International business summary
1. Globalization and International Business
What is globalization? Globalization refers to the widening set of interdependent relationships among people from different parts of a world that is divided into nations.
The term also refers to the integration of world economies through the reduction of barriers to the movement of trade, capital, technology, and people. Throughout history, human contacts over ever-wider geographic areas have expanded the variety of available resources, products, services, and markets.
Today, so many different components, ingredients, and specialized business activities go into products that we’re often challenged to say exactly where they were made. For example Apple’s iPhones are shipped from China and seem to be Chinese, yet less than four percent of their value is actually performed in China! Globalization Is the ongoing process that deepens and broadens the relationships and interdepence among countries
International Business is a mechanism to bring about globalization.
It consists of all commercial transactions between two or more countries (including sales, investments, and transportation)
The goal of private business is to make profits
Government business may or may not be motivated by profit
Why is this study important?
- Most companies are international or compete with international companies
- Modes of operations may differ from those used domestically
- The best way of conducting may differ by country
- An understanding helps you to make career decisions
- An understanding helps you to decide what government policies to support
What is international business? International business consists of all commercial transactions that take place between two or more countries. International business activities allow us to get more variety, better quality, and/or lower prices.
International business activities may be performed by private companies motivated by profit, or by governments that undertake them either for profit or for political reasons.
Why should you study international business? There are many reasons. One of the most important is because global events affect companies of all sizes and in all industries. In fact, managers today need to consider where in the world to obtain the inputs they need of the required quality and at the best possible price and also where they can best sell the product or service that they’ve put together from those inputs. In many cases, managers may find that they can be more competitive by engaging in global business transactions.
It’s also important to recognize that the best way of doing business abroad may not be the same as the best way at home. When a company operates internationally, it engage in modes of business such as exporting and importing that differ from those in which it engages domestically. In addition, physical, social, and competitive conditions differ among countries and affect the optimum ways to conduct business. So we often find that companies operating internationally have more diverse and complex operating environments than those that conduct business only at home.
Even if you aren’t working at an international company it’s important to understand international business complexities because overall national conditions— things like profits, employment security and wages, consumer prices, and national security are all affected by the international operations of companies and by government regulations of those operations. Factors in international business operations:
This Figure shows the complex relationships among conditions and operations that a firm may face when its conducts some of its business internationally. We’ll be referring back to this Figure throughout the chapter.
Sports are related to globalization because
- Competitions goes worldwide
- Television and internet brings sport to homes worldwide
Sport is related to international business because advertisers use sports to increase their brand awareness
*Faster traveling makes international sports possible
*Modern media increases popularity of foreign sports
*Prosperity is spreading worldwide more and more
*sport clubs are lucrative investments for foreign investors
Forces driving globalization
1. Increase in and application of technology; developing new products rather than just producing them. Improved innovations, transportation and communications speed up interactions between countries. Also the costs reduced because of improved communication.
2. Liberalization of cross-border trade and resource movements; to protect its own industries, every country restricts the movement across its borders, not only of goods and services, but also of the resources, such as works and capital needed to produce them. However governments have reduced their restrictions on international movements of products and services for these reasons
- Their citizens want greater variety of goods and services at lower prices
- Competition spurs to become more efficient
- They want to induce other countries to lower their barriers in turn
3. Development of services that support international business
Companies and governments have developed a variety of services that facilitate the conduct of international business. For instance the the sale of goods and services in a foreign country and currency. Because of bank credit agreements, clearing arrangement that convert one currency into another and the insurance that covers such risks as damage en route and nonpayment.
4. Growing consumer pressures
We want more, newer, better products, and we want them more finely differentiated.
5. Increased global competition
The pressure of increased foreign competition can persuade companies to buy or sell abroad. Regardless of industry, firms have to become more global to compete in today’s business environment.
6. Changing political situations
A major reason for growth in international business is the end of the schism between the non-Communist world and what was once the Communist world. Governments now provide an array of services to help domestic companies sell more abroad, such as collecting information about foreign markets, furnishing contacts with potential buyers abroad and offering insurance against nonpayment in the home country currency.
7. Expanded cross-national cooperation
The government realize that their own interests can be addressed through international cooperation by means of ; treaties, agreements and consultation. The willingness to pursue such policies is due largely to these three needs.
1. To gain reciprocal advantages
2. To attack problems jointly that one country acting alone cannot solve
3. To deal with areas of concern that lie outside the territory of any nation
You may wonder what has been driving globalization. The answer is many different factors. One factor is technology. In recent years, we’ve seen tremendous advances in technology. The pace of new product development is faster than ever, and many companies are finding that in order to keep up, they need to team up with companies in other countries to gain financial resources or specialized capabilities. Firms are also finding that to justify their investments in new product development, they need to expand their sales to other markets.
Another factor driving globalization is the liberalization of cross-border trade. Today, most governments have reduced restrictions on cross-border trade giving their citizens access to a greater variety of goods and services at lower prices. Increased competition from foreign companies also encourages domestic producers to become more efficient. Governments hope that by opening their countries to trade, other countries will also lower trade barriers.
The development of new services that facilitate international business transactions have also increased further driving globalization. In addition, today’s consumers are more informed about foreign products and services and are better able to afford more luxury items. Moreover, more consumers are able to comparison shop to find better deals worldwide. Companies look for growing markets where consumer pressures are highest such as China.
Intense global competition is also driving globalization. Today, companies continually look abroad to increase market share and reduce costs in order to better compete with other firms. Expansion abroad can take many forms: so-called born-global companies start out with a global focus because of their founders’ international experience and because advances in communications give them a good idea of where global markets and suppliers are. Related to this, many new companies locate in areas where there are many competitors and suppliers—a situation known as clustering—which helps them to become quickly aware of foreign opportunities.
Finally, changing political situations and increased cross-national cooperation have allowed international business to flourish. Countries of different political systems are more open than before to conducting international trade with each other. Governments are spending more resources on the improvement of infrastructure facilitating the transport of goods and resources. Furthermore, governments have realized the benefits of international cooperation. In particular, governments engage in international cooperation in order to gain reciprocal advantages, to attack problems jointly that one country acting alone cannot solve, and to deal with areas of concern that lie outside the territory of any nation.
How can we measure globalization? Well, it’s not easy. In general, we know that globalization has been increasing at least since the mid-1900s. Indeed, at the moment, more than 20 percent of world production is sold outside of its country of origin as compared to just seven percent in 1950. However, much of the world is still relatively isolated.
One of the most comprehensive efforts to explore levels of globalization is the A.T. Kearney/Foreign Policy Index which ranks countries across four dimensions: economic, technological, personal contact, and political dimensions. Interestingly, the Index shows that a country can rank quite high on one dimension, but much lower on another. For example, the United States ranks high on the technological dimension, but much lower on the economic dimension. In contrast, Singapore and Hong Kong have ranked as the most globalized across all dimensions, while India and Iran are at the bottom of the list. Globalization can be difficult to measure. With the AT Kearney/ foreign policy globalization index ranks countries bye
- Economic dimensions
- Technological dimensions
- Personal contact
- Political dimensions
While there are many benefits to globalization, it remains controversial. Antiglobalization protests have become common at international conferences, and the reaction to government policies is sometimes violent.
Three issues are of particular concern. First, the threat the globalization poses to national sovereignty. According to critics, globalization undermines the ability of a country to act in its own best interests and can make smaller economies overly dependent on larger ones. Moreover, critics contend that even a country’s cultural sovereignty is threatened as products, companies, work methods, social structures and language are homogenized as a result of globalization.
A second concern is the effect of globalization on economic growth and the environment. Because globalization brings growth, more nonrenewable natural resources are consumed and damage to the environment increases. You might think of despoliation through toxic and pesticide runoffs into rivers and oceans, air pollution from factory and vehicle emissions, and deforestation that can affect weather and climate for example. However, others argue that global cooperation actually fosters superior and uniform standards for combating environmental problems, and that companies are encouraged to seek resource-saving and environmentally friendly technologies.
Finally, critics are concerned about the effect of globalization on income equality and personal stress. According to critics the income inequality that is present in many countries today is a result of the global superstar system that has emerged as a consequence of globalization. Critics contend that globalization has facilitated access to a greater supply of low-skilled and low-cost labor and encouraged competition that leads to winners and losers. There is also some evidence that the growth in globalization goes hand in hand not only with increased insecurity about job and social status, but also with costly social unrest. Critics of globalization also worry that the practice of offshoring is shifting too many jobs abroad. But keep in mind, that the practice allows companies to keep costs down, and can actually help create high value jobs at home. IBM’s offshoring strategy for example, allows the company to not only save money and boost sales, but also to create new jobs.
Costs of globalization
• Threats to national sovereignty
Countries lose sovereignty to act locally
• Economic growth and environmental stress
Growth consumes nonrenewable natural resources and increases environmental damage
• Growing income inequality and personal stress
Promotes global superstars at the expense of others
Why should companies engage in international business? A general answer is that going in international can help firms create value. More specifically, going global can help firms expand sales, acquire resources, and diversify or even reduce risks.
Why companies engage in International Business?
- To expands sales – SALES EXPANSION
Pursuing international sales increases the potential market profits
- To acquire resources – RESOURCE ACQUISITION
May give companies lower costs, new and better products and additional operating knowledge
- To diversify or reduce risk – RISK MINIMIZATION
International operations may reduce operating risk by smoothing sales and profits, preventing competitors from gaining advantage.
These three reasons guide all decisions about whether, where, and how to engage in international business.
The most popular modes of international business are merchandise exports and merchandise imports. They represent major sources of international revenues and expenditures for countries.
Modes of operations in International business
Merchandise exports = goods that are sent out of a country
Merchandise imports = goods that are brought into a country
Sometimes they are called visible exports and imports.
Services exports and imports are the fastest growing sector in international trade. The most important are tourism and transportation, service performance, and asset use.
Many countries depend on tourism and transportation for both foreign exchange earnings and employment.
Companies pay fees for services rendered in turnkey operations and management contracts. Turnkey operations are construction projects performed under contract and transferred to owners when they’re operational. Management contracts are arrangements in which one company provides personnel to perform general or specialized management functions for another.
Asset use involves allowing another company to use your trademarks, patents, copyrights, or expertise in exchange for royalties. This takes place through licensing and franchising agreements.
Service exports = provider and receiver of payment
Service imports = recipient and payer of payment
Examples: tourism and transportation, service performance (turnkey operations and management contracts, asset use (licensing and franchising)
Companies can also engage in international business by taking either a controlling or a non-controlling interest in a foreign company. When a firm takes a controlling interest the investment is known as foreign direct investment. If two or more companies share ownership of the investment it’s referred to as a joint venture. A non-controlling interest is called portfolio investment.
Investments:
FDI: Foreign direct investment investor takes a controlling interest in a foreign company = joint venture
Portfolio investment = a non-controlling financial interest in another entity.
We use different terms to refer to the various collaborative arrangements between companies including joint ventures, licensing arrangements, management contracts, and long-term contractual arrangements. Those relationships in which the agreement is of critical importance to one or more partners or to an agreement that doesn’t involve joint ownership are called strategic alliances.
Types of international organizations
Collaborative arrangements
- Joint ventures
- Licensing arrangements
- Management contracts
- Minority ownership
- Long-term contractual arrangements
Strategic alliance
- Companies that work together but the agreement is critical to at least one partner
- An agreement that does not involve joint ownership
Any company with foreign direct investments is known as a multinational enterprise. Other terms used for these types of companies include multinational company, multinational corporation, or transnational corporation.
Multinational enterprises (MNEs); take a global approach to markets and production or have operations in more than one country.
Sometimes they are referred to as :
- Multinational corporations (MNC’s)
- Multinational companies (MNC’s)
- Transnational companies (TNC’s)
Keep in mind that companies doing international business may have to adjust their typical methods of operation depending on the conditions in foreign markets or if the operating modes are different from those used domestically.
In foreign markets, companies may have to adapt their typical methods of doing business
- Foreign conditions may dictate a particular method
- Operating modes may be different from those used domestically
Companies involved in international business need to explore how the external environment will affect their operations. In particular, it’s important for managers to understand the social science disciplines and how they affect all functional business fields.
Why International business is different:
- The external environment affects a company’s international operations
- Managers must understand social science disciplines and how they affect functional fields
- Consider o Physical factors o Social factors o Competitive factors
We can organize physical and social factors into four groups. The first is geographic influences or how natural conditions influence the choice of production locations. The second group is political policies which impacts how, and even if, business takes place within a country. Related to this are legal policies. Firms must follow the laws in each country. The fourth group, behavioral factors, may also force a company to alter its operations to better fit with local cultural norms and values. Finally, economic forces affect costs, currency values, market size, and so on. Together, these factors influence how companies produce and market their products, how they staff their operations, and so on. Keep in mind that the factors may require a company to use a different method of operation internationally than is used domestically.
Physical and social factors:
• Geographic influences
– natural conditions influence production locations
• Political policies
– determines where and how business occurs
• Legal policies
– influence how a company operates
• Behavioral factors
– may require changes in operations
• Economic forces
– explain differences in costs, currency values, market size
Managers also need to understand how the competitive environment will affect their operations. A company’s competitive strategy - low cost, differentiation, or focus - will influence its international strategy, as will its resources and experience. Companies with greater resources and experience will have more opportunities open to them than companies with more limited resources or experience. Finally, the competitors a firm faces in each market will dictate to some degree a company’s international strategy.
The competitive environment;
• Competitive strategy for products
– Cost strategy
– Differentiation strategy
– Focus strategy
• Company resources and experience
– market leaders have more resources for international operations
• Competitors faced in each market
– local or international
In summary, a firm’s competitive strategy influences how and where it operates. Firms might find that their competitive situation differs from market to market.
- So, a company’s competitive strategy influences how and where it can best operate
- Its competitive situation may differ from country to country in terms of its relative strength and which competitors it faces
What is the future of international business and globalization? Well, there are three different perspectives on what the future might hold. Some believe that future globalization is inevitable. Those taking this perspective note that advances in transportation and communications are so pervasive that consumers everywhere will demand the best products for the best prices regardless of their origins. Moreover because MNEs have so many international production and distribution networks in place, they’ll pressure their governments to place fewer rather than more restrictions on the international movement of goods and the means of producing them. The largest challenge to overcome in this scenario will be figuring out how to spread the benefits of globalization equitably while minimizing the hardships placed on individuals and companies affected by increased international competition.
Others however, think that in the future international business will grow more along regional rather than along global lines. This argument is based on studies that indicate that companies tend to conduct international business in neighboring countries. It’s logical that when companies first engage in international business, they expand into neighboring countries first and continue outwardly from there. This helps reduce transportation costs and companies can benefit from regional trade agreements that reduce barriers.
Still others feel that the pace of both globalization and international business will slow down. Recall that antiglobalization sentiments have surfaced over the years, protesting against some of the negative effects of international business activity. This sentiment together with economic recession, growing political instability, and rising fuel costs among other things, threatens to slow international business growth. Looking to the future
Three major perspectives on the future of international business and globalization
- Further globalization is inevitable
- International business will grow primarily along regional rather than global lines
- Forces working against further globalization and international business will slow down both trends
3. The political and legal environments facing business
Every country has its own political and legal environment
Companies must determine where, when and how to adjust their business practices without undermining the basis for success.
Companies doing business internationally must navigate different philosophies, laws, and attitudes concerning political freedom, property rights, and social responsibility. Managers that understand the differences between countries are in a better position to compete.
Political and legal factors influencing international business operations The political environment
The goal of a country’s political system is to integrate the diverse elements of a society. A successful political system unites a society in the face of differing viewpoints. So for example, the peace and prosperity that exists in countries like Sweden and Australia illustrate the success of the political systems in those countries, while the instability and insurrection of Libya’s political system shows its failings.
Managers evaluate, monitor and forecast political environments.
A country’s political system: refers to the structural dimensions and power dynamics of its government that specify institutions, organizations and interest groups and define the norms that govern political activities.
The goal of the political system: is integrating the diverse elements of a society
Individualism vs collectivism
One standard way to assess a political system is exploring the degree to which it emphasizes individualism versus collectivism.
Individualism champions the rights of the individual over those of society. From a business perspective, this suggests that managers have the right to make economic decisions largely free of rules and regulations. You might be aware that countries that have an individualist orientation shape their marketplace with the idea of laissez-faire and support the idea that government should not interfere in business affairs. Under this perspective, individuals are presumed to be self-regulating in promoting economic prosperity and growth, acting fairly and justly to maximize personal performance without threatening the welfare of society.
In contrast, collectivism encourages the government to intervene to improve the welfare of the group at the expense of the individual. For business, this means that the ownership of assets, the structure of industries, the conduct of companies, and the actions of managers must improve the welfare of society. Therefore, group members accept the responsibility for making decisions that will benefit everyone. Countries taking a collectivist orientation hold that government will intervene in market situations to ensure that business practices benefit society.
Invidiualism: refers to the primacy of the rights and role of the individual.
Collectivism: refers to the primacy of the rights and role of the community
The business implications of individualism hold that each person has the right to make economic decisions free of rules and regulations. Countries with an individualistic orientation shape their marketplace with the idea of liassez faire. Literally meaning: leave things alone. It holds that the government should not interfere in business affairs.
Political ideology
A political ideology stipulates how society ought to functionand outlines the methods by which it will do so. Most modern societs are pluralistic.
Pluralism holds that there are multiple opinions about an issue, each of which contains part of the truth, but none that contain the entire truth.
Pluralistic: different groups champion competing political ideologies.
- Democrats vs. Republicans in the United States
- Democratic Party vs. Liberal Party in Japan
Most countries have competing ideologies. In the United States for example, the Democratic Party competes with the Republican Party to not only describe a vision for the future, but also the means of achieving that future. Most societies today are pluralistic – they have different groups championing different ideologies.
Spectrum analysis
A political spectrum outlines the various forms of political ideology.
Political freedom measures:
- the degree to which fair and competitive elections occur
- the extent to which individual and group freedoms are guaranteed
- the legitimacy ascribed to the general rule of law
- the freedom of the press
A political spectrum outlines the various forms of political ideology including anarchism, conservatism, secularism, environmentalism, liberalism, feminism, nationalism, socialism, and theocracy.
Managers are concerned with the degree of political freedom in a country and its effect on investment choices and operations decisions.
This Figure shows a political spectrum of the various forms of political ideologies. By configuring ideologies along the central axis we can model different political ideologies in relation to each other. The goal of relativity depends on specifying credible ideas to anchor the endpoints of the axis; reasonably set, one can then position alternative ideas.
In practice, purely democratic and totalitarian systems are extreme exceptions. Looking around the world, one finds that there are variations of each political ideology. For example, democratic systems range from radical on one side (advocates of extreme political reform) to reactionary (advocates of a return to past conditions). Likewise, totalitarian systems emphasize different degrees of state control; fascism aims to control people’s minds, souls, and daily existence, whereas authoritarianism confines itself to political control of the state. This Figure shows that the majority of political ideologies fall between democracy and totalitarianism.
Democracy
In a democracy:
– all citizens are politically and legally equal
– all are equally entitled to freedom of thought, opinion, belief, speech, and association
– all equally command sovereign power over public officials
Prominent types of democracy include
– Representative
– Multiparty
– Parliamentary
– Social
Understanding the ideals and means of democracy and totalitarianism can help explain the other points on the political spectrum. Democracy calls for participation by citizens in a fair and just decision-making process. Since it supports individualism, companies can make investment and operational decisions based on economic rather than political standards. Under a democracy, commerce and trade is promoted.
Totalitarianism
A totalitarian system subordinates the individual to the interests of the collective
- dissent is eliminated through indoctrination, persecution, surveillance, propaganda, censorship, and violence
Prominent types of totalitarianism include
- Authoritarianism
- Fascism
- Secular
- Theocratic
A totalitarian system champions the power of a few over the many. Under a totalitarian system, the government maintains control over many aspects of life, the individual is subordinated to the state, and all opposing political and cultural expression is suppressed. Managers operating in a totalitarian state must make decisions based on political rather than economic standards. Typically, local companies are favored over foreign firms forcing multinational companies to make business deals that would not occur in a democratic environment.
The standard of freedom
- Freedom House assesses political and civil freedom around the world
- Freedom House recognizes three types of political systems o Free country o Partly free country o Not free country
Freedom House classifies countries according to their political and civil freedom. A free country has open political competition, respect for civil liberties, independent civic life, and independent media. A partly free country has limited political rights and civil liberties, corruption, weak rules of law, ethnic and religious strife, unfair elections, and censorship. A not free country has few or no political rights and civil liberties.
Third wave of democratization
Third wave of democratization : number of democracies doubled in two decades
Engines of democracy:
1. The failure of totalitarian regimes to deliver economic progress
2. Improved communications technology
3. Economic dividends of increasing political freedom
The Third Wave of Democratization refers to the third major surge of democracy in the 20th century that began in 1974. During this time the number of democratic countries doubled. This steady diffusion of democratic ideology resulted in a situation in which today, some 50 percent of the world’s population lives in a democracy.
The rise of democracy was a result of the failure of totalitarian regimes to deliver economic progress, improved communications technology, and economic dividends of increasing political freedom. However, despite these gains, over the last five years, some of the gains in political freedom have declined.
Democracy: Recession and retreat
• Democracy’s retreat
– just 26 of the world’s democracies are full democracies
• Engines of totalitarianism
– Economic development
– Inconsistencies
– Economics problems
– Standards of democracy
While democracy still retains its appeal worldwide, there are signs that it may actually be in retreat. According to the Economist Intelligence Unit many countries are democracies in name only. The EIU classifies four types of political systems – full democracy, flawed democracy, hybrid regime, and authoritarian regime.
Today, 12 percent of the world’s population lives in a full democracy, 37 percent in a flawed democracy, 14 percent in a hybrid regime, and 37 percent in an authoritarian regime.
What’s fueling this trend? Several things. One is the growing uncertainty of the relationship between democracy and levels of economic development. A second involves the democracy setbacks in several European countries. Third, the economic problems and in particular the global financial crisis that has plagued the world over the last few years. Finally is the question of just how democracy should be defined and what its standards should be.
Political ideology and the MNE
What will the political map look like in the future?
– The Washington Consensus
– The Beijing Consensus
– The Clash of Civilizations
What happens in the future? Managers must watch carefully and adapt their operations and decisions accordingly.
• The Washington Consensus champions democracy, freedom, the rule of law, and human rights.
• The Beijing Consensus calls for a one-party system in which elected representatives, preapproved by the ruling party, oversee a nominal democratic system whose citizens, though granted the right to vote, cannot participate in decision making.
• Under the Clash of Civilizations scenario irreconcilable cultural and religious differences between Islam and the West will trigger a backlash against Western political ideals and their crystallization in the ideologically interventionist Washington Consensus.
Political risk refers to the risk that political decisions or events in a country negatively affect the profitability or sustainability of an investment
Types:
- Systemic
- Procedural
- Distributive
- Catastrophic
Political risk represents a very real threat for companies today especially in fast-growing, emerging markets where weak legal systems, makeshift institutions, volatile cities, and fragile regimes complicate the business environment. Moreover, the global credit crisis has aggravated political risk across both developed and developing markets.
There are four categories of political risk.
- Systemic Risks are risks that impact all firms that operate in the particular political system.
- Procedural Risk refers to the risk evolving from the daily movement of people, products, and funds from point to point in the global market. Each move creates a procedural transaction between the units involved, whether units of a company or units of a country. Political actions sometimes create frictions that interfere with these transactions.
- Distributive Risk is a result of the profits generated by foreign companies in the local economy. If the host country questions the distributive justice of the rewards of operating in its market, it may wonder whether, as the business grows more successful, it is receiving its “fair” share of the growing profits.
- Finally, Catastrophic Risk includes random political developments that adversely affect the operations of every company in a country. Typically, it arises from specific flash points, such as ethnic discord, illegal regime change, civil disorder, or insurrection. It disrupts the business environment in a way that affects every firm in the country. If such disruptions spiral out of control, they devastate companies and nations.
The legal environment
The legal system is the mechanism for creating interpreting and enforcing the laws in a specified jurisdiction
Types:
– Common law
– Civil law
– Theocratic law
– Customary law
– Mixed systems
International managers must be aware of how a country develops, interprets, and enforces its laws. Legal systems vary across counties because of variations in traditions, precedent, usage, custom, and religious precepts.
Modern legal systems are composed of constitutional law which preserves an open and just political order, criminal law which safeguards the social order, and civil and commercial laws which promote fairness.
There are five types of legal systems. A common law system is based on tradition, precedent, custom, usage, and interpretation by the courts. A civil law system relies on a systematic collection of codes and statues that judges must follow. A theocratic system is based on religious precepts. A customary legal system follows the wisdom of daily experience. Finally, a mixed legal system combines elements of the other systems.
Trends in legal systems
What is the basis of rule in a country?
– The rule of man
• legal rights derive from the individual who commands the power to impose them
• associated with a totalitarian system
– The rule of law
• systematic and objective laws applied by public officials who are held accountable for their administration
• associated with a democratic system
The retreat of democracy is also changing the legal environment. As countries shift toward totalitarian regimes, the legal system changes to one in which business activity is regulated by the government to support state objectives.
Managers must determine what the basis of rule is in a given country – the rule of man or the rule of law. The rule of man is the basis of a totalitarian system, while the rule of law is the basis of democracy.
Note that the rule of law prevails in wealthier, Westernized countries, but that the rule of man is in place in many emerging economies. In the past, it was common for managers to avoid countries where the rule of man prevailed, but slow growth in countries dominated by the rule of law is forcing managers to reconsider this approach.
Operational concerns
• Operational issues
– Starting a business
– Entering and enforcing contracts
– Hiring and firing local workers
– Closing down the business
• In general
– rich countries regulate less
– poor countries regulate more
Managers doing business abroad face a complex political and legal environment that makes decision- making in the multinational company challenging.
Just starting a new business creates several concerns related to registering the new company’s name, choosing the appropriate tax structure, getting licenses and permits, arranging credit, and securing insurance. Some countries facilitate this process, while others do not.
Managers must also be aware of how a country’s political and legal environment affects both entering and enforcing contracts. A contract, which is essential to business transactions, is a binding legal agreement that formally exchanges promises, the breach of which triggers legal proceedings. Countries with common law systems tend to encourage precise, detailed contracts, but countries with civil law systems where the civil code deals with many pertinent issues, encourage shorter and less specific contracts.
Another area that managers must explore is related to hiring and firing local workers. However, laws and practices in this area vary greatly across the world. Singapore, New Zealand, and the United States are among the countries with the most flexible labor-regulation statutes. China has the most flexibility in hiring and firing plus the greatest discretion in setting employment conditions, but, Angola, Belarus, and Paraguay place rigid restrictions on firing.
Finally, how a business is closed down must be explored. Some countries make the process quite difficult. In the United States, for example, the Internal Revenue Service requires completing a series of forms that report, among many others points, changes in the business structure, the sale of assets, payments to subcontractors, and termination of a retirement plan. Other countries like Ireland, Japan, and Canada allow companies to close their doors much more easily.
In general we say that there is an inverse relationship between a nation’s wealth and its tendency to regulate business.
Strategic concerns
• Strategic issues
• Country of origin and local content
• Marketplace behavior
• Product safety and liability
• Legal jurisdiction
• Intellectual property
In addition to basic operation decisions managers must also consider longer term strategic issues and how the political and legal environment might influence them.
A product’s country of origin – where the product was grown, produced, or manufactured – is important for determining import charges. Many countries require companies to ensure that a certain percentage of a good is made locally. These regulations are called local content rules. Today’s slow economic growth have made “buy-local” campaigns very popular.
Marketplace behavior can make strategic decisions challenging especially where rule of man prevails. Governments determine what is permissible in all forms of business activities, including sourcing, distributing, advertising, and pricing products. So managers are vulnerable to abrupt changes that could require them to adjust their manufacturing configuration, their supply chain coordination, and their marketing strategy.
Product safety and liability is another strategic areas of concern for managers. Local standards may require companies to customize their products. Since these standards often reflect cultural values or social norms, companies must adapt the product to boost its appeal to local consumers.
Countries also have legal jurisdiction to stipulate laws that set the criteria for litigation when agents—whether legal residents of the same or of different countries—are unable to resolve a dispute. Typically, in a cross-national dispute, each company petitions its home-country court to claim jurisdiction hoping that this will ensure more favorable treatment.
Finally, companies must consider intellectual property rights and protection in a given country.
Intellectual property: Rights and Protection
• Intellectual property refers to creative ideas, expertise, or intangible insights that grant its owner a competitive advantage
• Intellectual property rights refer to the right to control and derive the benefits from writing, inventions, processes, and identifiers
– no “global” patent, trademark or copyright exists
The protection of intellectual property has become a hot topic in today’s global economy. Product piracy has become common, and many countries feel that others are not doing enough to safeguard the rights of those who own intellectual property.
It is difficult for companies to maintain control over their intellectual property because no “global” patent, trademark, or copyright exists. Therefore, managers must be especially vigilant to ensure that product piracy does not occur. Yet, it can be exceedingly difficult to do so. The business of intellectual property theft is huge. Some estimates suggest that international trade in pirated goods is more than $600 billion a year.
Attitudes towards intellectual property
– Legal legacies
• rule of man versus rule of law
– Wealth, poverty, and protection
• levels of economic development
– Cultural orientation
• individualism versus collectivism
How do countries decide how and if to protect intellectual property? Well, every country’s policies regarding intellectual property are different and reflect the nation’s legal legacies, economic development, and cultural orientation.
The largest share of pirated products is made in countries where the rule of man is dominant. Protection tends to be much better in countries where the rule of law prevails. A country’s economic level of development also plays a role in the protection of intellectual property. Poorer countries typically impose fewer regulations compared to wealthier countries. Similarly, intellectual property rights protection tends to be better in countries where individualism is emphasized, whereas in collectivist societies, protection is much lower.
Can protection be improved? Perhaps, but it could take a while. Over time, countries that become idea creators tend to improve their protection of intellectual property. China for example, has long been known for product piracy, but as it has become an idea lab in recent years, it has been making a better effort to protect intellectual property. In general, countries that generate intellectual property are strong advocates of protecting ownership rights.
5. Globalization and society
MNE = multinational enterprise as a company with a worldwide approach to markets and production or one with operations in more than one country
Who should companies satisfy? What do they want
Companies must satisfy
- Stakeholders
- Employees
- Customers
- Society
Foundations of Ethical behavior:
There are 3 levels of moral development:
- Preconventional (what is right or wrong)
- Conventional (role conformity)
- Postconventional (internalized)
What to do when you have to make an ethical decision?
Teleological approach : these are decisions based on the consequences of the action
Utilitarianism : an action is right if it produces the greatest amount of good
Deontological approach : moral judgments are made and moral reasoning occurs independently of consequences
Ethical behavior can help a company develop a competitive advantage.
Avoid being perceived as irresponsible
Relativism vs Normativism
Relativism: ethical truths depend on the groups holding them
Normativism: there are universal standards of behavior that all cultures should follow.
Legal justification Pro and Con
Extraterritoriality: Imposing domestic legal and ethical practices on the foreign subsidiaries fo companies headquartered in their jurisdictions
Key ethical issues that companies must confront in doing business in foreign country
Corruption: the misuse of entrusted power for private gain
Bribes: payments of promises to pay cash or anything of value
Occurs: to obtain government contracts & to get public officials to do what they should be doing anyway
What is being done about corruption?
International accords to stop bribery
- OECD anti-bribery convention
- ICC code of rules
- UN convention against corruption
Regional initiatives include
- EU efforts
- US. Foreign corrupt practices act and Sarbanes- oxley legislation
Industry initiatives include
- 2005 world economic forum zero tolerance pact
Sustainable Business:
Sustainability: meeting the needs of the present without compromising the ability of future generations to meet their own needs
What is Sustainable business:
Environment: monitor and seek to reduce our impact on the environment
Community: encourage employee engagement in the community. Use our business skills and activities to support the communities in which we operate
Workplace: encourage diversity at work and recognition of other cultures. Attract and retain talent. Ensure all employees operate ethically and with integrity. Act as a responsible employer. Enable employees to achieve a safe healthy and productive work life.
Marketplace: seek to enlarge our customer communities and improve levels of customer service by understanding and responding their needs. Support customers CR objectives and pursue business opportunities. Ensure a safe and healthy environment. Encourage suppliers to adopt CR policies and standards in line with our own.
Ethical dimensions of labor conditions
Pressures for ethical behavior with respect to workers:
- Governments
- Trade unions
- Media
- Individual investors
- Consumers
- Corporate investors: pension funds
- NGO’s
Code of conduct
Respect >>> environment >>> community >>> ethics >>>confidentiality
Pyramid
FDI is a major source of capital expertise, but it is also the center of a controversy over the costs and benefits to home and host countries
MNE’s must balance the interest of different constituencies that have different objectives
The economic and political effects of MNE’s are difficult to evaluate because of conflicting influences on different countries objectives, intervening variables that oscure cause and effect relationships, and differences among MNE’s practices
MNE’s may affect countries balance of payments, growth and employment objectives. Under different conditions, these effects may be positive or negative for the host or home country.
The balance-of-payments effects of FDI involve import stimulus versus import displacement export stimulus versus export displacement and capital flows might be positive initially for the host country but negative later as the investor sends returns back to the home market.
FDI creates jobs and economic growth in the host country. Given that resources are not fully employed, FDI may or may not have an adverse impact on jobs and economic growth in the home market.
Relative behavior implies that we act according to the norms of the countries where we operate. Normative behavior implies there are universal standards for ethical conduct that should be followed everywhere.
The law is an important basis for ethical behacior, but not all unetchical behavior is illegal. Thus ethical behavior must go beyond the law to include common decency.
Bribery is a form of unethical behavior being addressed at the multilateral level, such as at the UN and OECD, and at the national level such as with the foreign corrupt practices act in the United States.
Environmental concerns are raised with extractive industries and industries that generate air and water pollution or that produce products such as automobiles that use fossil fuels.
The Kyoto protocol, which requires the reduction of the emission of greenhouse gases, has not been adopted by all countries and is therefore still limited in its total global impact. However, companies must adapt to countries that have implemented the Kyoto protocol.
Pharmaceutical companies face challenges on how to make enough money to fund the R&D into new drugs and how to help provide critical drugs to developing countries at lower prices.
A major challenge facing MNE’s is the globalization of the supplu chain and the impact on workers, especially in the areas of fair wages, child labor, working conditions, working hours, and freedom of association.
Companies respond to the pressures for greater corporate social responsibility by establishing codes of conduct, distributing them to suppliers and subcontractors internationally, and ensuring compliance with the codes through effective training and auditing programs. 9. Global foreign-exchange markets
What is foreign exhange?
Foreign exchange
money denominated in the currency of another nation or group of nations
Foreign exchange market
where foreign exchange transactions take place
Exchange rate
the price of a currency
Some aspects of the foreign exhange market
The foreign exchange market has two segments:
OTC commercial and investment banks
Securities exchanges
Global OTC(over-the-counter) foreign exchange instruments include:
Spot transactions
Involve the exchange of currency at an agreed upon rate for deliver within two business days
Outright forward transactions
Involve the exchange of currency on a future date beyond two business days. It is the single purchase or sale of a currency for future delivery.
FX swap
One currency is swapped for another on one date and then swapped back on a future date.
Currency swaps
Deal more with interest-bearing financial instruments (such as a bond) and involve the exchange of principal and interest payments.
Options
Are the right, but not the obligation to trade foreign currency in the future.
Futures contracts
Is an agreement between two parties o buy or sell a particular currency at a particular price on a particular future date, as specified in a standardized contract to all participants in that currency futures exchange and is not traded OTC.
Size, composition and location of the foreign exchange market.
Market size is $4 trillion daily
the U.S. dollar is the most important currency on the foreign-exchange market
London is the main foreign exchange market in the world
The most commonly traded currency pairs are EUR/USD and USD/JPY
Major foreign exchange markets
American terms (direct quote)
the number of dollars per unit of foreign currency
European terms (indirect quote)
the number of units of foreign currency per dollar
bid rate(buy): is the price at which the dealer is willing to buy foreign currency the offer(sell): is the price at which the dealer is willing to sell foreign currency the spread: is the difference between the bid and offer rates, as well as the dealer’s
The forward market
Forward discounts
when the forward rate is less than the spot rate
Forward premiums
when the forward rate is greater than the spot rate
Option
the right, but not the obligation, to trade a foreign currency at a specific exchange rate
Futures
specifies an exchange rate in advance of the actual exchange of currency
not as flexible as a forward contract
Banks and exchanges
The top banks in the inter-bank market in foreign exchange can
trade in specific market locations
engage in major currencies and cross-trades
deal in specific currencies
handle derivatives
forwards, options, futures, swaps
conduct key market research
How companies use foreign exchange
Other financial flows for business
Speculation
buying or selling of a foreign currency that has an element of risk and a chance of great profits
speculators take positions in foreign-exchange markets and other capital markets to earn a profit
Arbitrage
the buying and selling of foreign currencies at a profit due to price discrepancies
interest arbitrage; involves investing in interest-bearing instruments in foreign exchange in an effort to earn a profit due to interest rate differentials.
Where are foreign exchange markets headed?
More efficient markets
create more opportunities for foreign exchange trading
lower costs
Financial crisis in Europe
future of the euro
Rise of the Chinese yuan and Brazilian real
Technology developments
more electronic trades
The international Monetary Fund
The goals of the International Monetary Fund (IMF) are to
ensure stability in the international monetary system
promote international monetary cooperation and exchange-rate stability
facilitate the balanced growth of international trade
provide resources to help members in balance-of-payments difficulties or to assist with poverty reduction
The Bretton Woods Agreement
established a par value, or benchmark value, for each currency initially quoted in terms of gold and the U.S. dollar
The dollar became the world benchmark for trading currencies and continues in that role today
The global financial crisis and the IMF
The global crisis in 2008-2009 raised concerns over global liquidity
prompted the G20 to inject huge amounts of cash into the IMF
Greece’s 2010-2011 financial crisis required assistance from the IMF and the EU
the IMF required Greece to adopt very unpopular austerity measures
Three choices:
The IMF classifies currencies into three categories
Hard peg / Fixed : Establishing a fixed exchange rate between one national currency (usually that of a small country) and another national currency (usually that of an industrial power). One country, in other words, "pegs" the value of its currency to the value of another currency. This is commonly done by countries with a history of monetary instability is used as a means of restoring and maintaining order. This U.S. dollar is frequently used for a hard peg by other smaller nations. The result of a hard peg is to eliminate control by the pegging nation and relying on the actions of the targeting nation.
Soft peg: means the country tries to keep the currency exchange rate basically about the same, but allows it to fluctuate up and down a little.
Floating: are those that generally change accoding to market forces but may be subject to market intervention. Brazil and India are considered to have floating currencies
Reasons for pegging or floating: anyone involved in international business needs to understand how the exchange rates of countries with which they do business are determined, because exchange rates affect marketing, production and financial decisions.
The euro
The European Monetary System (EMS)
established to create exchange rate stability within the European Community
European Monetary Union (EMU)
outlined the criteria for euro applicants
the U.K., Sweden, and Denmark opted not to adopt the euro
The European Central Bank (ECB)
sets monetary policy for the adopters of the euro
Determining exchange rates;
Currency in a floating rate world
demand for a country’s currency is a function of the demand for that country’s goods and services and financial assets
Currency in a fixed rate or managed floating rate world
Role of central banks
reserve assets
intervening in the market
attitudes toward intervention
Foreign exchange convertibility and controls
Hard currencies
U.S. dollar, euro, British pound, Japanese yen
Soft currencies
developing countries
Countries can control convertibility through
licenses
multiple exchange rate systems
advance import deposits
quantity controls
Exchange rates and PPP
Purchasing power parity (PPP)
a change in relative inflation between two countries must cause a change in exchange rates to keep the prices of goods in the countries fairly similar
The Big Mac Index
Exchange rates and Interest rates
The Fisher Effect
links inflation and interest rates
The International Fisher Effect (IFE)
links interest rates and exchange rates
Other Factors in Exchange Rate Determination
confidence
information
Fundamental and technical forecasting
Forecasting exchange rates
Fundamental forecasting
uses trends in economic variables to predict future rates
Technical forecasting
uses past trends in exchange rates to spot future trends
Biases can skew forecasts
Timing, direction, and magnitude of exchange rate movements are important to consider
Fundamental factors to monitor
Monitor
The institutional setting
Fundamental analyses
Confidence factors
Events
Technical analyses
Futures of an economy
Managers should also consider
Inflation
Unemployment
Debt
Income distribution
Poverty
Balance of payments
Inflation
Inflation
a measure of the increase in the cost of living
Deflation
when prices for products go down not up
Reflation
increase the money supply and reduce taxes to accelerate economic activity
Unemployment
Unemployment rate
share of unemployed workers seeking employment for pay relative to the total civilian labor force
Misery index
the sum of a country’s inflation and unemployment rates
Debt
the total of a government’s financial obligations
internal debt
external debt
Growing public debt signals
tax increases
reduced growth
rising inflation
Balance of payments
Balance of payments
reports a country’s trade and financial transactions with the rest of the world
Current account
tracks merchandise trade
Capital account
tracks loans given to foreigners and loans received by citizens
Business implications of exchange rate changes
Marketing Decisions
when the value of a country’s currency rises, exporting becomes more difficult as the product becomes more expensive in foreign markets
Production Decisions
might locate production in a weak currency country because the initial investment is cheap and it will make a good base for exports
Financial Decisions
currency rates influence sourcing, cross-border remittance of funds, and the reporting of financial results
11. The strategy of International Business
MNE: Multi National Enterprise
Winners:
- Google
- Zalando
- Apple
- Zara
- Samsung
- Bmw
- Spotify
- Whatsapp
- Audi
- Starbucks
- Oracle
- Super dry japan
- Rtl media
- Fox media
- Lenovo
- Safaricom
- Ikea
Losers: - Nokia
- Sbs media
- Microsoft
- Lonsdale clothing
- Blackberry
- Sony
- Tomtom
- Phillips
- Emi
- Dell
- Gm opel
- Renault
- Puma
- Wordperfect
- Novell
- Compaq
- Ibm
- Upc
- Post nl
Competitive advantage
Doing things differently from your competitors in order to gain market share and/or profitability.
Ignore industry standards
Red ocean strategy Blue ocean strategy
Compete in existing market space Create uncontested market space
Beat the competition Make the competition irrelevant
Exploit existing demand Create and capture new demand
Make the value-cost trade-off Break the value-cost trade-off
Align the whole system of a firm’s activities with its strategic choice of differentiation or low cost Align the whole system of a firm’s activities in pursuit of differentiation and low cost.
What do they do differently? Zara case
They put clothes on the market within 3 weeks instead of 6 months
They design 11000 instead of 2000
Minimize advertising costs
Commodity production in China, fashion production in Spain
Value chain integration
Average sustainable clothing
Trendwatching effectiveness
Prime location stores
2 times a week delivery cycle
Real-time inventory and sales data
Local pricing strategy
First class retailmanagers
Freshness of offerings based on 4 weeks client visiting cycle; buy now attitude
85% full price sales
Resasonable quality, highly fashionable, reasonable pricing
The value chain (porter)
Primary activities:
Product design >>> operations >>> outbound logistics >>> marketing >>> service
Support activities
Materials & equipment >>> firm infrastructure >>> Human resource >>> systems & solutions
Developments:
- Emerging markets
- Bric countries
- Bottom of the pyramid
- Frugal innovation
- Cloud computing/mobile computing
Industry structure (porter)
Industry structure involves the relationship among
- Suppliers of inputs
- Buyers of outputs
- Substitute products
- Potential new entrants
- Rivalry among competing firms
Industry Change
Industry structure changes because of:
- Competitor moves
- Government policies
- Shifting preferences
- Technological developments
Industry structure, strategy and value
The industry organization paradigm (restrictive headstart) ; presumes that markets demonstrate perfect competition where no firm or industry consistently outperforms others
The power of innovative executives ; bright executives exploit the market imperfections to outperform rivals
Strategy’s hallmarks ; value & strategy
Creating value/positioning
- Value: to measure of a firm’s capability of selling what it makes for more than the costs incurred to make it
- Create value using: o a cost leadership strategy make products for a lower cost than competitors o a differentiation strategy (customer intimacy or productleasdership (hagel) make products for which consumers are willing to pay a premium price
The firm as a value chain
The value chain ; the set of linked activities the company performs to design, produce, market, distribute and support a product.
The value chain consists of:
- primary activities: design, make , sell and deliver the product
- support activities: implement primary activities
Managing the value chain
Configuration ; distributing value chain activities around the world
- concentrated ; putting all value chain activities in one location
- dispersed ; performing different value chain activities in different locations (location economies)
When configuring the value, consider:
- the business environment
- innovation context
- resource costs
- logistics
- digitization
- scale of economies
Coordination ; linking the value chain activities
Factors that influence coordination
- operational obstacles
- core competencies ; special outlook, skills, capability or technology that runs through the firm’s operations, threading disconnected activities into an integrated value chain.
- Subsidiary networks ; social networks
Change and the value chain
The configuration and coordination of a value chain responds to changes in customers, competitiors, industries and environments.
- Even a well configured and coordinated value chain can become obsolete ; so designing and delivering a strategy should be an ongoing process.
Global integration vs local responsiveness
Firms face two conflicts pressures:
- Pressures for global integration o The procedd of combining differentiated parts into a standardized whole o Maximize efficiency
- Pressures for local responsiveness o The process of disaggregating a standardized whole into differentiated parts o Optimize effectiviness
Pressures for global integration
Drivers of global integration
- The globalization of markets o Technology helps standardize consumer preferences (mass and social media) o Global products have become popular
Allows for standardization of product design
- The efficiency gains of standardization o Location, scale and learning effects o WTO supports global standards
Pressure for local responsiveness is driven by
- Consumer divergence o Cultural predisposition o Historical legacy o Nationalism
- Host government policies o Fiscal, monetary and business regulations
International strategy
- Leverage a company’s core competencies into foreign markets
- Critical elements of the value chain are centralized at headquarters
The strategy works well when
- The firm has core competencies that foreign rivals lack
- There is low pressure for global integration
- There is low pressure for local responsiveness
Multidomestic strategy
- Emphasizes responsiveness to the unique circumstances that prevail in a country’s market
- Value added activities are adapted to local markets
The strategy works well when
- There is high pressure for local responsiveness
- There is low pressure for global integration
Global strategy
- Make standardized products that are marketed with little adaptation to local conditions
- Exploit location economies and capture scale economies
The strategy works well when
- The MNE is the cost leader
- There is low pressure for local responsiveness
- There is high pressure for global integration
Transnational strategy
- Simultaneously leverages core competencies worldwide
- Reduces costs by exploiting location economics
- Adapts to local conditions
The strategy works well when
- Global learning and knowledge flows are emphasized
- There is a high pressure for local responsiveness
- There is high pressure for global integration
The role of strategy in International Business
1. External influences: Industry structure and drivers Competitive dynamics
Economic conditions
Political, legal and regulatory
Managers , as agents of their firms, devise strategies to engage international markets in ways that sustain the company’s growth and boost its profitability
Strategy is defines as the efforts of managers to build an strengthen the company’s competitive position within its industry to create superior value
Value is the measure of a firm’s ability to sell what it makes for more than the cost it incurred to make it
Firm performance is influenced by both the structure of the company’s industry and the insight of managers strategic decision making. Estimates vary on the degree of influence for both factors . managers need to be familiar with industry- and firm-level conditions in making strategy.
Managers typically anchor analysis of industry structure by modeling the strength and importance of the so-called five fundamental forces.
Firms create value either through a low-cost leadership strategy or a differentiation strategy.
Interpreting the firm within the context of the value chain provides a strong tool to improve the accuracy of strategic analyses and decisions
The value chain is shaped by how managers opt to configure and then coordinate discrete value activities
Firms pay close attention to location economics when configuring their value chain
Competitive rivalry presses companies to coordinate value chain activities so that they leverage core competencies
Companies that operate internationally face the asymmetric pressured of global integration versus local responsiveness
Change, whether in managers, competencies, industries or environments, often spurs companies to rethink and reset their value activities.
The firm entering and competing in foreign markets can adopt either an international, multidomestic, global or transnational strategy.
Firms often use a mix of these four types due to company, industry and environmental situations. 12. Country evaluation and selection
Countries offer different opportunities for companies to create value from increasing sale or acquiring competitively useful assets. They must be careful in making the following decisions:
1. In which countries to locate sales, production and administrative and auxiliary services.
2. The sequence for entering different countries
3. The amount of resources and efforts to allocate to each country where they operate.
Companies need to
• Determine the order of country entry
• Set the rates of resource allocation among countries
In choosing geographic sites, a company must decide:
- Where to sell
- Where to produce
Scanning:
Managers use scanning techniques to compare countries on broad indicators of opportunities and risks. Scanning is like seeding widely and then weeding out. It is useful insofar as a company might otherwise consider too few or too many possibilities.
Without scanning a company may:
• Overlook opportunities and risks
• Examine too may or too few possibilities
Managers can use a technique called scanning to weed out countries that aren’t good options, and focus on those that offer the most potential. Since scanning uses publicly available information, it’s a relatively cheap way to narrow down a large group of countries.
After the scanning process, managers can use onsite visits to further determine the feasibility and desirability of countries.
Opportunities and risks
Opportunities
- Sales expansion obsolescence and leapfrogging of products, prices, income elasticity, substitution, income equality, cultural factors and taste, existence of a trading bloc
- Cost consideration o labor, infrastructure, ease of transportation and communications, governmental incentives and disincentives
Risks
- Political risk o analyzing past patterns, analyzing opinions, examining social and economic conditions
- Foreign exchange risk o exchange rate changes, mobility of funds
- Competitive risk o making operations compatible, spreading risk, following competitors of customers, heading off competition
When scanning, managers need to use information that can reveal opportunities and risks. They might consider economic and demographic data such as income levels or population density to reveal sales potential in a market.
Managers also need to consider other variables like the potential for a product to become obsolete or even leapfrog another product.
Similarly, a firm looking at producing in foreign markets needs to consider the costs involved in doing so by exploring wage rates and differences in infrastructure that could cause operating costs to increase, and so on.
Just because production costs are low or sales potential is high in a given country does not automatically mean it makes sense. Managers also need to factor risk into their decisions.
Keep in mind that companies and managers have different perceptions of what constitutes risk, that one company’s risk may be another’s opportunity, that companies can minimize risk in other ways than simply avoiding certain locations, and that all risks have trade-offs.
Risks that should be considered include political risk, foreign exchange risk, and competitive risk. When considering political risk, note that using past patterns of risk can be problematic. In fact, it’s important to consider risk as it applies to a specific company or industry. Managers should also consider the opinions of several individuals and explore social and economic conditions to gauge the potential for social uprisings.
Managers need to consider exchange rate changes and the mobility of funds when exploring foreign exchange risk. Depending on the particular situation, companies may want to ensure that they have highly liquid assets for at least some of their holdings even if it means earning a lower return.
Finally, managers should consider four factors when analyzing competitive risk: making operations compatible, spreading risk, following competitors or customers, and heading off competition.
Collecting and analyzing data
Problems with data o Inaccurate information o Non-compatibility o Limited resources o Misleading data o Reliance on legally reported market activities o Poor research methodology
Where can companies collect data?
- Sources of information o External
government agencies, specialized services, and trade associations o Internal
Allocating among locations
- Complementary strategies for international expansion
- Alternative gradual commitments
- Geographic diversification versus concentration
- Reinvestment versus harvesting
Diversification strategy go to many markets fast and then build up slowly in each
Concentration strategy go to one or a few markets and build up fast before going to others
A hybrid of the two
Reinvestment making new commitments to maintain competitiveness
Harvesting
reducing commitments because they do not fit the overall strategy or because there are more attractive alternatives.
The location decision process:
Step 1: Scanning
Scanning allows managers to examine most or all countries broadly and then narrow them to the most promising ones. In scanning, managers compare country information that is readily available, inexpensive and fairly comparable, usually without having to incur the expense of visiting foreign countries. Instead they analyze available information such as from the internet and they communicate with experienced people.
Step 2: detailed analysis
Once managers narrow their consideration to the most promising countries. They need to compare the feasibility and desirability of each. At this point unless they are satisfied to outsource all their production and sales, they almost always need to go on location to analyze and collect more specific information.
Summary book:
Because companies seldom have sufficient resources to exploit all opportunities, two major considerations facing managers are which markets to serve and where to locate the production to serve those markets.
Companies decisions on market and production location are highly interdependent because often need to serve markets from local production and because they want to use existing production capacity.
Scanning techniques aid managers in considering alternatives that might otherwise be overlooked. They also help limit the final detailed feasibility studies to manageable number of those that appear most promising.
Because each company has unique competitive capabilities and objectives, the factors affecting the choice of operating location will be slightly different for each. Nevertheless, a large number of companies consider comparative market potential indicators when seeking foreign sales and cost indicators when seeking foreign assets.
Four broad categories of risk that companies may consider are political, monetary, natural disaster and competitive.
The amount, accuracy, and timeliness of published data vary substantially among countries. Managers should be particularly aware of different definitions of terms, different collection methods and different base years for reports as we as misleading response.
Companies frequently use several tools to compare opportunities and risk in various countries, such as grids that rate country projects according to a number of separate dimensions and matrices for example: one won which companies plot opportunity no one axis and risk on another.
When allocating resources among countries, companies need to consider how to treat reinvestments and divestments, the interdepence of operations in different countries, and whether they should follow diversification versus concentration strategies.
Companies may reduce the risk of liability of foreignness by moving first to countries more similar to their home countries. Alternatively they may contract with experiences companies to handle operations for them. Limit the resources they commit to foreign operations and delay entry to many countries until they are operating successfully in one or a few.
Companies must develop location strategies for new investments and devise means of deemphasizing certain areas and divesting if necessary.
Companies often evaluate entry to a country without comparing that country with other countries. This is because they may need to react quickly to proposals, to respond to competitive threats and because multiple feasibility studies seldom are finished simultaneously
The location decision process.
13. Import and export
Exporting and importing is one of the fastest growing economic activities in the world.
What is export?
Exporting sends products to another country
Exporting is the sale of goods or services produced by a firm based in one country to customers that reside in another country. Technically a product does not need to physically leave a country to qualify as an export. Rather, it needs to earn foreign currency.
Types of exporters:
- Non-exporter focus on domestic market o This sort of company commands little to no knowledge about exporting
- Occasional exporter serendipity/tiptoe
This sort of company has filled unsolicited orders from foreign buyers, but passively, if at all, investigates international trade options. They understand the basics of the export process. But, for any number of reasons, they do not see it as a vital aspect of their strategy
- Regular exporter export=part of strategy o This sort of company aggressively pursues export sales and has extensive experience with its practicalities, complexities, and technicalities. It sees exporting as a productive, profitable, strategic activity.
Entry mode is influenced by:
1. Ownership advantages: firms’core competences (namely the special outlook, skill capability, or technology that run through its operations, are the basis of its competitive advantage.
2. Location advantages: the combination of sales opportunity and investment risk in foreign markets creates favorable locations-more plainly, markets with many consumers that will likely buy your product.
3. Internalization advantages: companies often respond to market imperfections, namely the sort of things that create uncertainties, by internalizing market processes. The company reduces risks and exploit gaps.
Predicting export activity:
- Core competencies
- Competition
- Production process
- Executive leadership
- Effective marketing
Why export?
1. Profitability
Companies often sell their products for higher prices abroad than at home.
2. Productivity (best solution)
Oftentimes, productivity is tied o increase scale effects: by utilizing unused capacity or spreading research costs over more customers, companies improve their operational efficiency.
3. Diversification
Fortifying adaptability – reducing vulnerability – improving bargaining power.
Two approaches:
1. Incremental internationalization
Exporting is a learning process
2. Born global
Instant internationalization
Global focus.
Direct exporting: involves independent representatives, distributors or retailers outside of the exporters home country
Indirect exporting: products are sold to an intermediary in the domestic market, which then exports them.
What is import?
Importing brings products in from another country
Importing is the purchase of a good or service by a buyer in one country from a seller in another.
Types of importers:
- Input optimizers o This sort of importer uses foreign sourcing to optimize, in terms of price or quality, the inputs fed in to a supply chain.
- Opportunistic o This sort of importer looks for products around the world that it can import and profitably sell to local citizen.
- Arbitrageurs o This sort of importer looks to foreign sourcing to get the highest-quality product at the lowest possible price.
Reasons to import
1. Specialization of labor
2. Global rivalry
3. Local unavailability
4. Diversification
5. Top management outlook
Importing and Exporting: Problems and pitfalls:
- Financial risks
- Customer management
- Lack of international business experience
- Marketing barriers
- Top management commitment
- Trade regulations
- Trade documentation
Resources and assistance
- Government agencies
- Export intermediaries
- Customs agents
- Customs brokers
- Freight forwarders
- Third party logistics
-
Countertrade:
Different arrangements that parties use to trade products via transactions that use limited or no currency or credit.
Countertrade is an umbrella term for several sorts of trade, such as barter or offset, in which the seller accept goods or services, rather than currency or credit, as payment.
Costs:
- Inefficient
- Risky
- Cumbersome
Benefits:
- Build mutually beneficial relationships 16. Marketing Globally Marketing principles in foreign markets are similar to those in domestic markets:
- product
- price
- promotion
- place
However some or all elements may need to be adapted to better fit local markets
Marketing strategies
Marketing strategy depends on marketing orientation:
- production
- sales
- customer
- strategic marketing
- social marketing
Firms can segment and target markets by country, by global segment and using multiple criteria.
Why do firms alter products:
- legal reasons
- cultural reasons
- economic reasons
Product line extent and mix:
Product line decisions depend on
- sales and cost considerations
- product life cycle considerations
Pricing strategies:
Potential obstacles in international pricing
- government intervention: o set minimum or maximum pricing o prohibit certain pricing practices
- market diversity o consumers may be willing to pay higher prices
• pricing tactics:
- skimming strategy
- penetration strategy
- cost-plus strategy
• export price escalation: higher costs, because of transportation and export
• fluctuations in currency value
Gray market or product diversion: the selling and handling of goods through unofficial distributors
Promotion strategies
Promotion is the presentation of messages intended to help sell a product or service
Push-pull mix
Push: uses direct selling techniques
Pull: relies on mass media
Advantages of standardized advertising:
- lower cost
- better quality at local level
- common global image
- rapid entry into multiple countries however, firms could have problems with
- translation
- legalities
- market needs
Branding strategies
Brand = an identifying mark for a product or service e.g. starbucks, macdonalds
Advantages of a worldwide brand
- global image
- global player identification
Problems with global brands
- language
- brand acquisition
- country-of-origin
- generic and near generic names
Distribution strategies
Distribution: the course – physical path or legal title that goods take between production and consumption
(factory, importer, wholesaler, store)
Distribution strategies
Deciding whether to standardize
- distribution can vary substantially among countries
- distribution can be difficult to change once you have contacts and have made a distribution chain
When choosing distributors and channels firms must consider
- whether internal handling is feasible
- which distributors are qualified
- the reliability of after-sales service
- Distributors choose which products to handle.
- To get a distributor to work for them, companies may have to: o Give incentives o Use successful products as bait for new ones o Convince distributors that their product and company are viable
Factors that can contribute to distribution cost differences among countries include:
- infrastructure conditions
- the number of levels in the distribution system
- retail inefficiencies
- size and operating hour restrictions
- inventory stock-outs
E-commerce and the internet:
Opportunities: can replace traditional sales methods and faster customer service
Problems: cannot differentiate sales programs between countries and still must comply with local laws
Evolving challenges to segment markets
- disparities between ‘haves’ and ‘have not’s’ will increase
- companies will have conflicting opportunities to serve both ‘haves’ and ‘have not’s’
- attitudinal differences will continue to affect demand
- materialism, cosmopolitanism and consumer ethnocentrism = chauvinism
although the principles for selling abroad are the same as those for selling domestically, the international businessperson must deal with a less familiar environment.
International marketing strategies depend on companies orientations which include production customer strategic and social.
Companies need to decide which market segments to target. These segments may include different or similar groups from different countries. Once they make this determination, their product, branding, promotion, pricing, and distribution decisions should be compatible with the needs of their target markets.
A standardized approach to marketing means maximum uniformity in products an programs among the countries in which sales occur. Although this approach minimized expenses, most companies make changes to fit country needs to increase sales volume.
A variety of legal, cultural, and economic conditions may call for altering products to capture foreign demand, but the cost of alteration relative to additional sales potential should be considered. In addition to determining when to alter products, companies also must decide how many and which products to sell abroad.
Government regulations may directly or indirectly affect the prices that companies charge. International pricing is further complicated because of fluctuations in currency values, differences in product preferences, price escalation in exporting and variations in fixes versus variable pricing practices.
For each product in each country a company must determine not only its promotional budget but also the mix between push and pull strategies and promotions. The relationship between push and pull should depend on the distribution system, cost and availability of media, consumer attitudes and the products’ price compared with incomes.
Major problems for standardizing advertising among countries are translation, legality and message needs.
Global branding is hampered by language differences, expansion by acquisition, nationality images, and laws concerning generic names. Nevertheless, global brands help develop a global image.
Distribution channels vary substantially among countries. The differences may affect not only the relative costs of operating but also the ease of making initial sales.
Companies need to choose distributors carefully, both on the basis of their ability and on their trustworthiness. At the same time, companies have to sell themselves to get distributors to handle their products and services.
Although the internet offers new opportunities to sell internationally, using the internet does not negate companies needs to develop sound programs within their marketing mix.
Gap analysis is a tool that helps companies determine why they have not met their market potentials for given countries and to decide what part of the marketing mix to emphasize.
20. International Human Resources
Human resource management: shepherds an organization’s most valued assets: its people
HRM is more difficult in international companies because of :
- Environmental differences
- Strategic contingencies
- Organizational challenges
Strategizing HRM:
Superior human resources are essential to
- High productivity
- Competitive advantage
- Value creation
MNE’s need to integrate strategy and HRM
MNE executives can be
- Locals: expatriates (leave their own country to live and wowrk in another) o Home country nationals who is a citizen of the country where the firm is headquartered o Third-country nationals is an employee who is a citizen of neither the home nor the host country
Trends in expatriate assignments:
- Most expatriate assignments are short term lasting less than a year
- More assignments are going to younger and older workers than in the past
- The number of female expatriates, third-country nationals and reverse expatriates is rising
There are 3 approaches to staffing
Ethnocentric: fill key management positions with home0country nationals
Polycentric: use host-country nationals to manage local subsidiaries
Geocentric: seek the best people for key jobs throughout the organization, regardless of nationality
Ethnocentric Framework Polycentric Framework Geocentric Framework
Key benefits
Command and control Economical Leverages powerful ideas worldwide
Local talent gaps Nationalism Promotes learning dynamics
Social integration Management development
Local implementation Employee morale
High turnover among locals Expatriate failure
Management development Local innovation
Possible threats
Cultural arrogance Complicates coordinating an controlling value Tough to develop, costly to run, hard to maintain
Blind spot for innovations in other countries Isolate country operations Difficult to find qualified expatriates that effectively move from country to country Reduces inventive among locals to engage a global perspective
Expat selection
Screening executives to find those with the greatest inclination and highest potential for a foreign assignment Candidates are screened according to:
- Technical competence
- Adaptiveness o Self-maintenance o Satisfactory relationships with host nationals o Sensitivity to host environments
- Leadership
Main key competences of expatriates
- Global mindset
- Cultural intelligence/sensitivity
- Adaptability to change
- Strategic thinking
- Leadership skills
- Flexibility
Main concerns of expatriates ahead of moving to foreign assignments
- Reestablishing a social life
- Feeling lonely and missing friends and family
- Career prospects
- Relocation process
- Language barriers
- Healthcare-quality and access
Common reasons for expatriate failure: inability of the spouse and family to adapt to the hos country.
To prevent expatriate failure, companies may provide preparation programs to provide:
- General country understanding
- Cultural sensitivity
- Practical skills
Compensation packages should:
- Motivate employees
- Allow employees to maintain their standard of living
- Reflect the responsibilities of the position
- Ensure that after-tax income will not fall
- Maintain pay equity among peers
- Compete with industry packages
- Be easily administered
Types of compensation plans:
- Home-based method
- Headquarters-based method
- Host-based method
A typical compensation package includes:
- Base salary
- Foreign service allowance
- Medical facilities
- Tax differentials
Repatriation
The process of reintegration the expatriate into the home country upon completion of the foreign assignment.
Can pose problems:
- Work
- Financial
- Social
The challenge is to find the right job for the returning manager.
What is globalization? Globalization refers to the widening set of interdependent relationships among people from different parts of a world that is divided into nations.
The term also refers to the integration of world economies through the reduction of barriers to the movement of trade, capital, technology, and people. Throughout history, human contacts over ever-wider geographic areas have expanded the variety of available resources, products, services, and markets.
Today, so many different components, ingredients, and specialized business activities go into products that we’re often challenged to say exactly where they were made. For example Apple’s iPhones are shipped from China and seem to be Chinese, yet less than four percent of their value is actually performed in China! Globalization Is the ongoing process that deepens and broadens the relationships and interdepence among countries
International Business is a mechanism to bring about globalization.
It consists of all commercial transactions between two or more countries (including sales, investments, and transportation)
The goal of private business is to make profits
Government business may or may not be motivated by profit
Why is this study important?
- Most companies are international or compete with international companies
- Modes of operations may differ from those used domestically
- The best way of conducting may differ by country
- An understanding helps you to make career decisions
- An understanding helps you to decide what government policies to support
What is international business? International business consists of all commercial transactions that take place between two or more countries. International business activities allow us to get more variety, better quality, and/or lower prices.
International business activities may be performed by private companies motivated by profit, or by governments that undertake them either for profit or for political reasons.
Why should you study international business? There are many reasons. One of the most important is because global events affect companies of all sizes and in all industries. In fact, managers today need to consider where in the world to obtain the inputs they need of the required quality and at the best possible price and also where they can best sell the product or service that they’ve put together from those inputs. In many cases, managers may find that they can be more competitive by engaging in global business transactions.
It’s also important to recognize that the best way of doing business abroad may not be the same as the best way at home. When a company operates internationally, it engage in modes of business such as exporting and importing that differ from those in which it engages domestically. In addition, physical, social, and competitive conditions differ among countries and affect the optimum ways to conduct business. So we often find that companies operating internationally have more diverse and complex operating environments than those that conduct business only at home.
Even if you aren’t working at an international company it’s important to understand international business complexities because overall national conditions— things like profits, employment security and wages, consumer prices, and national security are all affected by the international operations of companies and by government regulations of those operations. Factors in international business operations:
This Figure shows the complex relationships among conditions and operations that a firm may face when its conducts some of its business internationally. We’ll be referring back to this Figure throughout the chapter.
Sports are related to globalization because
- Competitions goes worldwide
- Television and internet brings sport to homes worldwide
Sport is related to international business because advertisers use sports to increase their brand awareness
*Faster traveling makes international sports possible
*Modern media increases popularity of foreign sports
*Prosperity is spreading worldwide more and more
*sport clubs are lucrative investments for foreign investors
Forces driving globalization
1. Increase in and application of technology; developing new products rather than just producing them. Improved innovations, transportation and communications speed up interactions between countries. Also the costs reduced because of improved communication.
2. Liberalization of cross-border trade and resource movements; to protect its own industries, every country restricts the movement across its borders, not only of goods and services, but also of the resources, such as works and capital needed to produce them. However governments have reduced their restrictions on international movements of products and services for these reasons
- Their citizens want greater variety of goods and services at lower prices
- Competition spurs to become more efficient
- They want to induce other countries to lower their barriers in turn
3. Development of services that support international business
Companies and governments have developed a variety of services that facilitate the conduct of international business. For instance the the sale of goods and services in a foreign country and currency. Because of bank credit agreements, clearing arrangement that convert one currency into another and the insurance that covers such risks as damage en route and nonpayment.
4. Growing consumer pressures
We want more, newer, better products, and we want them more finely differentiated.
5. Increased global competition
The pressure of increased foreign competition can persuade companies to buy or sell abroad. Regardless of industry, firms have to become more global to compete in today’s business environment.
6. Changing political situations
A major reason for growth in international business is the end of the schism between the non-Communist world and what was once the Communist world. Governments now provide an array of services to help domestic companies sell more abroad, such as collecting information about foreign markets, furnishing contacts with potential buyers abroad and offering insurance against nonpayment in the home country currency.
7. Expanded cross-national cooperation
The government realize that their own interests can be addressed through international cooperation by means of ; treaties, agreements and consultation. The willingness to pursue such policies is due largely to these three needs.
1. To gain reciprocal advantages
2. To attack problems jointly that one country acting alone cannot solve
3. To deal with areas of concern that lie outside the territory of any nation
You may wonder what has been driving globalization. The answer is many different factors. One factor is technology. In recent years, we’ve seen tremendous advances in technology. The pace of new product development is faster than ever, and many companies are finding that in order to keep up, they need to team up with companies in other countries to gain financial resources or specialized capabilities. Firms are also finding that to justify their investments in new product development, they need to expand their sales to other markets.
Another factor driving globalization is the liberalization of cross-border trade. Today, most governments have reduced restrictions on cross-border trade giving their citizens access to a greater variety of goods and services at lower prices. Increased competition from foreign companies also encourages domestic producers to become more efficient. Governments hope that by opening their countries to trade, other countries will also lower trade barriers.
The development of new services that facilitate international business transactions have also increased further driving globalization. In addition, today’s consumers are more informed about foreign products and services and are better able to afford more luxury items. Moreover, more consumers are able to comparison shop to find better deals worldwide. Companies look for growing markets where consumer pressures are highest such as China.
Intense global competition is also driving globalization. Today, companies continually look abroad to increase market share and reduce costs in order to better compete with other firms. Expansion abroad can take many forms: so-called born-global companies start out with a global focus because of their founders’ international experience and because advances in communications give them a good idea of where global markets and suppliers are. Related to this, many new companies locate in areas where there are many competitors and suppliers—a situation known as clustering—which helps them to become quickly aware of foreign opportunities.
Finally, changing political situations and increased cross-national cooperation have allowed international business to flourish. Countries of different political systems are more open than before to conducting international trade with each other. Governments are spending more resources on the improvement of infrastructure facilitating the transport of goods and resources. Furthermore, governments have realized the benefits of international cooperation. In particular, governments engage in international cooperation in order to gain reciprocal advantages, to attack problems jointly that one country acting alone cannot solve, and to deal with areas of concern that lie outside the territory of any nation.
How can we measure globalization? Well, it’s not easy. In general, we know that globalization has been increasing at least since the mid-1900s. Indeed, at the moment, more than 20 percent of world production is sold outside of its country of origin as compared to just seven percent in 1950. However, much of the world is still relatively isolated.
One of the most comprehensive efforts to explore levels of globalization is the A.T. Kearney/Foreign Policy Index which ranks countries across four dimensions: economic, technological, personal contact, and political dimensions. Interestingly, the Index shows that a country can rank quite high on one dimension, but much lower on another. For example, the United States ranks high on the technological dimension, but much lower on the economic dimension. In contrast, Singapore and Hong Kong have ranked as the most globalized across all dimensions, while India and Iran are at the bottom of the list. Globalization can be difficult to measure. With the AT Kearney/ foreign policy globalization index ranks countries bye
- Economic dimensions
- Technological dimensions
- Personal contact
- Political dimensions
While there are many benefits to globalization, it remains controversial. Antiglobalization protests have become common at international conferences, and the reaction to government policies is sometimes violent.
Three issues are of particular concern. First, the threat the globalization poses to national sovereignty. According to critics, globalization undermines the ability of a country to act in its own best interests and can make smaller economies overly dependent on larger ones. Moreover, critics contend that even a country’s cultural sovereignty is threatened as products, companies, work methods, social structures and language are homogenized as a result of globalization.
A second concern is the effect of globalization on economic growth and the environment. Because globalization brings growth, more nonrenewable natural resources are consumed and damage to the environment increases. You might think of despoliation through toxic and pesticide runoffs into rivers and oceans, air pollution from factory and vehicle emissions, and deforestation that can affect weather and climate for example. However, others argue that global cooperation actually fosters superior and uniform standards for combating environmental problems, and that companies are encouraged to seek resource-saving and environmentally friendly technologies.
Finally, critics are concerned about the effect of globalization on income equality and personal stress. According to critics the income inequality that is present in many countries today is a result of the global superstar system that has emerged as a consequence of globalization. Critics contend that globalization has facilitated access to a greater supply of low-skilled and low-cost labor and encouraged competition that leads to winners and losers. There is also some evidence that the growth in globalization goes hand in hand not only with increased insecurity about job and social status, but also with costly social unrest. Critics of globalization also worry that the practice of offshoring is shifting too many jobs abroad. But keep in mind, that the practice allows companies to keep costs down, and can actually help create high value jobs at home. IBM’s offshoring strategy for example, allows the company to not only save money and boost sales, but also to create new jobs.
Costs of globalization
• Threats to national sovereignty
Countries lose sovereignty to act locally
• Economic growth and environmental stress
Growth consumes nonrenewable natural resources and increases environmental damage
• Growing income inequality and personal stress
Promotes global superstars at the expense of others
Why should companies engage in international business? A general answer is that going in international can help firms create value. More specifically, going global can help firms expand sales, acquire resources, and diversify or even reduce risks.
Why companies engage in International Business?
- To expands sales – SALES EXPANSION
Pursuing international sales increases the potential market profits
- To acquire resources – RESOURCE ACQUISITION
May give companies lower costs, new and better products and additional operating knowledge
- To diversify or reduce risk – RISK MINIMIZATION
International operations may reduce operating risk by smoothing sales and profits, preventing competitors from gaining advantage.
These three reasons guide all decisions about whether, where, and how to engage in international business.
The most popular modes of international business are merchandise exports and merchandise imports. They represent major sources of international revenues and expenditures for countries.
Modes of operations in International business
Merchandise exports = goods that are sent out of a country
Merchandise imports = goods that are brought into a country
Sometimes they are called visible exports and imports.
Services exports and imports are the fastest growing sector in international trade. The most important are tourism and transportation, service performance, and asset use.
Many countries depend on tourism and transportation for both foreign exchange earnings and employment.
Companies pay fees for services rendered in turnkey operations and management contracts. Turnkey operations are construction projects performed under contract and transferred to owners when they’re operational. Management contracts are arrangements in which one company provides personnel to perform general or specialized management functions for another.
Asset use involves allowing another company to use your trademarks, patents, copyrights, or expertise in exchange for royalties. This takes place through licensing and franchising agreements.
Service exports = provider and receiver of payment
Service imports = recipient and payer of payment
Examples: tourism and transportation, service performance (turnkey operations and management contracts, asset use (licensing and franchising)
Companies can also engage in international business by taking either a controlling or a non-controlling interest in a foreign company. When a firm takes a controlling interest the investment is known as foreign direct investment. If two or more companies share ownership of the investment it’s referred to as a joint venture. A non-controlling interest is called portfolio investment.
Investments:
FDI: Foreign direct investment investor takes a controlling interest in a foreign company = joint venture
Portfolio investment = a non-controlling financial interest in another entity.
We use different terms to refer to the various collaborative arrangements between companies including joint ventures, licensing arrangements, management contracts, and long-term contractual arrangements. Those relationships in which the agreement is of critical importance to one or more partners or to an agreement that doesn’t involve joint ownership are called strategic alliances.
Types of international organizations
Collaborative arrangements
- Joint ventures
- Licensing arrangements
- Management contracts
- Minority ownership
- Long-term contractual arrangements
Strategic alliance
- Companies that work together but the agreement is critical to at least one partner
- An agreement that does not involve joint ownership
Any company with foreign direct investments is known as a multinational enterprise. Other terms used for these types of companies include multinational company, multinational corporation, or transnational corporation.
Multinational enterprises (MNEs); take a global approach to markets and production or have operations in more than one country.
Sometimes they are referred to as :
- Multinational corporations (MNC’s)
- Multinational companies (MNC’s)
- Transnational companies (TNC’s)
Keep in mind that companies doing international business may have to adjust their typical methods of operation depending on the conditions in foreign markets or if the operating modes are different from those used domestically.
In foreign markets, companies may have to adapt their typical methods of doing business
- Foreign conditions may dictate a particular method
- Operating modes may be different from those used domestically
Companies involved in international business need to explore how the external environment will affect their operations. In particular, it’s important for managers to understand the social science disciplines and how they affect all functional business fields.
Why International business is different:
- The external environment affects a company’s international operations
- Managers must understand social science disciplines and how they affect functional fields
- Consider o Physical factors o Social factors o Competitive factors
We can organize physical and social factors into four groups. The first is geographic influences or how natural conditions influence the choice of production locations. The second group is political policies which impacts how, and even if, business takes place within a country. Related to this are legal policies. Firms must follow the laws in each country. The fourth group, behavioral factors, may also force a company to alter its operations to better fit with local cultural norms and values. Finally, economic forces affect costs, currency values, market size, and so on. Together, these factors influence how companies produce and market their products, how they staff their operations, and so on. Keep in mind that the factors may require a company to use a different method of operation internationally than is used domestically.
Physical and social factors:
• Geographic influences
– natural conditions influence production locations
• Political policies
– determines where and how business occurs
• Legal policies
– influence how a company operates
• Behavioral factors
– may require changes in operations
• Economic forces
– explain differences in costs, currency values, market size
Managers also need to understand how the competitive environment will affect their operations. A company’s competitive strategy - low cost, differentiation, or focus - will influence its international strategy, as will its resources and experience. Companies with greater resources and experience will have more opportunities open to them than companies with more limited resources or experience. Finally, the competitors a firm faces in each market will dictate to some degree a company’s international strategy.
The competitive environment;
• Competitive strategy for products
– Cost strategy
– Differentiation strategy
– Focus strategy
• Company resources and experience
– market leaders have more resources for international operations
• Competitors faced in each market
– local or international
In summary, a firm’s competitive strategy influences how and where it operates. Firms might find that their competitive situation differs from market to market.
- So, a company’s competitive strategy influences how and where it can best operate
- Its competitive situation may differ from country to country in terms of its relative strength and which competitors it faces
What is the future of international business and globalization? Well, there are three different perspectives on what the future might hold. Some believe that future globalization is inevitable. Those taking this perspective note that advances in transportation and communications are so pervasive that consumers everywhere will demand the best products for the best prices regardless of their origins. Moreover because MNEs have so many international production and distribution networks in place, they’ll pressure their governments to place fewer rather than more restrictions on the international movement of goods and the means of producing them. The largest challenge to overcome in this scenario will be figuring out how to spread the benefits of globalization equitably while minimizing the hardships placed on individuals and companies affected by increased international competition.
Others however, think that in the future international business will grow more along regional rather than along global lines. This argument is based on studies that indicate that companies tend to conduct international business in neighboring countries. It’s logical that when companies first engage in international business, they expand into neighboring countries first and continue outwardly from there. This helps reduce transportation costs and companies can benefit from regional trade agreements that reduce barriers.
Still others feel that the pace of both globalization and international business will slow down. Recall that antiglobalization sentiments have surfaced over the years, protesting against some of the negative effects of international business activity. This sentiment together with economic recession, growing political instability, and rising fuel costs among other things, threatens to slow international business growth. Looking to the future
Three major perspectives on the future of international business and globalization
- Further globalization is inevitable
- International business will grow primarily along regional rather than global lines
- Forces working against further globalization and international business will slow down both trends
3. The political and legal environments facing business
Every country has its own political and legal environment
Companies must determine where, when and how to adjust their business practices without undermining the basis for success.
Companies doing business internationally must navigate different philosophies, laws, and attitudes concerning political freedom, property rights, and social responsibility. Managers that understand the differences between countries are in a better position to compete.
Political and legal factors influencing international business operations The political environment
The goal of a country’s political system is to integrate the diverse elements of a society. A successful political system unites a society in the face of differing viewpoints. So for example, the peace and prosperity that exists in countries like Sweden and Australia illustrate the success of the political systems in those countries, while the instability and insurrection of Libya’s political system shows its failings.
Managers evaluate, monitor and forecast political environments.
A country’s political system: refers to the structural dimensions and power dynamics of its government that specify institutions, organizations and interest groups and define the norms that govern political activities.
The goal of the political system: is integrating the diverse elements of a society
Individualism vs collectivism
One standard way to assess a political system is exploring the degree to which it emphasizes individualism versus collectivism.
Individualism champions the rights of the individual over those of society. From a business perspective, this suggests that managers have the right to make economic decisions largely free of rules and regulations. You might be aware that countries that have an individualist orientation shape their marketplace with the idea of laissez-faire and support the idea that government should not interfere in business affairs. Under this perspective, individuals are presumed to be self-regulating in promoting economic prosperity and growth, acting fairly and justly to maximize personal performance without threatening the welfare of society.
In contrast, collectivism encourages the government to intervene to improve the welfare of the group at the expense of the individual. For business, this means that the ownership of assets, the structure of industries, the conduct of companies, and the actions of managers must improve the welfare of society. Therefore, group members accept the responsibility for making decisions that will benefit everyone. Countries taking a collectivist orientation hold that government will intervene in market situations to ensure that business practices benefit society.
Invidiualism: refers to the primacy of the rights and role of the individual.
Collectivism: refers to the primacy of the rights and role of the community
The business implications of individualism hold that each person has the right to make economic decisions free of rules and regulations. Countries with an individualistic orientation shape their marketplace with the idea of liassez faire. Literally meaning: leave things alone. It holds that the government should not interfere in business affairs.
Political ideology
A political ideology stipulates how society ought to functionand outlines the methods by which it will do so. Most modern societs are pluralistic.
Pluralism holds that there are multiple opinions about an issue, each of which contains part of the truth, but none that contain the entire truth.
Pluralistic: different groups champion competing political ideologies.
- Democrats vs. Republicans in the United States
- Democratic Party vs. Liberal Party in Japan
Most countries have competing ideologies. In the United States for example, the Democratic Party competes with the Republican Party to not only describe a vision for the future, but also the means of achieving that future. Most societies today are pluralistic – they have different groups championing different ideologies.
Spectrum analysis
A political spectrum outlines the various forms of political ideology.
Political freedom measures:
- the degree to which fair and competitive elections occur
- the extent to which individual and group freedoms are guaranteed
- the legitimacy ascribed to the general rule of law
- the freedom of the press
A political spectrum outlines the various forms of political ideology including anarchism, conservatism, secularism, environmentalism, liberalism, feminism, nationalism, socialism, and theocracy.
Managers are concerned with the degree of political freedom in a country and its effect on investment choices and operations decisions.
This Figure shows a political spectrum of the various forms of political ideologies. By configuring ideologies along the central axis we can model different political ideologies in relation to each other. The goal of relativity depends on specifying credible ideas to anchor the endpoints of the axis; reasonably set, one can then position alternative ideas.
In practice, purely democratic and totalitarian systems are extreme exceptions. Looking around the world, one finds that there are variations of each political ideology. For example, democratic systems range from radical on one side (advocates of extreme political reform) to reactionary (advocates of a return to past conditions). Likewise, totalitarian systems emphasize different degrees of state control; fascism aims to control people’s minds, souls, and daily existence, whereas authoritarianism confines itself to political control of the state. This Figure shows that the majority of political ideologies fall between democracy and totalitarianism.
Democracy
In a democracy:
– all citizens are politically and legally equal
– all are equally entitled to freedom of thought, opinion, belief, speech, and association
– all equally command sovereign power over public officials
Prominent types of democracy include
– Representative
– Multiparty
– Parliamentary
– Social
Understanding the ideals and means of democracy and totalitarianism can help explain the other points on the political spectrum. Democracy calls for participation by citizens in a fair and just decision-making process. Since it supports individualism, companies can make investment and operational decisions based on economic rather than political standards. Under a democracy, commerce and trade is promoted.
Totalitarianism
A totalitarian system subordinates the individual to the interests of the collective
- dissent is eliminated through indoctrination, persecution, surveillance, propaganda, censorship, and violence
Prominent types of totalitarianism include
- Authoritarianism
- Fascism
- Secular
- Theocratic
A totalitarian system champions the power of a few over the many. Under a totalitarian system, the government maintains control over many aspects of life, the individual is subordinated to the state, and all opposing political and cultural expression is suppressed. Managers operating in a totalitarian state must make decisions based on political rather than economic standards. Typically, local companies are favored over foreign firms forcing multinational companies to make business deals that would not occur in a democratic environment.
The standard of freedom
- Freedom House assesses political and civil freedom around the world
- Freedom House recognizes three types of political systems o Free country o Partly free country o Not free country
Freedom House classifies countries according to their political and civil freedom. A free country has open political competition, respect for civil liberties, independent civic life, and independent media. A partly free country has limited political rights and civil liberties, corruption, weak rules of law, ethnic and religious strife, unfair elections, and censorship. A not free country has few or no political rights and civil liberties.
Third wave of democratization
Third wave of democratization : number of democracies doubled in two decades
Engines of democracy:
1. The failure of totalitarian regimes to deliver economic progress
2. Improved communications technology
3. Economic dividends of increasing political freedom
The Third Wave of Democratization refers to the third major surge of democracy in the 20th century that began in 1974. During this time the number of democratic countries doubled. This steady diffusion of democratic ideology resulted in a situation in which today, some 50 percent of the world’s population lives in a democracy.
The rise of democracy was a result of the failure of totalitarian regimes to deliver economic progress, improved communications technology, and economic dividends of increasing political freedom. However, despite these gains, over the last five years, some of the gains in political freedom have declined.
Democracy: Recession and retreat
• Democracy’s retreat
– just 26 of the world’s democracies are full democracies
• Engines of totalitarianism
– Economic development
– Inconsistencies
– Economics problems
– Standards of democracy
While democracy still retains its appeal worldwide, there are signs that it may actually be in retreat. According to the Economist Intelligence Unit many countries are democracies in name only. The EIU classifies four types of political systems – full democracy, flawed democracy, hybrid regime, and authoritarian regime.
Today, 12 percent of the world’s population lives in a full democracy, 37 percent in a flawed democracy, 14 percent in a hybrid regime, and 37 percent in an authoritarian regime.
What’s fueling this trend? Several things. One is the growing uncertainty of the relationship between democracy and levels of economic development. A second involves the democracy setbacks in several European countries. Third, the economic problems and in particular the global financial crisis that has plagued the world over the last few years. Finally is the question of just how democracy should be defined and what its standards should be.
Political ideology and the MNE
What will the political map look like in the future?
– The Washington Consensus
– The Beijing Consensus
– The Clash of Civilizations
What happens in the future? Managers must watch carefully and adapt their operations and decisions accordingly.
• The Washington Consensus champions democracy, freedom, the rule of law, and human rights.
• The Beijing Consensus calls for a one-party system in which elected representatives, preapproved by the ruling party, oversee a nominal democratic system whose citizens, though granted the right to vote, cannot participate in decision making.
• Under the Clash of Civilizations scenario irreconcilable cultural and religious differences between Islam and the West will trigger a backlash against Western political ideals and their crystallization in the ideologically interventionist Washington Consensus.
Political risk refers to the risk that political decisions or events in a country negatively affect the profitability or sustainability of an investment
Types:
- Systemic
- Procedural
- Distributive
- Catastrophic
Political risk represents a very real threat for companies today especially in fast-growing, emerging markets where weak legal systems, makeshift institutions, volatile cities, and fragile regimes complicate the business environment. Moreover, the global credit crisis has aggravated political risk across both developed and developing markets.
There are four categories of political risk.
- Systemic Risks are risks that impact all firms that operate in the particular political system.
- Procedural Risk refers to the risk evolving from the daily movement of people, products, and funds from point to point in the global market. Each move creates a procedural transaction between the units involved, whether units of a company or units of a country. Political actions sometimes create frictions that interfere with these transactions.
- Distributive Risk is a result of the profits generated by foreign companies in the local economy. If the host country questions the distributive justice of the rewards of operating in its market, it may wonder whether, as the business grows more successful, it is receiving its “fair” share of the growing profits.
- Finally, Catastrophic Risk includes random political developments that adversely affect the operations of every company in a country. Typically, it arises from specific flash points, such as ethnic discord, illegal regime change, civil disorder, or insurrection. It disrupts the business environment in a way that affects every firm in the country. If such disruptions spiral out of control, they devastate companies and nations.
The legal environment
The legal system is the mechanism for creating interpreting and enforcing the laws in a specified jurisdiction
Types:
– Common law
– Civil law
– Theocratic law
– Customary law
– Mixed systems
International managers must be aware of how a country develops, interprets, and enforces its laws. Legal systems vary across counties because of variations in traditions, precedent, usage, custom, and religious precepts.
Modern legal systems are composed of constitutional law which preserves an open and just political order, criminal law which safeguards the social order, and civil and commercial laws which promote fairness.
There are five types of legal systems. A common law system is based on tradition, precedent, custom, usage, and interpretation by the courts. A civil law system relies on a systematic collection of codes and statues that judges must follow. A theocratic system is based on religious precepts. A customary legal system follows the wisdom of daily experience. Finally, a mixed legal system combines elements of the other systems.
Trends in legal systems
What is the basis of rule in a country?
– The rule of man
• legal rights derive from the individual who commands the power to impose them
• associated with a totalitarian system
– The rule of law
• systematic and objective laws applied by public officials who are held accountable for their administration
• associated with a democratic system
The retreat of democracy is also changing the legal environment. As countries shift toward totalitarian regimes, the legal system changes to one in which business activity is regulated by the government to support state objectives.
Managers must determine what the basis of rule is in a given country – the rule of man or the rule of law. The rule of man is the basis of a totalitarian system, while the rule of law is the basis of democracy.
Note that the rule of law prevails in wealthier, Westernized countries, but that the rule of man is in place in many emerging economies. In the past, it was common for managers to avoid countries where the rule of man prevailed, but slow growth in countries dominated by the rule of law is forcing managers to reconsider this approach.
Operational concerns
• Operational issues
– Starting a business
– Entering and enforcing contracts
– Hiring and firing local workers
– Closing down the business
• In general
– rich countries regulate less
– poor countries regulate more
Managers doing business abroad face a complex political and legal environment that makes decision- making in the multinational company challenging.
Just starting a new business creates several concerns related to registering the new company’s name, choosing the appropriate tax structure, getting licenses and permits, arranging credit, and securing insurance. Some countries facilitate this process, while others do not.
Managers must also be aware of how a country’s political and legal environment affects both entering and enforcing contracts. A contract, which is essential to business transactions, is a binding legal agreement that formally exchanges promises, the breach of which triggers legal proceedings. Countries with common law systems tend to encourage precise, detailed contracts, but countries with civil law systems where the civil code deals with many pertinent issues, encourage shorter and less specific contracts.
Another area that managers must explore is related to hiring and firing local workers. However, laws and practices in this area vary greatly across the world. Singapore, New Zealand, and the United States are among the countries with the most flexible labor-regulation statutes. China has the most flexibility in hiring and firing plus the greatest discretion in setting employment conditions, but, Angola, Belarus, and Paraguay place rigid restrictions on firing.
Finally, how a business is closed down must be explored. Some countries make the process quite difficult. In the United States, for example, the Internal Revenue Service requires completing a series of forms that report, among many others points, changes in the business structure, the sale of assets, payments to subcontractors, and termination of a retirement plan. Other countries like Ireland, Japan, and Canada allow companies to close their doors much more easily.
In general we say that there is an inverse relationship between a nation’s wealth and its tendency to regulate business.
Strategic concerns
• Strategic issues
• Country of origin and local content
• Marketplace behavior
• Product safety and liability
• Legal jurisdiction
• Intellectual property
In addition to basic operation decisions managers must also consider longer term strategic issues and how the political and legal environment might influence them.
A product’s country of origin – where the product was grown, produced, or manufactured – is important for determining import charges. Many countries require companies to ensure that a certain percentage of a good is made locally. These regulations are called local content rules. Today’s slow economic growth have made “buy-local” campaigns very popular.
Marketplace behavior can make strategic decisions challenging especially where rule of man prevails. Governments determine what is permissible in all forms of business activities, including sourcing, distributing, advertising, and pricing products. So managers are vulnerable to abrupt changes that could require them to adjust their manufacturing configuration, their supply chain coordination, and their marketing strategy.
Product safety and liability is another strategic areas of concern for managers. Local standards may require companies to customize their products. Since these standards often reflect cultural values or social norms, companies must adapt the product to boost its appeal to local consumers.
Countries also have legal jurisdiction to stipulate laws that set the criteria for litigation when agents—whether legal residents of the same or of different countries—are unable to resolve a dispute. Typically, in a cross-national dispute, each company petitions its home-country court to claim jurisdiction hoping that this will ensure more favorable treatment.
Finally, companies must consider intellectual property rights and protection in a given country.
Intellectual property: Rights and Protection
• Intellectual property refers to creative ideas, expertise, or intangible insights that grant its owner a competitive advantage
• Intellectual property rights refer to the right to control and derive the benefits from writing, inventions, processes, and identifiers
– no “global” patent, trademark or copyright exists
The protection of intellectual property has become a hot topic in today’s global economy. Product piracy has become common, and many countries feel that others are not doing enough to safeguard the rights of those who own intellectual property.
It is difficult for companies to maintain control over their intellectual property because no “global” patent, trademark, or copyright exists. Therefore, managers must be especially vigilant to ensure that product piracy does not occur. Yet, it can be exceedingly difficult to do so. The business of intellectual property theft is huge. Some estimates suggest that international trade in pirated goods is more than $600 billion a year.
Attitudes towards intellectual property
– Legal legacies
• rule of man versus rule of law
– Wealth, poverty, and protection
• levels of economic development
– Cultural orientation
• individualism versus collectivism
How do countries decide how and if to protect intellectual property? Well, every country’s policies regarding intellectual property are different and reflect the nation’s legal legacies, economic development, and cultural orientation.
The largest share of pirated products is made in countries where the rule of man is dominant. Protection tends to be much better in countries where the rule of law prevails. A country’s economic level of development also plays a role in the protection of intellectual property. Poorer countries typically impose fewer regulations compared to wealthier countries. Similarly, intellectual property rights protection tends to be better in countries where individualism is emphasized, whereas in collectivist societies, protection is much lower.
Can protection be improved? Perhaps, but it could take a while. Over time, countries that become idea creators tend to improve their protection of intellectual property. China for example, has long been known for product piracy, but as it has become an idea lab in recent years, it has been making a better effort to protect intellectual property. In general, countries that generate intellectual property are strong advocates of protecting ownership rights.
5. Globalization and society
MNE = multinational enterprise as a company with a worldwide approach to markets and production or one with operations in more than one country
Who should companies satisfy? What do they want
Companies must satisfy
- Stakeholders
- Employees
- Customers
- Society
Foundations of Ethical behavior:
There are 3 levels of moral development:
- Preconventional (what is right or wrong)
- Conventional (role conformity)
- Postconventional (internalized)
What to do when you have to make an ethical decision?
Teleological approach : these are decisions based on the consequences of the action
Utilitarianism : an action is right if it produces the greatest amount of good
Deontological approach : moral judgments are made and moral reasoning occurs independently of consequences
Ethical behavior can help a company develop a competitive advantage.
Avoid being perceived as irresponsible
Relativism vs Normativism
Relativism: ethical truths depend on the groups holding them
Normativism: there are universal standards of behavior that all cultures should follow.
Legal justification Pro and Con
Extraterritoriality: Imposing domestic legal and ethical practices on the foreign subsidiaries fo companies headquartered in their jurisdictions
Key ethical issues that companies must confront in doing business in foreign country
Corruption: the misuse of entrusted power for private gain
Bribes: payments of promises to pay cash or anything of value
Occurs: to obtain government contracts & to get public officials to do what they should be doing anyway
What is being done about corruption?
International accords to stop bribery
- OECD anti-bribery convention
- ICC code of rules
- UN convention against corruption
Regional initiatives include
- EU efforts
- US. Foreign corrupt practices act and Sarbanes- oxley legislation
Industry initiatives include
- 2005 world economic forum zero tolerance pact
Sustainable Business:
Sustainability: meeting the needs of the present without compromising the ability of future generations to meet their own needs
What is Sustainable business:
Environment: monitor and seek to reduce our impact on the environment
Community: encourage employee engagement in the community. Use our business skills and activities to support the communities in which we operate
Workplace: encourage diversity at work and recognition of other cultures. Attract and retain talent. Ensure all employees operate ethically and with integrity. Act as a responsible employer. Enable employees to achieve a safe healthy and productive work life.
Marketplace: seek to enlarge our customer communities and improve levels of customer service by understanding and responding their needs. Support customers CR objectives and pursue business opportunities. Ensure a safe and healthy environment. Encourage suppliers to adopt CR policies and standards in line with our own.
Ethical dimensions of labor conditions
Pressures for ethical behavior with respect to workers:
- Governments
- Trade unions
- Media
- Individual investors
- Consumers
- Corporate investors: pension funds
- NGO’s
Code of conduct
Respect >>> environment >>> community >>> ethics >>>confidentiality
Pyramid
FDI is a major source of capital expertise, but it is also the center of a controversy over the costs and benefits to home and host countries
MNE’s must balance the interest of different constituencies that have different objectives
The economic and political effects of MNE’s are difficult to evaluate because of conflicting influences on different countries objectives, intervening variables that oscure cause and effect relationships, and differences among MNE’s practices
MNE’s may affect countries balance of payments, growth and employment objectives. Under different conditions, these effects may be positive or negative for the host or home country.
The balance-of-payments effects of FDI involve import stimulus versus import displacement export stimulus versus export displacement and capital flows might be positive initially for the host country but negative later as the investor sends returns back to the home market.
FDI creates jobs and economic growth in the host country. Given that resources are not fully employed, FDI may or may not have an adverse impact on jobs and economic growth in the home market.
Relative behavior implies that we act according to the norms of the countries where we operate. Normative behavior implies there are universal standards for ethical conduct that should be followed everywhere.
The law is an important basis for ethical behacior, but not all unetchical behavior is illegal. Thus ethical behavior must go beyond the law to include common decency.
Bribery is a form of unethical behavior being addressed at the multilateral level, such as at the UN and OECD, and at the national level such as with the foreign corrupt practices act in the United States.
Environmental concerns are raised with extractive industries and industries that generate air and water pollution or that produce products such as automobiles that use fossil fuels.
The Kyoto protocol, which requires the reduction of the emission of greenhouse gases, has not been adopted by all countries and is therefore still limited in its total global impact. However, companies must adapt to countries that have implemented the Kyoto protocol.
Pharmaceutical companies face challenges on how to make enough money to fund the R&D into new drugs and how to help provide critical drugs to developing countries at lower prices.
A major challenge facing MNE’s is the globalization of the supplu chain and the impact on workers, especially in the areas of fair wages, child labor, working conditions, working hours, and freedom of association.
Companies respond to the pressures for greater corporate social responsibility by establishing codes of conduct, distributing them to suppliers and subcontractors internationally, and ensuring compliance with the codes through effective training and auditing programs. 9. Global foreign-exchange markets
What is foreign exhange?
Foreign exchange
money denominated in the currency of another nation or group of nations
Foreign exchange market
where foreign exchange transactions take place
Exchange rate
the price of a currency
Some aspects of the foreign exhange market
The foreign exchange market has two segments:
OTC commercial and investment banks
Securities exchanges
Global OTC(over-the-counter) foreign exchange instruments include:
Spot transactions
Involve the exchange of currency at an agreed upon rate for deliver within two business days
Outright forward transactions
Involve the exchange of currency on a future date beyond two business days. It is the single purchase or sale of a currency for future delivery.
FX swap
One currency is swapped for another on one date and then swapped back on a future date.
Currency swaps
Deal more with interest-bearing financial instruments (such as a bond) and involve the exchange of principal and interest payments.
Options
Are the right, but not the obligation to trade foreign currency in the future.
Futures contracts
Is an agreement between two parties o buy or sell a particular currency at a particular price on a particular future date, as specified in a standardized contract to all participants in that currency futures exchange and is not traded OTC.
Size, composition and location of the foreign exchange market.
Market size is $4 trillion daily
the U.S. dollar is the most important currency on the foreign-exchange market
London is the main foreign exchange market in the world
The most commonly traded currency pairs are EUR/USD and USD/JPY
Major foreign exchange markets
American terms (direct quote)
the number of dollars per unit of foreign currency
European terms (indirect quote)
the number of units of foreign currency per dollar
bid rate(buy): is the price at which the dealer is willing to buy foreign currency the offer(sell): is the price at which the dealer is willing to sell foreign currency the spread: is the difference between the bid and offer rates, as well as the dealer’s
The forward market
Forward discounts
when the forward rate is less than the spot rate
Forward premiums
when the forward rate is greater than the spot rate
Option
the right, but not the obligation, to trade a foreign currency at a specific exchange rate
Futures
specifies an exchange rate in advance of the actual exchange of currency
not as flexible as a forward contract
Banks and exchanges
The top banks in the inter-bank market in foreign exchange can
trade in specific market locations
engage in major currencies and cross-trades
deal in specific currencies
handle derivatives
forwards, options, futures, swaps
conduct key market research
How companies use foreign exchange
Other financial flows for business
Speculation
buying or selling of a foreign currency that has an element of risk and a chance of great profits
speculators take positions in foreign-exchange markets and other capital markets to earn a profit
Arbitrage
the buying and selling of foreign currencies at a profit due to price discrepancies
interest arbitrage; involves investing in interest-bearing instruments in foreign exchange in an effort to earn a profit due to interest rate differentials.
Where are foreign exchange markets headed?
More efficient markets
create more opportunities for foreign exchange trading
lower costs
Financial crisis in Europe
future of the euro
Rise of the Chinese yuan and Brazilian real
Technology developments
more electronic trades
The international Monetary Fund
The goals of the International Monetary Fund (IMF) are to
ensure stability in the international monetary system
promote international monetary cooperation and exchange-rate stability
facilitate the balanced growth of international trade
provide resources to help members in balance-of-payments difficulties or to assist with poverty reduction
The Bretton Woods Agreement
established a par value, or benchmark value, for each currency initially quoted in terms of gold and the U.S. dollar
The dollar became the world benchmark for trading currencies and continues in that role today
The global financial crisis and the IMF
The global crisis in 2008-2009 raised concerns over global liquidity
prompted the G20 to inject huge amounts of cash into the IMF
Greece’s 2010-2011 financial crisis required assistance from the IMF and the EU
the IMF required Greece to adopt very unpopular austerity measures
Three choices:
The IMF classifies currencies into three categories
Hard peg / Fixed : Establishing a fixed exchange rate between one national currency (usually that of a small country) and another national currency (usually that of an industrial power). One country, in other words, "pegs" the value of its currency to the value of another currency. This is commonly done by countries with a history of monetary instability is used as a means of restoring and maintaining order. This U.S. dollar is frequently used for a hard peg by other smaller nations. The result of a hard peg is to eliminate control by the pegging nation and relying on the actions of the targeting nation.
Soft peg: means the country tries to keep the currency exchange rate basically about the same, but allows it to fluctuate up and down a little.
Floating: are those that generally change accoding to market forces but may be subject to market intervention. Brazil and India are considered to have floating currencies
Reasons for pegging or floating: anyone involved in international business needs to understand how the exchange rates of countries with which they do business are determined, because exchange rates affect marketing, production and financial decisions.
The euro
The European Monetary System (EMS)
established to create exchange rate stability within the European Community
European Monetary Union (EMU)
outlined the criteria for euro applicants
the U.K., Sweden, and Denmark opted not to adopt the euro
The European Central Bank (ECB)
sets monetary policy for the adopters of the euro
Determining exchange rates;
Currency in a floating rate world
demand for a country’s currency is a function of the demand for that country’s goods and services and financial assets
Currency in a fixed rate or managed floating rate world
Role of central banks
reserve assets
intervening in the market
attitudes toward intervention
Foreign exchange convertibility and controls
Hard currencies
U.S. dollar, euro, British pound, Japanese yen
Soft currencies
developing countries
Countries can control convertibility through
licenses
multiple exchange rate systems
advance import deposits
quantity controls
Exchange rates and PPP
Purchasing power parity (PPP)
a change in relative inflation between two countries must cause a change in exchange rates to keep the prices of goods in the countries fairly similar
The Big Mac Index
Exchange rates and Interest rates
The Fisher Effect
links inflation and interest rates
The International Fisher Effect (IFE)
links interest rates and exchange rates
Other Factors in Exchange Rate Determination
confidence
information
Fundamental and technical forecasting
Forecasting exchange rates
Fundamental forecasting
uses trends in economic variables to predict future rates
Technical forecasting
uses past trends in exchange rates to spot future trends
Biases can skew forecasts
Timing, direction, and magnitude of exchange rate movements are important to consider
Fundamental factors to monitor
Monitor
The institutional setting
Fundamental analyses
Confidence factors
Events
Technical analyses
Futures of an economy
Managers should also consider
Inflation
Unemployment
Debt
Income distribution
Poverty
Balance of payments
Inflation
Inflation
a measure of the increase in the cost of living
Deflation
when prices for products go down not up
Reflation
increase the money supply and reduce taxes to accelerate economic activity
Unemployment
Unemployment rate
share of unemployed workers seeking employment for pay relative to the total civilian labor force
Misery index
the sum of a country’s inflation and unemployment rates
Debt
the total of a government’s financial obligations
internal debt
external debt
Growing public debt signals
tax increases
reduced growth
rising inflation
Balance of payments
Balance of payments
reports a country’s trade and financial transactions with the rest of the world
Current account
tracks merchandise trade
Capital account
tracks loans given to foreigners and loans received by citizens
Business implications of exchange rate changes
Marketing Decisions
when the value of a country’s currency rises, exporting becomes more difficult as the product becomes more expensive in foreign markets
Production Decisions
might locate production in a weak currency country because the initial investment is cheap and it will make a good base for exports
Financial Decisions
currency rates influence sourcing, cross-border remittance of funds, and the reporting of financial results
11. The strategy of International Business
MNE: Multi National Enterprise
Winners:
- Zalando
- Apple
- Zara
- Samsung
- Bmw
- Spotify
- Audi
- Starbucks
- Oracle
- Super dry japan
- Rtl media
- Fox media
- Lenovo
- Safaricom
- Ikea
Losers: - Nokia
- Sbs media
- Microsoft
- Lonsdale clothing
- Blackberry
- Sony
- Tomtom
- Phillips
- Emi
- Dell
- Gm opel
- Renault
- Puma
- Wordperfect
- Novell
- Compaq
- Ibm
- Upc
- Post nl
Competitive advantage
Doing things differently from your competitors in order to gain market share and/or profitability.
Ignore industry standards
Red ocean strategy Blue ocean strategy
Compete in existing market space Create uncontested market space
Beat the competition Make the competition irrelevant
Exploit existing demand Create and capture new demand
Make the value-cost trade-off Break the value-cost trade-off
Align the whole system of a firm’s activities with its strategic choice of differentiation or low cost Align the whole system of a firm’s activities in pursuit of differentiation and low cost.
What do they do differently? Zara case
They put clothes on the market within 3 weeks instead of 6 months
They design 11000 instead of 2000
Minimize advertising costs
Commodity production in China, fashion production in Spain
Value chain integration
Average sustainable clothing
Trendwatching effectiveness
Prime location stores
2 times a week delivery cycle
Real-time inventory and sales data
Local pricing strategy
First class retailmanagers
Freshness of offerings based on 4 weeks client visiting cycle; buy now attitude
85% full price sales
Resasonable quality, highly fashionable, reasonable pricing
The value chain (porter)
Primary activities:
Product design >>> operations >>> outbound logistics >>> marketing >>> service
Support activities
Materials & equipment >>> firm infrastructure >>> Human resource >>> systems & solutions
Developments:
- Emerging markets
- Bric countries
- Bottom of the pyramid
- Frugal innovation
- Cloud computing/mobile computing
Industry structure (porter)
Industry structure involves the relationship among
- Suppliers of inputs
- Buyers of outputs
- Substitute products
- Potential new entrants
- Rivalry among competing firms
Industry Change
Industry structure changes because of:
- Competitor moves
- Government policies
- Shifting preferences
- Technological developments
Industry structure, strategy and value
The industry organization paradigm (restrictive headstart) ; presumes that markets demonstrate perfect competition where no firm or industry consistently outperforms others
The power of innovative executives ; bright executives exploit the market imperfections to outperform rivals
Strategy’s hallmarks ; value & strategy
Creating value/positioning
- Value: to measure of a firm’s capability of selling what it makes for more than the costs incurred to make it
- Create value using: o a cost leadership strategy make products for a lower cost than competitors o a differentiation strategy (customer intimacy or productleasdership (hagel) make products for which consumers are willing to pay a premium price
The firm as a value chain
The value chain ; the set of linked activities the company performs to design, produce, market, distribute and support a product.
The value chain consists of:
- primary activities: design, make , sell and deliver the product
- support activities: implement primary activities
Managing the value chain
Configuration ; distributing value chain activities around the world
- concentrated ; putting all value chain activities in one location
- dispersed ; performing different value chain activities in different locations (location economies)
When configuring the value, consider:
- the business environment
- innovation context
- resource costs
- logistics
- digitization
- scale of economies
Coordination ; linking the value chain activities
Factors that influence coordination
- operational obstacles
- core competencies ; special outlook, skills, capability or technology that runs through the firm’s operations, threading disconnected activities into an integrated value chain.
- Subsidiary networks ; social networks
Change and the value chain
The configuration and coordination of a value chain responds to changes in customers, competitiors, industries and environments.
- Even a well configured and coordinated value chain can become obsolete ; so designing and delivering a strategy should be an ongoing process.
Global integration vs local responsiveness
Firms face two conflicts pressures:
- Pressures for global integration o The procedd of combining differentiated parts into a standardized whole o Maximize efficiency
- Pressures for local responsiveness o The process of disaggregating a standardized whole into differentiated parts o Optimize effectiviness
Pressures for global integration
Drivers of global integration
- The globalization of markets o Technology helps standardize consumer preferences (mass and social media) o Global products have become popular
Allows for standardization of product design
- The efficiency gains of standardization o Location, scale and learning effects o WTO supports global standards
Pressure for local responsiveness is driven by
- Consumer divergence o Cultural predisposition o Historical legacy o Nationalism
- Host government policies o Fiscal, monetary and business regulations
International strategy
- Leverage a company’s core competencies into foreign markets
- Critical elements of the value chain are centralized at headquarters
The strategy works well when
- The firm has core competencies that foreign rivals lack
- There is low pressure for global integration
- There is low pressure for local responsiveness
Multidomestic strategy
- Emphasizes responsiveness to the unique circumstances that prevail in a country’s market
- Value added activities are adapted to local markets
The strategy works well when
- There is high pressure for local responsiveness
- There is low pressure for global integration
Global strategy
- Make standardized products that are marketed with little adaptation to local conditions
- Exploit location economies and capture scale economies
The strategy works well when
- The MNE is the cost leader
- There is low pressure for local responsiveness
- There is high pressure for global integration
Transnational strategy
- Simultaneously leverages core competencies worldwide
- Reduces costs by exploiting location economics
- Adapts to local conditions
The strategy works well when
- Global learning and knowledge flows are emphasized
- There is a high pressure for local responsiveness
- There is high pressure for global integration
The role of strategy in International Business
1. External influences: Industry structure and drivers Competitive dynamics
Economic conditions
Political, legal and regulatory
Managers , as agents of their firms, devise strategies to engage international markets in ways that sustain the company’s growth and boost its profitability
Strategy is defines as the efforts of managers to build an strengthen the company’s competitive position within its industry to create superior value
Value is the measure of a firm’s ability to sell what it makes for more than the cost it incurred to make it
Firm performance is influenced by both the structure of the company’s industry and the insight of managers strategic decision making. Estimates vary on the degree of influence for both factors . managers need to be familiar with industry- and firm-level conditions in making strategy.
Managers typically anchor analysis of industry structure by modeling the strength and importance of the so-called five fundamental forces.
Firms create value either through a low-cost leadership strategy or a differentiation strategy.
Interpreting the firm within the context of the value chain provides a strong tool to improve the accuracy of strategic analyses and decisions
The value chain is shaped by how managers opt to configure and then coordinate discrete value activities
Firms pay close attention to location economics when configuring their value chain
Competitive rivalry presses companies to coordinate value chain activities so that they leverage core competencies
Companies that operate internationally face the asymmetric pressured of global integration versus local responsiveness
Change, whether in managers, competencies, industries or environments, often spurs companies to rethink and reset their value activities.
The firm entering and competing in foreign markets can adopt either an international, multidomestic, global or transnational strategy.
Firms often use a mix of these four types due to company, industry and environmental situations. 12. Country evaluation and selection
Countries offer different opportunities for companies to create value from increasing sale or acquiring competitively useful assets. They must be careful in making the following decisions:
1. In which countries to locate sales, production and administrative and auxiliary services.
2. The sequence for entering different countries
3. The amount of resources and efforts to allocate to each country where they operate.
Companies need to
• Determine the order of country entry
• Set the rates of resource allocation among countries
In choosing geographic sites, a company must decide:
- Where to sell
- Where to produce
Scanning:
Managers use scanning techniques to compare countries on broad indicators of opportunities and risks. Scanning is like seeding widely and then weeding out. It is useful insofar as a company might otherwise consider too few or too many possibilities.
Without scanning a company may:
• Overlook opportunities and risks
• Examine too may or too few possibilities
Managers can use a technique called scanning to weed out countries that aren’t good options, and focus on those that offer the most potential. Since scanning uses publicly available information, it’s a relatively cheap way to narrow down a large group of countries.
After the scanning process, managers can use onsite visits to further determine the feasibility and desirability of countries.
Opportunities and risks
Opportunities
- Sales expansion obsolescence and leapfrogging of products, prices, income elasticity, substitution, income equality, cultural factors and taste, existence of a trading bloc
- Cost consideration o labor, infrastructure, ease of transportation and communications, governmental incentives and disincentives
Risks
- Political risk o analyzing past patterns, analyzing opinions, examining social and economic conditions
- Foreign exchange risk o exchange rate changes, mobility of funds
- Competitive risk o making operations compatible, spreading risk, following competitors of customers, heading off competition
When scanning, managers need to use information that can reveal opportunities and risks. They might consider economic and demographic data such as income levels or population density to reveal sales potential in a market.
Managers also need to consider other variables like the potential for a product to become obsolete or even leapfrog another product.
Similarly, a firm looking at producing in foreign markets needs to consider the costs involved in doing so by exploring wage rates and differences in infrastructure that could cause operating costs to increase, and so on.
Just because production costs are low or sales potential is high in a given country does not automatically mean it makes sense. Managers also need to factor risk into their decisions.
Keep in mind that companies and managers have different perceptions of what constitutes risk, that one company’s risk may be another’s opportunity, that companies can minimize risk in other ways than simply avoiding certain locations, and that all risks have trade-offs.
Risks that should be considered include political risk, foreign exchange risk, and competitive risk. When considering political risk, note that using past patterns of risk can be problematic. In fact, it’s important to consider risk as it applies to a specific company or industry. Managers should also consider the opinions of several individuals and explore social and economic conditions to gauge the potential for social uprisings.
Managers need to consider exchange rate changes and the mobility of funds when exploring foreign exchange risk. Depending on the particular situation, companies may want to ensure that they have highly liquid assets for at least some of their holdings even if it means earning a lower return.
Finally, managers should consider four factors when analyzing competitive risk: making operations compatible, spreading risk, following competitors or customers, and heading off competition.
Collecting and analyzing data
Problems with data o Inaccurate information o Non-compatibility o Limited resources o Misleading data o Reliance on legally reported market activities o Poor research methodology
Where can companies collect data?
- Sources of information o External
government agencies, specialized services, and trade associations o Internal
Allocating among locations
- Complementary strategies for international expansion
- Alternative gradual commitments
- Geographic diversification versus concentration
- Reinvestment versus harvesting
Diversification strategy go to many markets fast and then build up slowly in each
Concentration strategy go to one or a few markets and build up fast before going to others
A hybrid of the two
Reinvestment making new commitments to maintain competitiveness
Harvesting
reducing commitments because they do not fit the overall strategy or because there are more attractive alternatives.
The location decision process:
Step 1: Scanning
Scanning allows managers to examine most or all countries broadly and then narrow them to the most promising ones. In scanning, managers compare country information that is readily available, inexpensive and fairly comparable, usually without having to incur the expense of visiting foreign countries. Instead they analyze available information such as from the internet and they communicate with experienced people.
Step 2: detailed analysis
Once managers narrow their consideration to the most promising countries. They need to compare the feasibility and desirability of each. At this point unless they are satisfied to outsource all their production and sales, they almost always need to go on location to analyze and collect more specific information.
Summary book:
Because companies seldom have sufficient resources to exploit all opportunities, two major considerations facing managers are which markets to serve and where to locate the production to serve those markets.
Companies decisions on market and production location are highly interdependent because often need to serve markets from local production and because they want to use existing production capacity.
Scanning techniques aid managers in considering alternatives that might otherwise be overlooked. They also help limit the final detailed feasibility studies to manageable number of those that appear most promising.
Because each company has unique competitive capabilities and objectives, the factors affecting the choice of operating location will be slightly different for each. Nevertheless, a large number of companies consider comparative market potential indicators when seeking foreign sales and cost indicators when seeking foreign assets.
Four broad categories of risk that companies may consider are political, monetary, natural disaster and competitive.
The amount, accuracy, and timeliness of published data vary substantially among countries. Managers should be particularly aware of different definitions of terms, different collection methods and different base years for reports as we as misleading response.
Companies frequently use several tools to compare opportunities and risk in various countries, such as grids that rate country projects according to a number of separate dimensions and matrices for example: one won which companies plot opportunity no one axis and risk on another.
When allocating resources among countries, companies need to consider how to treat reinvestments and divestments, the interdepence of operations in different countries, and whether they should follow diversification versus concentration strategies.
Companies may reduce the risk of liability of foreignness by moving first to countries more similar to their home countries. Alternatively they may contract with experiences companies to handle operations for them. Limit the resources they commit to foreign operations and delay entry to many countries until they are operating successfully in one or a few.
Companies must develop location strategies for new investments and devise means of deemphasizing certain areas and divesting if necessary.
Companies often evaluate entry to a country without comparing that country with other countries. This is because they may need to react quickly to proposals, to respond to competitive threats and because multiple feasibility studies seldom are finished simultaneously
The location decision process.
13. Import and export
Exporting and importing is one of the fastest growing economic activities in the world.
What is export?
Exporting sends products to another country
Exporting is the sale of goods or services produced by a firm based in one country to customers that reside in another country. Technically a product does not need to physically leave a country to qualify as an export. Rather, it needs to earn foreign currency.
Types of exporters:
- Non-exporter focus on domestic market o This sort of company commands little to no knowledge about exporting
- Occasional exporter serendipity/tiptoe
This sort of company has filled unsolicited orders from foreign buyers, but passively, if at all, investigates international trade options. They understand the basics of the export process. But, for any number of reasons, they do not see it as a vital aspect of their strategy
- Regular exporter export=part of strategy o This sort of company aggressively pursues export sales and has extensive experience with its practicalities, complexities, and technicalities. It sees exporting as a productive, profitable, strategic activity.
Entry mode is influenced by:
1. Ownership advantages: firms’core competences (namely the special outlook, skill capability, or technology that run through its operations, are the basis of its competitive advantage.
2. Location advantages: the combination of sales opportunity and investment risk in foreign markets creates favorable locations-more plainly, markets with many consumers that will likely buy your product.
3. Internalization advantages: companies often respond to market imperfections, namely the sort of things that create uncertainties, by internalizing market processes. The company reduces risks and exploit gaps.
Predicting export activity:
- Core competencies
- Competition
- Production process
- Executive leadership
- Effective marketing
Why export?
1. Profitability
Companies often sell their products for higher prices abroad than at home.
2. Productivity (best solution)
Oftentimes, productivity is tied o increase scale effects: by utilizing unused capacity or spreading research costs over more customers, companies improve their operational efficiency.
3. Diversification
Fortifying adaptability – reducing vulnerability – improving bargaining power.
Two approaches:
1. Incremental internationalization
Exporting is a learning process
2. Born global
Instant internationalization
Global focus.
Direct exporting: involves independent representatives, distributors or retailers outside of the exporters home country
Indirect exporting: products are sold to an intermediary in the domestic market, which then exports them.
What is import?
Importing brings products in from another country
Importing is the purchase of a good or service by a buyer in one country from a seller in another.
Types of importers:
- Input optimizers o This sort of importer uses foreign sourcing to optimize, in terms of price or quality, the inputs fed in to a supply chain.
- Opportunistic o This sort of importer looks for products around the world that it can import and profitably sell to local citizen.
- Arbitrageurs o This sort of importer looks to foreign sourcing to get the highest-quality product at the lowest possible price.
Reasons to import
1. Specialization of labor
2. Global rivalry
3. Local unavailability
4. Diversification
5. Top management outlook
Importing and Exporting: Problems and pitfalls:
- Financial risks
- Customer management
- Lack of international business experience
- Marketing barriers
- Top management commitment
- Trade regulations
- Trade documentation
Resources and assistance
- Government agencies
- Export intermediaries
- Customs agents
- Customs brokers
- Freight forwarders
- Third party logistics
-
Countertrade:
Different arrangements that parties use to trade products via transactions that use limited or no currency or credit.
Countertrade is an umbrella term for several sorts of trade, such as barter or offset, in which the seller accept goods or services, rather than currency or credit, as payment.
Costs:
- Inefficient
- Risky
- Cumbersome
Benefits:
- Build mutually beneficial relationships 16. Marketing Globally Marketing principles in foreign markets are similar to those in domestic markets:
- product
- price
- promotion
- place
However some or all elements may need to be adapted to better fit local markets
Marketing strategies
Marketing strategy depends on marketing orientation:
- production
- sales
- customer
- strategic marketing
- social marketing
Firms can segment and target markets by country, by global segment and using multiple criteria.
Why do firms alter products:
- legal reasons
- cultural reasons
- economic reasons
Product line extent and mix:
Product line decisions depend on
- sales and cost considerations
- product life cycle considerations
Pricing strategies:
Potential obstacles in international pricing
- government intervention: o set minimum or maximum pricing o prohibit certain pricing practices
- market diversity o consumers may be willing to pay higher prices
• pricing tactics:
- skimming strategy
- penetration strategy
- cost-plus strategy
• export price escalation: higher costs, because of transportation and export
• fluctuations in currency value
Gray market or product diversion: the selling and handling of goods through unofficial distributors
Promotion strategies
Promotion is the presentation of messages intended to help sell a product or service
Push-pull mix
Push: uses direct selling techniques
Pull: relies on mass media
Advantages of standardized advertising:
- lower cost
- better quality at local level
- common global image
- rapid entry into multiple countries however, firms could have problems with
- translation
- legalities
- market needs
Branding strategies
Brand = an identifying mark for a product or service e.g. starbucks, macdonalds
Advantages of a worldwide brand
- global image
- global player identification
Problems with global brands
- language
- brand acquisition
- country-of-origin
- generic and near generic names
Distribution strategies
Distribution: the course – physical path or legal title that goods take between production and consumption
(factory, importer, wholesaler, store)
Distribution strategies
Deciding whether to standardize
- distribution can vary substantially among countries
- distribution can be difficult to change once you have contacts and have made a distribution chain
When choosing distributors and channels firms must consider
- whether internal handling is feasible
- which distributors are qualified
- the reliability of after-sales service
- Distributors choose which products to handle.
- To get a distributor to work for them, companies may have to: o Give incentives o Use successful products as bait for new ones o Convince distributors that their product and company are viable
Factors that can contribute to distribution cost differences among countries include:
- infrastructure conditions
- the number of levels in the distribution system
- retail inefficiencies
- size and operating hour restrictions
- inventory stock-outs
E-commerce and the internet:
Opportunities: can replace traditional sales methods and faster customer service
Problems: cannot differentiate sales programs between countries and still must comply with local laws
Evolving challenges to segment markets
- disparities between ‘haves’ and ‘have not’s’ will increase
- companies will have conflicting opportunities to serve both ‘haves’ and ‘have not’s’
- attitudinal differences will continue to affect demand
- materialism, cosmopolitanism and consumer ethnocentrism = chauvinism
although the principles for selling abroad are the same as those for selling domestically, the international businessperson must deal with a less familiar environment.
International marketing strategies depend on companies orientations which include production customer strategic and social.
Companies need to decide which market segments to target. These segments may include different or similar groups from different countries. Once they make this determination, their product, branding, promotion, pricing, and distribution decisions should be compatible with the needs of their target markets.
A standardized approach to marketing means maximum uniformity in products an programs among the countries in which sales occur. Although this approach minimized expenses, most companies make changes to fit country needs to increase sales volume.
A variety of legal, cultural, and economic conditions may call for altering products to capture foreign demand, but the cost of alteration relative to additional sales potential should be considered. In addition to determining when to alter products, companies also must decide how many and which products to sell abroad.
Government regulations may directly or indirectly affect the prices that companies charge. International pricing is further complicated because of fluctuations in currency values, differences in product preferences, price escalation in exporting and variations in fixes versus variable pricing practices.
For each product in each country a company must determine not only its promotional budget but also the mix between push and pull strategies and promotions. The relationship between push and pull should depend on the distribution system, cost and availability of media, consumer attitudes and the products’ price compared with incomes.
Major problems for standardizing advertising among countries are translation, legality and message needs.
Global branding is hampered by language differences, expansion by acquisition, nationality images, and laws concerning generic names. Nevertheless, global brands help develop a global image.
Distribution channels vary substantially among countries. The differences may affect not only the relative costs of operating but also the ease of making initial sales.
Companies need to choose distributors carefully, both on the basis of their ability and on their trustworthiness. At the same time, companies have to sell themselves to get distributors to handle their products and services.
Although the internet offers new opportunities to sell internationally, using the internet does not negate companies needs to develop sound programs within their marketing mix.
Gap analysis is a tool that helps companies determine why they have not met their market potentials for given countries and to decide what part of the marketing mix to emphasize.
20. International Human Resources
Human resource management: shepherds an organization’s most valued assets: its people
HRM is more difficult in international companies because of :
- Environmental differences
- Strategic contingencies
- Organizational challenges
Strategizing HRM:
Superior human resources are essential to
- High productivity
- Competitive advantage
- Value creation
MNE’s need to integrate strategy and HRM
MNE executives can be
- Locals: expatriates (leave their own country to live and wowrk in another) o Home country nationals who is a citizen of the country where the firm is headquartered o Third-country nationals is an employee who is a citizen of neither the home nor the host country
Trends in expatriate assignments:
- Most expatriate assignments are short term lasting less than a year
- More assignments are going to younger and older workers than in the past
- The number of female expatriates, third-country nationals and reverse expatriates is rising
There are 3 approaches to staffing
Ethnocentric: fill key management positions with home0country nationals
Polycentric: use host-country nationals to manage local subsidiaries
Geocentric: seek the best people for key jobs throughout the organization, regardless of nationality
Ethnocentric Framework Polycentric Framework Geocentric Framework
Key benefits
Command and control Economical Leverages powerful ideas worldwide
Local talent gaps Nationalism Promotes learning dynamics
Social integration Management development
Local implementation Employee morale
High turnover among locals Expatriate failure
Management development Local innovation
Possible threats
Cultural arrogance Complicates coordinating an controlling value Tough to develop, costly to run, hard to maintain
Blind spot for innovations in other countries Isolate country operations Difficult to find qualified expatriates that effectively move from country to country Reduces inventive among locals to engage a global perspective
Expat selection
Screening executives to find those with the greatest inclination and highest potential for a foreign assignment Candidates are screened according to:
- Technical competence
- Adaptiveness o Self-maintenance o Satisfactory relationships with host nationals o Sensitivity to host environments
- Leadership
Main key competences of expatriates
- Global mindset
- Cultural intelligence/sensitivity
- Adaptability to change
- Strategic thinking
- Leadership skills
- Flexibility
Main concerns of expatriates ahead of moving to foreign assignments
- Reestablishing a social life
- Feeling lonely and missing friends and family
- Career prospects
- Relocation process
- Language barriers
- Healthcare-quality and access
Common reasons for expatriate failure: inability of the spouse and family to adapt to the hos country.
To prevent expatriate failure, companies may provide preparation programs to provide:
- General country understanding
- Cultural sensitivity
- Practical skills
Compensation packages should:
- Motivate employees
- Allow employees to maintain their standard of living
- Reflect the responsibilities of the position
- Ensure that after-tax income will not fall
- Maintain pay equity among peers
- Compete with industry packages
- Be easily administered
Types of compensation plans:
- Home-based method
- Headquarters-based method
- Host-based method
A typical compensation package includes:
- Base salary
- Foreign service allowance
- Medical facilities
- Tax differentials
Repatriation
The process of reintegration the expatriate into the home country upon completion of the foreign assignment.
Can pose problems:
- Work
- Financial
- Social
The challenge is to find the right job for the returning manager.
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