Professional Documents
Culture Documents
Narmada
"ACCEPT EVERYTHING ABOUT YOURSELF -- I MEAN EVERYTHING, YOU ARE YOU AND THAT IS THE BEGINNING AND THE END -- NO APOLOGIES, NO REGRETS." ( 14/03/12)
Module 1
1. GLOBALIZATION
AND
INTERNATIONAL BUSINESS
Definition of Globalization
The broadening set of interdependent relationships among people from different parts of a world that happens to be divided into nations
All commercial transactionsincluding sales, investments, and transportation that take place between two or more countries
Increase in and expansion of technology Liberalization of cross-border trade and resource movements Development of services that support international business Growing consumer pressures Increased global competition
Threats to national sovereignty Growth and environmental stress Growing income inequality
Globalization creates international business opportunities. International business is done by global sourcing, import/export, licensing, and franchising. International business is done by joint ventures and wholly owned subsidiaries. International business is complicated by different legal and political systems.
Global Economy
Resources, markets and competition are worldwide in scope.
Globalization
The process of growing interdependence among elements of the global economy.
Global Sourcing
Firms purchase products and services from around the world for local use.
International Business
Conducting commercial transactions across national boundaries
Exporting
Local products are sold abroad
Importing
The process of acquiring products abroad and selling them in domestic markets.
Licensing
one firm pays a fee for rights to make or sell another companys products.
Franchising
a firm pays a fee for rights to use another companys name and operating methods.
Joint Venture
A firm operates in a foreign country through co-ownership with local parties.
Strategic Alliance
Each partner hopes to achieve through cooperation things they couldnt
do alone.
Foreign Subsidiary
A local operation completely owned by a foreign firm.
FOREIGN MARKET ENTRY MODES The decision of how to enter a foreign market can have a significant impact on the results. Expansion into foreign markets can be achieved via the following four mechanisms:
Exporting
Exporting is the marketing and direct sale of domestically-produced goods in another country. Exporting is a traditional and well-established method of reaching foreign markets. Since exporting does not require that the goods be produced in the target country, no investment in foreign production facilities is required. Most of the costs associated with exporting take the form of marketing expenses. Exporting commonly requires coordination among four players:
Licensing
Licensing essentially permits a company in the target country to use the property of the licensor. Such property usually is intangible, such as trademarks, patents, and production techniques. The licensee pays a fee in exchange for the rights to use the intangible property and possibly for technical assistance. Because little investment on the part of the licensor is required, licensing has the potential to provide a very large ROI. However, because the licensee produces and markets the product, potential returns from manufacturing and marketing activities may be lost.
Joint Venture
There are five common objectives in a joint venture: market entry, risk/reward sharing, technology sharing and joint product development, and conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships. Such alliances often are favorable when:
the partners' strategic goals converge while their competitive goals diverge; the partners' size, market power, and resources are small compared to the industry leaders; and Partners' are able to learn from one another while limiting access to their own proprietary skills.
The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources, and government intentions. Potential problems include:
conflict over asymmetric new investments mistrust over proprietary knowledge performance ambiguity - how to split the pie lack of parent firm support cultural clashes if, how, and when to terminate the relationship
Strategic imperative: the partners want to maximize the advantage gained for the joint venture, but they also want to maximize their own competitive position. The joint venture attempts to develop shared resources, but each firm wants to develop and protect its own proprietary resources. The joint venture is controlled through negotiations and coordination processes, while each firm would like to have hierarchical control.
foreign investment may be made through the acquisition of an existing entity or the establishment of a new enterprise. Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment. However, it requires a high level of resources and a high degree of commitment. Comparison of Foreign Market Entry Modes Mode Conditions Favoring this Mode Limited sales potential in target country; little product adaptation required Advantages Disadvantages
Trade barriers & tariffs add to Minimizes risk and costs. investment. Distribution channels close to Transport costs Exporting plants Speed of entry Limits access to local High target country Maximizes scale; uses information production costs existing facilities. Company viewed as an Liberal import policies outsider High political risk Import and investment barriers Legal protection possible in target environment. Licensing Low sales potential in target country. Large cultural distance High ROI Licensee lacks ability to become a competitor. Import barriers Large cultural distance
Lack of control Minimizes risk and over use of assets. investment. Speed of entry Able to circumvent trade barriers Licensee may become competitor. Knowledge spillovers License period is limited Difficult to manage Dilution of control Greater risk than
Joint Ventures
Assets cannot be fairly priced High sales potential Some political risk Government restrictions on foreign ownership Combines resources of 2 companies. Potential for learning Viewed as insider exporting a & licensing Knowledge spillovers Partner may become a competitor.
Less investment Local company can provide required skills, resources, distribution network, brand name, etc. Greater knowledge of local Higher risk than Import barriers other modes market Direct Small cultural distance Can better apply Investme Assets cannot be fairly priced specialized skills nt Minimizes knowledge High sales potential spillover Low political risk Can be viewed as an insider Requires more resources and commitment May be difficult to manage the local resources.
WHICH
b) Technological Forces
WORLD TRADE ORGANIZATION A global institution to promote free trade and open markets around the
world. Location: Geneva, Switzerland Established: 1 January 1995 Created by: Uruguay Round negotiations (1986-94)
Membership: 149 countries (on 11 December 2005) Budget: 175 million Swiss francs for 2006 Secretariat staff: 635 Head: Pascal Lamy (Director-General)
MULTINATIONAL CORPORATIONS
Multinational corporations do substantial business in several countries. Multinational corporations can be controversial at home and abroad. Multinational corporations face a variety of ethical challenges. Planning and Controlling are complicated in multinational corporations. Organizing is complicated in multinational corporations. Leading is complicated in multinational corporations. Multinational Corporation (MNC) A business with extensive foreign operations in more than one county. Transnational Corporation A MNC that operates worldwide on a borderless basis.
MNC ISSUES
Protectionism
A call for tariffs and special treatment to protect domestic firms from foreign competition.
Corruption
Illegal practices to further ones business interests. Transparency International gives these countries its poorest corruption scores: Indonesia Tajikistan Haiti Myanmar Nigeria Bangladesh Paraguay
Currency Risk
The possible loss of profits because of fluctuating exchange rates. EFFECTS
OF GLOBALIZATION
Industrial
Emergence of worldwide production markets and broader access to a range of foreign products for consumers and companies. Particularly movement of material and goods between and within national boundaries.
Financial
Emergence of worldwide financial markets and better access to external financing for borrowers.
Economic
Global common market, based on the freedom of exchange of goods and capital. Interconnectedness of markets means that an economic collapse in any one given country cannot be contained.
Informational
Increase in information flows between geographically remote locations. Technological change with advent of fibre optic communications, satellites, and increased availability of telephone and Internet.
Competition
Survival in the new global business market calls for improved productivity and increased competition. Due to the market becoming worldwide, companies in various industries have to upgrade their products and use technology skillfully in order to face increased competition.
Political
WTO, EU, NATO, APEC, G8
Ecological
Global environmental challenges that might be solved with international cooperation, such as climate change, cross-boundary water and air pollution, depletion of vital resources.
Language
- the most popular language is English.
About 35% of the world's mail, telexes, and cables are in English. Approximately 40% of the world's radio programs are in English. About 50% of all Internet traffic uses English.
Social
UN, Red Cross, Greenpeace, non-governmental organisations as main agents of global public policy, including humanitarian aid and developmental efforts
Legal/Ethical
Increase in the number of standards applied globally; e.g. copyright laws, patents and world trade agreements. The creation of the international criminal court and international justice movements.
AND
ADVANTAGES
CHALLENGES
OF
GLOBALIZATION
Productivity:
Globalization allows the benefits of productivity developments in one nation to move more quickly to other nations A downside to this transfer is that individuals and companies must adjust to compete
Consumers
Consumers benefit from globalization through their ability to choose from a greater variety of products and services and to buy from cheaper production locations A potential problem is the consumers weaker control over supplies from foreign countries
Employment
Critics of globalization contend that the quality, as well as the quantity, of jobs should be considered
The Environment
Many of the most desired resources are in the poorest areas of the world where people can benefit economically from exploiting these resources On the other hand, concern is high over the depletion of finite resources, potential climatic changes, and destruction of the environment
Sovereignty
Globalization may undermine sovereignty in two ways:
Contact with other countries creates more cultural borrowing Countries are concerned that important decisions may be made abroad that will undermine their national well-being
VIEWS
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.
2.
FACING BUSINESS .
lead to sanctions, ranging from being hauled off by the police for indecent exposure to being laughed at by others for wearing a suit at the beach. (4)Conscious awareness of cultural standards is limited. One American spy was intercepted by the Germans during World War II simply because of the way he held his knife and fork while eating. (5)Cultures fall somewhere on a continuum between static and dynamic depending on how quickly they accept change. For example, American culture has changed a great deal since the 1950s, while the culture of Saudi Arabia has changed much less
When people from different areas speak the same language, culture spreads more easily Among nations that share a same language, commerce is easier Isolation from other groups, especially because of language, tends to stabilize cultures.
Some countries see language as being so important that they regulate the inclusion of foreign words and/or mandate the use of the countrys official language for business purposes.
Religion as a Cultural Stabilizer Religion is a major source of both cultural imperatives and cultural taboos. Major religions include: -Buddhism -Christianity -Hinduism -Islam Judaism
OR
Centuries of profound religious influence continue to play a major role in shaping cultural values Many religions influence specific beliefs that may affect business
Social Stratification Systems Ascribed group memberships are defined at birth; they may include gender, family, age, caste, and ethnic or national origin. Acquired group memberships are based on ones choice of affiliation, such as political party, religion, and social and professional organizations. Social stratification affects both business strategy and operational practices. Factors Affecting Work Ethics The desire for material wealth vs. the desire for leisure (Protestant Ethic) The expectation of success and reward Assertiveness (Hofstedes masculinity vs. femininity index) Needs satisfaction (Maslows Hierarchy) Motivated employees are normally more productive, and higher productivity leads to lower costs. Implications/Conclusions Culture is dynamic and evolves over time. Economic development and globalization are two engines of cultural change. In addition to being part of a national culture, people are simultaneously part of other cultures, such as social and professional associations and business and government organizations. Host cultures do not always expect firms and individuals to conform to their norms; in some instances they may choose to accommodate differences in traditions. International firms should make a concerted effort to identify ideas and behaviors in host countries and foreign cultures that can be usefully applied across the whole of their organizations.
DEALING
WITH
CULTURAL DIFFERENCES
Accommodation
Cultural distance Culture shock Company and Management orientations polycentric ethnocentric geocentric
1.POPULATION- When the population is higher, the bigger is the market. However, it is necessary to look into the following. (a) Age groups and Sex- Different age groups of people, their taste & interests, preferences along with sexual differences, the trend of outlook and attitude people focus and prefer to adopt matters a lot.
(b) Social class or groups- This refers to the economic class of living and groups which they belong in the living environment, which also has an impact for product selling.
(c) Educational background-This refers to the background of the corresponding person who is actually involved in international markets, it doesn't specify anything in the form of an individual acquiring management degree, it specifies something more in the form of his/her family and circle of friends including peers with many people who give support for him to flourish well in international markets.
(d) Number of households- This gives information about the total number of households, the type of household ,nature of household and the kind of work which is performed in major by the household which can be identified and used if needed for marketing tool in international levels.
(e) Geographical concentration and differences- This specifies the concentration of each and every place on selected products in major amounts which is favorable for its market condition and clearly indicates the differences in choice of product chosen by each and every country depending on the demand condition. (f) The rate of changes in the above mentioned characteristics-specifies changes involved in each of the above mentioned qualities. 2. GROSS NATIONAL PRODUCT(GNP) (a) Rate of growth of the economy- This must be positive and favorable for growth of the economy. (b) Standard of living-specifies the quality of living of people which must improve and give rising standards which will be the real benefit of international marketing if adopted properly efficiently and effectively. (c) Percapita income
3. THE POLITICAL
AND
LEGAL ENVIRONMENTS
FACING
BUSINESS
Political Ideology
The system of ideas that expresses the goals, theories, and aims of a sociopolitical program Most modern societies are pluralisticdifferent groups champion competing political ideologies
Democracy
Wide participation by citizens in the decision-making process
Totalitarianism
Restricts decision making to a few individuals Types: Authoritarianism Fascism Secular totalitarianism
Theocratic totalitarianism
Employment of Nationals
Shared ownership JV, partnership Make a separate local company Reduction of risk exposure
Being Civic minded Be a good corporate citizen Sponsor civic projects schools, hospitals, roads, water systems
Political neutrality Behind the scenes lobbying Develop local allies who can provide political contacts
DEFINITION
OF A
LEGAL SYSTEM
The mechanism for creating, interpreting, and enforcing the laws in a specified jurisdiction
Types:
Common law Civil law Theocratic law Customary law
Mixed systems
Code laws Codified legal system Commercial, civil, criminal How the law is applied to facts
Common law Tradition, past practices, legal precedents through interpretation of statutes, legislations, and past rulings
Theocratic law
Intellectual property
Intangible property rights that are a result of intellectual effort Intellectual property rights refer to the right to control and derive the benefits from writing, inventions, processes and identifiers Local attitudes play a large role in piracy Legal issues In IB Different business cultures, legal environments and languages increase the risk of confusion when you trade internationally. It's important to have a clear contract. With trade in goods, attention often focuses on responsibilities for delivery, set out using internationally recognized Incoterms. Other issues, such as what is being supplied, are usually relatively straightforward.
For trade in services, it's almost the opposite. It can be difficult to specify exactly what services are to be provided, to what standards. It can be helpful to focus on what the desired outcomes are - i.e. what the service should achieve. This can be part of a service level agreement in the contract
There are other important legal issues to consider: The location of supplier and customer can vary, affecting which country's regulations apply. See the page in this guide on delivering services internationally. You need to sort out payment issues such as choice of currency and protection against the risk of non-payment. See the page in this guide on payment for international trade in services. You may need to take action to protect your intellectual property in other countries..
Module 2
1. THE ECONOMIC ENVIRONMENTS
FACING BUSINESS
Economics environment refers all economics surroundings that influence organization activities. It consists of economic parameters. It is concerned with the nature and direction of economy in which the organizations operate. Totality of economic factors, such as employment, income, inflation, interest rates, productivity, and wealth, that influence the buying behavior of consumers and firms.
Important elements of economic development are: 1. Economic systems: Economic system determines the scope of private
sec tore ownership of the factors of production and market forces. The model of economic system are: A) Free market economic :This system is based on private ownership of
the factors of production. Profit serves as the driver of economic engine. The competitive market mechanism guides business decisions. There is freedom of choice. Individual initiative is encouraged. B) Centrally planned economy: This system is based on police ownership of the factors of production. The economy is centrally planned. Controlled and regulated by the government. There is no consumer sovereignty. Police enterprises play a dominant role. C) Mixed economy: This system is a mix of free market and centrally planned economics. Both public and private sectors coexist. The public sector ha ownership and control of basic industries including utilities. The sector owns agriculture and other industries but is regulated by the state.
State of economic development: An economy can be least developed developing and developed. Organizational activities are influence by the stage of economic development. Income: The level of employment affect expenditure, saving and investment. They together influence the economic conditions of organization. Employment: The level of employment affects organization. It determines availability and of labor. Business cycle: The stages of business cycle can prosperity; rescission and recovery .They affects the health organization. Influence: It is rise in price level. Influences costs, price and profit of organization.
SA ARC: South Asian Association for Regional Cooperation. ASIAN: Association of South East Asian Nations. EU: European Union.
Economic.. Nature of the Economy Level of development Sectoral composition of output Inter-sectoral linkages
Economic Conditions Income levels Distribution of income GDP, GMP trends Sectoral growth trends Demand and supply trends Price trends Trade and BOP trends
Economic Policies Industrial policy Trade policy Monetary policy Fiscal policy Foreign exchange policy Foreign investment and technology policy
Global linkages Magnitude and nature of cross-border trade flows, financial flows Membership of WTO, IMF, World bank, trade blocs
Developed economies High levels of income, consumption and business competition Markets may be saturated due to population trends Replacement demand
Developing economies Steady increase in population Increase in income Creation of primary demand
OR
Objectives
To understand the importance of economic analysis of foreign markets To identify the major dimensions of international economic analysis To compare and contrast macroeconomic indicators To profile the characteristics of the types of economic systems To discuss the idea of economic freedom To profile the idea, drivers, and constraints of economic transition
Company managers study economic environments to estimate how trends affect their performance A countrys economic policies are a leading indicator of governments goals and its planned use of economic tools and market reforms. Economic development directly impacts citizens, managers, policymakers, and institutions.
Gross national income (GNI): the income generated both by total domestic production as well as the international production activities of national companies
Gross domestic product (GDP): the total value of all goods and services produced within a nations borders over one year, no matter whether domestic or foreign-owned companies make the product.
Adjustments to GNI
Number of people in a country Growth rate Local cost of living Economic sustainability
Business freedom Trade freedom Monetary freedom Freedom from government Fiscal freedom Property rights Investment freedom Financial freedom Freedom from corruption Labor freedom
2. GLOBALIZATION
SOCIETY.
Learning Objectives
To evaluate the major economic effects of MNEs on home and host countries To understand the foundations of responsible corporate behavior in the international sphere To discuss some key issues in the social activities and consequences of globalized business To examine corporate responses to globalization
ETHICAL
DILEMMAS
Ethical dilemma is a complex situation that will often involve an apparent mental conflict between moral imperatives, in which to obey one would result in transgressing another. This is also called an ethical paradox since in moral philosophy, paradox often plays a central role in ethics debates. OR
Ethical dilemmas, also known as moral dilemmas, have been a problem for ethical
theorists as far back as Plato. An ethical dilemma is a situation wherein moral precepts or ethical obligations conflict in such a way that any possible resolution to the dilemma is morally intolerable. In other words, an ethical dilemma is any situation in which guiding moral principles cannot determine which course of action is right or wrong.
*Personal self-interest
* Company profit * Operating efficiency * Individual friendships * Team interests * Social responsibility * Personal morality * Rules and standard procedures * Laws and professional codes
OR
Globalization is not new, but the present era has distinctive features. Shrinking space, shrinking time and disappearing borders are linking people's lives more deeply, more intensely, more immediately than ever before. Globalization is a complex process which changes as well as has the potential to change the various events in the world at multiple levels. And globalization is a process of integrating not just the economy but culture, technology and governance. This era of globalization is opening many opportunities for millions of people around the world. Global markets, global technology, global ideas and global solidarity can enrich the lives of people everywhere, greatly expanding their choices. The growing interdependence of people's lives calls for shared values and a shared commitment to the human development of all people. Globalization, although often described as the cause of much turbulence and change, is in fact the umbrella term for the collective effect, the change itself. The challenge of globalization in the new century is not to stop the expansion of global markets. The challenge is to find the rules and institutions for stronger governancelocal, national, regional and globalto
preserve the advantages of global markets and competition, but also to provide enough space for human, community and environmental people not just for profits. Globalization is thus related with: Ethics less violation of human rights, not more. Equity less disparity within and between nations, not more. Inclusion less marginalization of people and countries, not more. Human security less instability of societies and less vulnerability of people, not more. Sustainability less environmental destruction, not more. Development less poverty and deprivation, not more. Indeed, there is a need for a recommitment to bring together of all the world's peoples around an agenda that does not seek to stifle the very productive and revolutionary innovations. However, it is essential that in so doing we do not forget basic and fundamental obligations that have been recognized and honored for decades as essential to a wholesome human existence.
Module 3
1. INTERNATIONAL TRADE
AND
FACTOR-MOBILITY THEORY.
Chapter Objectives
To understand theories of international trade To explain how global efficiency can be improved through free trade To identify factors affecting national trade patterns To explain why a countrys export capabilities are dynamic To understand why production factors To explain the relationship between foreign trade and international factor mobility
1)Mercantilism
countries should export more than they import - balance of trade surplus result in more gold & silver for governments trade conducted by governments Led consolidation of power trade with colonies import less-valued raw materials export more-valued manufactured goods views trade as zero-sum game
2)Absolute Advantage
proposed by Adam Smith countries differed in their ability to produce different goods efficiently and should specialize in the production of goods they can produce more efficiently views trade as a positive sum game countries will benefit from trade if they have an absolute advantage in one product
3)Comparative Advantage
even if a country has an absolute advantage in both products it should Specialize in production of that good in which it has a comparative advantage proposed by Ricardo
Full employment 2 products and 2 countries only Ignores role of technology and marketing Perfect competition Mobility of resources Transportation costs ignored Max efficiency - countries produce goods for other reasons
Theories of Specialization
Both absolute and comparative advantage theories are based on specialization Assumptions policymakers question: full employment economic efficiency division of gains transport costs statics and dynamics services
Factor-Proportions Theory
A countrys relative endowments of land, labor, and capital will determine the relative costs of these factors Factor costs will determine which goods the country can produce most efficiently
Country-similarity Theory
Most trade today occurs among high-income countries because they share similar market segments and because they produce and consume so much more than emerging economies Much of the pattern of two-way trading partners may be explained by cultural similarity between the countries, political and economic agreements, and by the distance between them
Limitations of the Porter Diamond Theory Production factors and finished goods are only partially mobile internationally The cost and feasibility of transferring production factors rather than exporting finished goods internationally will determine which alternative is better
The Relationship between Trade and Factor Mobility Capital and labor move internationally to gain more income and flee adverse political situations Although international mobility of production factors may be a substitute for trade, the mobility may stimulate trade through sales of components, equipment, and complementary products
2. GOVERNMENT INFLUENCE
ON
TRADE.
Chapter Objectives
To explain the rationales for governmental policies that enhance and restrict trade To show the effects of pressure groups on trade policies To describe the potential and actual effects of governmental intervention on the free flow of trade To illustrate the major means by which trade is restricted and regulated To demonstrate the business uncertainties and business opportunities created by governmental trade policies
Protecting Infant-Industries
The infant-industry argument for protection holds that governmental prevention of import competition is necessary to help certain industries move from high-cost to low-cost production
Brings in investment funds. Diversifies the economy. Brings more income than primary products do. Reduces imports and promotes exports. Helps the nation-building process.
maintaining domestic supplies of essential goods preventing potential enemies from gaining goods that would help them achieve their objectives
Trade controls that directly affect quantity and indirectly affect price include: quotas voluntary export restraint (VERs) buy local legislation standards and labels
licensing arrangements specific permission requirements administrative delays reciprocal requirements restrictions on services
4. C ROSS-NATIONAL COOPERATION
AGREEMENTS.
Chapter Objectives
To identify the major characteristics and challenges of the World Trade Organization
To discuss the pros and cons of global, bilateral, and regional integration
To describe the static and dynamic impact of trade agreements on trade and investment flows
To compare and contrast different regional trading groups, including but not exclusively the European Union (EU), the North American Free Trade Agreement (NAFTA), the Southern Common Market (MERCOSUR), and the Association of South East Asian Nations (ASEAN)
To describe other forms of global cooperation, such as the United Nations and the Organization of Petroleum Exporting Countries (OPEC)
GATT
The General Agreement on Tariffs and Trade (GATT), begun in 1947, created a continuing means for countries to negotiate the reduction and elimination of trade barriers and to agree on simplified mechanisms for the conduct of international trade
WTO
The World Trade Organization (WTO) replaced GATT in 1995 as a continuing means of trade negotiations that aspires to foster the principle of trade without discrimination and to provide a better means of mediating trade disputes and of enforcing agreements
The Effects of Integration Once protection is eliminated among member countries, trade creation allows MNEs to specialize and trade based on comparative advantage
Trade diversion occurs when the supply of products shifts from countries that are not members of an economic bloc to those that are
EUROPEAN UNION
Regional, as opposed to global, economic integration occurs because of the greater ease of promoting cooperation on a smaller scale The European Union (EU) is an effective common market that has abolished most restrictions on factor mobility and is harmonizing national political, economic, and social policies The EU is comprised of 27 countries, including 12 countries from mostly Central and Eastern Europe that joined since 2004 The EU has abolished trade barriers on: intrazonal trade instituted a common external tariff created a common currency, the euro
The North American Free Trade Agreement (NAFTA) is designed to eliminate tariff barriers and liberalize investment opportunities and trade in services Key provisions in NAFTA are labor and environmental agreements
Caribbean Community (CARICOM) Central American Common Market (CACM) Central American Free Trade Agreement (CAFTA-DR) Andean Community (CAN) The Southern Common Market (MERCOSUR) The proposed South American Community of Nations.
Association of Southeast Asian Nations (ASEAN) Asia Pacific Economic Cooperation (APEC) The African Union
The United Nations is comprised of representatives of most of the countries in the world and international trade and development in a number of significant ways
Commodity Agreements
Many developing countries rely on commodity exports to supply the hard currency they need for economic development Instability in commodity prices has resulted in fluctuations in export earnings
OPEC is an effective commodity agreement in terms of attempting to stabilize supply and price
Chapters Objectives
To learn the fundamentals of foreign exchange To identify the major characteristics of the foreign exchange market and how governments control the flow of currencies across national borders To describe how the foreign exchange market works To examine the different institutions that deal in foreign exchange To understand why companies deal in foreign exchange
Foreign Exchange
Foreign exchange is money denominated in the currency of another nation or group of nations The market in which these transactions take place is the foreign-exchange market. The exchange rate is the price of a currency
Currency swaps deal more with interest-bearing financial instruments (such as a bond), and they involve the exchange of principal and interest payments. Options are the right but not the obligation to trade foreign currency in the future. A futures contract is an agreement between two parties to buy or sell a particular currency at a particular price on a particular future date.
An invoice currency in many contracts. An intervention currency employed by monetary authorities in market operations to influence their own exchange rates.
Futures
A foreign currency future is an exchange-traded instrument that guarantees a future price for the trading of foreign exchange, but the contracts are for a specific amount and specific maturity date
Companies work with foreign exchange dealers to trade currency Dealers also work with each other and can trade currency through: voice brokers electronic brokerage services directly with other bank dealers
Companies use foreign exchange to settle transactions involving the imports and exports of goods and services, for foreign investments, and to earn money through arbitrage or speculation
5. THE DETERMINATION
OF
EXCHANGE RATES.
Chapter Objectives
To describe the International Monetary Fund and its role in the determination of exchange rates
To explain how the European Monetary System works and how the euro came into being as the currency of the euro zone
To identify the major determinants of exchange rates To show how managers try to forecast exchange-rate movements
Originally organized in 1945 Objectives: To promote international monetary cooperation, exchange stability, and orderly exchange arrangements To foster economic growth and high levels of employment To provide temporary financial assistance to countries to help ease balance-of-payments adjustment
IMF History
The Bretton Woods Agreement set a fixed exchange rate against gold & the US dollar The Jamaica Agreement (1976) eliminated par values against gold and the US dollar and permitted greater flexibility. Voting is through the Quota system
The Special Drawing Right (SDR) is a special asset the IMF created to increase international reserves The value of the SDR is based upon the weighted average of a basket of four currencies: the U.S. dollar, the euro, the Japanese yen, and the British pound.
EXCHANGE RATES
The world can be divided into: Countries that basically let their currencies float according to market forces with minimal or no Central Bank intervention Countries that do not but rely on heavy Central Bank intervention and control
Anyone involved in international business needs to understand how the exchange rates of countries with which they do business are determined
The Euro
European Monetary System (EMS): established by the EU (then the EC) in 1979 as a means of creating exchange rate stability within the bloc European Central Bank: established by the EU on July 1, 1998, to set monetary policy and to administer the euro Euro: the common European currency established on Jan. 1, 1999 as part of the EUs move toward monetary union as called for by the Treaty of Maastricht of 1992
European Monetary Union (EMU): a formal arrangement linking many but not all of the currencies of the EU
Africa
African countries are committed to establishing a common currency by 2021, but there are many obstacles to accomplishing this objective
Currencies that float freely respond to supply and demand conditions free from government intervention The demand for a countrys currency is a function of the demand for its goods and services and the demand for financial assets denominated in its currency Fixed exchange rates do not automatically change in value due to supply and demand conditions but are regulated by their Central Banks
Central Banks
Central banks are the key institutions in countries that intervene in foreignexchange markets to influence currency values The Bank for International Settlements (BIS) in Switzerland acts as a central bankers bank. It facilitates communication and transactions among the worlds central banks A central bank intervenes in money markets by increasing a supply of its countrys currency when it wants to push the value of the currency down and by stimulating demand for the currency when it wants the currencys value to rise
Many countries that strictly control and regulate the convertibility of their currency have a black market that maintains an exchange rate that is more indicative of supply and demand than is the official rate
Foreign-Exchange Convertibility
Fully convertible currencies, often called hard currencies, are those that the government allows both residents and nonresidents to purchase in unlimited amounts Currencies that are not fully convertible are often called soft currencies, or weak currencies They tend to be the currencies of developing countries
Exchange Controls
To conserve scarce foreign exchange, some governments impose exchange restrictions on companies or individuals who want to exchange money, such as import licensing multiple exchange rates import deposit requirements quantity controls
FACTORS
purchasing-power parity
differences in real interest rates confidence in the governments ability to manage the political and economic environment certain technical factors that result from trading
Fundamental forecasting uses trends in economic variables to predict future rates. The data can be plugged into an econometric model or evaluated on a more subjective basis. Technical forecasting uses past trends in exchange rates themselves to spot future trends in rates.
Factors to Monitor
Major factors that managers should monitor when trying to predict the timing, magnitude, and direction of an exchange-rate change include the institutional setting fundamental analysis confidence factors events technical analysis
Exchange rates can affect business decisions in three major areas: Marketing
Production Finance
Module 4
1.THE STRATEGY
OF
INTERNATIONAL BUSINESS
Chapter Objectives
To examine the idea of industry structure, firm strategy, and value creation To profile the features and functions of the value chain framework To appreciate how managers configure and coordinate a value chain To identify the dimensions that shape how managers develop strategy To profile the types of strategies firms use in international business
Firm performance is influenced by both the structure of the companys 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
Creating Value
Firms create value either through a low-cost leadership strategy or a differentiation strategy
The value chain lets managers deconstruct the general idea of create value into a series of discrete activities The function of the value chain is shaped by how managers opt to configure and then coordinate discrete value activities
Types of Strategy
The firm entering and competing in foreign markets can adopt either an: international multidomestic global transnational strategy
Often, firms use a mix of these four types due to company, industry, and environmental situations
SELECTION.
2. COUNTRY EVALUATION
AND
Chapter Objectives
To grasp company strategies for sequencing the penetration of countries To see how scanning techniques can help managers both limit geographic alternatives and consider otherwise overlooked areas To discern the major opportunity and risk variables a company should consider when deciding whether and where to expand abroad To know the methods and problems when collecting and comparing information internationally To understand some simplifying tools for helping to decide where to operate To consider how companies allocate emphasis among the countries where they operate To comprehend why location decisions do not necessarily compare different countries possibilities
Location
Companies lack resources to take advantage of all international opportunities. 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
Scanning techniques aid managers in considering alternatives that might otherwise be overlooked They also help limit the final detailed feasibility studies to a manageable number of those that appear most promising
Strategies for ultimately reaching a high level of commitment in many countries are: Diversificationgoes to many fast and then builds up slowly in each. Concentrationsgo to one or a few and build up fast before going to others. A hybrid of the two.
3. EXPORT
AND
IMPORT STRATEGIES.
Chapter Objectives
To introduce the ideas of export and import To identify the elements of export and exporting strategies To compare direct and indirect selling of exporting To identify the elements of import and importing strategies To discuss the types and roles of third-party intermediaries in exporting To discuss the role of countertrade in international business
Importing is the purchase of goods or services by a company based in one country from sellers that reside in another
Advantages of Exporting
Lower investment way to enter foreign markets Lower risk way to enter foreign markets Expands sales Achieves scale economies Diversifies sales
Characteristics of Exporters
The probability of a companys becoming an exporter increases with company size, but the extent of exporting does not directly correlate with size Companies export to increase sales revenues, use excess capacity, and diversify markets
Pitfalls of Exporting
Companies new to exporting (and also some experienced exporters) often make many mistakes One way to avoid mistakes is to develop a comprehensive export strategy that includes an analysis of the companys resources as well as its export potential Companies can also improve the odds of export success by working with an experienced export intermediary
Types of importers
Those looking for any product around the world to import and sell. Those looking for foreign sourcing to get their products at the cheapest price. Those using foreign sourcing as part of their global supply chain.
Types of imports
Industrial and consumer goods to independent individuals and companies. Intermediate goods and services that are part of the firms global supply chain.
Customs Agencies
Customs agencies assess and collect duties, as well as ensure that import regulations are adhered to A custom broker helps by valuing products to qualify for: more favorable duty treatment qualifying products for duty refunds through drawback provisions deferring duties by using bonded warehouses and foreign trade zones limiting liability by properly marking an imports country of origin
Indirect Selling
Exporters may deal directly with: agents or distributors in a foreign country indirectly through third-party intermediaries, such as export management companies other types of trading companies
Direct Selling
Through distributors who usually deal with retailers instead of end users To retailers and end users Internet marketing is a new form of direct exporting that is allowing many smalland medium-sized companies to access export markets as never before
Export Documentation
Key export documents are: pro forma invoice commercial invoice bill of lading consular invoice certificate of origin shippers export declaration export packing list
Export Assistance
Trading companies can perform many of the functions for which manufacturers lack the expertise Exporters can use the services of other specialists, such as freight forwarders, to facilitate exporting These specialists can help an exporter with the complex documentation that accompanies exports Government agencies in some countries, such as the Ex-Im Bank in the United States, provide assistance in: terms of direct loans to importers bank guarantees to fund an exporters working capital needs insurance against commercial and political risk
Countertrade
Countertrade is when goods and services are traded for each other. It is used when a firm exports to a country whose currency creates barriers to efficient trade Common types are: barter, buyback, offset, switch trading, and counter purchase
AND
4. DIRECT INVESTMENT
COLLABORATIVE STRATEGIES.
Chapter Objectives
To clarify why companies may need to use modes other than exporting to operate effectively in international business To comprehend why and how companies make foreign direct investments To understand the major motives that guide managers when choosing a collaborative arrangement for international business To define the major types of collaborative arrangements To describe what companies should consider when entering into arrangements with other companies To grasp what makes collaborative arrangements succeed or fail To see how companies can manage diverse collaborative arrangements
Licensing
Licensing agreements may be: exclusive or nonexclusive used for patents, copyrights, trademarks, and other intangible property Licensing often has an economic motive, such as the desire for faster start-up, lower costs, or access to additional resources
Franchising
Franchising includes providing an intangible asset (usually a trademark) and continually infusing necessary assets Many types of products and many countries participate in franchising Franchisors face a dilemma: the more standardization, the less acceptance in the foreign country the more adjustment to the foreign country, the less the franchisor is needed
Management Contracts
Management contracts are used primarily when the foreign company can manage better than the owners
Turnkey Operations
Turnkey operations are: Most commonly performed by construction companies Often performed for a governmental agency
Joint Ventures
Joint ventures may have various combinations of ownership The type of legal organization may be a partnership, a corporation, or some other form permitted in the country of operation When more than two organizations participate, the joint venture is sometimes called a consortium
Equity Alliances
An equity alliance is a collaborative arrangement in which at least one of the collaborating companies takes an ownership position (almost always minority) in the other(s). Equity alliances help solidify collaboration
Negotiating Process
In technology agreements: seller does not want to give information without assurance of payment
Performance Assessment
When collaborating with another company, managers must: continue to monitor performance assess whether to take over operations
5. THE ORGANIZATION
OF
INTERNATIONAL BUSINESS
Chapter Objectives
Profile the evolving understanding of the organization of international business Describe traditional and contemporary structures Study the systems used to coordinate and control operations Profile the role of organization culture Examine special situations in the organization of international business
Organization in the MNE is an integrated function of its formal structure, coordination and control systems, and the shared values that make up its culture Prevailing environmental and workplace trends pressure managers to question their customary approaches to organizing their companies
Vertical Differentiation
Vertical differentiation is the matter of how the company balances centralization versus decentralization of decision making Centralization is the degree to which high-level managers, usually above the country level, make strategic decisions and pass them to lower levels for implementation. Decentralization is the degree to which lower-level managers, usually at or below the country level, make and implement strategic decisions. Decision making should occur at the level of the people who are most directly affected and have the most intimate knowledge about the problem.
Horizontal Differentiation
Horizontal differentiation describes how the company designs its formal structure to perform three functions: Specify the total set of organizational tasks Divide those tasks into jobs, departments, subsidiaries, and divisions so the work gets done Assign authority and authority relationships to make sure work gets done in ways that support the companys strategy
Contemporary structures
Contemporary structures, like the network or virtual formats, arrange work roles, responsibilities, and relationships in ways that eliminate the horizontal, vertical, or external boundaries that block the development of knowledge-generating and decision-making relationships
No matter what sort of structure the MNE uses, it needs to develop coordination and control mechanisms to prevent duplication of efforts, to ensure that headquarters managers do not withhold the best resources from the international operations, and to include insights from anywhere in the organization
Coordination Systems
Coordination can take place via standardization, plans, and mutual adjustment Standardization relies on specifying standard operating procedures: planning relies on general goals and detailed objectives mutual adjustment relies on frequent interaction among related parties
Approaches to Coordination
Coordination by standardization: Sets universal rules and procedures that apply to units worldwide. Enforces consistency in performance of activities in geographically dispersed units.
Coordination by plan requires interdependent units to meet common deadlines and objectives. Coordination by mutual adjustment requires managers to interact personally with counterparts.
Control Methods
Companies exercise control through: Market control uses external market mechanisms to establish objective standards.
Bureaucratic control emphasizes organizational authority and relies on rules and regulations. Clan control uses shared values and ideals to moderate employee behavior.
Control Mechanisms
Reports Visits to Subsidiaries Management Performance Evaluations Cost and Accounting Comparisons Evaluative Measurements Information Systems
Organization Culture
The set of fundamental assumptions about the organization and its goals and practices that members of the company share A system of shared values about what is important and beliefs about how the world works.
Importance of Culture
Key features of a companys organization culture include: Values and principles of management. Work climate and atmosphere. Patterns of how we do things around here. Traditions. Ethical standards.
Module 5
1. MARKETING GLOBALLY.
Chapter Objectives
To understand a range of product policies and the circumstances in which they are appropriate internationally To grasp the reasons for product alterations when deciding between standardized versus differentiated marketing programs among countries To appreciate the pricing complexities when selling in foreign markets To interpret country differences that may necessitate alterations in promotional practices To comprehend the different branding strategies companies may employ internationally To discern complications of international distribution and practices of effective distribution
To perceive why and how emphasis in the marketing mix may vary among countries
Marketing Orientations
International marketing strategies depend on companies orientations that include: Production Sales Customer Strategic marketing Societal marketing
Production Orientation
Companies focus primarily on production - either efficiency or high quality - with little emphasis on marketing. Used internationally for certain cases: Commodity sales Passive exports Foreign-market segments or niches
Other Orientations
Sales orientation: a company tries to sell abroad what it can sell domestically and in the same manner on the assumption that consumers are sufficiently similar globally. Customer orientation: the product and method of marketing it are varied Strategic Marketing orientation: combines production, sales, and customer orientations
Social Marketing orientation: Companies consider effects on all stakeholders when selling or making their products.
Major problems for standardizing advertising among countries are: Translation Legality Message needs
Branding Strategies
A brand is an identifying mark for products or services. Global branding is hampered by:
language differences expansion by acquisition nationality images laws concerning generic names
Distribution Strategies
Distribution is the course - physical path or legal title - that goods take between production and consumption. Distribution reflects different country environments: It may vary substantially among countries.
It is difficult to change.
Some evaluation criteria for distributors include their: Financial capability. Connections with customers. Fit with a companys product. Other resources.
Five factors that often contribute to cost differences in distribution are infrastructure conditions, the number of levels in the distribution system, retail inefficiencies, size and operating-hour restrictions, and inventory stock-outs.
Usage - less product sold by all competitors than potential. Product line - company lacks some product variations. Distribution - company misses geographic or intensity Coverage.
Competitive - competitors sales not explained by product line and distribution gaps.
2. GLOBAL MANUFACTURING
AND
Chapter Objectives
To describe different dimensions of global manufacturing strategy To examine the elements of global supply chain management To show how quality affects the global supply chain To illustrate how supplier networks function To explain how inventory management is a key dimension of the global supply chain To present different alternatives for transporting products along the supply chain from suppliers to customers
Logistics
Logistics, or materials management, is that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customers requirements
Compatibility
The degree of consistency between FDI decisions and a companys competitive strategy. Some company strategies that managers must consider: Efficiency/cost Dependability Quality
Innovation Flexibility
Manufacturing Configuration
Three broad categories of manufacturing configuration are: centralized facility regional facilities multidomestic facilities
Information Technology
EDI (electronic data interchange) ERP (enterprise resource planning) MRP (material requirements planning) RFID (radio frequency ID) E-commerce Private technology exchange (PTX)
Quality
Quality is defined as meeting or exceeding the expectations of customers. Quality standards can be: general (ISO 9000) industry-specific company-specific (AQL, zero defects, TQM, and Six Sigma)
employee involvement continuous improvements The goal of TQM is to eliminate all defects.
Supplier Networks
Sourcing: the process of a firm having inputs supplied to it from outside suppliers (both domestic and foreign) for the production process. Domestic sourcing allows the company to avoid problems related to: language culture currency tariffs, and so forth Foreign sourcing allows the company to reduce costs and improve quality, among other things
Outsourcing
Major outsourcing configurations: Vertical integration. Outsourcing through industrial clusters. Other outsourcing.
Supplier Relations
When a company sources parts from suppliers around the world, distance, time, and the uncertainty of the international political and economic environment can make it difficult for managers to manage inventory flows accurately
Transportation Networks
The transportation system links together suppliers, companies and customers Foreign trade zones (FTZs) - special locations for storing domestic and imported inventory in order to avoid paying duties until the inventory is used in production or sold.
Chapter Objectives
To examine the major factors influencing the development of accounting practices in different countries To examine the global convergence of accounting standards To explain how companies account for foreign-currency transactions and translate foreign-currency financial statements
To discuss different forms of performance evaluation of foreign operations and how foreign exchange can complicate the budget process To explain how arbitrary transfer pricing can complicate performance evaluation and control To introduce the balanced scorecard as an approach to evaluating performance
Accounting Objectives
The accounting process identifies, records, and interprets economic events. The Financial Accounting Standards Board (FASB) sets accounting standards in the United States. The International Accounting Standards Board (IASB) is an international privatesector organization that sets accounting standards.
Financial Statements
Financial statements differ in terms of: language currency type of statements (income statement, balance sheet, etc.) financial statement format extent of footnote disclosures the underlying GAAP on which the financial statements are based Major approaches to dealing with accounting and reporting differences:
Mutual recognition. Reconciliation to local GAAP. Recasting of financial statements in terms of local GAAP.
foreign-currency receivables or payables be put on the income statement. The same procedure must be followed according to IFRS.
Translation Methods
The functional currency is the currency of the primary economic environment in which the entity operates. The current-rate method applies when the local currency is the functional currency. The temporal method applies when the parents reporting currency is the functional currency.
When using a budget, management must select a currency to set the budget and a currency to evaluate performance. The most widely used approaches to translate budgets and compare with performance use forecasts of the exchange rate.
Corporate Governance
The external and internal factors designed to safeguard the assets of a company and protect the rights of shareholders. Corporate governance practices worldwide are partly a function of the legal environment in the countries where companies operate. The Sarbanes-Oxley Act of 2002 was passed in the United States to improve financial reporting and strengthen internal controls.
Chapter Objectives
To describe the multinational finance function and how it fits in the MNEs organizational structure To show how companies can acquire outside funds for normal operations and expansion, including offshore debt and equity funds To explore how offshore financial centers are used to raise funds and manage cash flows To explain how companies include international factors in the capital budgeting process To discuss the major internal sources of funds available to the MNE and to show how these funds are managed globally To describe how companies protect against the major financial risks of inflation and exchange-rate movements
The CFO acquires financial resources and allocates them among the companys activities and projects. Capital structure of the company is the mix between long-term debt and equity Leverage is the degree to which a firm funds the growth of business by debt. The amount of leverage used varies from country to country.
Companies can use local and international debt markets to raise funds.
Eurocurrencies
A Eurocurrency is any currency banked outside its country of origin, but it is primarily dollars banked outside the United States Four major sources of Eurocurrencies: Foreign governments or individuals who want to hold dollars outside the United States Multinational enterprises that have cash in excess of current needs European banks with foreign currency in excess of current needs Countries such as Germany, Japan, and Taiwan that have large balanceof-trade surpluses held as reserves
International Bonds
A foreign bond is one sold outside the country of the borrower but denominated in the currency of the country of issue A Eurobond, also called a global bond, is a bond issue sold in a currency other than that of the country of issue
Capital budgeting techniques: Payback period. Net present value of a project. Internal rate of return.
MNEs need to determine free cash flows based on cash flow estimates and tax rates in different countries and an appropriate required rate of return adjusted for risk. Two ways to deal with the variations in future cash flows: determine several different scenarios or adjust the hurdle rate
Netting requires sophisticated software and good banking relationships in different countries.
Exposure-Management Strategy
To protect assets from exchange-rate risk, management needs to: Define and measure exposure. Establish a reporting system. Adopt an overall policy on exposure management. Formulate hedging strategies.
Forward contracts can establish a fixed exchange rate for future transactions. Currency options can ensure access to foreign currency at a fixed exchange rate for a specific period of time.
With a value-added tax, each company pays a percentage of the value added to a product at each stage of the business process. Corporate tax rates vary from country to country.
Transfer Prices
A transfer price is a price on goods and services one member of a corporate family sells to another. The OECD has set transfer pricing guidelines to eliminate the manipulation of prices and, therefore, taxes for MNEs.
Chapter Objectives
To discuss the importance of human resource management in international business To profile principal types of staffing policies used by international companies To explain the qualifications of international managers To examine how MNEs select, prepare, compensate, and retain managers To profile MNEs relations with organized labor
A third-country national is an employee who is a citizen of neither the home nor the host country.
Staffing Policies
Three perspectives describe how companies set about staffing their international operations, namely the: ethnocentric - fills management positions with home-country nationals polycentric - uses host-country nationals to manage local subsidiaries geocentric approaches - seeks the best people for key jobs throughout the organization, regardless of their nationality
Companies may use elements of each staffing policy but one type normally predominates While executive transferred from headquarters to local operations are more likely to best understand the companys core competencies, an ethnocentric staffing can result in a narrow perspective in foreign markets
Selecting Expatriates
Technical competence often is the strongest determinant of who is selected for an international assignment. Adaptiveness refers to a persons potential for Self-maintenance and personal resourcefulness. Developing satisfactory relationships. Interpreting the immediate environment.
Top managers in subsidiaries usually assume a greater range of leadership roles and broader duties than do managers of similar-size home-country operations.
Expatriate Failure
Expatriate failure is operationally costly and professionally detrimental. The improving sophistication of MNE selection procedures has reduced the rate of expatriate failure. A leading cause of expatriate failure is the inability of a spouse to adapt to the host country.
Training Expatriates
Training and predeparture preparations can lower the probability of expatriate failure. Increasingly, preparation activities include the spouse. Training and predeparture preparations often includes: general country orientation cultural sensitivity practical skills
MNEs usually anchor training programs to transfer specific information about the host country as well as improve the executive's cultural sensitivity.
Compensating Expatriates
Compensation must neither overly reward nor unduly punish a person for accepting a foreign assignment. The most common approach to expatriate pay is the balance sheet approach. MNEs often provide additional compensation or more fringe benefits to employees who work in remote or dangerous areas. Companies struggle to determine the proper degree to which they should equalize pay for the same job done in different countries.
Repatriating Expatriates
Repatriation, the act of returning home from a foreign assignment, has many difficulties Repatriation tends to cause dissonance in many areas, most notably Financial. Work. Social.
The principal cause of repatriation frustrations is finding the right job for someone to return to
Labor may be at a disadvantage in MNE negotiations because the Country bargaining unit is only a small part of MNE activities. MNE may continue serving customers with foreign production or resources.
Falling union membership in many countries foreshadows lower bargaining power for labor, whereas the effort of MNEs to develop integrated labor relations across countries increases their bargaining power.
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