technology may permit them to work from anywhere, evidence shows business travel has
increased in concert with advances in communications.
Exercises: Country Evaluation and Selection
Exercise 13.1. As the phenomenon of economic integration progresses, the
process of country selection takes on new dimensions. Compare and contrast the
opportunities and risks associated with establishing operations in the European
Union to those in the NAFTA region. Would such investments be primarily
resource or market seeking? explain and give examples to support ideas.
Exercise 13.2. Compare the costs and benefits of investing in an industrialized

economy to the costs and benefits of investing in a developing economy from the
standpoint of an MNE.
43
Chapter 9
Export and Import Strategies
Objectives
1. Identify the key elements of export and import strategies.
2. Compare the direct and indirect selling of exports.
3. Identify the key elements of import strategies and importing.
4. Discuss the roles of several types of third-party intermediaries and trading
companies in exporting.
5. Show how freight forwarders help exporters with the movement of goods.
6. Identify the methods of receiving payment for exports and the financing of
receivables.
7. Discuss the role of countertrade in international business.
Chapter Overview
In many ways, Chapter 9 is a natural extension of Chapter 16 because much of it
deals with elements of the marketing mix, especially channels of distribution. The first
part of the chapter is devoted to an examination of export and import strategies. Table
17.1 identifies the steps to consider when developing an export (or import) business plan.
Next, the roles of a wide variety of third-party intermediaries are discussed. The chapter
concludes with a discussion of the major issues related to export financing, including the
use of countertrade as a form of payment mechanism.
Chapter Outline
OPENING CASE: Grieve Corporation—A Small Business Export Strategy
A small firm located near Chicago, Grieve Corporation manufactures laboratory
and industrial ovens, furnaces and heat processing systems for the U.S. market. Grieve
began losing business as (i) foreign competitors began to penetrate the U.S. market and
(ii) its customers began to move overseas and started sourcing locally. With the help of
the International Trade Administration of the U.S. Department of Commerce, Grieve was
able to identify potential Asian distributors. During a business trip to Asia, the president
of Grieve met with potential candidates and successfully recruited exclusive agents for
each country visited. Once Grieve had gained sufficient experience in the Asian market,
export activities were expanded to other regions. Moving into international markets has
proved to be a major factor in the firm’s continued growth and success.
I. INTRODUCTION
Whereas exports represent goods and services flowing out of a
country, imports represent goods and services flowing into a
country. Exports result in receipts and imports result in payments. Although
export and import activities are a natural extension of distribution strategy, they
also include elements of product, promotion and pricing factors and decisions.
Both exporting and importing entail a lower level of risk than foreign direct
44
investment, but while exporting offers less control over the marketing
function, importing offers less control over the production function.
II. EXPORT STRATEGY

A firm’s choice of entry mode depends on various factors, such as
the ownership advantages of the firm, the location advantages of the market and
the internalization advantages of specific assets, international experience and/or
the ability to develop differentiated products (see Chapter 8). In general, firms
that possess few ownership advantages either do not enter foreign markets, or
they use the lower-risk entry modes of exporting and licensing. Still in all, the
decision to export must fit a company’s overall strategy and take into
account global concentration (the presence of relatively few major
players), global synergies (the gains from sharing corporate expertise on a global
basis) and global strategic motivations (the firm’s competitive reasons to enter a
given market).
A. Characteristics of Exporters
Research conducted on the characteristics of exporters has resulted in two
basic conclusions: (i) the probability of exporting increases with size of
company revenues and (ii) export intensity (the percentage of total
revenues generated by exports) is not positively correlated with company
size. Factors such as the risk profile of management and the nature of
industry competition are just as important as firm size.
B. Why Companies Export
Companies export in order to increase sales revenues, achieve economies
of scale in production, diversify markets and minimize risk.
C. Stages of Export Development
Firms tend to move through three phases of export
development: pre-engagement, initial exporting and advanced exporting.
As they do so, they tend to (i) export to more countries and (ii) expect
exports to grow as a percentage of total sales. In addition, they also tend to
(i) diversify their markets to more distant countries and (ii) move into
environments that are increasingly different from those of their home
countries.
D. Potential Pitfalls of Exporting
The operational mistakes associated with exporting can be very costly. In
addition, events such as 9/11 can bring international trade activities to a
complete halt in the affected region.
III. IMPORT STRATEGY
The import process involves strategic and procedural issues that basically
mirror those of the export process. (See question #1 of this chapter’s closing case
for an outline of a sample import business plan.) There are two basic types
of imports: extracompany imports from independent (unrelated) upstream sources
and intracompany imports from a firm’s upstream global supply chain that
represent intermediate goods and services. The three basic types of importers are
those that:
∙ look for any product around the world that will generate a positive cash
flow
∙ look to foreign sourcing as a means to minimize product costs
∙ use foreign sourcing as part of their global supply chain strategy.

An import broker is a certified specialist who obtains required government
permissions and other clearances before forwarding the necessary documents to
the carrier(s) of the goods.
A. The Role of Customs Agencies
Customs reflect a country’s import and export procedures and restrictions.
The primary duties of a customs agency are the assessment and collection
45
of all duties, taxes and fees on imported products, the enforcement

of customs and related laws and the administration of certain navigation
laws and treaties. National customs agencies are increasingly involved in
dealing with smuggling operations and preventing foreign terrorist attacks.
A customs broker can help an importer minimize duties by (i) valuing
products in such a way that they qualify for more favorable treatment, (ii)
qualifying for duty refunds through drawback provisions, (iii) deferring
duties by using bonded warehouses and foreign trade zones and (iv)
limiting liability by properly marking an import’s country of origin.
B. Import Documentation
The import documentation process can be both complicated and
cumbersome. Without proper documentation, customs agencies will not
release shipments. Documents are of two types: (i) those that determine
whether customs will release the shipment and (ii) those that contain the
information necessary for duty assessment and data gathering purposes. At
a minimum, the required documents would include an entry manifest, a
commercial invoice and a packing list.
IV. THIRD-PARTY INTERMEDIARIES

Third-party intermediaries are independent (unrelated) firms that facilitate
international trade transactions by assisting both importers and exporters. They
may perform any or all of the following functions:
∙ stimulate sales, obtain orders and conduct market research
∙ perform credit investigations and payment-collection activities
∙ handle foreign traffic arrangements and shipping details
∙ provide support for a client’s sales, distribution and promotion staff.

Direct exports represent products sold to an independent party outside of the
exporter’s home country; indirect exports are first sold to an intermediary in the
domestic market, who then sells the products in the export market. While services
are more likely to be exported on a direct basis, goods are exported via both
avenues.
A. Direct Selling
Direct selling, i.e., exporting through sales representatives to distributors,
foreign retailers, or final end users, gives exporters greater control over the
marketing function and offers the potential to earn higher profits as well.
Whereas a sales representative usually operates on a commission basis,
a distributor is a merchant who purchases goods from a manufacturer and
resells them at a profit.
B. Direct Exporting through the Internet and Electronic Commerce
Electronic commerce allows companies both large and small to engage in
direct marketing quickly, easily and inexpensively. It is especially
important for small and medium-size firms that wish to reach distant
markets.
C. Indirect Selling
Indirect selling, i.e., selling products to or through an independent
domestic intermediary, is carried out via export management
companies and export trading companies.
D. Export Management Companies
An export management company [EMC] is a firm that either acts as a
manufacturer’s agent or buys merchandise from manufacturers for
international distribution. EMCs generally operate on a contractual basis,
provide exclusive representation in a well-defined foreign territory and act
as the export arm of a manufacturer. Often, export management
companies specialize according to product, function and/or market area.
46
E. Export Trading Companies

An export trading company [ETC] is somewhat like an export
management company, but its primary purpose in becoming involved in
international trade as an independent broker is to match domestic
exporters to foreign customers. Export trading companies that are based in
the U.S. may be exempt from antitrust provisions in order to allow them to
penetrate foreign markets by collaborating with other U.S. firms.
G. Foreign Freight Forwarders
A freight forwarder is a foreign trade specialist who deals in the
movement of goods from producer to customer. Even export management
companies may use the specialized services of foreign freight
forwarders. The typical freight forwarder is the largest export intermediary
in terms of the weight and value of cargo handled. Some may specialize in
the type of mode used, others in the geographical area served. The
movement of goods across a variety of modes from origin to destination is
known as intermodal transportation. Three recent trends leading to a
preference for air freight over ocean freight are: (i) the need for more
frequent shipments, (ii) lighter-weight shipments and (iii) high-value
shipments.
V. EXPORT FINANCING
From the exporter’s point of view, four major issues relate to export financing: (i)
the price of the product, (ii) the method of payment, (iii) the financing of
receivables and (iv) insurance.
A. Product Price
Export prices must factor in exchange rate fluctuations, transportation
costs, relevant duties, the costs of multiple wholesale channels, insurance
fees, bank charges, antidumping laws, etc.
B. Method of Payment
The flow of money across national borders requires the use of special
documents and may be very complicated. In descending order of security
for the exporter, the basic methods of payment for exports are:
∙ cash in advance
∙ a letter of credit (obligates the buyer’s bank to pay the exporter)

▪ a revocable letter of credit may be changed by any of the
parties to the agreement
▪ an irrevocable letter of credit requires all parties to the
agreement to consent to the change in the document
▪ a confirmed letter of credit adds a guarantee of payment to an
additional bank (usually an interbank agreement).
∙ a draft or bill of exchange
▪ a documentary draft instructs the importer to pay the exporter
if specified documents are presented
▪ a sight draft requires payment to be made immediately
▪ a time draft requires payment to be made at some specific date
in the future.
∙ an open account (the exporter bills the importer but does not
require formal payment documents—generally limited to members
of the same corporate group).
D. Insurance
47
The two types of insurance most often used for export transactions are: (i)
transportation risks (e.g., devastating weather conditions or rough
handling by carriers) and (ii) political, commercial and foreign-exchange
(environmental) risks. While private insurers will covers these types of
risks for established exporters with a proven record, government agencies
tend to be the most important insurers of export shipments.
VI. COUNTERTRADE
Countertrade involves a reciprocal flow of goods and services. It provides a
means to complete a transaction when a firm (or government) does not have
sufficient convertible currency to pay for imports, or it simply does not have
sufficient funds. Countertrade transactions can be divided into two basic types:
(i) barter (based on clearing arrangements used to avoid money-based exchange)
and (ii) buybacks, offsets and counterpurchase (all of which are used to impose
reciprocal commitments).
A. Barter
Barter occurs when goods or services are traded for other goods and
services, i.e., it represents a non-monetary transaction. (Barter is not only
the oldest form of countertrade, it is the oldest form of any type of trade
transaction.) Buybacks represent counter-deliveries the exporter receives
as payment that in fact are related to or originate from the original export.
B. Offset Trade
Offset trade occurs when the exporter sells goods or services for cash but
then helps the importer find opportunities to earn hard currency. Direct
offsets include generated business that directly relates to the
export; indirect offsets include generated business unrelated to the export.
ETHICAL DILEMMA:
Is Demand Always Just Cause to Export?
Of all of the issues associated with exporting, two of the most vexing have to do
with hazardous materials and sensitive technology. First, regulations concerning
pesticides and other dangerous chemicals are often more lax in many of the developing
countries than in the industrialized world. The concept of prior informed consent would
require each exporter of a banned or restricted substance to obtain through its
home-country government the express consent of the importing country government.
Those who oppose this principle do so on grounds of ethical relativism and national
sovereignty. Second, although governments usually control the export of sensitive
technology to friends and foes alike, many firms try to bypass such controls. Documents
may be falsified to hide the true nature of a transaction. In neither instance does the mere
existence of demand seem to be sufficient reason to justify export transactions.

How Will Technology Affect Exporting?
Exporting continues to differ across countries in terms of its importance in
generating GDP and employment. Nonetheless, advances in transportation and
communications will continue to facilitate export growth and make it easier for firms to
reach distant international markets. A primary advance in communication technology is
the electronic data interchange (EDI), which facilitates the electronic transfer of
information across the whole of the value chain. One of the major developments to affect
exporting is the use of the Internet, which brings producers and customers from all over
the world together in ways not possible before and allows firms to engage in direct
exporting.
Exercises: Export and Import Strategies
48
Exercise 17.1. Research has shown although the largest firms in the world also
tend to be the world’s largest exporters, export intensity is not positively
correlated with the size of a firm. Begin to explore the reasons for this. Then, ask
students to discuss the levels of export intensity they would expect to find with
respect to a variety of industries. Explain and compare differences across
industries.
Chapter 10
Global Manufacturing and Supply Chain Management
Objectives
1. Describe different dimensions of global manufacturing strategy.
2. Examine the elements of global supply chain management.
3. Show how quality affects the global supply chain.
4. Illustrate how supplier networks function.
5. Explain how inventory management is a key dimension of the global supply
chain.
6. Present different alternatives for transporting products from suppliers to
customers along the supply chain.
Chapter Overview
Important objectives shared by the global manufacturing and supply chain
functions are to simultaneously lower costs and increase quality by eliminating defects
from both processes. Chapter 18 examines supply chain networks to see how firms can
manage the various links most effectively. The chapter begins by discussing global
manufacturing strategy. It then moves on to explore supply chain management issues,
quality standards and supplier networks. The chapter concludes with a discussion of
inventory management and the development of effective transportation networks.
Chapter Outline
OPENING CASE: Samsonite’s Global Supply Chain [See Map 18.1, Figures 18.1-3]
This case describes how Samsonite, a U.S.-based corporation that manufactures and
distributes both hardside and softside luggage, developed its global manufacturing and
distribution systems. Samsonite began its operations in 1910 in Denver, Colorado, but it
took many years to become a global firm after moving first through decentralized and
49
then centralized supply-chain structures. By the end of the 1960s, Samsonite was
manufacturing luggage in the Netherlands, Belgium, Spain, Mexico and Japan; it was
also marketing luggage worldwide through a variety of distributors. During the 1990s,
Samsonite expanded throughout Eastern Europe and established several joint-venture
operations in China and other parts of Asia as well. As Samsonite expanded throughout
the world, it entered into subcontract arrangements in Asia and Eastern Europe for
outsourced parts and finished goods in order to supplement its own production. By 2002,
Samsonite’s European operations alone had grown to six company-owned production
facilities and one joint-venture facility, plus a series of subsidiaries, joint ventures, retail
franchises, distributors and agents set up to service the European market. R&D is done
both in Europe and the U.S.
I. INTRODUCTION
The supply chain function encompasses the sourcing and coordination of
materials, information and funds from the initial raw material supplier to the final
customer. It concerns the management of the value-added process from the
supplier’s supplier to the customer’s customer. Suppliers can be part of the
manufacturer’s organizational structure, as in the case of a vertically integrated
organization, or they can be independent organizations. An important part of
the supply chain function is logistics (aka materials management), which
encompasses the planning, implementation and control of the efficient and
effective flow and storage of products and information from the point of origin to
the final customer. Because the supply chain is quite broad, the coordination of
the network actually occurs through interactions within the network. The greater
the geographic spread of the firm, the more difficult it becomes to manage
the supply chain effectively.
II. GLOBAL MANUFACTURING STRATEGIES

The success of a global manufacturing strategy depends on four key
factors:
(i) compatibility, (ii) configuration, (iii) coordination and (iv) control. Virtual
manufacturing describes the situation in which a firm subcontracts the
manufacturing process to another company, i.e., the firm chooses to outsource.
A. Manufacturing Compatibility
Compatibility refers to the degree of consistency between a firm’s foreign
direct investment decisions and its competitive
strategy. Cost-minimization and the drive for globalization force MNEs to
pursue economies of scale in manufacturing, often by producing at low
labor-cost sites. Other key variables include dependability, quality,
flexibility and innovation. Offshore manufacturing refers to
manufacturing activities that occur beyond the borders of a firm’s home
country.
B. Manufacturing Configuration
MNEs consider three basic configurations en route to developing their
global manufacturing strategies. They are:
∙ centralized manufacturing in a single country
(a global export approach)
∙ regionalized manufacturing in the specific regions served
(a regionalized marketing and manufacturing approach)
∙ local manufacturing in each country market served
(a multidomestic marketing and manufacturing approach).
Rationalization represents the specialization of production by product or
process in different parts of the world in order to take advantage of
varying costs of labor, capital and raw materials.
C. Coordination and Control
50
Coordination represents the linking or integrating of participants all along

the global supply chain into a unified system. Control embraces systems,
such as organizational structure and performance measurement, which are
designed to help ensure strategies are implemented, monitored and
revised, when appropriate.
III. GLOBAL SUPPLY CHAIN MANAGEMENT

Global supply chain management concerns the sourcing and coordination of
materials, information and funds from the initial raw material supplier to the final
customer. A comprehensive supply chain strategy should include the following 10
elements:
∙ customer service requirements
∙ plant and distribution center network design
∙ inventory management
∙ outsourcing and third-party logistics relationships
∙ key customer and supplier relationships
∙ business processes
∙ information systems
∙ organizational design and training requirements
∙ performance metrics
∙ performance goals.
The key to making a global information system work effectively is
information. Electronic data interchange (EDI) refers to the electronic
movement of money and information via computers and telecommunications
equipment in a way that effectively links suppliers, customers and third-party
intermediaries, and ultimately enhances customer value. Enterprise resource
planning (ERP) refers to the use of software to link information flows from
different parts of a business and from different parts of the
world. E-commerce refers to the use of the Internet to link suppliers with firms
and firms with customers. The extranet refers to using the Internet to link a
company with external constituencies.
IV. QUALITY
Quality refers to meeting or exceeding the expectations of the customer. More
specifically, it incorporates conformance to specifications, value enhancement,
fitness for use, after-sales support and psychological impressions
(image). Acceptable quality level (AQL) is a premise that allows for a tolerable
(negotiable) level of defects that can be corrected through repair and service
warranties. Zero defects describes the refusal to tolerate defects of any kind.
A. Total Quality Management
Total quality management [TQM] stresses three principles: (i) customer
satisfaction, (ii) employee involvement and (iii) continuous improvements
at every level of the organization. The goal of TQM is to eliminate all
defects. It focuses on benchmarking world-class standards, product and
service design, process design and purchasing practices. Kaizen represents
the Japanese process of continuous improvement, which requires
identifying problems and enlisting employees at all levels of the
organization to help eliminate the problems. Six Sigma is a highly focused
quality-control system designed to scrutinize a firm’s entire production
51
system and eliminate defects, slash product cycle time and cut costs across
the board.
B. Quality Standards
The three different levels (types) of quality standards are: (i) a general
level, (ii) an industry specific level and (iii) a company level. The general
level includes ISO 9000:2000 certification, i.e., a set of five universal
standards initially designed to harmonize technical standards within the
EU that is now accepted worldwide; it is applied uniformly to companies
in any industry and of any size in order to promote quality at every level
of an organization. Rather than judging the quality of a product, ISO
9000:2000 evaluates the management of the manufacturing process
according to standards in 20 domains, from purchasing to design to
training. Industry-specific standards and company-specific standards
represent the quality-related requirements expected of suppliers.
V. SUPPLIER NETWORKS
Sourcing strategy is the path a firm pursues in obtaining materials, components
and final products either from within or outside of the organization and from both
domestic and foreign locations. Global sourcing represents the first step in the
process of global materials management (logistics). Firms pursue global
sourcing strategies in order to reduce costs, improve quality, increase their
exposure to worldwide technology, strengthen the reliability of supply, improve
the supply delivery process, gain access to strategic materials, establish a presence
in a foreign market, satisfy offset requirements and/or react to competitors’
offshore sourcing practices. The three major configurations that have emerged
for global sourcing are: (i) vertical integration (ii) arm’s length purchases from
independent suppliers and (iii) Japanese keiretsu relationships with suppliers.
A. Make or Buy Decision
Outsourcing refers to those production activities that occur outside of the
firm, i.e., the use of external (foreign) suppliers to provide materials,
components, services, or finished goods. In determining whether to make
or buy, MNEs should focus on making those parts and performing those
processes critical to a product and in which they have a distinctive
advantage. Other things can potentially be outsourced.
B. Supplier Relations
When an MNE decides to outsource rather than integrate vertically, it must
determine the nature and extent of its involvement with suppliers.
C. Purchasing Function [See Figure 18.9]
Global progression in the purchasing function includes four phases:
∙ domestic purchasing only
∙ foreign buying based on need
∙ foreign buying as a part of procurement strategy
∙ integration of global procurement strategy.

E-sourcing, i.e., the use of the Internet in the purchasing process, is
rapidly growing in popularity.
VI. INVENTORY MANAGEMENT

Whether a firm decides to source from inside or outside the company or from
domestic or foreign suppliers, it needs to manage the flow and storage of
inventory. However, the distance, time and uncertainty associated with foreign
environments will surely complicate the inventory management process.
A. Just-in-Time Systems
A just-in-time [JIT] manufacturing system reduces inventory costs by
having raw materials and components delivered just as they are needed in
52
the production process. JIT typically implies sole sourcing for specific
parts in order to get the supplier to commit to the stringent delivery and
quality requirements inherent in the system. A company’s inventory
management strategy determines the desired frequency and size of
shipments and whether JIT will be used.
B. Foreign Trade Zones
Foreign trade zones (FTZs) are government-designated areas in which
goods can be stored, inspected and/or manufactured without being subject
to formal customs procedures until they actually enter the country. A
general-purpose zone is usually established near a port of entry, such as a
seaport, an airport, or a border crossing. A subzone is under the same
administrative domain but is usually physically separate from a
general-purpose zone. FTZs often serve as a site to store inputs until they
are needed at a particular production site.
VII. TRANSPORTATION NETWORKS

The international transportation of goods is extremely complicated with
respect to documentation, choice of carrier (air, land, ocean) and the decision to
outsource the function to a third-party intermediary or to establish internal
transportation capabilities. The key is to link manufacturers and suppliers on one
end and manufacturers and final customers on the other. Third-party
intermediaries are a critical factor in transportation networks. They can provide a
host of services, including packing, storing and shipping.

To Be Global, an MNE Must Establish Strong Supply Chain Links
In their efforts to serve worldwide markets, MNEs are discovering that to take
advantage of market imperfections and drive costs down, they need greater control over
global manufacturing operations. Improvements in communications technology will
continue to facilitate the flow of information, and firms will continue to gain critical
flexibility in establishing relationships and to improve quality, delivery time and their
responsiveness to customer needs. A major decision any firm must make is whether it
wants to be in the manufacturing business or to outsource its manufacturing activities.
Whichever path they choose, MNEs will have to develop strong global supply chain
management systems in order to compete effectively in today’s dynamic global business
environment.
Exercises: Global Manufacturing and Supply Chain Management

Exercise 18.1. The total cost concept is a major concern in global manufacturing
and supply chain management. Strategic reorder points and economic order
quantities must be determined. The tradeoffs between (i) customer service and
cost minimization and (ii) control and flexibility must be considered. Contractual
linkages with the participants in the system must be negotiated and honored.
discuss the challenges a firm faces in establishing its global manufacturing and
supply chain network given the dynamics of today’s competitive environment.
Use examples of firms in different types of industries as a basis for the discussion.
Exercise 18.2. A firm is considering whether to make a component in house or to

outsource it to an independent foreign supplier. Manufacturing the part in house
will require an investment in specialized assets; quality control and the protection
of intellectual property rights are major concerns. The most efficient and reliable
suppliers are located in countries whose currencies many foreign exchange
analysts expect will appreciate in the next decade; likewise, wage rates in those
countries are expected to rise. discuss the pros and cons of manufacturing the
component in house as opposed to outsourcing it. Should the firm
consider foreign direct investment as one of its options? Explain.
53
Chapter 11
Marketing Globally
Objectives
1. Introduce techniques for assessing market sizes for given countries.
2. Describe a range of product policies and the circumstances in which they are
appropriate.
3. Contrast practices of standardized vs. differentiated marketing programs for each
country in which sales are made.
4. Emphasize how environmental differences complicate the management of
marketing worldwide.
5. Discuss the major international considerations within the marketing mix: product,
pricing, promotion, branding and distribution.
Chapter Overview
54
Marketing is a social and managerial process through which individuals and

organizations satisfy their needs and objectives via the exchange process. Chapter 16
begins by examining the ways in which marketing managers analyze country market
potential in order to develop effective international marketing mix strategies. It reviews
the adaptation vs. standardization debate and also considers the rationale for selecting
nationally responsive vs. globally integrated marketing strategies. The chapter discusses
each of the marketing mix variables from an international perspective and concludes with
a note about international electronic commerce.
Chapter Outline
OPENING CASE: Avon [See Map 16.1]
Founded in 1886, Avon is one of the world’s largest manufacturers and marketers
of beauty-related products. This case describes Avon’s push into foreign markets via a
combination of nationally responsive and globally standardized marketing strategies. The
company has foreign direct investments in 58 countries and markets in others through
licensing, franchising and distributor arrangements. More than 60 percent of its sales
come from outside the U.S. Avon seeks to develop a global image of being a company
that supports women and their needs. It relies heavily on independent salespersons who
sell directly to individual customers. Avon emphasizes standardized products that carry
its global brand, but allows product lines and brand names to vary by country if needed.
In addition, each country operation sets its own prices to reflect local market conditions
and strategic objectives. Whenever possible, Avon transfers organizational learning and
successful practices from one country to another.
I. INTRODUCTION
Although basic marketing principles are the same in both domestic and
foreign markets, environmental differences often require those principles be
applied in different ways. A marketing mix consists of the controllable variables,
i.e., product and branding, promotion, distribution (place) and price designed to
create value for the customer and achieve competitive advantage for the firm.
II. MARKET SIZE ANALYSIS

Once a firm decides to enter foreign markets, it must carefully
collect and analyze data in order to determine specific country
product-market potential and the marketing mix required to achieve its
objectives.
A. Total Market Potential
Total market potential represents the total potential sales of all
competitors within a given product market (category). To determine
potential demand for its own product, a firm must first estimate the
potential sales of the total market and then derive its current and desired
market-share. The major indicators for potential sales of most products are
present income and population, plus the rate of growth in each. Other
variables to be considered include the possible obsolescence and
leapfrogging of products, the costs of both essential and non-essential
products, income elasticity, income inequality, the availability of substitute
products and cultural factors and tastes.
B. Gap Analysis
Gap analysis represents a method for estimating a firm’s potential
sales of a given product by determining the difference between the total
market potential and gaps in usage, competition, product line offerings and
distribution. Gap analysis helps managers determine both the size of and
the reasons for differences between market potential and actual sales.
III. PRODUCT POLICY
55
Economists define a product as a bundle of benefits; marketers more

elaborately state the idea as anything that can be offered for acquisition, attention,
use, or consumption that might satisfy a need or want. Products can be tangible,
intangible, or some combination of the two. The international applications of five
common product policies are highlighted below.
A. Production Orientation
A production orientation indicates a firm is more concerned about
production variables such as efficiency, quality and/or capacity than it is
about marketing. Firms assume customers want lower prices and/or higher
quality. Such an approach is still used internationally for selling
commodities, for passive exports and for serving foreign-market segments
that resemble domestic markets.
B. Sales Orientation
A sales orientation indicates a firm assumes global customers are
reasonably similar and it can therefore sell abroad the same product it sells
at home. A firm will be aided in this approach when there is also a
spillover of product information from one country to another.
C. Customer Orientation
A customer orientation indicates a firm is sensitive to customer needs,
i.e., it thinks in terms of identifying and serving the needs of the customer.
Given a particular country market, what products are needed?
D. Strategic Marketing Orientation
A strategic marketing orientation indicates a firm is committed to
continuously serving foreign target markets and to making incremental
product adaptations to satisfy local customers. It draws upon elements of
the production, sales and customer orientations, as appropriate.
E. Societal Marketing Orientation
The societal marketing orientation indicates a firm recognizes it must
conduct its activities in a way that preserves or enhances the well-being of
all its stakeholders, i.e., as it serves the needs of its customers it must also
address the environmental, health, social and work-related problems that
may arise when producing or marketing its products abroad.
F. Reasons for Product Alterations
The primary reasons behind the tendency of firms to alter their products to
meet local conditions are legal, cultural and/or economic in nature.
1. Legal Reasons. Explicit product-related legal requirements vary
widely by country but are usually meant to protect customers, the
environment, or both. Protective packaging laws and international
product standards represent two very complicated legal issues.
2. Cultural Reasons. Cultural factors affecting product demand
may or may not be easily discerned. While religious beliefs may
offer clear guidelines regarding product acceptability, other factors
such as color, design and artistic preferences may be much more
subtle.
3. Economic Reasons. Levels of income, differences in income
distribution and the extent and condition of available infrastructure
can all affect demand for a particular product. Often,
price-reducing alterations are required if a firm wishes to
participate in a particular country market.
G. Alteration Costs
Usually firms will choose to standardize basic components while altering
critical end-use characteristics. Certain alterations (such as packaging and
color options) may be inexpensive to make, yet they can have an
important effect on demand.
H. Extent and Mix of the Product Line
56
When making product line decisions, managers must consider the cost and
effect on sales of offering just one or a few products internationally as
opposed to an entire family of products. Whereas narrowing a product line
allows for the concentration of effort and resources, the broadening of a
product line may lead to distribution economies.
I. Product-Life Cycle Considerations
Differences will likely exist across countries in both the shape and the
length of a product’s life cycle. A product facing declining sales in one
country may have growing or sustained sales in another. Such country
differences can lead to an extended life for a given product.
IV. PRICING
Price represents the value asked for a product. Although usually expressed
as a monetary value, in the case of barter transactions it may not be. In the long
run, price must be low enough to generate sufficient demand but high enough to
yield a profit to the firm. The complexities of pricing are exacerbated in the
international arena.
A. Government Intervention
Every country has laws that either directly or indirectly affect prices to the
final customer. Price controls may set either maximum or minimum prices
for designated products. The WTO permits a government to establish
restrictions against any imports that enter the country at a price below the
price charged to customers in the exporting country (dumping). However,
a firm may charge different prices in different countries because of
competitive and demand factors (e.g., a firm may choose to exclude fixed
costs in the price calculation of products exported to developing countries
in order to be price competitive in those markets.)
B. Greater Market Diversity
Country variations lead to many ways of segmenting the market for a
particular product. Depending upon market conditions, a firm may adopt
any of the following pricing strategies.
1. Skimming. A skimming pricing strategy sets a high price for a
new product, which is aimed at market innovators. Over time, the
price will be progressively lowered in response to demand and
supply conditions, i.e., the presence of additional competitors.
2. Penetration. A penetration pricing strategy sets an aggressively
low price to attract a maximum number of customers (some of
whom may switch from other brands) and to discourage
competition.
3. Cost-plus. A simple cost-plus strategy sets the price at a desired
margin over cost.
C. Price Escalation in Exporting
If standard markups occur within distribution channels, either lengthening
the channels or adding other expenses somewhere within the network will
further increase the delivered price of the product. Common reasons for
price escalation in export sales are tariffs and the often greater distance to
the market. To compete in export markets, a firm may have to sell its
products to intermediaries at a reduced price in order to lessen the amount
of price escalation.
D. Currency Value and Price Changes
Pricing in the case of highly volatile currencies can be extremely difficult,
especially under conditions of high inflation. Pricing decisions must assure
the company of sufficient funds to replenish inventory. This may result in
the need for frequent price adjustments. Further, currency fluctuations also
affect pricing decisions for any product that faces foreign competition;
when a currency is strong producers may have to accept a lower profit
margin if they wish to be price competitive.
57
E. Fixed vs. Variable Pricing [See Table 16.1]

The extent to which manufacturers can or must set prices at the retail level
varies substantially by country. There is also substantial variation in
whether, where and for what products customers prefer or expect to
negotiate an agreed-upon price. Local laws and customs may limit firms’
abilities to set prices as they choose. In many cultures, prices are simply
the starting point in the bargaining process.
F. Company-to-Company Pricing
Dominant retailers with substantial clout may get suppliers to offer them
lower prices, which in turn will enable them to compete as the lowest-cost
retailer. However, such clout may not exist in new foreign markets. In
addition, many industrial buyers are claiming large price reductions
through Internet purchases.
V. PROMOTION
Promotion consists of the messages intended to help sell a product, i.e.,
direct and indirect forms of communication designed to inform, persuade and/or
remind a target audience about an organization and its products. The promotion
mix consists of personal selling, advertising, sales promotion/support and
publicity/ public relations activities.
A. The Push-Pull Mix
Promotion strategies may be categorized as push (personal
selling and trade sales promotion) or pull (advertising, consumer sales
promotion and publicity). Most firms use a combination of both. Factors
that will determine the mix of push and pull strategies include the type of
distribution system, the cost and availability of media, customer attitudes
toward sources of information and the relative price of the product as
compared to disposable income.
B. Standardization of Advertising Programs
Advertising represents any paid form of media (nonpersonal) presentation.
Although savings from the standardization of advertising are not as great
as those from product standardization, they can nonetheless be substantial.
However, in addition to reducing costs, standardized advertising may also
improve the quality of advertising at the local level, prevent the confusion
associated with different national messages and images and speed the
entry of products into new country markets. Standardization usually
implies using the same agency globally. However, it is difficult to
completely standardize an advertising campaign for a number of reasons.
1. Translation. When a media transmission spans multiple
countries, there is no opportunity to translate a message into other
local languages. When messages are translated, numerous
difficulties can be encountered with both language (content and
meaning) and images.
2. Legality. What is deemed to be legal advertising in one country
may in fact be illegal elsewhere. Differences result mainly from
varying national views on consumer protection, competitive
protection, standards of morality and nationalism.
3. Message Needs. An advertising theme may not be appropriate
everywhere because of national differences in how well consumers
know a product, how they perceive it, who makes the purchasing
decision and what features are most important.
VI. BRANDING
A brand is a name, term, sign, symbol and/or design that is intended to
identify a product or product line and differentiate it in the marketplace.
A trademark is a brand, or a part of a brand, that is granted legal protection
because it is capable of exclusive appropriation. It protects the seller’s exclusive
58
rights to use the brand name and/or brand mark. MNEs must make four major
branding decisions: brand vs. no brand, a manufacturer’s brand vs. a private
brand, one brand vs. multiple brands and a global brand vs. multiple local or
regional brands.
A. Language Factors
Both the translation and pronunciation of brand names pose potential
problems in many markets. Often the problems are obvious, but other
times they are quite subtle, yet critical. In addition, brand symbols (shapes
and colors) are culturally sensitive in many societies.
B. Brand Acquisitions
When an MNE acquires a (foreign) firm, it automatically acquires its
brands. In some instances those brands will be maintained; in others they
will be folded into a larger brand in order to capture economies of scale
and to promote regional/global brand recognition.
C. Country-of Origin Images
Firms must determine whether to promote a local or foreign image for
their products. The products of some countries may be perceived as being
particularly desirable and of higher quality than products from other
countries. A firm may be able to enhance its competitive advantage by
effectively exploiting this perception.
D. Generic and Near-Generic Names
While firms want their brand names to become household words, they do
not want those names to become so common they are considered to
be generic (e.g., Kleenex and Xerox). Generic names may either stimulate
or frustrate the sales of the firm from whom the name was expropriated.
VII. DISTRIBUTION
Distribution refers to the physical and legal path that products follow from
the point of production to the point of consumption. The distribution
channel (aka the marketing channel) consists of the set of interdependent
individuals and organizations that take title to or assist in the transfer of a title to a
product from producer to final customer. Coverage refers to the nature of a firm’s
distribution strategy within a given region (exclusive, selective, or intensive). In
many instances, geographic barriers and poor transportation infrastructure and
facilities will divide a country into very distinct viable and non-viable markets.
ETHICAL DILEMMA:
What Products Should Companies Market Internationally?
Even when MNEs strictly abide by host-country laws, they may be criticized for
paying too little attention to the product needs of developing countries. In addition,
MNEs have also been faulted for promoting products to people who either do not
understand a product’s potential negative consequences or cannot afford it (even though
they may want it). It is not clear that even if stakeholders could agree on what comprises
responsible behavior, governments could effectively legislate it. In the absence of
regulation, how far companies should go to protect customers is unclear both within and
across countries. Further, is it in the best interests of a firm (and its stakeholders) to give
in to pressure groups, especially when the grounds for their protests are highly
controversial?

Will the “Haves” and the “Have-Nots” Meet the “Have Somes”?
Most projections indicate the disparities between the “haves” and the “have-nots”
of the world will continue to grow throughout the foreseeable future, both within and
59
across countries. To serve the “haves,” firms will offer luxury products to customer
niches that cut across national boundaries. At the other extreme, companies will have
numerous opportunities to develop low-cost standardized products designed to fit the
needs of the “have-nots.” For many firms, these two extremes present a serious dilemma.
Moreover, firms will find it increasingly difficult to charge different prices in different
countries, although they will be increasingly able to cut intermediaries out of the
distribution channels for their products.
Exercises: Marketing Globally

Exercise 16.1. While many firms have moved to develop globally standardized
products, others have moved toward more product differentiation across countries.
Discuss the types of products for which they would expect to see more global
standardization, and those for which they would expect to see more local
differentiation. Consider both goods and services.
Exercise 16.2. A number of advertising agencies have expanded their operations

to the global level so they can offer their services on a worldwide basis. Discuss
the reasons an MNE might prefer to work with a single global advertising agency
rather than a series of local or regional agencies.
60

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MGT 304: International Business and Trade

I. INTRODUCTION TO THE FIELD OF INTERNATIONAL BUSINESS

2. Acquire Resources. Foreign-sourced goods, services, components,

II. MODES OF INTERNATIONAL BUSINESS

A firm can engage in international business through various operating modes,

A. Merchandise Exports and Imports

yield export earnings to service providers in the form of fees paid

2. Portfolio Investment. Portfolio investment is a non-controlling

III. EXTERNAL INFLUENCES ON INTERNATIONAL BUSINESS

Thus, a firm’s competitive strategy directly influences how and where it

IV. EVOLUTION OF STRATEGY IN THE INTERNATIONALIZATION

3. Deepening Mode of Commitment. Usually firms begin their

Although governments act in their own self-interest, they may choose to

ETHICAL DILEMMAS AND SOCIAL RESPONSIBILITY:

Sorting through the World of Right and Wrong in International Business

LOOKING TO THE FUTURE:

Seizing That Window of International Business Opportunity

Exercises: The Internationalization Process

Exercise 1.2. Explore the impact of standardization, containerization and

II. CULTURAL AWARENESS

III. IDENTIFICATION AND DYNAMICS OF CULTURES

D. Religion as a Cultural Stabilizer

IV. BEHAVIORAL PRACTICES AFFECTING BUSINESS

societies, group membership may dictate one’s access to education,

4. Family-based Groups. In societies where there is low trust

5. Occupation. In every society certain occupations are perceived as

1. Materialism and Leisure. People are motivated to work for

2. Expectation of Success and Reward. Although the same tasks

3. Masculinity Index. Hofstede’s study of employees from 50

and profitability over quality of life and environment, are not

4. Need Hierarchy. Maslow’s hierarchy of needs states that people

2. Individualism vs. Collectivism. Nationalities differ as to whether

2. Trust. Trust represents one’s belief in the reliability and honesty of

3. Fatalism. Fatalism represents the belief that events are

E. Information and Task Processing

People from different cultures obtain, perceive, and process information in

2. Obtaining Information. Language represents a culture’s means

3. Information Processing. All cultures categorize, plan and

V. STRATEGIES FOR DEALING WITH CULTURAL DIFFERENCES

2. Silent Language. Silent language incorporates the wide variety

during conversations, the perception of time and punctuality, a

D. Company and Management Orientations

2. Ethnocentrism. Ethnocentrism represents a belief that one’s own

3. Geocentrism. Geocentrism represents a managerial approach in

E. Strategies for Instituting Change

2. Cost Benefit of Change. Some adjustments to foreign cultures

3. Resistance to Too Much Change. Resistance to change may be

4. Participation. A proposed change should be discussed with

5. Reward Sharing. A company may choose to provide benefits for

6. Opinion Leaders. Characteristics of opinion leaders often vary

7. Timing. Many good business changes fail because they are

8. Learning Abroad. The essence for undertaking transnational

ETHICAL DILEMMAS AND SOCIAL RESPONSIBILITY:

LOOKING TO THE FUTURE:

Exercises: Cultural Challenges

II. THE POLITICAL ENVIRONMENT

III. BASIC POLITICAL IDEOLOGIES

B. The Political Spectrum

a. Political Rights and Civil Liberties. Political

b. Stability in Democracies. Many democracies that have

2. Totalitarianism. Totalitarianism represents a political system in

IV. THE IMPACT OF THE POLITICAL SYSTEM ON MANAGEMENT

Political risk reflects the expectation that the political climate in a