405 - International Business

International Business Aashiesh Tavkarr PhD
WELCOME TO THE WORLD

OF
INTERNATIONAL
BUSINESS
The International Business

Imperative
Learning Objectives
To understand the history and impact of
international business.
To learn the definition of international
business.
To recognize the growth of global linkages
today.
To understand the U.S. position in world trade
and the impact international business has on
the United States.
To appreciate the opportunities and challenges
offered by international business.
Need for International Business

More and more firms around the
world are going global, including:
Manufacturing firms
Service companies (i.e. banks, insurance,
consulting firms)
Art, film, and music companies
Need for International Business

International business:
causes the flow of ideas, services, and
capital across the world
offers consumers new choices
permits the acquisition of a wider
variety of products
facilitates the mobility of labor,
capital, and technology
provides challenging employment
opportunities
reallocates resources, makes preferential
choices, and shifts activities to a global
level
What is International Business?
International business consists of

transactions that are devised and
carried out across national borders
to satisfy the objectives of
individuals, companies, and
organizations.
Types of International Business

Export-import trade
Foreign direct
investment
Licensing
Franchising
Management contracts
International Business Questions

How will an idea, good, or service fit
into the international market?
Should trade or investment be used
to enter a foreign market?
Should supplies be obtained
domestically or abroad?
What product adjustments are
necessary to be responsive to local
conditions?
What are the threats from global
competitors, and how can these
threats be counteracted?
International Business and the

Roman Empire
Pax Romana, or Roman Peace ensured that
merchants were able to travel safely and
rapidly.
Common coinage simplified business
transactions.
Rome developed a systematic law, central
market locations, and an effective
communication system; all of which enabled
international business to flourish in the
Roman Empire.
The growth of the Roman Empire occurred
mainly through the linkages of business
International Business and the

Roman Empire (cont.)
The decline of the Roman Empire can be
attributed in part to:
infighting and increasing decadence
the Pax Romana being no longer enforced
the decline of use and acceptance of the common
coinage
declining levels of communication
As a result, former Roman allies
cooperated with invaders.
United States: A Global Leader

The United States has developed a
world leadership position due to:
its use of market-based transactions in the
Western world
a broad flow of ideas, goods, and services
across national borders
an encouragement of international
communication and transportation
Pax Americana, an American sponsored and
enforced peace
The Smoot-Hawley Act

The the 1930’s, the U.S. passed the Smoot-
Hawley Act, which raised import duties to
reduce the volume of goods coming into the
U.S.
The act was passed in the hope that it would

restore domestic employment.
The result was a worldwide depression and

the collapse of the world financial system.
Expansion of International Trade

In the past 30 years, the volume of
international trade has expanded from
$200 billion to over $7.5 trillion.
The sales of foreign affiliates of

multinational corporations are now
twice as high as global exports.
Global Links Today

International business has created a network
of global links that bind countries,
institutions, and individuals with trade,
financial markets, technology, and living
standards.
For example, a reduction in coffee production in
Brazil would affect individuals and economies
worldwide.
Recent Changes in
International Business
Total world trade declined dramatically
after 2000, but is again on the rise.
The rate of globalization is accelerating.
Regionalization is taking place, resulting

in trading blocs.
The participation of countries in world

trade is shifting.
The Composition of Trade

Between the 1960’s and the 1990’s the
importance of manufactured goods
increased while the role of primary
commodities (i.e. rubber or mining) had
decreased.
More recently, there has been a shift of
manufacturing to countries with
emerging economies.
There has been an increase in the area
of services trade in recent years.
The Current U.S. International

Trade Position
Exports and Imports of Goods and Services per Capita
for Selected Countries
Country Exports per Capita Imports per Capita

Australia $4,296 $4,525
Brazil 379 428
China 222 199
Japan 4,165 3,622
Kenya 91 125
United Kingdom 4,767 5,500
United States 3,472 4,962
The Impact of International

Business on the United States
U.S. international business outflows are
important on the macroeconomic level in
terms of balancing the trade account.
On the microeconomic level, participation

in international business can help firms
achieve economies of scale that cannot be
achieved in domestic markets.
Average Plant Salary and Wages

(per worker, dollars per hour)
30
25
20
$ per hour
15
10
0
All Plants Small Plants Large Plants
Non-Exporters Exporters
Globalization
Because of globalization, for the first
time in history, the availability of
international products and services can
be accessed by individuals in many
countries, from diverse economic
backgrounds.
Culture
Learning Objectives
To define and demonstrate the effect of
culture’s various dimensions on business.
To examine ways in which cultural knowledge
can be acquired and individuals and
organizations prepared for cross-cultural interaction.
To illustrate ways in which cultural risk poses a
challenge to the effective conduct of business
communications and transactions.
To suggest ways in which businesses act as change
agents in the diverse cultural environments in which
they operate.
Expanding Operations Across

Borders
Two distinct tasks
emerge:
to understand cultural
differences and the
ways they manifest
themselves
to determine
similarities across
cultures and exploit
them in strategy
formulation
Culture Defined
Culture is an integrated
system of learned
behavior patterns that are
characteristic of the
members of any given
society.
Characteristics of Culture
Culture is learned, shared, and transmitted
from one generation to the next.
Culture can be passed from parents to

children, by social organizations, special
interest groups, the government, schools, and
churches.
Culture is multidimensional, consisting of a

number of common elements that are
interdependent.
Acculturation
Acculturation is the
process of adjusting and
adapting to a specific
culture other than one’s
own. It is one of the keys
to success in international
operations.
High- versus Low-Context

Cultures
High-context culture Low-context culture
context is at least as most of the information is
important as what is contained explicitly in
actually said words
what is not being said can what is said is more
carry more meaning than important that what is not
what is said said
focuses on group focuses on individual
development development
Japan and Saudi Arabia are The U.S. is an example
examples
Change Agents
By introducing new products or ideas
and practices, an international business
entity becomes a change agent.
this may shift consumption from one
product to another, or
it may lead to massive social change
Many governments take action to

protect their culture-specific industries.
Cultural Universals
Cultural universals are manifestations of the
total way of life of any group of people.
These include elements such as bodily

adornment, courtship rituals, etiquette,
concept of family, gestures, joking, mealtime
customs, music, personal names, status
differentiation, and trade customs.
Elements of Culture
Language (verbal
and nonverbal) Religion
Values and
Attitudes
Manners and
Customs
Material Elements
Social Institutions Education Aesthetics

The Four Roles of Language

Language aids in information gathering and
evaluation.
Language provides access to local society.
Language capability is increasingly important

in company communications.
Language provides more than the ability to

communicate because it extends beyond
mechanics to the interpretation of contexts
that may influence business operations.
Nonverbal language
Distinctions must be made in five key topics:
Time
Space
Material Possessions
Friendship Patterns
Business Agreements
Dominant Religions
Christianity
Islam
Hinduism
Buddhism
Confucianism
Values and Attitudes

Value of U.S. Culture Alternate Value Function Affected
The individual can influence Life follows a preordained Planning and scheduling
the future course
We must work hard to Hard work is not the pre- Motivation and reward
accomplish our objectives requisite for success; wisdom, system
luck, and time are also required
Commitments should be A commitment may be Negotiating or
honored super- bargaining
One should effectively use seded by aare
Schedules conflicting
important but only Long and short range
one’s time inrequest
relation to other priorities planning
A primary obligation of the The individual employee has a Loyalty, commitment,
employee is to the organization primary obligation to the family and motivation
The best qualified person should Family issues and friendship Employment, promotions
be given the position available can determine employment recruiting, selection
Manners and Customs

Potential ways in which negotiators may
not be prepared:
the understanding of different ways of thinking
attention to the necessity to save face
knowledge and appreciation of the host country
recognition of the decision-making process and
the role of personal relations and personalities
the allocation of time for negotiations
Material Elements
Material culture refers to the results of
technology and is directly related to how a
society organizes its economic activity.
It is manifested in the availability and

adequacy of the basic economic, social,
financial, and marketing infrastructure for the
international business in a market.
Material Elements Chart

Material Culture
Financial and
Economic Social
Marketing
Infrastructure Infrastructure
Infrastructure
transportation energy housing health banks research firms
communications education
Aesthetics
Good taste is
expressed through
colors, form, and
music.
The meanings of colors

and symbols vary from
country to country.
Education
Education, either
formal or informal,
plays a major role in
the passing on and
sharing of culture.
International firms
need to understand the
varying emphases on
particular skills and the
overall level of
education provided.
Social Institutions
Social stratification is the division of a
particular population into classes.
Reference groups provide the values and

attitudes that influence behavior. Primary
reference groups include the family and
coworkers.
Social organization determines the roles of

managers and subordinates and how they
relate to each other.
Cultural Knowledge
Cultural knowledge can be defined by the way it is
acquired:
objective or factual information is obtained through
communication, research, and education.
experiential knowledge can be acquired only by
being involved in a culture other than one’s own.
Interpretive knowledge is the ability to

understand and fully appreciate the nuances of
different cultural traits and patterns.
Acquiring International Experience

Manager’s ranking of factors involved in
acquiring international expertise
Factor Considered Critical Considered Important

Assignments overseas 85% 9%
Business travel 83 17
Training programs 28 57
Non-business travel 28 54
Reading 22 72
Graduate courses 13 52
Precareer activities 9 50
Undergraduate courses 1 48
Cross-Cultural Behavior Model

Strategic
Change
Opinion
Agent
Leadership
Cognitive Adoption
Search Adoption
Tendency
Communication
about Propensity
Innovation to Change
Evaluation
Cognitive
of
Distortion
Innovation
Cultural
Lifestyle
Consequences
Cross-Cultural Behavior Model

The key variable of the
model is propensity to
change, which is a function
of three constructs:
cultural lifestyle
change agents
communication about the

innovation
Cultural Dimension Scores for 12 countries
100 100
Japan U.S.A
France Netherlands
Great Britain
Mexico
Brazil
Uncertainty Germany Germany
Arab Countries Individualism
Avoidance France
Netherlands West Africa
Japan
50 50
Brazil
U.S.A Indonesia Arab Countries
Great Britain Mexico
Hong Kong
Hong Kong
West Africa
Indonesia
0 50 100 50 0
Power Distance Masculinity
Dimensions of Culture
Differences in cultural lifestyle can be
explained by:
individualism
power distance
uncertainty avoidance
Masculinity
Asian countries tend to have high uncertainty

avoidance and low masculinity.
Western countries tend to have low

uncertainty avoidance and high masculinity.
Self Reference Criterion

Self reference criterion is the unconscious
reference to one’s own cultural values and is
the root of most international business
problems.
Suggestions to reduce cultural bias include:
Define the problem or goal in terms of domestic cultural
traits, habits, or norms.
Define the problem or goal in terms of the foreign cultural
traits, habits, or norms.
Isolate the self-reference criterion influence in the problem,
and examine it to see how it complicates the problem.
Redefine the problem without the self-reference criterion
influence, and solve for the optimum-goal situation
Cross-Cultural Training
Cultural training programs
should include:
culture-specific information
general cultural information
on values, practices, and
assumptions
self-specific information
that identifies one’s own
cultural paradigm
Cross-Cultural Training (cont.)

Additional forms of training
include:
mentoring
area studies programs
cultural assimilator
programs, in which trainees
must respond to scenarios of
specific situations in a
particular country
sensitivity training
field experience
Tips for Making Culture Work

for Business Success
Embrace local culture
Build relationships
Employ locals to gain cultural
knowledge
Help employees understand you
Adapt products and practices to local
markets
Coordinate by region
Trade and Investment

Policies
Learning Objectives
To see how trade and investment policies have
historically been a subset of domestic policies.
To examine how traditional attitudes toward

trade and investment policies are changing.
To see the effects of global links in trade and

investment on policymakers.
To understand that nations must cooperate closely in

the future to maintain a viable global trade and
investment environment.
Rationale and Goals of Trade

and Investment Policies
Government policies are designed to regulate, direct,
and protect national activities. The exercise of these
policies is the result of national sovereignty, which
provides a government with the right to shape the
environment of the country and its citizens.
The domestic policy actions of most governments
aim to increase the standard of living of citizens and
to improve the quality of life, and to achieve full
employment.
These policies affect international trade and
investment indirectly.
Rationale and Goals of Trade

and Investment Policies (cont.)
In more direct ways, a country may also pursue
technology transfer from abroad or the exclusion of
foreign industries to the benefit of domestic infant
firms.
Government officials can also develop regulations on
imports to protect citizens.
Nations institute foreign policy measures designed
with domestic concerns in mind but explicitly aimed
to exercise influence abroad.
A major foreign policy goal is national security.
International Organizations
General Agreement on
Tariffs and Trade (GATT)
International Trade World Trade

Organization (ITO) Organization (WTO)
The International Trade

Organization
In 1948, the ITO represented an
agreement among 53 countries
to:
Aid in international commercial policies,
restrictive business practices,
commodity agreements, employment
and reconstruction, and economic
development and international
investment.
It developed a constitution for a new
United Nations agency.
The ITO was never implemented.
The General Agreement on

Tariffs and Trade
GATT started in 1947 as a set of rules to
ensure nondiscrimination, transparent
procedures, the settlement of disputes, and
the participation of the lesser-developed
countries in international trade.
GATT used tariff concessions to limit the level of tariffs
that would be imposed on other GATT members.
The Most Favored Nation clause calls for each
member country to grant every other member country
the same treatment that it accords with any other
country with respect to imports and exports.
The World Trade Organization

The WTO was introduced in
1995 and administers
international trade and
investment accords.
In 2002, the Doha Round ended
the first stage of implementation.
The aim is to further hasten
implementation of liberalization to
help the impoverished and
developing nations.
Changes in the Global Policy

Environment
Three major changes have occurred over
time in the global policy environment:
a reduction of domestic policy influence;
a weakening of traditional international
institutions;
and a sharpening of the conflict between
industrialized and developing nations.
Reduction of Domestic Policy

Influences
Currency flows have increased from an average daily
trade volume of $18 billion in 1980 to $1.2 trillion in 2001.
As a result, currency flows have begun to set the value of

exchange rates independent of trade, which in turn have
now begun to determine the level of trade.
The interactions between global and domestic financial

flows have severely limited the influence of governments.
To regain influence, some governments have tried to

restrict world trade by erecting barriers, charging tariffs,
and implementing import regulations.
Weakening of International
Institutions
The intense links among nations and the new
economic environment resulting from new market
entrants and the encounter of different economic
systems are weakening the WTO.
The International Monetary Fund does not have
the funds available to satisfy the needs of all
struggling nations.
The World Bank has been unsuccessful in
furthering the economic goals of the developing
world and newly emerging market economies. Some
claim that its bank policies have created more
poverty.
Conflict Between Industrialized

and Developing Nations
In the past, it was hoped that the gap between
industrialized and developing nations would
gradually be closed.
Although several less-developed nations have

emerged as newly industrialized countries,
even more nations are facing grim economic
futures.
An increase in environmental awareness has

led to a further sharpening of the conflict.
Restrictions of Imports
Many countries including the United States have
passed antidumping laws which help domestic
industries by restricting foreign products being sold
below the cost of production, or at prices lower than
those in the home market.
Imports are also restricted by nontariff barriers, such

as buy-domestic campaigns. It is difficult to remove
these barriers.
Imports can also be reduced by tightening market

access and entry of foreign products through
involved procedures and inspections.
Effects of Import Restriction

Import control may mean that the most efficient sources
of supply are not available, resulting in second-best
products or higher costs for restricted supplies.
Import control may result in the downstream change in
the composition of imports.
Due to inefficiency,
import controls may
cause a lag in
technological
advancements.
Restrictions of Exports
Nations control their exports for reasons of
short supply, national security and foreign
policy purposes, or the desire to retain
capital.
National security controls are placed on
weapons and high-technology exports.
Although restriction of exports is a valuable
international relations tool, it may give a
country’s firms the reputation of being
unreliable suppliers and may divert orders to
firms of other nations.
Export Promotion
Export promotion is designed to help firms enter and
maintain their position in international markets and
to match or counteract similar efforts by other
nations.
Various approaches toward export promotion

include:
knowledge transfer
direct or indirect subsidization of export activities
reducing governmental red tape for exporters
export financing and mixed aid credits to exporters
altered tax legislation for nationals living abroad
Import Promotion
Countries that maintain large
balance-of-trade surpluses use
import promotion measures.
The Japan External Trade
Organization (JETRO) has begun to
focus on the promotion of imports to
Japan.
The Impacts of Foreign Direct

Investment on Host Countries
Positive Impact Negative Impact
capital information industrial dominance
technology and technological
management skills
dependence
transfer
regional and sectoral disturbance of economic
development plans
internal competition and cultural change
entrepreneurship interference by home
favorable effect on government of
balance of payments multinational corporation
increased employment
Restrictions on Investment
Many nations that lack necessary
foreign exchange reserves restrict
exports of capital, because
capital flight can be a major
problem.
Once governments impose
restrictions on the export of
funds, the desire to transfer
capital abroad increases. This
creates problems for gaining new
outside investors.
Investment Promotion
Financial Incentives
Fiscal Incentives Nonfinancial Incentives

Investment Promotion (cont.)

Fiscal incentives are specific tax measures
designed to attract the foreign investor, including
special depreciation allowances, tax credits or
rebates, special deductions for capital expenditures,
tax holidays, and reduction of tax burdens.
Financial incentives offer special funding for the
investor by providing land or building, loans, and
loan guarantees.
Nonfinancial incentives can consist of guaranteed
government purchases, special protection from
competition, and investments in infrastructure
facilities.
Bargaining Power of Multinational

Corporation and Host Country
Bargaining
Power
Policy Provided/Demanded
Incentives for Investment
Continued Privileged
Treatment
Discriminating Requirements MNC
End of Relationship/
Divestment
Time
U.S. Perspective on Trade and

Investment Policies
The U.S. seeks a positive trade policy rather than
reactive, ad hoc responses to specific situations.
Protectionist legislation can be helpful, provided

it is not enacted into law.
Trade promotion authority gives Congress the

right to accept or reject treaties and agreements, but
reduces the amendment procedures
International Perspective on
Trade and Investment Policies
From an international perspective, trade and
investment negotiations must continue.
In doing so, trade and investment policy can

take either a multilateral or bilateral approach:
bilateral negotiations are carried out mainly between
two nations.
multilateral negotiations are carried out among a
number of nations.
Politics and Law

Learning Objectives
To understand the importance of the political
and legal environments in both the home and
host countries to the international business
executive.
To learn how governments affect business
through legislation and regulations.
To see how the political actions of countries expose
firms to international risks.
To examine the differing laws regulating international
trade found in different countries.
To understand how international political relations,
agreements, and treaties can affect international
business.
A Look at Three Segments

The Home-Country
Perspective
Host Country Political
and Legal Environment
International Relations
and Laws
The Home Country Perspective

Major areas of governmental
activity that are of concern to the
international business manager:
Embargoes and Sanctions
Export Controls
Regulation of International
Business Behavior
Sanctions and Embargoes

Governmental actions that distort
free flows of trade in goods,
services, or ideas for adversarial
and political, rather than economic,
purposes.
Sanctions tend to consist of specific
coercive trade measures.
Embargoes are typically broader in
that they prohibit trade entirely.
Export Controls
Are designed to deny or delay the acquisition
of strategically important goods by
adversaries.
The legal basis for export controls varies in
nations.
Most international business can be carried out
under NLR conditions.
Export licenses are issued by the Dept. of
Commerce for commodities whose export is
considered sensitive.
How an Export License is Issued

Specialists in the Department of Commerce
match the exported commodity with the
Critical Commodities list, the country of
destination, and the recipient company.
If no concerns exist in any one of the three
areas, a license is issued.
This process is only carried out if the product
or the recipient country is considered
sensitive.
A New Environment for Export Controls

The speed of change
Focus of export
and the rapid
controls on the Third
dissemination of
World
information and
A loosening of mutual innovation around the
bonds among allied world
nations
The issue of
The increased foreign equipment size
availability of high-
tech products
Implementation and Enforcement of

Export Controls
Export controls are increasingly difficult to
implement and enforce.
The number of countries that are able to
manufacture products of strategic importance
has increased.
Products that are in need of control are
developed and disseminated very quickly.
It is difficult to control the transfer of
technology and know-how.
Regulation of International
Business Behavior
Regulations on firms varies
substantially among nations.
Nations may employ boycotts to
govern business activities.
Antitrust Laws are a regulatory
activity.
Bribery
Firms operating abroad are
affected by laws against bribery
and corruption.
International businesses may
bribe to counterbalance poor
product quality, to create a
market for goods, or to stay
competitive with other firms that
bribe.
Host Country
Political Action and Risk
Varies widely from country to country
Economic Risk
Less dangerous, but more common
Three Types of Political Risk

Ownership Risk
Exposes property and life
Operating Risk
Interference with the ongoing operations
of a firm
Transfer Risk
Limitations on the outflow of funds
Political Risk May Involve

Confiscation
The government takeover of a firm without
compensation to the owners.
Expropriation
A form of government takeover in which
the firm’s owners are compensated.
Domestication
The government demands transfer of
ownership and management responsibility.
Economic Risk
Exchange controls may be levied
Tax policies may be used to control
corporations and their capital
Price controls may employed to
control prices of imported products
or services
Managing the Risk

Demonstration of
concern with host
country’s society can be
effective.
Firms can take out
insurance to cover losses
due to political and
economic risk.
Legal Differences and Restraints

Countries differ in their laws as as
well as in their use of the law. There
are two major legal systems
worldwide:
Common Law: Based on tradition and
dependent upon precedent and custom.
Code Law: Based on a comprehensive set of
written statutes.
International Relations and Laws

International Politics:The effect of politics on
international business is determined by both the
bilateral political relations between home and host
countries and by multilateral agreements
governing the relations among groups of
countries.
International Law:Plays an important role in the
conduct of international business. Treaties and
agreements have a strong influence on
international business operations.
International Law
The World Trade Organization defines
internationally acceptable economic
practices for its member nations.
The Patent Cooperation Treaty (PCT)
provides procedures for filing patent
applications.
The United Nations has developed codes
and guidelines that affect international
business.
In cases of disagreement, the

parties can choose:
Arbitration: Procedures are quicker and
often spelled out in the original contract
Litigation: Often involves extensive

delays and is very costly
The Theory of Trade and

Investment
Learning Objectives
To understand the traditional arguments
of how and why international trade
improves the welfare of all countries
To review the history and compare the
implications of trade theory from the original
work of Adam Smith to the contemporary theories
of Michael Porter
To examine the criticisms of classical trade theory
and examine alternative viewpoints of which
business and economic forces determine trade
patterns between countries
To explore the similarities and distinctions
between international trade and international
investment
Evolution of Trade Theory

The Age of Mercantilism
Classical Trade Theory
Factor Proportions Trade
Theory
International Investment
and Product Cycle Theory
The New Trade Theory:
Strategic Trade
The Theory of International
Investment
The Age of Mercantilism

The evolution of trade into the form
we see today reflects three events:
The Collapse of Feudal Society
The Emergence of the Mercantilist Philosophy
The Life Cycle of the Colonial Systems of the

European Nation-States
Mercantilism
Mixed exchange through
trade with accumulation
of wealth
Conducted under
authority of government
Demise of mercantilism
inevitable
Classical Trade Theory

The Theory of Absolute Advantage
The ability of a country to produce a
product with fewer inputs than another
country
The Theory of Comparative

Advantage
The notion that although a country may
produce both products more cheaply than
another country, it is relatively better at
producing one product than the other
Classical Trade Theory Contributions

Adam Smith—Division of Labor
Industrial societies increase output using same
labor-hours as pre-industrial society
David Ricardo—Comparative
Advantage
Countries with no obvious reason for trade can
specialize in production, and trade for products
they do not produce
Gains From Trade
A nation can achieve consumption levels
beyond what it could produce by itself
Factor Proportions Trade Theory
Developed
Developedby
byEli
EliHeckscher
Heckscher
Expanded
Expandedby
byBertil
BertilOhlin
Ohlin

Considers Two Factors of Production
Labor
Capital

A country that is relatively labor
abundant (capital abundant) should
specialize in the production and
export of that product which is
relatively labor intensive (capital
intensive).
The Leontief Paradox

The Test:
Could Factor Proportions Theory
be used to explain the types of
goods the United States imported
and exported?
The Method:
Input-output analysis
The Leontief Paradox

The Findings:
The U.S. exported labor-intensive
products and imported capital-
intensive products.
The Controversy:
Findings were the opposite of what
was generally believed to be true!
Overlapping Product Ranges Theory:

Staffan Burenstam Linder
Trade in manufactured goods
dictated not by cost concerns, but
by similarity in product demands
across countries.
Work focused on preferences of
consumer demand.
Today, termed market segments.
Product Cycle Theory
Raymond Vernon
Focus on the product,
not its factor
proportions
Two technology-based
premises
Product Cycle Theory:

Vernon’s Premises
Technical innovations leading to new
and profitable products require large
quantities of capital and skilled labor
The product and the methods for

manufacture go through three stages
of maturation
Stages of the Product Cycle

The New Product
The Maturing Product
The Standardized Product

The Product Cycle and Trade

Implications
Increased emphasis on technology’s
impact on product cost
Explained international investment
Limitations
Most appropriate for technology-based products
Some products not easily characterized by stages
of maturity
Most relevant to products produced through mass
production
The New Trade Theory:

Strategic Trade
Two New Contributions
Paul Krugman-How trade is altered
when markets are not perfectly
competitive
Michael Porter-Examined
competitiveness of industries on a
global basis
Strategic Trade
Krugman’s Economics of Scale:
Internal
InternalEconomies
Economiesof
ofScale
Scale
External
ExternalEconomies
Economiesof
ofScale
Scale
Strategic Trade
Government can play a beneficial
role when markets are not purely
competitive
Theory expands to government’s
role in international trade
Four circumstances exist that
involve imperfect competition in
which strategic trade may apply
Strategic Trade
The Four Circumstances Involving
Imperfect Competition:
Price Cost
Cost
Price
Externalities
Externalities
Repetition
Repetition
Strategic Trade
Porter’s Diamond of National
Advantage
Innovation is what drives and sustains
competitiveness
Four components of competition
Factor Conditions
Demand Conditions
Related and Supporting Industries
Firm Strategy, Structure, and Rivalry
Michael Porter’s Competitive Clusters
Critical masses of
unusual competitive
success in particular
fields, located in one
place

Investment
The movement of capital has
allowed foreign direct
investments across the globe

Investment
Firms as Seekers
Seeking Resources
Seeking Factor Advantages
Seeking Knowledge
Seeking Security
Seeking Markets

Investment
Firms as Exploiters of Imperfections
Imperfections in Access
Imperfections in Factor Mobility
Imperfections in Management
Firms as Internalizers
Establish their own multinational operations-
internalize production
Competitive advantage due to confidentiality
The
The Balance
Balance of
of
Payments
Payments
Learning Objectives
To understand the fundamental principles of how countries
measure international business activity, the balance
of payments
To examine the similarities of the current and capital
accounts of the balance of payments
To understand the critical differences between trade in
merchandise and services and why international investment
activity has recently been controversial in the United States
To review the mechanical steps of how exchange rates are
transmitted into altered trade prices and eventually trade
volumes
To understand how countries with different government
policies toward international trade and investments, or
different levels of economic development, differ in their
balance of payments
Introduction
The measurement of all international
economic transactions between the
residents of a country and foreign
residents is called the balance of
payments (BOP)
The two major sub accounts of the
balance of payments are:
Current account
Capital account
Fundamentals of Balance of
Payments Accounting
The balance of payments must balance
Subaccounts may be imbalanced
Three main elements to the process of
measuring international economic
activity include:
Identifying what is and is not an international
economic transaction
Understanding how the flow of goods, services,
assets, and money creates debits and credits to
the overall BOP
Understanding the bookkeeping procedures for
BOP accounting
Defining International Transactions

Identifying many
international
transactions is ordinarily
not difficult
However, some
international
transactions are not
obvious
The BOP as a Flow Statement

The BOP is often
believed to be a balance
sheet rather than a cash
flow statement
There are two types of
business transactions
that dominate the BOP:
Real assets
Financial assets
BOP Accounting: Double-

Entry Bookkeeping
BOP employs an A debit is created
accounting whenever:
technique called An asset is increased
double-entry A liability is decreased
bookkeeping An expense is
increased
In this age-old
A credit is created
method every
whenever:
transaction produces
An asset is decreased
a debit and a credit
A liability is increased
of the same amount
An expense is
decreased
BOP Accounting: Double-

Entry Bookkeeping
The measurement of all international
transactions in and out of a country over
a year is a difficult task
Mistakes, errors, and statistical
discrepancies will and do occur
Current and capital account entries are
recorded independent of one another,
not together as this accounting method
would prescribe
The Accounts of the Balance

of Payments
The BOP is comprised of two
primary subaccounts:
Current Account
Financial/Capital Account
Two additional and important
subaccounts of the BOP include:
Net Errors and Omissions Account
Official Reserves Account
The Current Account

This account includes all
international economic
transactions with income or
payment flows occurring within
the year, the current period
It consists of four subcategories:
Goods trade
Services trade
Income
Current transfers
This account is typically dominated
by Goods Trade
The Current Account

The Balance on Trade (BOT) refers specifically
to the balance of exports and imports of goods
trade only
The deficits in the BOT of the past decade have
been an area of concern for the U.S.
Merchandise trade is the core of international
trade and has three major components:
Manufactured goods
Agriculture
Fuels
The most encouraging news for U.S.
manufacturing trade is the growth of exports
in recent years
The Capital and Financial

Account
This account of the BOP measures
all international economic
transactions of financial assets
It is divided into two major
components:
Capital Account
Financial Account
The Capital Account

The Capital Account is made up of
transfers of:
Financial assets
The acquisition and disposal of
nonproduced/nonfinancial assets
The Financial Account

The Financial Account consists
of three components:
Direct investment
Portfolio investment
Other asset investments
The contents of this account
are for all intents and purposes
the same as those of the
Capital Account under IMFs
BOP accounting framework
used prior to 1996
Net Direct Investment

This is the net balance of capital
dispersed out of and into the U.S. for
the purpose of exerting control over
assets
Follows the 10% ownership threshold
rule
The source of concern over foreign
investments in any country focuses on
two topics:
Control
Profit
Portfolio Investment
This is the net balance of capital that
flows in and out of the U.S., but does
not reach the 10% ownership threshold
of direct investment
It is capital invested in activities that
are purely profit-motivated rather than
ones made in the prospect of controlling
or managing the investment
These have shown much more volatile
behavior than net direct investments
over the past decade
Other Investment
Assets/Liabilities
This category consists of:
Short-term trade credits
Long-term trade credits
Cross-border loans from all types of
financial institutions
Currency deposits
Bank deposits
Other accounts receivable
Accounts payable
Official Reserves Account

This is the total currency
and metallic reserves held
by official monetary
authorities within the
country
Its significance depends on
whether the country is
operating under:
A fixed exchange rate regime
A floating exchange rate
system
The Balance of Payments--Total

The International Monetary Fund (IMF) is the
multinational organization that collects the
BOP statistics for over 160 different countries
around the globe
The current, capital, and financial accounts
combine to form the basic balance and is one
of the most frequently used summary
measures of the BOP
The current, capital, financial, and net errors
and omissions accounts combine to form the
summary measure known as the overall
balance or official settlements balance
The Balance of Payments and

Economic Crises
The sum of cross-border international
economic activity can be used by
international managers to forecast
economic conditions and in some cases,
the likelihood of economic crises
The mechanics of international
economic crises often follow a similar
path of development
The Asian Crisis

The roots of this currency crisis extended
from a fundamental change in the
economics of the region
It started as early as 1990 in Thailand
The most visible roots were the excesses in
capital flows into Thailand in 1996 and
early 1997
Corporate socialism, corporate governance,
banking liquidity and management are
underlying causes that apply to every
nation facing economic crisis
Capital Mobility
The degree to which capital moves
freely cross-border is critical to a
country’s balance of payments
The ability of capital to move involves
economic and political factors
Obstfeld and Taylor (2001) studied
the globalization of capital markets
and argued the post-1860 era can be
subdivided into four distinct periods
Capital Flight
Capital flight is the sudden and
shocking outflow of capital
from a nation’s economy in
which it is perceived there is
political, economic, or currency
crises forthcoming
Five primary mechanisms exist

by which capital may be moved
from one country to another
The Cases of China and

Turkey
The Chinese Turkey’s economic
balance of and financial crisis
of 2000-2001
payments serves serves as a prime
as an interesting example of how a
example of one country’s balance
country’s ongoing of payments can
efforts to manage deteriorate or
essentially collapse
its current and in a very short
financial accounts period of time
Financial Markets
Learning Objectives
To understand how currencies are traded and
quoted on world financial markets
To examine the links between interest rates
and exchange rates
To understand the similarities and differences
between domestic sources of capital and
international sources of capital
To examine how the needs of individual borrowers
have changed the nature of the instruments traded
on world financial markets in the past decade
To understand how the debt crises of the 1980s
and 1990s are linked to the international financial
markets and exchange rates
The Market for Currencies

The price of any one
country’s currency in terms
of another country’s currency
is called a foreign currency
exchange rate
Every market, every country,
and every firm may have its
own set of currency symbols
Exchange Rate Quotations

and Terminology
Direct quotation: Spot rates: when
when the subject the exchange of
currency is stated currencies takes
place immediately
first
Forward rates:
Indirect quotation: when the currency
when the subject exchange takes
currency is stated place at a later
second date and at an
agreed upon
exchange rate
Direct and Indirect

Quotations
Most currencies are quoted in direct
quotes versus the U.S. dollar
The major exceptions are currencies
associated with the British
Commonwealth and the European euro
When an exchange rate of a currency is
stated without using the U.S. dollar as a
reference, it is referred to as a cross
rate
Foreign Currency Market

Structure
The market for foreign
currencies is a worldwide
market that is informal in
structure
The “market” is actually the
thousands of
telecommunications links
among financial institutions
around the globe and it is
open nearly 24 hours a day
Market Size and Composition

Until recently there was little data on the
actual volume of trading on world foreign
currency markets
In the spring of 1986, the Federal Reserve
Bank of New York along with others started
surveying the activity of currency trading
every three years
Growth of foreign currency trading has been
nothing less than astronomical
The majority of the world’s trading in foreign
currencies is still taking place in the cities
where international financial activity is
centered, London, New York, and Tokyo
Market Size and Composition

Three reasons typically given for
the enormous growth in foreign
currency trading are:
Deregulation of international capital flows
Gains in technology and transaction cost
efficiency
The world is a risky place
The Purpose of Exchange

Rates
If countries are to trade,
they must be able to
exchange currencies
The exchange of one
country’s currency for
another should be
relatively simple, but it’s
not
What is a Currency Worth?

The exchange rate The version of
between currencies purchasing power
should equalize its parity that estimates
purchasing power the exchange rate
The theory of between two
purchasing power currencies using just
parity (PPP) is one good or service
simply the rate that as a measure of the
equalizes the price of proper exchange for
the identical product all goods and
or service in two services is called the
different currencies Law of One Price
Monetary Systems of the

20th Century
Mixed/fixed floating
exchange rate system is
in operation today
Prior to this, the Gold
Standard was in effect
Prior to that, the Bretton
Woods Agreement was in
effect
The Gold Standard

The gold standard began sometime in
the 1880s
It was premised on three basic ideas:
A system of fixed rates of exchange existed
between participating countries
Money issued by member countries had to be
backed by gold reserves
Gold acted as an automatic adjustment
Under this standard, each country’s
currency would be set in value per
ounce of gold
The Bretton Woods Agreement

The governments of 44 of the Allied Powers
gathered together in Bretton Woods, New
Hampshire in 1944 to plan for the postwar
international monetary system
This agreement called for the following:
Fixed exchange rates between member countries
The establishment of a fund of gold and currencies for
stabilization of their currencies, the International
Monetary Fund
The establishment of a bank, the World Bank, that
would provide funding for long-term development
projects
Floating Exchange Rates

Since March 1973, the world’s
major currencies have floated
in value versus each other
The inability of a country to
control the value of its
currency on world markets
has been a harsh reality for
most
Direct intervention
Coordinated intervention
The European Monetary

System and the Euro
In 1979 a formalized structure was put in place among
many of the major members of the European Community
The European Monetary System (EMS) officially began
operation in March 1979 and once again established a
grid of fixed parity rates among member currencies
The EMS consisted of three elements:
First, all countries that were committing their currencies and
their efforts to the preservation of fixed exchange rates
entered the Exchange Rate Mechanism (ERM)
Second, was the actual grid of bilateral exchange rates with
their specialized band limits
Third, was the creation of the European Currency Unit (ECU)
The Maastricht Treaty

The members of the European
Union concluded this treaty in
December 1991
This treaty:
Laid out terms goals of harmonized social
and welfare policies
Specified a timetable for the adoption of a
single currency to replace all individual
currencies
The Euro
On December 31, The monetary policy
1998, the final fixed for the EMU will be
rates between the 11 conducted by the
currencies and the European Central
euro were put into Bank (ECB) and has a
place single responsibility
On January 1, of safeguarding the
1999,the euro was stability of the euro
officially launched as On January 4, 1999,
a single currency for the euro began
the European Union trading on world
currency markets
International Money
Markets
International money markets,
often termed the Eurocurrency
markets, constitute an
enormous financial market
that is in many ways outside
the jurisdiction and
supervision of world financial
and governmental authorities
Eurocurrency Markets and

Eurocurrency Interest Rates
A Eurocurrency is While there are
any foreign hundreds of
currency different major
denominated interest rates
deposit or around the globe,
account at a the international
financial financial markets
institution outside focus on the
the country of the interbank interest
currency’s issue rates
Defining International
Financing
The definition of what constitutes
an international financial
transaction is dependent on two
characteristics:
Whether the borrower is domestic or
foreign
Whether the borrower is raising capital
denominated in the domestic currency or a
foreign currency
Defining International
Financing
The two characteristics that define
an international financial
transaction form four categories:
Domestic borrower/domestic currency
Foreign borrower/domestic currency
Domestic borrower/foreign currency
Foreign borrower/foreign currency
Structure of International
Banking
Correspondent bank: an
unrelated bank based in
a foreign country
Representative bank:
basically a sales office for
a bank
International Security
Markets
The international debt
securities markets have
experienced the greatest
growth in the past decade
It includes:
Bonds
Equities
Private placements
The International Bond

Market
The international bond market
provides the bulk of financing
Foreign bonds
Eurobonds
Bearer bonds
Private Placements
One of the largest and
unpublicized capital
markets
A private placement is
the sale of debts or
equity to a large
investor
Economic Integration
Learning Objectives
To review types of economic integration
among countries
To examine the costs and benefits of
integrative arrangements
To understand the structure of the European
Union and its implications for firms within and
outside Europe
To explore the emergence of other integration
agreements, especially in the Americas and
Asia
To suggest corporate response to advancing
economic integration
Introduction
Economic integration is best
viewed as a spectrum with the
various integrative agreements in
effect today lying in the middle of
this spectrum
The level of integration defines the
nature and degree of economic
links among countries
Levels of Economic
Integration
Trading bloc: Trading blocs may
preferential take various
economic forms:
arrangement Free trade area
among a group of Customs union
countries Common market
Economic union
The Free Trade Area and the

Customs Union
The free trade area is Members of a
the least restrictive customs union
and loosest form of dismantle barriers to
economic integration trade in goods and
services among
among countries themselves
In a free trade area, A customs union
all barriers to trade establishes a
among member common trade policy
countries are with respect to
removed nonmembers
The Common Market and the

Economic Union
A common market has The creation of a true
no barriers to trade economic union requires
among members and integration of economic
has a common external policies in addition to the
trade policy free movement of goods,
Factors of production services, and factors of
are mobile among production
members Under this union,
Members of a common members would
market must be harmonize monetary
prepared to cooperate policies, taxation, and
closely in monetary, government spending and
fiscal, and employment a common currency would
policies be used by all members
Arguments Surrounding
Economic Integration
A number of arguments surround
economic integration
These arguments center on:
Trade creation and diversion
The effects of integration on import
prices, competition, economies of
scale, and factor productivity
The benefits of regionalism versus
nationalism
Trade Creation and Trade

Diversion
Whereas trade creation
is positive in moving
toward freer trade, and
therefore lower prices
for consumers within the
EU, the impact of trade
diversion is negative
Reduced Import Prices

When a small country imposes a
tariff on imports, the price of the
goods will typically rise, which will
in turn result in lower demand for
the imported goods
When a bloc of countries imposes
the tariff, the fall in demand for the
imported goods will be substantial
Increased Competition
and Economies of Scale
Integration increases market size
and may result in a lower degree
of monopoly in the production of
certain goods and services
Certain industries may not be
economically viable in smaller,
trade protected countries
Internal economies of scale
External economies of scale
Higher Factor Productivity and

Regionalism Versus Nationalism
When factors of The biggest
production are freely impediment to
mobile, the wealth economic integration
of the common
remains the
market countries, in
aggregate, will likely reluctance of nations
increase to surrender a
Factor mobility will measure of their
not benefit each autonomy
country in the
common market
European Integration
Economic integration in Europe
from 1948 to the mid 1980s:
Organization for European Economic
Cooperation (OEEC)
Treaty of Rome
European Free Trade Association (EFTA)
Common agricultural policy (CAP)
European Integration
The European Union

since the mid 1980s:
1992 White Paper
European Union (EU)
Organization of the EU
The executive body of the EU is the
European Commission,
headquartered in Brussels
The Council of Ministers has the
final power to decided EU actions
The future expansion of the EU will
cause changes in the decision
making processes
Implications of the Integrated

European Market
Perhaps the most important implication for
Europe is the economic growth that is
expected to result
Several specific sources of increased growth
have been identified:
Gains from eliminating transaction costs
Achievement of economies of scale
More intense competition
Cheaper transaction costs and reduced currency
risks
Many U.S. firms fear a unified Europe
North American Economic

Integration
Although the EU is undoubtedly the most
successful and well-known integrative
effort, integration efforts in North America
has gained momentum and attention
North American integration has an interest
in purely economic issues and there are no
constituencies for political integration
U.S.-Canada Free Trade Agreement
North American Free Trade Agreement (NAFTA)
Other Economic Alliances

The world’s developing
countries have perhaps
the most to gain from
successful integrative
efforts
Import substitution
Integration in Latin America
Before the signing of the U.S.-Canada

Free Trade Agreement, all of the major
trading bloc activity in the Americas had
taken place in Latin America
One of the longest lived integration
efforts among developing countries was
the Latin America Free Trade
Association (LAFTA), formed in 1961
Integration in Asia and Integration

in Africa and the Middle East
The development in Africa’s economic
Asia has been groupings range from
different from that in currency unions among
Europe and the European nations and
their former colonies
Americas to customs unions
Asian interest in among neighboring
regional integration states
is increasing for Countries in the Arab
pragmatic reasons world have made some
progress in economic
integration
Economic Integration and

the International Manager
Regional economic integration creates
opportunities and challenges for the
international manager
Economic integration may have an impact on a
company’s entry mode
Decisions regarding integrating markets must
be assessed from four different perspectives
Effects of change
Strategic planning
Reorganization
Lobbying
Cartels and Commodity Price

Agreements
An important characteristic that
distinguishes developing countries from
industrialized countries is the nature of
their export earnings
This distinction is important for several
reasons
A cartel is an association of producers of a
particular good
Commodity price agreements involve both
buyers and sellers in an agreement to
manage the price of a certain commodity
Emerging Markets
Learning Objectives
To understand the special concerns that
must be considered by the international
manager dealing with emerging market
economies.
To survey the vast opportunities for trade
offered by emerging market economies.
To understand why economic change is
difficult and requires much adjustment.
To become aware that privatization offers new
opportunities for international trade and
investment.
Doing Business with

Transition Economies
The major market economies
emerging out of formerly
centrally planned economies
are:
Russia and the now independent
states of the former Soviet Union.
Eastern and central European nations
(Albania, Bulgaria, the Czech and
Slovak Republics, Hungary, Poland,
and Romania).
The Trade History of Socialist

Countries
After 1918, Socialist states had a monopoly on
foreign trade, which was concentrated in the
hands of organizations specifically authorized
by the state.
This trade structure isolated the firms and consumers
from the West and unlinked demand from supply.
The result was misallocated resources, ineffective
channels of distribution, and inefficiency due to lack of
competition.
Managers of plants were more concerned with
producing the quantities stipulated by a rigid central
plan than with producing products and quality desired.
Perestroika and Glasnost

In the mid 1980’s, the Soviet Union developed
two new political and economic programs:
perestroika and glasnost
Perestroika was used to fundamentally reform the
Soviet Union economy by improving the overall
technological and industrial base as well as the quality
of life for Soviet citizens through increased availability
of food, housing, and consumer goods.
Glasnost was used to complement those efforts by
encouraging the free exchange of ideas and discussion
of problems, pluralistic participation in decision-making,
and increased availability of information.
Changes after 1989

With an unexpected suddenness, the
Iron Curtain disappeared, and within
three years, the Communist empire
ceased to exist
Eastern Europe and the former Soviet Union
shifted their political and economic
orientations toward a market economy.
Trade flows were redirected.
Austerity programs were introduced, which led
to a decrease in the standard of living.
All of these changes ended the Cold War.
The Realities of Economic

Change
Many transition economies face infrastructure
shortages.
Capital shortages are also a major constraint.
It is difficult for corporations to respond to
demand because consumer knowledge is
vague.
Allocation mentality, or waiting for
instructions from above, represent a
management problem.
Employee and manager commitment can be
hard to find.
The changes complicate managerial decision
making.
The Realities of Economic

Change (cont.)
Given the poor market orientation in the previous
business environment, managers must adapt their
behavior in these areas:
Problem Solving
Decision Making
Customer Orientation
Team Building Development
Adjusting to Global Change

Resistance to change should be
expected in countries that experience
rapid economic and political change.
The established market economies of
the West also must be prepared for
change due to:
The reorientation trade flows
Job shifts
Declines in employment
Challenges
The frequent unavailability of convertible
currency makes many products out of reach for
citizens of emerging market economies.
Lack of protection of intellectual property
rights dissuade firms from investing in
emerging market economies.
Attempting to source products from emerging
market economies can be problematic.
The quality of products can be inferior in
emerging market economies.
Opportunities
Some transition economies have
products that are unique in
performance and can be successfully
traded internationally.
Consumer products in transition
economies are gaining favor
because of competitive pricing.
There are substantial opportunities
for technology transfer.
Reasons for State-owned

Enterprises
The reasons for the existence of state-owned
enterprises in emerging market economies
are:
Increased national security
Increased economic security
The investment is too large for the private sector
Governments rescue failing private enterprises by
placing them in government ownership
State-owned firms are more socially-oriented than
private firms which are more profit-oriented
State-owned Enterprises and

The three types of activities where firms are
likely to encounter state-owned enterprises:
The Sourcing or
Marketing Process
International
Market Entry
Competition
Drawbacks to State-owned
Enterprises
Competition is restrained, which results in
lower quality of goods and reduced
innovation.
The international competitiveness of state-
owned enterprises declines, resulting in
the need for government subsidies.
Many government-controlled corporations
are losing money because the focus is on
job allocation rather than business.
Reasons for Privatization

Through privatization, budgets can be reduced
and more efficient services can be provided.
Goods and services can be more competitive
and innovative.
Experience indicates that private enterprises
outperform state-run companies.
Privatization attracts foreign investment
capital.
Governments can use proceeds from
privatization to help fund other pressing
domestic needs.
Privatization Opportunities
for International Firms
Existing firms can be acquired at low cost,
often with governmental support through tax
exemptions, investment grants, special
depreciation allowances, and low-interest
credits.
Since wages are low in countries where
privatization takes place, there is more
opportunity to build low-cost manufacturing
and sourcing bases.
The international firm can act as a catalyst by
accelerating the pace of transferring business
skills and technology and by boosting trade
prospects.
The Less-developed Markets

The less developed markets in
the world include countries in:
Africa
Asia
Eastern Europe
Latin America
the Middle East
The emergence of these markets
presents a great opportunity for
citizens and companies alike.
The World Economic Pyramid
Annual Per Capita Income Tiers World Population
More than $20,000 1 75 to 100 million
1.5 to 1.75
$1,500 to $20,000 2 and 3
billion
Less than $1,500 4 4 billion

Multinational Firm’s Role

Multinational firms have experienced a
high rate of success when entering
transition economies for several reasons:
They tend to enter sectors that allow high profit
potential with minimal capital investments.
They increase in size only after they gain
experience and knowledge of the local markets.
The governments in transition economies award
special privileges to multinational firms.
As multinational firms mature in these economies,
the domestic market itself becomes a market
opportunity.
World-class Competition
Many economies now recognize that they must
be world class competitors in order to develop
businesses.
Domestic firms enter into joint ventures with

global firms to tap into their knowledge base
and success.
This can be difficult, given that domestic firms

rarely have significant capital to contribute.
Building the Knowledge Base

Learning Objectives
To gain an understanding of the need for
research.
To explore the differences between
domestic and international research.
To learn where to find and how to use sources
of secondary information.
To gain insight into the gathering of primary
data.
To examine the need for international
management information systems.
International and
Domestic Research
The tools and techniques
of international research
are the same as those of
domestic research.
The difference is in the
environment to which
the tools are applied.
International and Domestic

Research (cont.)
The four primary reasons for the differences
between international and domestic research
are:
New Parameters
New Environmental
Factors
An Increase in the
A Broader Definition Number
of Competition of Factors Involved
New Parameters
In crossing international borders, a firm
encounters parameters not found in
domestic business.
Examples include:
Duties
Foreign currencies and changes in their value
Different modes of transportation
International documentation
Differing modes of operating internationally
New Environmental Factors

Many of the domestic assumptions on
which the firm and its activities were
founded may not hold true
internationally.
Management needs to:
Learn the culture of the host country
Understand its political systems and level of
stability
Comprehend the existing differences in societal
structures and language
Understand pertinent legal issues
The Number of Factors

Involved
When a firm enters a new international
market, the number of changing
dimensions increases.
Coordination of the interaction among the
dimensions is crucial to the international
success of the firm for two reasons:
In order to exercise some central control over
international operations, a firm must be able to
compare results and activities across countries.
The firm must be able to learn from its international
operations and must find new ways to apply the new
lessons learned to different markets.
Broader Definition of
Competition
The international market
exposes the firm to much
greater variety of competition
than that found in the home
market.
Firms must:
Determine the breadth of the competition,
Track competitive activities,
Evaluate their actual and potential impact
on company operations on an ongoing
basis.
Lack of International
Research
International research is often less rigorous,
less formal, and less quantitative than
domestic research.
The four reasons why managers are reluctant
to engage in international research are:
Their lack of sensitivity to differences in culture,
consumer tastes, and market demands.
Limited appreciation for different environments abroad.
Lack of familiarity with national and international data
sources.
Firms build international business activities gradually,
frequently based on unsolicited orders.
The Importance of
International Research
Firms must learn where the opportunities are,
what customers want, why they want it, and
how they satisfy their needs and wants.
Research allows management to identify and
develop international strategies.
Firms must identify, evaluate, and compare
potential foreign business opportunities and
the subsequent target market selection.
Research is necessary for the development of a
business plan.
Determining Research
Objectives
As a starting point,
research objectives must
be determined for a firm.
These objectives will
depend on the views of
management, the
corporate mission of the
firm, the firm’s level of
internationalization, and
its competitive situation.
Going International-
Exporting
A frequent objective of international
research is that of foreign market
opportunity analysis. The aim is to utilize a
broad-brush approach.
Steps to this approach include:
A cursory analysis of general variables of a country.
A preliminary evaluation of each individual country.
Selection of appropriate markets for in-depth
evaluation.
Finally, a competitive assessment must be made.
Process of Researching Foreign

Market Potentials
Stage One
Preliminary Screening for Attractive Country Markets
Key Question to be answered:
Which foreign markets warrant detailed information?
Stage Two
Assessment of Industry Market Potential
What is the aggregate demand in each of the selected markets?
Stage Three
Company Sales and Promotion Analysis
How attractive is the potential demand for our products and services?
Going International-
Importing
When importing, the major focus shifts
from supplying to sourcing.
Management must identify markets that
produce suppliers or materials desired.
The importer needs to know:
The reliability of a foreign supplier,
The consistency of its product or service quality,
The length of delivery time,
Government rules and restrictions of the exporting
country
Secondary Data
Secondary data is information that already has
been collected by some other organization.
This data should be evaluated regarding the
quality of the source, how recent the data is,
and the relevance to the task at hand.
Because secondary data were originally
collected to serve another purpose, they can
often only be used as proxy information.
Precautions should be taken due to increasing
sensitivity to data privacy. Firms must inform
their customers of privacy policies.
Sources of Secondary Data

Other Firms
Directories
Governments
International
Institutions
Trade Associations Service

Organizations
Conducting Primary Research

Primary data are obtained
by a firm to fill specific
information needs.
The researcher must decide
whether research is to be
conducted in the consumer
or the industrial product
area.
Determining the Research

Technique
Selection of the research technique
depends on a variety of factors:
The objectivity of the data sought must be
determined. Unstructured data will require more
open-ended questions and more time than
structured data.
Whether the data should be collected in the real
world or in a controlled environment.
Whether to collect historical facts or information
about future developments.
Research Techniques
Interviews
Focus Groups Observation
Surveys Use of Web

Technology
The International
Information System
An information system is the systematic and
continuous gathering, analysis, and reporting
of data for decision-making purposes.
To be useful, the information system must be:
Relevant
Timely
Flexible
Accurate
Exhaustive
Consistent
Convenient
Export Complaint Systems

An export complaint system allows
customers to contact the original
supplier of a product in order to inquire
about products, make suggestions, or to
present complaints.
A firm must be able to aggregate and
analyze complaints and to make use of
them internally.
Increasingly, the Internet enables
customers to provide feedback on their
experiences with a firm.
The Mechanisms of Export

Complaint Systems
Environmental
Scanning
Delphi Studies Scenario Building

Environmental Scanning
Environmental scanning activities
provide continuous information on:
Political, social, and economic affairs
internationally
Changes of attitudes of public institutions and
private citizens
Possible upcoming alterations
Two significant methods of
environmental scanning are obtaining
factual input and content analysis.
Delphi Studies
Delphi studies are a means for
aggregating the judgements of a
number of experts who cannot
come together physically.
The Delphi technique is particularly

valuable because it uses mail, fax,
or electronic communication to
bridge large distances and therefore
makes experts accessible at a
reasonable cost.
Scenario Building
Scenario building involves the identification of
crucial variables and the degree of variation.
The possibility of joint occurrences must be
recognized.
For scenarios to be useful, managers must
analyze and respond to them by formulating
contingency plans.
Through the anticipation of possible problems,
managers hone their response capability and
in turn shorten response times to actual
problems.
Entry and Expansion

Learning Objectives
To learn how firms gradually progress
through an internationalization process.
To understand the strategic effects of
internationalization.
To study the various modes of entering
international markets.
To understand the role and functions of
international intermediaries.
To learn about the opportunities and
challenges of cooperative market
development.
International Management
Successful international managers tend to:
Be active
Be aggressive
Display a high degree of international orientation
Managerial commitment is critical because

foreign market penetration requires a vast
amount of market development activity,
sensitivity toward foreign environments,
research, and innovation.
The Steps to Developing

International Commitment
Become aware of international
business opportunities.
Determine the degree of the
firm’s internationalization.
Decide the timing of when to
start the internationalization
process and how quickly it
should progress.
Motivations for Going

International
Proactive Motivations Reactive Motivations
Profit advantage Competitive pressures
Unique products Overproduction
Technological Declining domestic sales
advantage Excess capacity
Exclusive information Saturated domestic
Tax benefit markets
Economies of scale Proximity to customers
and ports
Psychological Distance
Sometimes cultural variables, legal
factors, and other societal norms make
a foreign market that is geographically
close seem psychologically distant.
The two major issues of psychological
distance are:
Some of the distance seen by firms is based
on perception rather than reality.
Closer psychological proximity makes it easier
for firms to enter markets.
Profit Risk During Early

Internationalization
In the short term, firms may experience
increased risk and decreasing profits when
going international.
Market
Profit Gap
International
Before
Going
Risk
International Experience
The Keys to Successful

International Performance
Effectiveness
Efficiency Competitive
Strength
International Entry
Strategies
Exporting
Importing
Licensing
Franchising
Foreign Direct Interfirm

Investment Cooperation
Exporting and Importing

Firms can export and import using two
methods:
Indirect involvement means that the firm
participates in international business through
an intermediary and does not deal with
foreign customers or markets.
Direct involvement means that the firm works
with foreign customers or markets with the
opportunity to develop a relationship.
Firms decide on the desired method by
implementing transaction cost theory.
International Intermediaries
Importers and exporters often use
international intermediaries who
provide assistance in:
Documentation
Financing
Transportation
Identification of foreign suppliers and trading
companies
Providing business contacts
Export Management
Companies
Firms that specialize in
performing international
business services for other
companies are known as
export management
companies (EMCs)
The two primary roles of
EMCs are:
Agents
Distributors
Trading Companies
Trading companies help firms by importing,
exporting, countertrading, investing, and
manufacturing.
The sogashosha of Japan are the most powerful
trading companies in the world for four reasons:
They efficiently gather, evaluate, and translate market
information into business opportunities.
Economies of scale give them preferential treatment.
They operate around the world, not just Japan.
They have vast quantities of capital.
In the U.S., export trading company legislation is
designed to improve the export performance of
small and medium-sized firms.
Facilitators
Facilitators are entities outside the firm
that assist in the process of going
international by supplying knowledge and
information.
Private sector facilitators include:
Banks
Accounting firms
Consulting firms
Public sector facilitators include:
Departments of commerce
Export-Import Banks
Educational Institutions
Licensing
Under a licensing agreement, one firm
permits another to use its intellectual
property for compensation designated as
royalty.
The property licensed may include:
Patents
Trademarks
Copyrights
Technology
Technical know-how
Specific business skills
Benefits and Costs of

Licensing
Benefits Costs
It requires neither capital It is a very limited form of
investment nor detailed foreign market
involvement with foreign participation.
customers. It does not guarantee a
It capitalizes on research basis for future expansion.
and development already The licensor may create its
conducted. own competitor.
It helps avoid host country
regulations applicable to
equity ventures.
Franchising
Franchising is the granting of the right by a
parent company to another independent entity
to do business in a prescribed manner.
The major forms of franchising are:
Manufacturer-retailer systems such as car dealerships,
Manufacturer-wholesaler systems such as soft drink,
companies
Service-firm retailer systems such as fast-food outlets.
To be successful, the firm must offer unique
products or propositions, and a high degree of
standardization.
Key Reasons for Franchising
Market Potential
Financial Gain Saturated Domestic

Markets
Interfirm Cooperation
A strategic alliance is an arrangement between
two or more companies with a common
business objective.
To better compete, many companies form
strategic alliances with suppliers, customers,
competitors, and companies in other industries
to achieve goals.
Reasons for interfirm cooperation include:
Market development
To share risk or resources
To block and co-opt competitors
Types of Interfirm Competition

Number of Partners
Equity 2 More than 2
Informal Cooperation
None
(no binding agreement)
None Contractual
Agreement
Consortia
New Joint Venture
Equity
Some Participation
Contractual Agreements
Strategic alliance partners may join forces for
R&D, marketing, production, licensing, cross-
licensing, cross-market activities, or
outsourcing.
Contract manufacturing allows the corporation
to separate the physical production of goods
from the R&D and marketing stages.
Management contracts involve selling one’s
expertise in running a company while avoiding
the risk or benefit of ownership.
A turnkey operation is a contractual agreement
that permits a client to acquire a complete
system following its completion.
Equity Participation
Some companies have acquired
minority ownerships in companies
that have strategic importance for
them.
Reasons for engaging in equity
participation include:
It ensures supplier ability
It builds working relationships
It creates market entry and support of
global operations
Joint Ventures
A joint venture involves the participation of
two or more companies in an enterprise in
which each party contributes assets, has some
equity, and shares risk.
The 3 reasons for establishing a joint venture
are:
Government policy or legislation.
One partner’s needs for another partner’s skills.
One partner’s needs for another partner’s attributes or
assets.
The key to a joint venture is the sharing of a
common business objective.
Consortia
To combat the high costs and risks
of research and development,
research consortia have emerged in
the United States, Japan, and
Europe.
The Joint Research and
Development Act of 1984 allows
domestic and foreign firms to
participate in joint basic research
efforts without the fear of antitrust
action.
Since this act passed, over 100
consortia have been registered in
the United States.
Managerial Considerations
Issues to address before the formation of a venture include:
1. clear definition of the venture 7. government assistance,

and its duration, 8. transfer of technology,
2. ownership, control, and 9. marketing arrangements,
management, 10. environmental protection,
3. financial structure and policies, 11. record keeping and
4. taxation and fiscal obligation, inspection, and
5. employment and training, 12. settlement of disputes.
6. production,
Full Ownership
For some firms, foreign direct investment
requires full ownership. Reasons include:
An ethnocentric approach
Financial concerns
In order to make a rational decision about the
extent of ownership, management must
evaluate the extent to which total control is
important to the success of its international
marketing activities.
Increasingly, the international environment is
hostile to full ownership by multinational
firms.
International Market Entry

and Development Model
Domestic
Focus
Alternative Level of Motivations

Strategies Management Concerns
•Proactive
•Trading Commitment •Information
•Aware •Reactive
Export/Import •Mechanics
Multinational
•Licensing/ •Interested •Communication
Focus Franchising •Trial •Sales Effort
•Local •Evaluation Inter- •Service
presence mediaries
•Adaptation •EMC •Regulations
alliances
full ownership •Trading Co.
•Facilitators
Strategic Planning
Learning Objectives
Outline the process of strategic planning in
the context of the global marketplace.
Examine both the external and internal
factors that determine the conditions for
development of strategy and resource
allocation.
Illustrate how best to utilize the environmental
conditions within the competitive challenges and
resources of the firm to develop effective
programs.
Suggest how to achieve a balance between local
and regional/global priorities and concerns in the
implementation of strategy.
Strategic Planning
Globalization
The Strategic
Planning
Process
Globalization
Globalization reflects a business
orientation based on the belief that
the world is becoming more
homogeneous and that distinctions
between national markets are not
only fading but, for some products,
will eventually disappear.
Globalization Drivers
Both internal and external factors
will create favorable conditions for
development of strategy and
resource allocation on a global basis.
These factors can be divided into:
Market Factors
Cost Factors
Environmental Factors
Competitive Factors
Market Factors
The world customer gains new meaning.
Developed infrastructures lead to
attractive markets for other products.
Similarities in demand conditions
facilitates product design.
Channels of distribution are becoming
more global.
Technology changes the landscape of
markets.
Cost Factors
Two powerful
cost-related
globalization
drivers.
Cost inefficiencies
Duplication of effort
Environmental Factors
Removal of physical, fiscal, and
technical barriers to further facilitate
globalization of markets.
Rapid technological evolution
contributes to globalization efforts.
Smaller bureaucracies of mininationals
facilitates new product development
and allows for opportunities to seize
new markets.
Competitive Factors
Companies may have to
be the first to do
something new, or to
preempt competitors’
moves.
Market presence may be

necessary.
The Strategic Planning Process

Formal strategic planning contributes to:
Non-financial
Financial Performance Objectives
The Strategic Planning

Process Involves:
Adjusting the core strategy.
Formulating global marketing
strategy.
Developing global programs.
Implementing global programs.
Core Strategy
Assessing and Adjusting:
Forces determining business Companies must

success are common to assess their own
different countries. readiness for
necessary
Necessary Participants: moves
Executives from marketing,
production, finance, logistics
and procurement.
Formulating Global
Strategy
The choices:
Cost
CostLeadership
Leadership
Differentiation
Differentiation
Focus
Focus
Country-Market Choice
Three factors should determine
country selection:
The stand-alone attractiveness of a market.
Global strategic importance.
Possible synergies
Segmentation
The recognition that groups within
markets differ sufficiently to
warrant individual approaches.
Allows global companies to take
advantage of the benefits of
standardization.
Involves looking at markets on a
global or regional basis.
Developing Global Programs

Decisions involved in developing a
global program.
The degree of standardization in the
product offering.
The marketing program beyond the
product variable.
Location and extent of value-adding
activities.
Competitive moves to be made.
Product Offering
Product
standardization may
result in significant
cost savings.
Marketing Approach
Uniformity is sought especially in
elements that are strategic in nature,
whereas care is taken to localize
necessary tactical elements.
Glocalization
Location of Value-Added
Activities
Cost Reduction: Pool
PoolProduction
Production
Exploit
ExploitFactor
FactorCosts
Costs
Concentrate
ConcentrateActivities
Activities
Competitive Moves
Global companies may
have to respond to
competitive moves a
variety of markets.
Cross-subsidization may
offer competitive
advantage.
Implementing Global
Programs
Successful companies strive to
balance local and global
concerns.
Too much local production may reduce
import positioning.
Too little planning involvement by the
country organization may lead to NIH.
Avoiding The
Not-Invented-Here Syndrome
Ensure that local
managers participate in
the development of
strategies and programs.
Encourage local managers
to generate ideas.
Maintain local and global
product portfolios.
Allow local managers to
control budget.
Localizing Global Moves

The role of headquarters staff should be one of
coordination, and leveraging the resources of the
corporation.
Globalization calls for the centralization of
decision-making authority beyond that of the
multidomestic approach.
Executing global account management programs
builds relationships with customers and allows for
development of internal systems and interaction.
Decision-making in global companies supports
the goal of treating the world as a single market.
Organization,
Implementation, and
Control
Learning Objectives
Describe alternative organizational
structures for international operations.
Highlight factors affecting decisions
about the structure of international
organizations.
Indicate roles for country organizations in
the development of strategy and
implementation of programs.
Outline the need for and challenges of
controls in international operations.
Organizational Structure
Companies must change strategies
as their structures evolve from
domestic to multinational. The
basic functions of an organization
are to provide:
A route and locus of decision making and
coordination.
A system for reporting and communications.
Organizational Designs
Types of structures used by companies
to manage foreign activities:
Little/No
Little/NoFormal
Formal
Organization
Organization
International
InternationalDivision
Division
Global
GlobalOrganizations
Organizations
Little or No Formal Organization

Domestic operations assume
responsibility for international
activities in the early stages.
The organizational structure
reflects the increased demands
from the international
marketplace.
The export department structure
becomes obsolete as the firm
becomes more involved in foreign
markets.
The International Division

Centralizes in one entity all
of the responsibility for
international activities.
Best serve firms with few
products that do not vary
significantly.
Coordination is important.
Global Organizational Structures

Types: Most often used by
multinational
corporations.
Improved cost
Product Structure efficiency is a major
benefit.
Second most used

approach. Follows the
marketing concept
most closely.
Area Structure

(continued)
Types: The simplest from the

administrative
viewpoint. A variation
is one that uses
Functional processes as a basis
Structure for structure.
Especially used if
customer groups are
dramatically different.
Customer
Structure

(continued)
Types: Combines two or more
organizational
dimensions
simultaneously.
Integrates the various
Mixed Structure
approaches. Most
companies find this
arrangement
problematic.
Complexity of this
structure may increase
Matrix Structure the reaction time of a
company.
Implementation
Locus of Decision Making
Decentralized systems have loose and
simple controls. Subsidiary operates
as a profit center.
Centralized systems have tight controls.
Strategic decision making is at
headquarters.
Coordinated decentralization calls for
overall strategy to come from headquarters.
Subsidiaries are free to implement within
agreed upon range.
Decision Making
Factors that impact structure and
decision making.
Degree of involvement in international
operations.
Products that the firm markets.
Size and importance of the firm’s markets.
Human resource capability of the firm.
The Networked Global Organization

The network avoids problems
of effort duplication,
inefficiency, and resistance to
ideas.
Subsidiaries are able to make
local business development
decisions within the global
framework.
Internal Cooperation
Success for a global firm involves the
ability to move intellectual capital.
Boundarylessness describes a situation
in which people can act without regard
to status while feeling the freedom to
search elsewhere for innovative ideas.
International teams promote
cooperation.
Internal Cooperation
(contd.)
Greatly assisted
by Internet-based
technology.
Access to virtual
teams.
Country Organizations
Roles:
Contributor
Stra
tegic
Lead
er
k Hole
Implementor Blac
Strategic Leader
A competent national subsidiary that
may be serving as a partner in
developing and implementing strategy.
Contributor
Country organization with a distinctive
competence.
Implementor
Most entities hold this role. It provides
critical mass for the global effort.
Black Hole
The international company has a low
competence country organization, or
none at all.
Controls
Internal benchmarking is of great

importance in today’s market.
General instruments of control:

Bureaucratic/Formalized Control
Cultural Control
The Bureaucratic/Formalized
Control System
Elements:
International budget and
planning system.
Functional reporting system.
Policy manuals to direct
functional performance.
Cultural Control
Requires personal
interaction.
Requires careful
selection and
training of
corporate
personnel.
Exercising Controls
Manufacturing subsidiaries tend to
be controlled more intensively
than sales subsidiaries.
U.S.-based multinationals place
more emphasis on quantitative
data.
Control systems must consider the
impact of the environment.
Marketing
Learning Objectives
Suggest how markets for international
expansion can be selected, their demand
assessed, and appropriate strategies for
their development devised.
Describe how environmental differences
generate new challenges for the international
marketing manager.
Compare and contrast the merits of
standardization versus localization strategies for
country markets and of regional versus global
market efforts.
Discuss market-specific and global challenges
facing the marketing functions: product, price,
distribution, and promotion within both the
traditional and e-business dimensions.
Marketing
A look at: Target Market
Selection
Marketing
Management
Identification and Screening

Preliminary Screening
Estimating Market
Potentials by Product
Type
Estimating Sales
Potential for Company’s
Product
Identifying Segments in
Target Market
Preliminary Screening
This process must rely
chiefly on secondary
data for country-
specific factors as well
as product and
industry specific
factors.
Estimating Market Potential

The international
marketer needs to
assess the size of
existing markets and
forecast the size of
future markets.
The marketer uses both
quantitative and
qualitative techniques
for assessment.
Estimating Sales Potential

Collect product
and market
specific data
Competition
Market
Consumers
Product
Channel structure
Identifying Segments
Individuals and
organizations vary in their
wants, resources,
geographical locations,
buying attitudes, and
buying practices.
Concentration Versus Diversification

Major alternatives for choosing an expansion policy:
Concentration on
a small number of
markets.
Diversification is
growth in a
relatively large
number of
markets in early
stages.
Marketing Management
Standardization
The extent to which elements of the
marketing mix should be
standardized.
Adaptation
Marketers may consider every
situation independently, or rely on
decision-support systems to aid in
program adaptation.
Product Policy
The Core of the Firm’s Operations
Goods
Services
Factors in Product Adaptation

Regional, Country, or Local
Characteristics.
Governments hold stringent requirements.
Consider nontariff barriers.
Competitive offerings may provide a
baseline for resource measurement.
Economic development must be accounted
for.
Customer preferences must be considered.
Consider economic status of users.
Consideration of geography.
Purchase patterns must be considered.
Product Characteristics
Product
characteristics are
the inherent
features of the
product offering.
Company Considerations
Resources
Cost of adapting
Is It Worth Organization
It? Market
Opportunity
Profitability
Pricing Policy
The only element in the
marketing mix that is revenue
generating.
Export Pricing
Foreign Market Pricing
Price Coordination
Intracompany Pricing
Export Pricing
Strategies
Standard worldwide pricing is based on
average unit costs of fixed, variable, and
export-related costs.
Dual pricing differentiates between
domestic and export prices.
Market-differentiated pricing is based
on demand-oriented strategy making it
more consistent with the marketing
concept.
Foreign Market Pricing

Determined By
Corporate Objectives.
Costs.
Consumer Behavior and Market
Conditions.
Market Structure.
Environmental Constraints.
Price Coordination
Standard worldwide
pricing may be
mostly theoretical.
Significant price
gaps lead to the
emergence of gray
markets.
Intracompany Pricing
The pricing of
sales to
members of
the corporate
family.
Distribution Policy
Channels of
distribution
provide the
essential links
that connect
producers and
customers.
Channel Design
Determined by the 11 C-Factors
Customers Cost
Culture Coverage
Competition Control
Company Continuity
Character Communication
Capital
E-Commerce
Is forecast to grow at a
compound annual rate of 50+
percent within 5 years.
Western Europe has most
growth.
Governments work to come
to terms with security,
privacy, and access to the
Internet.
Promotional Policy
Advertising
Personal Selling
Sales Promotion
Publicity
Services
Learning Objectives
Examine the important role of services
in international business.
Understand why trade in services is more
complex than trade in goods.
Appreciate the heightened sensitivity required
for international service success.
Learn that stand-alone services are becoming
more important to world trade.
Examine the competitive advantage of firms in
the service sector.
Differences Between Sales and Goods
“a good is an
object, a device, a
thing;”
“a service is a deed,
a performance, an
effort.”
Links Between Services and Goods
Services may
complement
goods; at other
times, goods
may
complement
services.
Stand-Alone Services
Services Can Compete Against Goods
Types of Communication
Offerings:
services,
reservations,
Intangible car rentals, etc.
Food and drink,
cars, books,
etc.
Tangible
How Services Differ From Goods

Services are difficult to
inventory.
For services offerings, the
time of production is close
to the time of consumption.
Services are more often
intangible.
Services are often custom-
made.
Services often require new
forms of distribution.
The Role of Services in the U.S.

Since the Industrial Revolution, the
United States has seen itself as a
primary international competitor in:
The Production of Goods

The Role of Services in the U.S.

In the past decades the U.S. economy
has increasingly become a:
Service Economy
The Role of Global Services in the

World Economy
The rise of the service sector is a global
phenomenon.
Economies of developing countries
generally first establish agricultural and
manufacturing sectors before entering into
the services sector.
As more countries enter the sector, the
global services business will become more
competitive.
Global Transformations in the

Services Sector
The rise in services trade is due to

changes in the environment and in
technology.
Global Transformations in the

Services Sector
Reduction of
government
regulation.
Technological
advancement.
Problems in Service Trade
New problems have emerged in

the service sector together with
the increase in the importance of
service trade.
Problems in Service Trade

Data Collection Problems.
Data is often sketchy.
Service transactions are often statistically
invisible.
Global Regulations of Services.
National and economic security issues result in
barriers to entry.
Additional problems in the performance of services
abroad—tradition, regulation, etc.
Corporations and Services Trade

Services and E-Commerce
Easy access to
global markets.
Little-known firms
can become known.
Electronic business
media occurs at
different rates in
different countries.
Corporations and Services Trade

Typical International Services
Banking and consulting services can
become internationally competitive.
Insurance services can be sold
internationally.
Communication services have excellent
success in international operations.
Institutions successfully offer
international teaching services.
Tourism is a major service export.
Starting to Offer Services

Internationally
Novices follow the path of
the good, if the service is
delivered in support of a
good.
New marketers search for
similar market situations
abroad if the service is
independent from goods.
Strategic Indications
Will the service be

directed at people or
things?
Will the service act

result in tangible or
intangible actions?
Services Aimed at People
Directed at People’s Minds:
Arts
Religion
Consulting
Directed at People’s Bodies:
Healthcare
Fitness
Restaurants
Services Aimed at Things
Directed at physical possessions:
Laundry
Landscaping
Refueling
Directed at intangible assets:
Banking
Research
Investments
Gaining Credibility Abroad
Providing objective verification
of their capabilities.
Providing personal guarantees of
performance.
Cultivating a professional image.
The Role of Personnel in International

Service
Customer interface is intense.
Proper provisions must be
made for training of personnel.
Major emphasis must be placed
on appearance.
The person delivering the
service communicates the
overall attitude/value of the
service corporation.
Pricing and Financing in

International Strategy
Because services cannot
be stored, there is greater
responsiveness to demand
fluctuations.
Greater pricing flexibility
must be maintained.
The intangibility of
services makes financing
more difficult.
Logistics and Supply-Chain

Management
Learning Objectives
To understand the escalating importance
of logistics and supply-chain management
as crucial tools for competitiveness.
To learn about materials management and
physical distribution.
To learn why international logistics is more
complex than domestic logistics.
To see how the transportation infrastructure in
host countries often dictates the options open to
the manager.
To learn why international inventory management
is crucial for success.
International Logistics
International logistics is the

design and management of a
system that controls the forward
and reverse flow of materials,
services, and information into,
through, and out of the international
corporation.
International Logistics (cont.)

Through the implementation of international
logistics, the firm can implement cost-saving
programs such as just-in-time (JIT), electronic
data interchange (EDI), and early supplier
involvement (ESI).
The two phases of the movement of materials
include:
materials management, or the timely movement of
materials, parts, and supplies.
physical distribution, or the movement of the firm’s
physical product to its customers.
Three Concepts of Business

Logistics
Systems Concept
Total Cost Concept Trade-off Concept

Supply-Chain Management
Supply-chain management is the
integration of business processes from
end user through original suppliers, that
provide products, services, and
information that add value for
customers.
Supply-chain management connects a company’s
supply side with its demand side.
It opens up supplier relationships for companies
outside of the buyer’s domestic market.
The International Supply Chain

Suppliers Corporation Customers
Domestic/Import Inbound Outbound Domestic/Export

Sourcing Throughflow
Materials Materials Distribution
Order Order
Order Order Processing Placement
Processing Processing
Supplier-Firm Transportation Transportation

Interface
Physical Costumer-Firm
Transportation Transportation Materials Distribution Interface
Management Management
Customer Physical
Service Distribution
Management
Storage Storage Inventory Storage Inventory Inventory

Management Management Management
Forward and Reverse Flow of Information, Products, and Funds

Transportation Infrastructure
A firm’s logistics platform is determined by a
location’s ease and convenience of market
reach under favorable cost circumstances.
The public sector’s investment priorities,
safety regulations, tax incentives, and
transport policies can have major effects on
the logistics decisions of firms.
The logistics manager must learn about
existing and planned infrastructures abroad
and at home and factor them into the firm’s
strategy.
Vessels Used in Ocean Shipping
Liner Service
Bulk Service Tramp Service

Airfreight
Airfreight is available to and from most
countries, including the developing world.
International airfreight is expected to grow to 190
billion tons in 2005, compared to only 70 billion
tons in 1995.
Forty percent of the world’s manufactured travel
by air.
Items that are high-value or high in density tend
to travel by air.
Considerations for Selecting a

Mode of Transport
Transit Time Predictability
Cost Non-economic
Factors
Export Documentation
A bill of lading is a contract between the exporter
and the carrier indicating that the carrier has
accepted responsibility for the goods and will provide
transportation in return for payment.
A commercial invoice is a bill for the goods stating
basic information about the transaction, including a
description of the merchandise, total cost of the
goods sold, addresses of the shipper and seller, and
delivery and payment terms.
A freight forwarder specializes in handling export
documentation.
International Inventory Issues

Inventories tie up a major portion of corporate
funds, therefore proper inventory policies
should be a major concern to the international
logistician.
Just-in-time inventory policies minimize the
volume of inventory by making it available
only when needed.
The purpose of establishing inventory systems
are:
to maintain product movement in the delivery
pipeline
to have a cushion to absorb demand fluctuations
Three Factors that Decide the

Level of Inventory
Order Cycle Time
Desired Customer Use of Inventories as

Service Levels a Strategic Tool
International Packaging Issues

Packaging is instrumental in getting the merchandise
to the destination in a safe, presentable condition.
Because of the added stress of international shipping,
packaging that is adequate for domestic shipping
may be inadequate for international shipping.
Packaging considerations that should be taken into
account are environmental conditions and weight.
One solution to the packaging problem has been the
development of inter-modal containers.
Cost attention must be paid to international
packaging.
Storage Facilities
A stationary period is involved when merchandise
becomes inventory stored in warehouses.
The location decision addresses how many
distribution centers to have and where to locate
them.
Storage facilities abroad can differ in availability and
quality.
The logistician should analyze international product
sales and then rank order products according to
warehousing needs.
Special Trade Zones

Foreign trade zones are areas
where foreign goods may be held or
processed and then re-exported
without incurring duties.
Trade zones can be useful as
transshipment points to reduce
logistics cost and redesign marketing
approaches.
Governments and firms benefit from
foreign trade zones.
Export Processing Zones and

Economic Zones
In export processing zones, special rules apply
that are different in other regions of the country.
These zones usually provide tax-free and duty-free
treatment for production facilities whose output is
destined abroad.
The maquiladoras of Mexico are one example of a
program that permits firms to take advantage of
sharp differentials in labor costs.
Through the creation of special economic zones,
the Chinese government has attracted many foreign
investors bringing in millions of dollars.
Centralized Logistics
Management
In international logistics, the existence of a
headquarters staff that retains decision-
making power over logistics is important.
To avoid internal problems, both headquarters
staff and local management should report to
one person.
This individual can contribute an objective
view when inevitable conflicts arise in
international logistics coordination.
Decentralized Logistics
Management
When a firm serves many diverse international
markets, total centralization might leave the
firm unresponsive to local adaptation needs.
If each subsidiary is made a profit center in
itself, each one carries the full responsibility
for its performance.
Once products are within a specific market,
increased input from local logistics operations
should be expected and encouraged.
Outsourcing Logistics Services

The systematic outsourcing of
logistics capabilities is a third option.
By collaborating with transportation
firms, private warehouses, or other
specialists, corporate resources can
be concentrated on the firm’s core
product.
One-stop logistics allows shippers to
buy all the transportation modes and
functional services from a single
carrier.
The Supply Chain and the

Internet
Because of the internet, firms are able to
conduct many more global comparisons among
suppliers and select from a wider variety of
choices.
When customers have the ability to access a
company through the internet, the company
must be prepared for 24-hour order-taking and
customer service.
For all countries, but particularly in developing
nations, the issue of universal access to the
internet is crucial.
Logistics and Security

After the terrorist attacks of 2001, companies
have to deal with the fact that the pace of
international transactions has slowed down
and that formerly routine steps will now take
longer.
Logistics systems and modern transportation
systems are often the targets of attacks.
The need to institute new safeguards for
international shipments will affect the ability
of firms to efficiently plan their international
shipments.
Logistics and the Environment

Since environmental laws and regulations
differ across the globe, the firm’s efforts need
to be responsive to a wide variety of
requirements.
Reverse distribution systems are instrumental
in ensuring that the firm not only delivers the
product to the market, but also can retrieve it
from the market for subsequent use,
recycling, or disposal.
Companies need to learn how to
simultaneously achieve environmental and
economic goals.
Financial Management
Learning Objectives
To understand how value is measured
and managed across the multiple units
of the multinational firm.
To understand how international business
and investment activity alters and adds to
the traditional financial management activities
of the firm.
To understand the three primary currency
exposures that confront the multinational firm.
To examine how exchange rate changes alter
the value of the firm, and how management can
manage or hedge these exposures.
The Goal of Management

The goal for most Anglo-American markets is
stockholder maximization - the management
of the company seeks to maximize the returns
to stockholders by working to push share
prices up and to continually grow dividends.
The goal for most Continental European and

Japanese firms is corporate wealth
maximization - considering the financial and
social health of all stakeholders.
Global Financial Goals

The three primary
financial objectives are:
1. Maximization of
consolidated, after-tax
income.
2. Minimization of the firm’s
effective global tax
burden.
3. Correct positioning of the
firm’s income, cash flows,
and available funds.
Genus Corporation and

Foreign Subsidiaries
Genus Corporation
(USA)
Brazil Germany China
Moderate Tax High Tax Low Tax

Unstable Currency Stable Currency Stable Currency
Limited Funds Movement Free Funds Movement Blocked Funds
Multinational Management at
Genus
The primary goal of the firm is the maximization of
consolidated profits, after tax.
Consolidated profits are the profits of all the individual
units of the firm originating in many different
currencies.
Each of the incorporated units of the firm has its own
set of traditional financial statements, which are
expressed in the local currency.
The shareholders of Genus track the firm’s financial
performance on the basis of earnings per share (EPS).
Each affiliate is located within a country’s borders and
is therefore subject to all laws and regulations within
that country.
Evaluating Potential Foreign

Investment
Evaluating the potential for foreign investment
includes:
Capital budgeting - the process of evaluating the financial
feasibility of an individual investment.
Capital structure - the determination of the relative
quantities of debt capital and equity capital that will
constitute the funding of the investment.
Working capital and cash flow management - the
management of operating the financial cash flows passing
in and out of a specific investment project.
Financial Trust
Unlike most domestic business, international
business often occurs between two parties that
do not know each other very well.
In order to conduct business, a large degree of
financial trust must exist.
Financial trust is the trust that the buyer
of a product will actually pay for it
on or after delivery.
Financial Trust Using a Letter

of Credit (L/C)
3
Yokohama Bank Pacific First Bank
(Japan) (United States)
6
1 2
Financing of trade & 4
with L/C
7
Endaka Construction Vanport Lumber

Old-growth
(Japan) pine lumber Company
exported (United States)
5
Financial Trust Using a Letter

of Credit (L/C)
1. Endaka Construction requests a letter of credit to be
issued by its bank.
2. Yokohama Bank will determine if Endaka is financially
sound and capable of making the payments required.
3. Yokohama Bank issues the letter of credit to the
exporter’s bank, Pacific First Bank.
4. Pacific First assures Vanport that payment will be
made after evaluating the letter of credit.
5. The lumber order is loaded onboard the shipper.
6. Vanport draws a draft against Yokohama Bank for
payment.
7. Pacific Bank confirms the letter of credit and collects
from Yokohama Bank.
Multinational Investing
An investment is financially justified if it has a
positive net present value (NPV).
The construction of a capital budget is the
process of projecting the net operating cash
flows of the potential investment to determine
if it is indeed a good investment.
A capital budget is composed primarily of cash
flow components.
Capital Budget Components

Initial Expenses and
Capital Outlays
Operating Cash Flows Terminal Cash Flows

Risks in International
Investments
Risks are higher for international investments
than domestic investments.
The risk arises from the different countries,
their laws, regulations, potential for
interference with the normal operations of the
investment project, and currencies.
Foreign governments have the ability to pass
new laws, increasing risk for a parent
company.
Another risk issue is that the viewpoint or
perspective of the parent and the project may
no longer be the same.
International Cash Flow

Management
Cash management is the financing of short-term
or current assets.
Operating cash flows arise from the everyday
business activities of the firm such as paying for
materials or resources or receiving payments for
items sold.
Financing cash flows arise from the funding
activities of the firm. The servicing of existing
funding resources, interest on existing debt, and
dividend payments to shareholders constitute
frequent cash flows.
Transfer Prices
The prices at which multinational
firms sell their products to their
subsidiaries and affiliates are
called transfer prices.
Theoretically, they are equivalent
to what the product would cost if
purchased on the open market.
Sometimes, transfer prices are set
internally, which may result in the
subsidiary being more or less
profitable.
Cash Management
Netting, which combines cash flows between subsidiaries
and parent companies, is particularly helpful if the two
way flow is in two currencies.
Combining capital, or cash pooling, allows a firm to
spend less in terms of foregone interest on cash balances.
A foreign subsidiary that is expecting its local currency to
fall in value relative to that of the parent company may try
to speed up, or lead its payments to the parent.
If the local currency is expected to rise versus that of the
parent company, the subsidiary may want to wait, or lag
payments.
Cash Management (cont.)

Reinvoicing occurs when one
office in a multinational firm takes
ownership of all invoices and
payments between units.
An internal bank can be
established within a firm if its
financial resources and needs are
either too large or too sophisticated
for the financial services that are
available in local subsidiary markets.
Types of Foreign Currency

Exposure
Transaction Exposure
Economic Exposure Translation Exposure

Transaction Exposure
Transaction exposure is the risk associated
with a contractual payment of foreign
currency.
It is the most common type of exchange risk.
The two conditions necessary for a
transaction exposure to exist are:
1. A cash flow that is denominated in a foreign
country.
2. The cash flow will occur at a future date.
Transaction Exposure (cont.)

Managing transaction exposures usually is
accomplished by either natural hedging or
contractual hedging.
Natural hedging describes how a firm might arrange to
have foreign currency cash flows coming in and going
out at roughly the same times and same amounts.
Contractual hedging is when a firm uses financial
contracts to hedge the transaction exposure. The most
common foreign currency contractual hedge is the
forward contract.
Firms that import or export on a continuing basis
have constant transaction exposures.
Economic Exposure
Economic exposure is the risk to the firm that
its long-term cash flows will be affected,
positively or negatively, by unexpected future
exchange rate changes.
It emphasizes that there is a limit to a firm’s

ability to predict either cash flows or exchange
rate changes in the medium to long term.
Management of economic exposure is being

prepared for the unexpected.
Translation Exposure
Translation exposure is the
risk that arises from the legal
requirement that all firms
consolidate their financial
statements of all worldwide
operations annually.
Unlike transaction and economic
exposures, which are “true”
exposures, translation exposure
is an economic problem.
Countertrade
Countertrade is a sale that encompasses more
than an exchange of goods, services, or ideas
for money.
Historically, countertrade was mainly conducted
in the form of barter, which is a direct exchange
of goods of approximately equal value, with no
money involved.
Conditions that encourage countertrade are:
lack of money,
lack of value of or faith in money,
lack of acceptability of money as an exchange
medium,
greater ease of transaction by using goods.
Reasons for Countertrade

Increasingly, countries and companies are
deciding that sometimes countertrade
transactions are more beneficial than
transactions based on financial exchange.
The use of countertrade permits the covert
reduction of prices and therefore allows the
circumvention of price and exchange controls.
Many countries are responding favorably to
the notion of bilateralism.
Countertrade is viewed as an excellent
mechanism to gain entry into new markets.
Corporate Governance,
Accounting, and Taxation
Learning Objectives
To explore the purpose and structure of corporative
governance as it is practiced globally
To examine the failures in corporate governance
in recent years and how authorities are responding
to these changes
To understand how accounting practices differ across
countries and how these differences may alter the
competitiveness of firms in international markets
To isolate which accounting practices are likely to constitute
much of the competitiveness debate in the coming decade
To examine the primary differences in international taxation
across-countries and in turn how governments deal with both
domestic and foreign firms operating in their markets
To understand problems faced by many U.S.-based
multinational firms in paying taxes both in foreign countries
and in the United States.
Introduction
The structure and conduct of
corporate governance and the
methods used in the measurement
of company operations,
accounting, principles, and
practice vary dramatically across
countries
Taxation and accounting are
fundamentally related
Corporate Governance
The relationship among stakeholders
used to determine and control strategic
direction and performance of an
organization is termed corporate
governance
The way in which order and process is
established to ensure that decisions are
made and interests are represented
properly for all stakeholders
The Goal of Corporate

Governance
The single The most widely accepted
overriding statement of good corporate
governance practices are
objective of
those established by OBECD
corporate The rights of shareholders
governance is the The equity treatment of
optimization over shareholders
time of the return The role of stakeholders in
corporate governance
to shareholders Disclosure and transparency
The responsibilities of the board
The Structure of Corporate

Governance
The internal forces, the officers of the corporation
and the Board of directors, are those directly
responsible for determining the strategic direction
and the execution of the company’s future
The external forces include:

The equity markets
The analysts
The creditors and credit agencies who lend them money
The auditors
The multitude of regulators
Auditors and Regulators

Auditors are Regulatory oversight
responsible for of publicly traded
providing an external firms in the U.S. is
professional opinion provided by
as to the fairness and governmental and
accuracy of corporate nongovernmental
financial statements agencies
These individuals Securities and
follow the generally Exchange Commission
(SEC)
accepted accounting
Applicable stock
principles exchange
Comparative Corporate
Governance
Corporate governance
practices differ across
countries, economies, and
cultures and may be classified
by regime
Market-based
Family-based
Bank-based
Government-based
Comparative Corporate
Governance (cont.)
Corporate governance regimes
are a function of three major
factors in the evolution of
global corporate governance
principles and practices
Financial market development
Degree of separation between
management and ownership
Concept of disclosure and
transparency
The Case of Enron

Many of the issues related to
corporate governance and its
failures are best described by the
Enron case
Enron Corporation declared
bankruptcy in November 2001 as a
result of a complex combination of
business and governance failures
Corporate Governance
Reform
The debate regarding what needs to be
done about corporate governance
reform depends on which systems and
regimes are deemed superior
To date, reform in the United States has
been largely regulatory
Sarbanes-Oxley Act
Board structure and compensation
Transparency, accounting, and auditing
Minority shareholder rights
Accounting Diversity
The fact that accounting
principles differ across
countries is not, by itself,
a problem
The primary problem is
that real economic
decisions by lenders,
investors, or government
policymakers may be
distorted by the
differences
Principal Accounting Differences

Across Countries
International accounting diversity
can lead to problems in international
business conducted with the use of
financial statements
Poor or improper decision making
Hindering the ability to raise capital in
differing markets
Hindering from monitoring competitive
factors
Principal Differences: The Issues

The resulting impact of accounting differences
is to separate or segment international
markets for investors and firms alike
Communicating the financial results of a
foreign company operating in a foreign country
and foreign currency is often a task that must
be undertaken separately from the accounting
duties of the firm
Nine major areas of significant differences in
accounting practices across countries serve to
provide understanding of this issue and
highlight some of the major philosophical
differences
Principal Differences: The Issues

Accounting for research and development
expenses
Accounting for fixed assets
Inventory accounting treatment
Capitalizing or expensing leases
Pension plan accounting
Accounting for income taxes
Foreign currency translation
Accounting for mergers and acquisitions
Consolidation of equity securities holdings
The Process of Accounting

Standardization
First strong movement
There is still some conflict
toward accounting
over the terminology of
standardization was the
harmonization,
establishment of the
standardization, or
International Accounting
promulgation of uniform
Standards Committee
standards
(IASC) in 1973
1966 study of accounting
Two other recent
differences across
developments concerning
countries conducted by
international
Accountants
standardization merit
International Study
consideration
Group
General Electric Company
Financial Accounting
Standards Board (FASB)
International Taxation
Governments alone have the
power to tax
Governments want to tax all
companies within their
jurisdiction without placing
burdens on domestic or foreign
companies that would restrain
trade
Each country will state its
jurisdictional approach in the tax
treaties it signs with other
countries
Treaties establish the bounds of
jurisdiction to prevent double
taxation
Tax Jurisdictions and

Tax Types
Nations usually Taxes are generally
follow one of two classified one of
basic approaches two ways
to international Direct Taxes
Indirect Taxes
taxation
Residential
The value-added
approach tax (VAT) is the
primary revenue
Territorial or
source for the
source approach
European Union
Income Categories and

Taxation
There are three primary
methods used for the
transfer of funds across
tax jurisdictions
Royalties
Interest
Dividends
U.S. Taxation of
Foreign Operations
The U.S. exercises its rights to tax U.S.
residents’ income regardless of where the
income is earned
The income of a foreign branch of a U.S.
corporation is treated the same as if the
income was derived from sources within the
U.S.
Corporations operating in more than one
country are subject to double taxation
The calculation of foreign income taxes
deemed paid and the additional U.S. taxes due
involves the interaction of four components
Calculations of U.S. Taxes on

Foreign-Source Earnings: Four Cases
Foreign affiliate of a U.S. corporation
in a high-tax environment
in a low-tax environment
in a low-tax environment, 50 percent
payout
Foreign subsidiary of a U.S.
corporation is a CFC in a low-tax
environment
Concluding Remarks Regarding U.S.

Taxation of Foreign Income
Recent accounting and tax rule changes
may actually result in worsening the
effective tax rate and excess foreign tax
credit problem for U.S. corporations
Fuel is being added to the fires of world
governments and their shares of the
world tax pie
Human Resource Management

Learning Objectives
To describe the challenges of managing
managers and labor personnel both in
individual international markets and in
worldwide operations
To examine the sources, qualifications, and
compensation of international managers
To assess the effects of culture on managers
and management policies
To illustrate the different roles of labor in
international markets, especially that of labor
participation in management
Introduction
Organizations have two general human
resource objectives
Recruitment and retention
Increased effectiveness
To attain the two major objectives, the
skills and activities needed include:
Personnel planning and staffing
Personnel training
Compensation
An understanding of labor-management
relations
Managing Managers
The importance of the
quality of the workforce in
international business
cannot be stressed enough,
regardless of the stage of
internationalization of the
firm
Early stages
Advanced stages
Early Stages of
The marketing or sales manager of the firm
typically is responsible for beginning
export activities
The firm starting international operations
will usually hire an export manager from
outside rather than promote from within
This individual will have obtained experience from
another corporation or Foreign Service duty
High entrepreneurial spirit with trader mentality
Advanced Stages of
As the firm progresses, human
resources planning activities will
initially focus on the needs of various
markets and functions
One of the major sources of
competitive advantage of global
corporations is their ability to attract
talent from around the world
Interfirm Cooperative
Ventures
Global competition is
forging new
cooperative ties
between firms from
different countries,
thereby adding new
management
challenges for the
firms involved
Sources for Management

Recruitment
The location and the The recruitment
nationality of approach changes over
candidates for a the internalization
particular job are process of the firm
the key issues in When international
recruitment operations are
Internal or External
expanded, a
management
Local or Expatriates
development dilemma
may result

Recruitment
Currently, most managers in subsidiaries are host-
country nationals
Local managers, if not properly trained, may see
things differently from the way they are viewed at
headquarters
The decision as to whether to use home-country
nationals depends on several factors
The number of home-country nationals in an
overseas operation rarely rises above 10% of the
workforce with 1% being typical

Recruitment
The use of third-country nationals is most often seen
in large multinational companies that have adopted a
global philosophy
The ability to recruit for international assignments is
determined by the value an individual company
places on international operations and the experience
gained in working in them
In an era of regional integration, many companies
are facing a severe shortage of managers who can
think and operate regionally or globally
Selection criteria for

Overseas Assignments
The traits that have
been suggested as
necessary for the
international
manager range from
the ideal to the real
Competence Factors
An expatriate manager usually has
far more responsibility than a
manager in a comparable domestic
position and must be far more self-
sufficient in making decisions and
conducting daily business
Factual cultural knowledge
Area expertise
Adaptability Factors
The manager’s own
motivation to a great
extent determines the
viability of an overseas
assignment and
consequently its
success
Interpretive cultural
knowledge
Personal Characteristics
Despite all of the
efforts made by
multinational
companies to recruit
the best person
available,
demographics still
play a role in the
selection process
The Selection and Orientation

Challenge
Due to the cost of The candidate
transferring a selected will
manager participate in an
overseas, many orientation
firms go beyond
standard selection program on
procedures internal and
Adaptability external aspects
screening of the assignment
Culture Shock
The effectiveness of orientation
procedures can be measured only after
managers are overseas
Culture shock is the term used for
pronounced reactions to the
psychological disorientation that is
experienced in varying degrees when
spending an extended period of time
in a new environment
Causes and Remedies

The culture shock Four distinct
cycle for an stages of
overseas adjustment exist
assignment may during a foreign
assignment
last about fourteen
Initial euphoria
months Irritation and
hostility
Adjustment
Reentry
Repatriation
Returning home may
evoke mixed feelings
on the part of the
expatriate and the
family
Their concerns are
both professional and
personal
Base Salary and Salary-

Related Allowances
A manager’s base salary depends
on qualifications, responsibilities,
and duties
The purpose of a cost of living
allowance (COLA) is to enable the
manager to maintain as closely as
possible the same standard of
living that he or she would have
at home
Foreign service premium
Hardship allowance
Housing allowance
Tax equalization
Nonsalary-Related
Allowances
Other types of allowances are made
available to ease the transition into the
period of service abroad
Relocation
Mobility
Housing related
Automobile protection
Travel
Temporary living expenses
Education
Labor Participation in
Management
Over the past quarter century, many
changes have occurred in the traditional
labor-management relationship
To enhance workers’ role in decision
making, various techniques have
emerged
Self-management
Codetermination
Minority board membership
Work councils
Improvement of Quality of
Work Life
The term quality of work life has
come to encompass various
efforts in the areas of personal
and professional development
Individual job-related programs
include:
Work redesign
Team building
• Quality circles
Work scheduling
• Flextime
The Role of Labor Unions

The role of labor unions varies
from country to country
Internationalization of business
has created a number of
challenges for labor unions
The relations between companies
and unions can be cooperative
Human Resource Policies

The objectives of a human
resource policy pertaining to
workers are the same as for
management to anticipate the
demand for various skills and
to have in place programs
that will ensure the
availability of employees
when needed
Human Resource Policies

Compensation of the work
force is a controversial issue
Comparisons of compensation
packages are difficult
Differences in compensation
packages may come to a head
in merger and acquisition
situations
New Horizons
Learning Objectives
Understand the many
changing dimensions that
shape international business.
Learn about and evaluate the
international business forecasts
made by a panel of experts.
Be informed about different career
opportunities in international
business.
New Horizons
Environment
Globalization and Trade Negotiations
Government Policy
The Future of International Business
Management
Careers in International Business

Environment
Conditions of Change in:
Politics
Finance
Society
Technology
The Political Environment

Transformations
Reshaping of
existing political
blocks.
Formation of new
groupings.
Breakup of old
coalitions.
Planned Versus Market Economies

Eastern and Central Europe will
continue to be attractive for
international investment.
The distinction between developed and
less-developed countries is unlikely to
change.
Environmental protection will be a
major force in economic growth.
Much of the growth of the global
economy will be fueled by the emerging
markets of the Asia Pacific region.
A Divergence of Values
Nations hold differing
values and priorities.
Divergence of values will
require readjustment of
activities of the
international corporation.
International Finance
Debt constraints and low commodity
prices impose slow growth prospects
for developing countries.
Developed nations have an incentive
to help debtor nations.
The United States is the largest
debtor nation in the world.
Effects of Population Shifts

Population increase will
become a national
priority in the
industrialized world.
Population stabilization
continues to be the
challenge in the
developing world.
Technological Environment
Internet is democratizing
global business.
Small/medium-sized
enterprises can now be full
participants in the global
marketplace.
High technology is a
controversial area of
economic activity.
Globalization and Trade

Negotiations
Globalization will continue and trade
negotiations will continue to
experience difficulties.
Globalization and Trade

Negotiations
Long-term differentiation of
countries and firms includes:
ThoseWho
Those WhoGrow
Grow Those
ThoseWho
WhoCreate
Create
ThoseWho
Those WhoMake
Make Those
ThoseWho
WhoCoordinate
Coordinate
Government Policy
International trade activity now
affects domestic policy more than
ever.
Governments will need to coordinate
policies that affect the international
business environment.
Policymakers need a better
understanding of the nature of
international trade issues.
The Future of International

Business Management
Global change results in an increase
in risk.
International markets remain a
source of high profits.
International executives will need to
balance the public and the private
good.
International Product Policy

Environmental concern is a key issue
affecting product planning.
Firms will have to plan for the “post-
mortem” stage in the product life cycle.
Product life cycle will be measured in
months or even weeks.
Companies will have to deliver more
mass customization.
An increase will occur in the trend
toward strategic alliance.
International Communications
Advances made in international
communications will have a profound
impact on international management.
Most affected will be members of the
services sector.
Distribution Strategies
Innovation will determine new ways of
serving markets.
More sophisticated distribution systems will
also introduce new uncertainties such as risk
due to distribution interruptions.
International Pricing
Will become increasingly heated.
Forward pricing will become increasingly
difficult.
Price competition will be substantial.
Exchange rate movements may play a more
significant role in maintaining
competitiveness.
Nations will attempt to stimulate their
international competitiveness through
subsidization, targeting, or government
contracts.
Careers in International Business

-- To Prepare:
Be well versed in a specific functional business
area.
Take summer internships abroad.
Take language courses.
Obtain further in-depth training by enrolling in
International Business Courses!
Opportunities for Women in

Global Management
In the mid-1980’s women held
3.3% of overseas positions in
U.S. firms.
By 2000, 13% of expatriates
were women.
Expatriates are not seen as
women, but rather as
“foreigners who happen to be
women.”
Advantages are added visibility
and increased access to clients.
Employment With A Large Firm

Employees are expected to be grounded
in the practice and management of
business.
Managers are sent abroad because the
company expects him or her to reflect
corporate spirit.
Employees returning from the
international route may find few positions
available back at headquarters.
Employment With A Small Firm

May have recently developed an
international outlook.
With a more limited budget, most of the
work may be done by mail, fax, e-mail,
or by telephone.
International work may involve
importing.
Small firms provide excellent training
ground for international activities.
Self-Employment
The Opportunity to Become a True
International Entrepreneur
Specialized services that might be

offered by a consultant include:
international market research,
international strategic planning,
beginning-to-end assistance for
international entry or international
negotiations. There may be a higher
degree of risk involved, but there is
also an opportunity for higher
rewards.

405 - International Business

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International Business Aashiesh Tavkarr PhD

WELCOME TO THE WORLD

The International Business

Need for International Business

Need for International Business

What is International Business?

International business consists of

Types of International Business

International Business Questions

International Business and the

International Business and the

United States: A Global Leader

The Smoot-Hawley Act

The act was passed in the hope that it would

The result was a worldwide depression and

Expansion of International Trade

The sales of foreign affiliates of

Global Links Today

The rate of globalization is accelerating.

Regionalization is taking place, resulting

The participation of countries in world

The Composition of Trade

The Current U.S. International

Country Exports per Capita Imports per Capita

The Impact of International

On the microeconomic level, participation

Average Plant Salary and Wages

Expanding Operations Across

Culture can be passed from parents to

Culture is multidimensional, consisting of a

High- versus Low-Context

Many governments take action to

These include elements such as bodily

Social Institutions Education Aesthetics

The Four Roles of Language

Language provides access to local society.

Language capability is increasingly important

Language provides more than the ability to

Values and Attitudes

Manners and Customs

It is manifested in the availability and

Material Elements Chart

transportation energy housing health banks research firms

The meanings of colors

Reference groups provide the values and

Social organization determines the roles of

Interpretive knowledge is the ability to

Acquiring International Experience

Factor Considered Critical Considered Important

Cross-Cultural Behavior Model

Cross-Cultural Behavior Model

communication about the

Cultural Dimension Scores for 12 countries

Asian countries tend to have high uncertainty

Western countries tend to have low

Self Reference Criterion

Cross-Cultural Training (cont.)

Tips for Making Culture Work

Trade and Investment

To examine how traditional attitudes toward

To see the effects of global links in trade and

To understand that nations must cooperate closely in

Rationale and Goals of Trade