IB 2-1 Tasks 1, 2 & 3 Week 2 Literature Summary

IB 2-1 Tasks 1, 2 & 3 Week 2

IB 2.1 – International Business Strategy I Literature summary by Boris Nissen /45

Literature Summary Griffin, Ricky W., Pustray, Michael W.. (1998, December). International Business: a managerial perspective,

second editon. Addison-Wesley Longman

Chapter 1 – An Overview of International Business

What is international business? - international business: any business transaction between parties from more than one country (e.g. private

individuals, individual companies, groups of companies, and/or governmental agencies) - although international and domestic business are conceptually similar, complexity of skills and knowledge

needed for success in IB is far greater (knowledge about cultural, legal, political and social differences is needed as well as e.g. knowledge about the different currencies)

Why study IB? - nearly all businesses, even small ones are affected by international business - be competitive with other students - obtain cultural literacy

International business activities - historically the first IB activities were exporting and importing and also today most firms going international

start with it to limit their direct financial risk o exporting = selling of products made in one’s own country for use or resale in other countries o importing = buying of products made in other countries for use or resale in one’s own country o merchandise exports and imports (UK: visible trade) = trade in tangible products o service exports and imports (UK: invisible trade) = trade in intangible products (increasing

proportion of int. trade as already 60% of industrialized GDP is in services) - international investments = capital supplied by residents of one country to residents of another (second

major form of IB besides exp/imp) ! 2 forms o Foreign direct investments (FDI) = investments made for the purpose of actively controlling

property, assets or companies located in host countries (home country is where headquarters are located)

o Portfolio investments = purchases of foreign financial assets for a purpose other than control - other important forms of IB activities:

o Licensing: licensor gives the right to use some or all of its intellectual property to a licensee in return for a royalty payment

o Franchising: franchisor allows the franchisee to utilize its brand names, logos, operating techniques in return for a royalty payment

o Management contracts: a firm operates facilities or provides other management services to another firm for an agreed-upon fee

The extent of Internationalization - international business = an organization that engages in cross-border commercial transactions with

individuals, private firms and/or public-sector organizations (be aware that the term also describes transactions)

- multinational corporation (MNC) = firm that engages in foreign direct investment and owns or controls value-adding activities in more than one country

o mutlinational organization = as MNC but for non-profit organizations o multinational enterprise = for companies not having legal status as a corporation (distinction is not

made in the book) - MNCs can be categorized into 3 types:

o Multidomestic corporation = collection of relatively independent operating subsidiaries each focusing on a specific domestic market (best when economies of scale in production, distribution and marketing are low and coordination costs are high)

IB 2-1 Tasks 1, 2 & 3 Week 2


o Global corporation = views the world as a single market and strives to create standardized goods and services as consumers are assumed to be similar ! concentration of power at headquarters

o Transnational corporation = company seeking to combine benefits of global-scale efficiencies with benefits of local responsiveness

"# decision making for functions requiring uniform standards is centralized, the other functions are decentralized

"# requires high degree of interdependence among operating units - world company = a firm that transcends national boundaries and in so doing loses its national identity (at

present a theoretical level that may even never be achieved)

The evolution of IB

The early era of IB - until the Middle-Ages trade was the only IB activity – most important was the trade between Europe and Asia - in the age of imperialism, a growth of FDI and MNCs can be observed - with the approach of the 19th century and the development of mass production and transportation, MNCs and FDI went up

IB growth since WW2 - international trade and international investment enjoyed unprecedent growth in the past 5 decades - shifts in stock of FDI over the past 30 years:

o US has become a less important source of FDI (relative terms) and Japan’s and Germany’s importance has risen dramatically

o Share of FDI received by developed countries increased form 1967 to 1990, then FDI motivation shifted more to penetration of large consumer markets resulting in a large influx of FDI into China

o FDI by Japan has increased but it’s role as destination country remained the same

The golden era of US business: 1945-1960 - Americas infrastructure and industrial base were unscathed, Europe and Japan were in the reconstruction phase leaving US firms space

to grow and prosper - Marshall Plan = helped European countries rebuild economies using US funds creating local jobs, but also markets for US products

The resurgence of Europe and Japan: 1960-1980 - European and Japanese firms were prepared to reclaim their traditional market shares ! the initiatives undertaken created the

underpinnings of the complex global competitive environment - By 1970 European and Japanese producers were more efficient and concerned with costs gaining a comparative advantage and as the

oil crisis came, the US dependence on cheap energy resources enabled Europe and Japan to expand their market share

The new global marketplace: 1980 to the present - US recovered by emulating and developing competitive practices that European and Japanese firms were already successful with - FDI by European and Japanese Firms in the US and vice versa - by 1990 a competitive global economy was beginning to take shape ! 3 geographic marketplaces now dominate the world economy

producing and consuming the majority of the world’s output of goods and services: 1) US and Canada; 2) the EU; 3) Japan

Reasons for IB growth - several factors have contributed to the escalation of IB growth:

o Market expansion: as firms productive capacities outgrow the size of their home markets they seek new marketing opportunities (moist significant catalyst for IB growth)

o Resource acquisition: IB activity is growing as firms seek resources like materials, labor, capital or technology abroad because they are cheaper or at home even not available

o Competitive forces: Economies of scale make it difficult for small companies to compete with large ones

o Technological changes (particularly in communications, transportation and information processing): make IB possible

o Social changes: people now are more open and global awareness boosts sales of foreign products o Government trade and investment policies: reductions in import tariffs and barriers to FDI made

IB more feasible

Chapter 2 – Global Marketplaces and Business Centers - businesses trying to internationalize often blunder because they fail to obtain vital information (geography,

market characteristics, culture, politics…)

IB 2-1 Tasks 1, 2 & 3 Week 2


The structure of the World Economy - size of the world economy: $26 trillion in 1996 - factors of cultural and economic geography that affect international trade and investment flows:

o shared borders: proximity lowers transportation costs and eases access o common heritage: countries with a common heritage arising from ethic or political bonds often

have extensive IB relations o similar income levels: result in similarities in the needs and wants and thus an opportunity for

MNCs "# Triad: Japan, EU, US – world is dominated by them and any MNC must become an

insider in each region (Kenichi Ohmae) "# Quad: Japan, EU, US, Canada – account for 75% of world’s GDP

o ownership of natural resources

The Marketplaces of North America (29% of world output)

The United States - 3rd largest population and 4th largest land mass, but largest economy accounting for ¼ of the world’s GDP - international trade is a relatively small component of the economy (about 11%) but numbers are because of

its size misleading - 32% of the 500 largest corporations are headquartered in the US - US$ serves as invoicing currency: ½ of all international transactions are denominated in dollars and it also

is an important component of foreign-currency reserves worldwide - US attracts flight capital: money sent out of a politically or economically unstable country to one perceived

as a safe haven

Canada - 2nd largest land mass, but small population; rich in natural resources - exports account for 39% of the GDP, bilateral trade with the US being the largest single bilateral trading relationship in the world - till 1984, Canada adopted nationalistic and protectionist policies to maintain a separate cultural identity, but that movement ended 1984

and deregulation and privatization and a policy of economic openness were adopted - many companies choose to expand to Canada because of its excellent infrastructure and its political and legal stability – the only threat

to the stability is the conflict between French-speaking and English-speaking Canadians - companies have to be aware of the countries bilinguality (e.g. labeling laws)

Mexico - largest Spanish-speaking nation; independent form Spain since 1810 - after a civil war, in 1876 during a 35 year period, international trade was encouraged, but a peasant revolt ended this policy - in 1917 modern Mexico was founded with the adoption of the Mexican constitution and till 1982 Mexico discouraged foreign

investment and erected high tariff walls to protect its domestic industries - when inflation got out of hand in 1982 a policy of an open economy was adopted and in1988 privatization and deregulation followed - joining the NAFTA it attracted much attention form international business seeking new markets, sources of inputs, etc. but in 1994

there was another crisis and the Peso had to be devalued, growth was negative but with the help of international lenders Mexico got back on track

Central America and the Caribbean - another 20 countries geographically divided into 2 groups - though collective population is twice that of Canada, the collective GDP is far smaller - with few exceptions, economic development suffered form e.g. political instability, US intervention, import limitations by the US and

other developed countries, inadequate educational systems, etc.

The Marketplaces of Western Europe - can be divided into EU members and non-EU members - the EU is the world’s richest market – EU members can be divided into:

o rich, populous and politically powerful: Germany, France, UK, Italy o rich, less populous, less politically powerful: Denmark, Benelux countries (Belgium, Netherlands, Luxemburg), Austria,

Finland, Sweden o relatively poor: Greece, Ireland, Portugal, Spain

- Germany: 3rd largest economy in the world; usually 2nd largest exporter in the world, DM used to be the dominating currency of the region

- France favors more trade restrictions, UK is the counter power favoring free trade - UK is one of the 3 major international finance centers

The marketplaces of Eastern and Central Europe - region is undergoing more economic change than any other region, converting form communism to capitalism

IB 2-1 Tasks 1, 2 & 3 Week 2


The former Soviet Union - the USSR emerged from the wreckage of the Russian empire in 1917 introducing Communism and a state controlled economy – the

living standard falling behind the western countries, Gorbatchev’s economic and political reforms led to the collapse in 1991 - Newly Independent States (NIS) = 15 separate countries resulted from the disintegration in 1991, some of them lying geographically in

Asia - Commonwealth of Independent States (CIS) = forum to discuss issues of mutual concern for all but Estonia, Lativa and Lithuania; and

also a free-trade area - Russia is the world’s largest country in land mass and well endowed with natural resources - privatization = selling of state-owned property to the private sector – resulted in much economic pain and massive unemployment - challenges confronting the NIS: political conflicts between and with many of them; governmental instability (especially in Russia

where the President has extensive powers); weakness in the judicial systems and old bureaucratism ! but the NIS present rich IB opportunities and as they are politically important Western nations have facilitated private initiatives

Central Europe - Albania, Austria, Bulgaria, Czechoslovakia (now divided in Czech Republic and Slovak Republic), Hungary, Poland, Romania,

Bosnia-Herzegovina, Croatia, Macedonia, Slovenia, Yugoslavia - Most were heavily aligned with the former Soviet Union and had different abilities to respond to its disintegration - especially the satellite states lost their (guaranteed export markets) when the COMECON (Council for Mutual Economic Assistance)

lead by the USSR collapsed in 1989 and was abandoned in 1991 - a common problem was the restructuring form centrally organized communist systems to decentralized market systems; the Czech

Republic, Hungary and Poland are further along in this process than all the others - Czech Republic: a fast start into democracy and a free market, but the approach used did not bring new capital and new management so

it still has to struggle with inefficiencies - Poland: used a shock therapy opening its borders, attracting FDI with tax breaks and encouraging entrepreneurship - Hungary: was least communist in the block by adopting market socialism in 1968 already, and then only needed to close inefficient

companies and attract FDI (got more on a per capita basis than any other country in the region) - all other countries were slow adapting their economies - situation for the countries that split form former Yugoslavia and surrounding countries is even worse

The marketplaces of Asia - home to ½ the world’s population, but produces only 26% of world’s GDP - but importance cannot be minimized – it is source of high and low quality products and major destination and source of FDI - aggressive and efficient entrepreneurs have increasingly put pressure on European and North American firms to improve productivity

and quality

Japan - rose after WW2 to become the 2nd larges economy with growth rates outperforming all other major economies and also the world’s

largest creditor country - the growth is partly due to a close partnership of the Ministry of International Trade and Investment (MITI) and the industrial sector –

at first they concentrated on basic industries and then shifted to automobiles, consumer electronics and machinery - keiretsu = family of interrelated company typically centered around a bank with the individual companies holding small stakes in each

other – a sogo sosha (an export trading company) is usually also part of a keiretsu marketing the exports for the keiretsu worldwide - although exports account for only about 10% of the GDP, exports are assumed to have spurred the postwar growth – international

criticism because of unfair trading practices

Australia and New Zealand – the 2 traditional powers in Pacific Asia - although they share a common cultural heritage, there are significant differences - Australia: vast land, but small population concentrated on the costal lines; rich in natural resources; export accounting for 20% of GDP - New Zealand: the 2 main islands were in the post WW2 period among the slowest-growing economies, largely due to over-regulation;

1984 the economic policy was changed successfully; now int. trade accounts for 22.5% of its GDP (mainly exports attributable to its extensive pasture lands)

The four Tigers - Pacific Asia is one of the world’s most rapidly industrializing regions - The Four Tigers = South Korea, Taiwan, Singapore, Hong Kong (reference to Chinese heritage 3 of the 4 share) also

referred to as newly industrialized countries/economies (NICs/(NIEs) – formally Hong Kong is no country and the status of Taiwan is arguable

- due to the Asian Crisis, growth perspectives have dimmed

South Korea (Republic of Korea) - Korean peninsula was divided into communist North and capitalist South Korea after the Korean War - since 1960 South Korea has been one of the fastest growing economies, exporting accounting for about 27% of GDO (1995) - growth was accomplish by tight cooperation between the government and 30 large, privately owned, family centered conglomerates

(chaebols); discouragement of imports and reliance on large economic combines for industrialization - Asian crisis plunged many of the chaebols into a financial crisis – rescue package from the IMF

Taiwan (Republic of China) - island country off the coast of mainland China, but China regards it still as a province - exports account for 42% of the GDP, main trading partners being the US, China and Japan - due to fast-paced growth it can no longer compete as low-wage manufacturing center, making fundamental investments on the

mainland

IB 2-1 Tasks 1, 2 & 3 Week 2


Singapore - former British colony on a small island, independent since 1965 governed by a parliamentary democracy - fist emphasis on labor-intensive industries, but soon shit to higher-value-added activities and high-tech - today suffers from labor shortage and being an important port and center for oil refining - exports totaled in 1995 141% of its GDP due to re-exporting - re-exporting: import foreign goods for re-exportation to other countries

Hong Kong - Hong Kong was born out of the “opium war” between the UK and China 1839-42, in 1898 the UK were granted a 99-year lease on an

area of the Chinese mainland know as the New Territories - on July 1st 1997 Hong Kong became a Special Administrative Region of China with its own legislature to prevail for a period of 50

years - it offers highly skilled labor and serves as an entrepôt for China and serves also as a bridge between Taiwan and China - exports totaled in 1995 121% of its GDP, ½ with either China or the US

India - world’s second most populous country, till 1947 part of the British empire - Indian subcontinent is divided by religion: India: Hindus – Pakistan: Muslims (in 1971 split into Pakistan and Bangladesh) - heavy reliance on state ownership of key industries, till 1991 foreign investment was discouraged - in 1991 market opening reforms, but still lack of clarity in government policy and red tape - historically international trade is not very important, only 9.6% of GDP

China - world’s most populous country and one of the oldest - Communism was established in 1949 by Mao TseTung and went through several stages:

o “Great Leap Forward” (1958-1960): force industrialization through growth of small labor-intensive factories (failed) o “Cultural Revolution” (1966): purge of any opinion deviation form Mao’s doctrines ! chaos and set back in economic

progress o 1976 Mao died and the government adopted a limited free-market policy allowing agriculture and small businesses to be

held privately and allowing foreigners to form Joint-Ventures with Chinese firms o 1980: special development zones were created o 1992: all enterprises are granted more freedom from state’s central planners ! FDI exploded (especially by Chinese

investors form overseas) - exports totaled 21% of its GDP (1995) – 40% with Hong Kong and Macau

Southeast Asian Countries - Asia hosts numerous other countries at various stages of economic development - Thailand, Malaysa and Indonesia enjoyed high economic growth and attracted FDI serving as satellite plant hosts due to their low labor

costs, but the currency crisis hurt them badly - a new potentially important economy is Vietnam – formerly isolated by embargos, that were lifted recently (experts believe it has as

much potential as any of the four Tigers)

The marketplaces of Africa and the Middle East

Africa: - covers 22% of world’s total land area, and is home to 55 countries - most of it was colonized in the late 19th century by the major European powers, which surrendered power over the colonies starting in

the mid 1950th - in most countries economical development was hindered by political unrest and civil war only some countries shifted toward market-

oriented policies an multi-party democracies - most of the economy is tied to natural resources and low-cost labor - outstanding is the development of South Africa (with a ditch due to the isolation) and Mauritius

Middle East - region located between southwestern Asia and northeaster Africa – “cradle of civilization” and origin of several of the major religions - has history of conflict and political unrest; heavy reliance on oil - Saudi Arabia is the largest economy - Oil-rich nations try to diversify their economies

The Marketplaces of South America

- import substitution policy = country attempts to stimulate development of local industry by discouraging imports via high tariffs and non-tariff barriers

- export promotion = country pursues economic growth by expanding its exports - the 13 countries share a common political history as well as many economic and social problems - colonization divided them into Portugese speaking (Brazil) and Spanish speaking (all others) parts - after becoming independent most countries followed import substitution policies, resulting in inflation and destruction of the middle

class – by the late 1980th the major countries reoriented and created free-trade zones, privatized and positioned their economies to compete internationally – FDI is attracted

IB 2-1 Tasks 1, 2 & 3 Week 2


Classifying Countries by Income Levels - income levels provide clues about the purchasing power of residents, technological sophistication of local

production processes and the status of public infrastructure - gross national product (GNP) = market value of all goods and services produced by property and labor

owned by the country’s residents (used till 1990) - gross domestic product (GDP) = market value of all goods and services produced in the country - per capita income = average income per person in a country - per capita GDP = GDP / number of residents - while GDP indicates the overall size of an economy, the per capita income indicates the average income of

consumers - income distribution = relative numbers of rich, middle class and poor - World Bank classifies countries into:

o high-income ! per capita income > $9386 o middle-income ! per capita income > $764 o low-income ! per capita income < $764

- high-income countries are grouped in 3 clusters: o Organization for Economic Cooperation and Development (OECD) = 23 of 29 are high-income o Kuwait and the United Arab Emirates o The smaller industrialized countries: Hong Kong, Israel, Singapore, Taiwan

IB 2-1 Tasks 4, 5 Week 2


Chapter 3 – International Trade and investment theory

International Trade and the World Economy - trade = voluntary exchange of goods, services, assets or money between one person or organization and

another (voluntary ! both must think they gain) - international trade = trade between residents (individuals, firms, any form of organizations or associations)

of 2 countries - important data:

o international merchandise trade 1996: $5.1 trillion (18% of world GDP) (services $1.2 trillion) o Quad countries accounted for 2/3 of world trade

Classical Country-Based Trade Theories - country-based theories are useful in explaining interindustry trade of homogeneous, undifferentiated

products (earliest developed in 16th century) - firm-based theories are more helpful in understanding intraindustry trade of heterogeneous, differentiated

goods (developed after WW2)

Mercantilism - mercantilism = country’s wealth is measured by its holdings of gold and silver ! main goal is to enlarge

the holdings ! export more than you import (promote exports, hinder imports by protectionism) o hurts most members of society in form of higher prices o in Age of Imperialism, the burden was often shifted to the colonies

- neo-mercantilits or protectionists = modern supporters

Absolute Advantage - mercantilism actually wakens a country; its basic problem is that it confuses the acquisition of treasure with

the acquisition of wealth ! individuals cannot benefit from voluntary exchange + country produces goods it is not suited to produce

- theory of absolute advantage (Adam Smith) = a country should export those goods/services for which it is more productive than others and import those for which other countries are more productive ! overall consumption can be increased

Comparative Advantage - theory of comparative advantage (David Ricardo) = a country should produce and export those

goods/services for which it is relatively more productive than other countries and import those others are relatively more productive in

o trade thus also occurs if one country does not have an absolute advantage at all - opportunity cost = value of what is given up in order to produce a good (theory of comparative advantage

uses this concept)

Comparative Advantage with money - comparative advantage implies that you’re better of specializing in what you do relatively best - in real world, money is used as a medium of exchange and trade occurs because of the self-interest of

individual entrepreneurs - introducing money as the medium of exchange, prices set in a free market reflect a country’s comparative

advantage ! businesspeople do not need to know about the comparative advantage, their decision is based on desire to obtain supplies at the lowest price possible

Relative Factor Endowments - theory of relative factor endowments (or Heckscher-Ohlin theory) = a country will have a comparative

advantage in production products that intensively use resources it has in abundance ! based on 2 observations:

o factor endowments vary among countries o goods differ according to the types of factors that are used to produce them



- Leontief paradox = in a study conducted with data form 1947, assuming US exports to be capital-intensive according to the H-O theory, the findings were not consistent with the predictions of the H-O theory as US imports were nearly 30% more capital-intensive than the exports

o assumed flaw lies in the fact that the study discarded other factors of production

Modern Firm-Based Trade Theories - focus on the role of the firm rather than the country – reasons for their development: MNCs, intraindustry

trade, failure of empirical validation of H-O theory

Country Similarity Theory - interindustry trade = exchange of different goods produced in different countries (can be explained by

country-based theories) - intraindustry trade = trade between two countries of goods produced by the same industry (today accounts

for 40% of world trade) - country similarity theory = most trade in manufactured goods should be between countries with similar per

capita incomes and intraindustry trade in manufactured goods should be common (similar per capita income – similar preferences) – particularly useful in explaining trade in differentiated goods

Product Life Cycle Theory - international product life cycle theory: traces the roles of innovation, market expansion, comparative

advantage and strategic responses of global rivals in international production, trade and investment decisions o new product stage: product is introduced due to domestic demand – initial production is in the

developing country to allow quick feedback; few exports o maturing product stage: production capacity is expanded; domestic and foreign competitors in

other industrialized countries emerge (some also at the end of stage 1) o standardized product stage: product becomes a commodity and pressure on prices results in a shift

of production into low-wage countries; innovator’s country becomes net-importer; less developed countries may become net-exporters

Global Strategic Rivalry Theory - more recent theories examine the impact of trade flows of global strategic rivalry between MNCs – firms

struggle to develop some sustainable competitive advantage they can exploit to dominate - global strategic rivalry theory: focuses on strategic decisions firms adopt when competing internationally,

affecting both international trade and international investment o trade flows may be determined by which firms make the necessary R&D expenditures, firms with

large domestic markets have an advantage, because they are able to obtain quicker and richer feedback form customers

- firms have numerous ways of obtaining a sustainable competitive advantage o owning intellectual property rights (e.g. trademark, brand name, patent or copyright) o investing in R&D: R&D is a major cost component of high-technology products

"# first-mover advantage = a firms that acts first spending in R&D often build up a position where large entry costs deter other firms from competing – it then has the opportunity to dominate the world market

o achieving economies of scale or scope: "# economies of scale = when a product’s average costs decrease as the number of units

produced increases "# economies o scope = occur when firm’s average costs decrease as the number of different

products it produces increases o exploiting the experience curve: for certain types of products, production costs decline as a firm

gains more experience in manufacturing the product – presence of an experience curve may in fact govern global competition within an industry (e.g. semiconductor chip production)

Porter’s National Competitive Advantage - theory of national competitive advantage = success in international trade comes form the interaction of 4

country- and firm-specific elements (most recent theory 1990) (also known as Porter Diamond) o Factor conditions: country’s endowment of factors of production affects its ability to compete –

role of factor creation through training, research and innovation is stressed o Demand conditions: existence of a large, sophisticated domestic consumer base stimulates

development and distribution of innovative products (struggle for dominance in domestic market) – these firms thus also say ahead of international competitors



o Related and supporting industries: emergence of an industry stimulates development of local suppliers; competition among those suppliers leads to lower prices, higher-quality products and technological innovations in the input market, reinforcing the industry’s competitive advantage in world markets (suppliers may outlive the original industry)

o Firm strategy, structure and rivalry: domestic environment shapes a firms ability to compete in international markets, those facing vigorous competition domestically and withstand have it easier to succeed internationally

"# National policies may also affect firms’ international strategies and opportunities - Porter’s theory blends traditional county based theories with firm-based theories (the countries play a critical

role in creating an environment, but firms are the actors)

Overview of International Investment - international investment can be a substitute for trade, but also a complement

Types of international investments - portfolio investments = passive holdings of securities (none entail active management or control of the

securities’ issuer by the investor) – motivated by attempts to seek an attractive rate of return or a reduction of risk form diversification

- foreign direct investment (FDI) = acquisition of foreign assets for the purpose of controlling them (US government: ownership or control of 10% or more of an enterprise’s voting securities) – different forms can be purchase of existing assets, new investment, joint ventures...

- most FDI is made by and destined for the most prosperous countries

International investment theories - transaction costs: costs of entering into a transaction; e.g negotiating, monitoring and enforcing a contract - the pattern of FDI (FDI inward and outward is high) cannot be explained by national or industry differences

in rates of return --> other explanations (focus on the role of the firm) o ownership advantage theory = a firm owning a valuable asset that creates a competitive advantage

domestically can use that advantage to penetrate foreign markets through FDI "# does not explain why not another form of expansion is chose

o internationalization theory = FDI is more likely to occur (international production will be internalized within the firm) when the costs of negotiating, monitoring and enforcing a contract with a second firm are high

"# does not explain why production should be located abroad o Dunning’s eclectic theory = recognizes that FDI reflects both international business activity and

business activity internal to the firm (forms a unified theory of FDI) – FDI will occur when 3 conditions are satisfied:

"# ownership advantage: firm must own some unique competitive advantage to compete in foreign markets

"# location advantage: undertaking the business activity must be more profitable in a foreign location than undertaking it in a domestic location (foreign production must have advantages over exporting there)

"# internationalization advantage: firm must benefit more from controlling the foreign business activity than from hiring an independent local company (transaction costs, brand name, etc.)

Factors influencing Foreign Direct Investment

Supply factors (FDI motivated by efforts to control costs) - production costs: firms often undertake FDI in order to lower production costs – as communities grow or

shrink, their attractiveness or unattractiveness as potential production sites change; technological change can also affect costs and thus the attractiveness of FDI

- logistics: if transportation costs are significant, firms may choose to produce in the foreign market rather than to export form domestic factories (or host country investments are made to reduce distribution costs)

- availability of natural resources: firms may make FDI to access natural resources that are critical to their operations

- access to key technology: it can be advantageous to acquire ownership interests in an existing firm than to start research and try to reproduce an emerging technology



Demand factors (FDI motivated by market expansion) - customer access: many types of international business require firm to have a physical presence (e.g. KFC) - marketing advantages: e.g. physical presence enhances visibility of foreign firm’s products in the host

markets; if lower costs enable lower prices sales are expanded; buy local attitudes; improved customer service

- exploitation of competitive advantages: FDI may be the best means to exploit a competitive advantage a firm already enjoys

- consumer mobility: FDI may also be motivated by FDI from customers or clients (suppliers have to follow their customers not to endanger their local market with the customer)

Political factors - avoidance of trade barriers - economic development incentives: government incentives can be an important catalyst for FDI (e.g. reduced

utility rates, infrastructure addition, tax reductions...)

IB 2-1 Tasks 6, 7, 8 Week 3


Chapter 7 – International Cooperation among nations

The GATT and the WTO - collapse of international economy between the 2 world wars is partly blamed on countries’ imposing

prohibitive tariffs, quotas and other protectionist measures - after WW2 representatives of leading trading nations met in Havana to create the International Trade

Organization (ITO), but it never became existent, instead the General Agreement on Tariffs and Trade (GATT) which had started as part of the preparations for Havana took over its mission

How the GATT worked - GATT sponsored international negotiation to reduce tariffs, quotas and other non-tariff barriers (NTB) - In all GATT sponsored 8 rounds of conferences, mainly focusing on tariffs that fell from an average of 40%

(1948) to 3% (1995) leading to a dramatic growth in world trade - GATT tried to ensure that international trade was conducted on a nondiscriminatory basis:

o Most favored nation (MFN) principle = any preferential treatment granted to one country must be extended to all (member) countries

o MFN principle encourages multilateral, rather than bilateral trade negotiations, but there are 2 important exceptions (and also national security, balance of payments problems):

"# Members are permitted to lower tariffs to developing countries without lowering them for more developed countries ! increases competitive pressure in home market and might shift some production into the developing country (in the US this tariff code is known as the Generalized System of Preferences (GSP))

"# Regional arrangements that promote economic integration - Although GATT members were supposedly restricted to the use of tariffs only, loopholes opened paths for

quotas and other NTBs which are often discriminatory and are less transparent - Uruguay Round: Started in 1986, ratified in Morocco in 1994 – cut tariffs form 4.7 to 3% and also

recognized and addressed problem of growing NTBs, agreement on creation of the WTO

The WTO - came into being January 1st 1995, headquartered in Geneva; comprises 132 members (have to follow the

WTO rules) and 34 observer countries - 3 primary goals:

o promote trade flows by encouraging nations to adopt nondiscriminatory predictable trade policies o reduce remaining trade barriers through multilateral negotiations o establish impartial procedures for resolving trade disputes among members

- Problem sectors o Agriculture: trade has been distorted by export subsidies, import restrictions, etc. – the Cairns Group (group of major

agricultural exporters led by Argentina, Australia, Brazil, Canada, Thailand) pressured to ensure Uruguay round agreements o Textiles: since 1974 trade has been governed by the Multifibre Abreement (MFA) with a complex array of quotas and

tariffs (since Uruguay progressive dismantling) o General Agreement on Trade in Services (GATS): also controls on service trade should be administered in a

nondiscriminatory fashion, but service industries are very diverse and few concrete agreements are already made (since Uruguay)

o Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS): entrepreneurs, artists, investors have been hurt by inadequate enforcement by many countries of laws prohibiting illegal usage, copying or counterfeiting (Uruguay strengthend protection)

"# Intellectual property rights = patents, copyrights, trademarks, brand names o Trade-Related Investment Measures Agreement (TRIMS): agreement affects trade-balancing rules (countries may not

require foreign investors to limit imports of inputs to the amount of exports of local production), foreign exchange access (must be given), domestic sales requirements (investor cannot be forced to sell locally)

o Enforcement of WTO decisions: the GATT was notoreously week, but the WTO can give a complaining country the right to impose trade barriers on the offending country equal to the damage caused by the nontariff barrier that one erected

Regional Economic Integration - over 100 regional alliances exist, stimulating trade among their members - Free Trade Area = encourages trade among its members by eliminating trade barriers among them, but

each member is free to establish its own trade policies against nonmembers o Trade deflection: nonmembers reroute their exports to the member nation with the lowest external

trade barriers



o Rules of origin: detail the conditions under which a good is classified as a member good (to reduce trade deflection)

- Customs Union = free trade area policy + members also adopt common trade policies toward nonmembers - Common Market = customs union policy + members also eliminate barriers restricting movement of factors

of production among themselves - Economic Union = common market policy + members fully integrate their economies by coordinating their

economic policies (monetary & fiscal policy, taxation, social welfare…) - Political Union = By encompassing both political and economic integration the union effectively

transforms itself into one country

The impact of economic integration on firms - Expansion of customer base helps firms compete internationally, but more competition on their home-

market from companies within the trading block and outside FDI ! typically any form of economic integration benefits the national economy as a whole, but some groups will

loose - trade bloc are controversial because their uncertain impact on the global market:

o trade creation: production within the bloc is relocated to lower-cost producers o trade diversion: shift of production to higher-cost internal producers from lower-cost external

producers

The European Union - 15 members; population of 372 million, GDP of $8.4 trillion (30% of world) ! world’s richest market - EC (European Communities) was made up of the European Coal and Steel Community (1952), the

European Economic Community (1957 – Treaty of Rome calling for a common market) and the European Atomic Energy Community (1958) – name was changed 1993 into European Union (EU)

Completing the Common Market EC ‘92 - till 1987, the common market envisioned by the Treaty of Rome was far form reality because the EC

internally relied on a process of harmonization to eliminate conflicting national regulations o process of harmonization = members were encouraged to voluntarily adopt common EU-wide

regulations affecting intra-EU trade - 1986 the Single European Act was signed intended to help complete the formation of the internal market by

the end of 1992 (thus unofficially labeled EC ’92) to ensure “free movement of goods, persons, services and capital ! changes can be grouped in 3 categories

o Physical Barriers: "# removed with beginning of 1993 "# Schengen Agreement = abolishment of passport controls at common borders (first only

Germany, France, Benelux in 1990, later extended) o Technical Barriers:

"# different national product standards restricted trade, the EC ’92 called for a harmonization of the standards that are set by several EU organizations using an open process (also open to suggestions form nonmembers)

o Fiscal Barriers: "# EU members heavily rely on VAT as a primary source of revenue ! differences in VAT

rates make cross border shopping attractive, but harmonization is slowly and difficult The Benefits of EC ’92: - large rich market, but also increased competition benefiting the consumers - FDI has been attracted

From Common Market to Economic Union - Treaty on European Union (Maastricht Treaty) = new treaty based on 3 pillars:

o Common foreign and defense policies among members o Cooperation on police, judicial and public safety matters o New provisions to create an economic and monetary union

- Cohesion fund = fund funneling economic development aid to countries whose GDP is less than 90% EU average



- Economic and monetary union (EMU) = creates a single currency for the EU, eliminating exchange-rate risks and costs in 3 setps:

o Full membership of the European Monetary System (ERM) o Creation of the European Monetary Institute (EMI) that was transformed into the European

Central Bank o Complete economic and monetary union on January 1st 1999 with exchange rates fixed to the euro

– in 2002 euro banknotes and coins - Countrys were only allowed to take part in the EMU if they fulfilled the convergence criteria:

o Inflation < 1.5%, long-term interest rates max 2% more than average of lowest three, two years successful participation in the ERM, budget deficit < 3%, government debt > 60% of GDP

- not in EMU: Denmark, Sweden, UK, Greece - Treaty for Europe (Treaty of Amsterdam) (1997) – the most important points are

o Strong commitment to attack unemployment o Strengthening the role of the EU parliament o Establishment of a 2-track system (groups of members can proceed with economic and political

integration faster than the EU as a whole)

Governing the European Union - EU members created a supranatioal and intergovernmental government that develops, implements and

administers its progamms and resolves conflicts among members - Council of the European Union (Brussels)

o Composed of 15 representatives, who may differ depending on the council’s agenda o Allocation of votes is in rough proportion to population and economic power, decisions require a qualified majority (but

mostly unanimity is strived for) o Most powerful decision-making body, shows hesitancy of members to surrender power

- European Commission (Brussels) o Composed of 20 people selected for 5 years (small EU countries nominate 1 citizen, large 2) o Once in office these individuals have to be loyal to the EU, not their home countries o Responsibilities include: proposition of legislation to be considered by the Council; implementation of the provisions of the

treaties; protection of EU interests in political debates, extensive powers in implementing customs union, Common Agricultural Policy and completion of the internal market; administration of the EU bureaucracy and management of the budget

- European Parliament (Strasbourg) o Comprises 626 representatives elected in national elections to serve 5-year terms o Was originally the weakest body, but used budgetary powers to enlarge its influence o Co-decision procedure: Parliament shares decision-making power with the Council based on the fact that it can reject a

proposal form the Council and rework it (see page 267) - European Court of Justice (Luxembourg)

o 15 judges interpreting EU law and ensuring that members follow EU regulations and policies The legislative process - while EU policies are formulated supranationally they must be implemented at a national level - on issues the co-decision process is not used (environmental, research, transport issues) the process can be

summarized in 5 steps: o Commission has sole right to initiate legislation o Legislation approved by Commission is sent to the Parliament and an labor and industry advisory

group -> Commission may amend its proposal o Legislation is sent to the Council of Ministers (individual determination if it is member’s best

interest) o Council votes on the issue o National governments must pass national legislation to implement new EU policy

Other regional trading blocs - European Free Trade Association (EFTA) = Iceland, Liechtenstein, Norway, Switzerland - European Economic Area = EU + Iceland, Liechtenstein, Norway (promote free movement of goods, services, labor and capital)

The North American Free Trade Agreement (NAFTA) - implemented in 1994 it is a free trade agreement between Canada, the US and Mexico lowering tariff walls,

reducing NTBs and increasing investment opportunities over a period of 15 years - however have many industries received special treatment & detailed rules of origin have been set up to

prevent building of screwdriver plants o screwdriver plant = factory in which very little transformation of the product is undertaken



- NAFTA was built on the Canada-US bilateral trading relationship that is the world’s largest - expansion of NAFTA has been slowed down because in the US the grant of “fast-track authority” to

President Clinton expired and was not renewed o fast-track authority = allows president to negotiate trade treaties with other countries

- most likely next candidate is Chle

Other free trade Agreements in the Americas - Carribbean Basin Initiative (CBI) (1983) = a uni-directional free trade agreement- permitting duty-ree import into the United states of

goods originating in or assebled of US parts in the member states of the Central American Comman Market (CACM) and the Caribbrean Community and Common Market (CARICOM)

- Mercosur Accord (1991)= Agreement creating a customs union among Argentina, Brazil, Paraguay and Uruguay (Chile and Boliva participate in the free trade area); was a key element in the reforms of Argentina and Brazil; attracts lots of FDI

- Andean Pact (1969) = failure till renewal in 1992 to create a customs union (Bolivia, Colombia, Exuador)

Trade Arrangements in the Asia-Pacific Region - Australia-New Zealand Closer Economic Relations Trade Agreement (ANZCERTA or CER) (1983) = eliminates tariff and non-tariff

barriers, most analysts believe it is the world’s most successful free trade agreement - Association of Southeast Asian Nations (ASEAN) (1967) = founded to promote regional political and economic ooperation (Brunei,

Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam, Myanmar) – though they are not homogeneous, growth levels are high; establishment of a free trade area in 1993

- Asia-Pacific Economic Cooperation (APEC) (1989) = members are 18 countries from both sides of the pacific ocean (including US and China) – at first only a very informal group, but a 1994 meeting resulted in a declaration committing members to the objective of achieving free trade in goods, services and investments by 2010 (developed countries), 2020 (developing countries)

- African Initiatives: Southern African Development Community (SADC, Economic Community of Central African States (CEEAC), Economic Community of West African States (ECOWAS), but all enjoy little success

Internationl Commodity Arrangements - commodity cartel = group of producing countries trying to either protect them from fluctuation prices of

their internationally traded commodities (e.g. crude oil, rubber, coffee…) or to seek higher prices by assigning production quotas and limiting overall output

- commodity agreement = agreement among representatives form both producing and consuming countries jointly negotiating production levels and target prices for the commodity

- Organization of Petroleum Exporting Countries (OPEC) = most important and successful commodity cartel; composed of 11 members controlling 40% of the world’s oil production (power faded during the 80th)

Chapter 8 – Legal and Political Forces - an intternational business must obey laws not only of tis home, but also of all the hsot countries which

critically affect the profitability of its international commercial transactions

Differences in leagl systems - national legal systems vary dramatically (rule of law, role of lawyers, burden of proof, right to judical revie,

the laws themselves) due to historical, cultural, political and religious reasons and so due the legal obligations of firms in these countries

- common law = law based on cumulative decisions on individual cases through history ! it evolved

differently in each common law country o foundation of the legal systems in the UK and in its former colonies (including the US and Canada) o statutory laws = laws enacted by legislative action also vary between common low countries (e.g.

in UK losers in trials pay legislation expenses of both parties, in the US everybody pays his own) - civil law = law based on a codification of what is and is not permissible (most common form)

o important difference to common law is the role of the judges and lawyers: "# common law: judge is a neutral referee, lawyers are responsible to develop clients’ cases "# civil law: judge takes on many of the tasks of lawyers, e.g. determines scope of evidence

to be collected - religious law = based on the officially established rules governing the faith and practice of a particular

religion o theocracy = country that applies religious law to civil and criminal conduct (e.g. Iran) o IBs should be cautions on features such as absence of due process and appeals procedure



- bureaucratic law = the legal system prevailing in communist countries and in dictatorships, whatever the

country’s bureaucrats say it is, regardless of the formal law of the land ! lack of consistency/predictability

Home Country Laws - besides affection a firm’s domestic operations, home country laws may also affect its international

operations as well as those of its competitions ! home country laws may o directly regulate international business activity originating inside the country’s borders o indirectly affect the ability of domestic firms to compete internationally o directly or indirectly affect business activities occurring outside the country’s borders (e.g. firms

whose products are geared to the export market have to alter their production to meet the regulations of the importing countries)

Restrictions on trading with unfriendly countries - laws regulating international business are often politically motivated and designed to promote the country’s

foreign policy or military objectives ! it may attempt to change undesirable policy by another country by: o sanctions = government-imposed restraints against commerce with a foreign country o embargo = ban on the exporting and/or importing of goods to a particular country

- a particularly important form of sanctions is export controls on high technology o dual use products = products that may be used for both civilian and military purposes

Indirect effects on international competitiveness - domestic laws may also indirectly affect the abilities of domestic firms to compete internationally by

increasing their costs (e.g. high labor costs due to social welfare systems, tort laws) - tort laws = cover wrongful acts, damages and injuries caused by an action other than a breach of contract

Extraterritoriality - extraterritoriality = application of a country’s laws to activities occurring outside its borders

o e.g. many countries monitor international transfer prices to ensure firms are not evading income taxed owed them

o transfer prices = prices that one subsidiary of a firm pay s for goods purchased by a second subsidiary

! many US trading partners disagree with policies of the US and have passed “blocking laws” making it illegal for their home firms (including subsidiaries of US corporations) to comply with US sanctions

The Impacts of MNCs on Host Countries - MNCs affect and are affected by the political, economic, social and cultural environments of the host

countries in which they operate ! managers have to recognize how they should interact to maintain a productive relationship

- Economic impacts: o Positive: Investment creates jobs, tax revenue, technology transfer o Negative: Competition for domestic production, economy becomes dependent on economic health

of the MNC - Political impacts: sheer size gives them tremendous power (threat to shift production) - Cultural impacts: as MNCs can rise local standards of living and introduce new products and services,

people in the host country develop new norms, standards and behaviors

Host Country Laws - as countries have broad discretion to pass and enforce laws, foreign firms can do little when a law is

explicitly directed against foreign firms

Ownership issues - countries may decide on the balance between governmental control of the economy and reliance of market

force ! nationalization of industries o nationalization = transfer of ownership of resources from private to public sector o expropriation = if compensations if given in process of nationalization



o confiscation = if no compensation is given o privatization = conversion of state-owned property to privately owned property (creates

opportunities for international businesses) - many governments limit foreign ownership of domestic firms to avoid control of their economies or key

industries by foreigners; others have imposed restrictions on repatriation o repatriate = return to the home country profits earned in the host country

Intellectual Property Rights - intellectual property, patents, copyrights, trademarks, brand names, is an important asset of most MNCs and

they can be quickly damaged unless countries enforce those ownership rights - problems: treaties provide some protection, but not all countries have signed and enforce then; international

intellectual property laws are also not consistent; differences in patent practices - registration procedures of trademarks and brand names can also cause problems – most countries follow a

“fist to file” approach

Dispute resolution in IB - 4 questions must be answered for an international dispute to be resolved:

o Which country’s law applies? o In which country should the issue be resolved? o What technique should be used to resolve the conflict – litigation, arbitration, mediation or

negotiation? o How will the settlement be enforced?

- if a contracts contain no answer to the first two questions ! forum shopping o forum shopping = each party to a transaction may seek to hear the case in the court system most

favorable to its own interests - principle of comity = provides that a country will honor and enforce within its own territory the judgments

and decisions of foreign courts with certain limitations (reciprocity is extended between the countries, proper notice is given the defendant, the foreign court judgment does not violate domestic statutes or treaty obligation)

- arbitration = process by which both parties to the conflict agree to submit their cases to a private body whose decision they will honor (to speed up the process)

The Political Environment - political risk assessment = a systematic analysis of the political risks a firm faces in a foreign country - political risks = any changes in the political environment that may adversely affect the value of the firm’s

business activities (3 categories: ownership risk, operating risk, transfer risk) o macropolitical risk: affects all firms in a country o micropolitical risk: affects only a specific firm or firms within a specific industry

- experts believe that political risks increase when the gap between welfare level and expected level widens ! MNCs have to continually monitor the countries they are operating in (they can also insure themselves, see

OPIC and MIGA) - political risk assessment is particularly important when a country is undergoin substantial political, economi

or legal changes (higher political risks have to be matched with higher returns)



Chapter 9 – The role of culture

Characteristics of culutre - culture = the collection of values, beliefs , behaviors, customs and attitudes that distinguish a society – a

society’s culture determines the rules that govern how firms operate in the society - characteristics of culture:

o culture reflects learned behavior that is transmitted from one member of a society to another o elements of culture are interrelated o culture is as learned behavior adaptive – it changes in response to external forces o culture is shared by members of society and defines the membership

Elements of culture - society’s culture determines how its members communicate and interact ! basic elements of culture

o social structure o language o communication o religion o values and attitudes

Social Structure - social structure = overall framework that determines the roles of individuals within the society, the

stratification of the society and individuals’ mobility within the society - individuals, families and groups – societies differ in how the groups are defined and the relative importance

they place on the individual’s role within the groups - social stratification = all societies categorize people to some extent on the basis of their birth, occupation,

education, etc., but the degree differs and the importance of these categories defines how individuals interact with each other (e.g. MNCs in highly stratified societies have to adjust their hiring and promotion)

o social mobility = ability of individuals to move from one stratum of society to another – tends to be higher in less stratified societies

Language - is a primary delineator of cultural groups because it is an important means by which a society’s members

communicate ! language shapes the perception of the world, provides clues about the cultural values and aid acculturation, as well as it is a potential source of political conflict

- countries sharing a language often are culturally similar, but not identical (differences in laws, political systems, social structure and economic wealth create differences) ! firm’s initial efforts to expand abroad often focus on countries that speak the firm’s home language

- linguistic ties often create important competitive advantages (e.g. with the former colonies in Africa) - lingua franca = the predominant common language of IB is today English (advantage for native English

speaking persons) - some linguistic differences may be overcome through translation, but often translation problems arise

o backtranslation = after one person translates a document, a second person is hired to translate the translated version back into the original language (provides a check that the intended message is actually being sent)

- words may have different meanings to persons with diverse cultural backgrounds

Communication - verbal and nonverabal communication is a particularly important skill for international managers - the context in which a discussion occurs also plays a role in cross-cultural communication

o low-context culture = words used by the speaker explicitly convey the speaker’s message (e.g. Anglo-Saxon & Germanic countries) – important are the terms of a transaction

o high-context culture = the context in which a conversation occurs is just as important as the words actually spoken (e.g. Japan and Arab countries) – higher value on interpersonal relationships

- nonverabal communication is believed to convey 80 to 90% of all information transmitted by means other than language, because of cultural differences, this form of communication often can lead to misunderstandings



- gift giving and hospitality are also important means of communication in may business cultures

Religion - religion affects the ways in which members of a society relate to each other and outsiders and the types of

products consumers may purchases and the seasonal patterns of consumption - the impact of religion differs depending on the country’s legal system, its homogeneity of religious belies

and its toleration of other religious viewpoints o Protestant ethic = stresses individual hard work, frugality and achievements as means of glorifying

God

Values and Attitudes - values = principles and standards accepted by members of a society - attitudes = encompass the actions, feelings and thoughts that result from values - time – attitudes about time differ dramatically (time is money versus a relaxed attitude) - age – different attitudes exist (US: youthfulness; Japan: seniority) - education – formal system of public and private education is an important transmitter and reflection of the

cultural values of society - status – means by which status is achieved vary across cultures

Individual Differences, Culture and Business Behavior - elements of national culture affect the behavior and expectations of people ! personal traits and need

structures differ - Geert Hofstede identified 5 important dimensions along which people seem to differ across cultures (these

are not absolutes but reflect tendencies) - Social Orientation = relative importance of the interests of the individual vs. the interest of the group

o Individualism = the interests of the individual take precedence (high degree of independence) o Collectivism = the interests of the group take precedence (strongly influenced by shame)

- Power Orientation = the appropriateness of power/authority within organizations o Power respect = authority is inherent in one’s position within a hierarchy (authority is respected

just because of the rank) ! hierarchies exist to clearify authority o Power tolerance = individuals assess authority in view of its perceived rightness or their own

personal interests (people are more willing to question a decision made by a higher level) ! hirarchies exist to solve problems and organize tasks

o When social orientation and power orientation are superimposed, individualisic and poer-tolerant countries seem to cluster as do collectivistic and power-respecting countries

- Uncertainty Orientation = an emotional response to uncertainty and change o Uncertainty acceptance = positive response to change and new opportunities; ambiguity is seen as

a context in which individuals can grow and develop (more flexible hierarchies, rules, procedures) o Uncertainty avoidance = prefer structure and a consistent routine; ambiguity and change are seen

as undesirable (tend to adopt more rigid hierarchies and elaborate rules) - Goal Orientation = what motivates people to achieve different goals

o Aggressive goal behavior = value material possessions, money and assertiveness o Passive goal behavior = value social relevance, quality of life and the welfare of others

- Time Orientation = the extent to which members of a culture adopt a long-term or a short-term outlook on work and life

o Long-term outlook = value dedication, hard work and thrift o Short-term outlook = value traditions, social obligations

International Management and Cultural Differences

Cultural Clusters - cultural cluster = comprises countries that share many cultural similarities, although differences remain !

reduce some of the need to customize business practices (firms instinctively utilize country-clustering) - greenfield investment = new investment without local partner - cultural convergence = improvements in communication and transportation have started a process of

cultural convergence

Understanding New Cultures



- self-reference criterion = unconscious use of one’s own culture to help assess new surroundings - cross-cultural literacy = there are numerous ways to obtain knowledge - acculturation = process by which a person not only understands a foreign culture but also modifies and

adapts his or her behavior to make it compatible with that culture - a complication is that many countries have more than one culture ! to be successful one also has to

recognize important subcultures in culturally heterogeneous societies

Cultural differences and ethics - cultural differnces often create ethical problems

Chapter 14 – Managing Behavior and Interpersonal Relations

Individual Behavior in International Business

Personality differences across cultures - personality = relatively stable set of psychological attributes that distinguishes one person from another

(part of it is biologically inherited, the other shaped by the social and cultural environment) - the “Big Five” personality traits = five fundamental personality traits that are especially relevant to

organizations o agreeableness – ability to get along with others o conscientiousness – drive to impose orders and precision o emotional stability – inclination to maintain a balanced emotional state o extroversion – one’s comfort level with relationships o openness – one’s rigidity of beliefs and range of interests

- other personality traits at work o locus of control = extent to which people believe that their behavior has a real effect on what

happens to them "# internal locus of control = you are in control of your life "# external locus of control = forces beyond your control influence your life

o self-efficacy = indicates a person’s beliefs about his or her capabilities to perform a task (e.g. people with low self-efficacy tend to doubt their ability to perform)

o authoritarianism = extent to which an individual believes that power and status differences are appropriate within hierarchical social systems

o self-esteem = extent to which a person believes that he or she is a worthwhile and deserving individual (individuals with high levels of self-esteem seem to be more motivated and do perform at a higher level)

Attitudes across cultures - attitudes are complexes of beliefs and feelings, some evolve over time, others are made up in seconds !

important because they provide a way for most people to express their feelings - job satisfaction (dissatisfaction) = attitude that reflects the extent to which an individual is gratified by or

fulfilled in his or her work (satisfied employees tend to be absent less often, make positive contributions, stay with the firm, but higher levels of job satisfaction do not necessarily lead to higher performance)

- organizational commitment = reflects an individual’s identification with and loyalty to the organization

Perception across cultures - perception = set of processes by which an individual becomes aware of and interprets information about the

environment (important determinant of an attitude) - an individual’s cultural background play a role in shaping how a person’s filtering mechanisms work and

thus influence perception - stereotyping = making inferences about someone because of one or more characteristics they possess

Stress across cultures - stress = an individual’s response to a strong stimulus (stressor) – it is not bad at all, in the absence of stress

we may experience lethargy and stagnation, an optimal level of stress results in motivation and excitement - people in different cultures experience different forms of stress and handle stress in different ways



Motivation in International Business - motivation = overall set of forces that cause people to choose certain behaviors from a set of available

behaviors (yet the factors differ across cultures)

Needs and values across cultures - needs = things an individual must have or wants to have

o primary needs = things that people require to survive o secondary needs = psychological in character and learned from the environment and culture

- values = things that people believe to be important - if an individual is to be satisfied with her psychological contract, the inducements offered by the

organization must be consistent with her needs

Motivational processes across cultures - need-based models of motivation – attempt to identify the specific need or set of needs that result in

motivated behavior o Hoefstede’s work provides some useful insights into how need-based models of motivation are

likely to vary across cultures o Management by objectives (MBO) = subordinates and managers agree on the subordinates’ goals

over some period of evaluation (works by far not in all countries) o Maslow’s hierarchy of 5 basic needs: physiological, security, social, self-esteem, self-actualization

- process-based models of motivation – focus on the conscious process people use to select one behavior from among several

o expectancy theory = people are motivated to behave in certain ways to the extent that they perceive that such behaviors will lead to outcomes they find personally attractive (may be less able to explain behavior in collectivistic cultures

- reinforcement model = behavior that results in a positive outcome will be likely to be repeated under the same circumstances in the future

Leadership in International Business - leadership = use of noncoercive influence to shape the goals of a group or organization, to motivate

behavior toward reaching those goals and to help determine the group organizational culture ! leadersip is not management

o leadership: relies on personal power and focuses on motivation and communication o management: relies on formal power and authority and focuses on administration and decision

making - leaders cannot succeed by always using the same set of behaviors in all circumstances ! tailor behaviors to

fit situations; cultural factors affect appropriate leader behavior - implications for leaders in international settings can be drawn form the cultural factors identified by

Hofstede (especially power orientation, uncertainty orientation and goal orientation) - leaders in international settings need to consider a wide array of situational factors that may determine how

effective their behavior will be; cultural factors are among the most difficult and complex to assess and understand, but also the most crucial in determining leader effectiveness

Decision Making in International Business - decision making = process of choosing one alternative from among a set of alternatives in order to promote

the decision maker’s objectives – varies among cultures - normative model of decision making – managers apply logic and rationality in making the best decisions - descriptive model of decision making – behavioral processes limit a manager’s ability to always be logical

and rational

The normative model across cultures: Step 1: Problem recognition – people form different cultures are likely to recognize and define problem

situations in very different ways Step 2: Identifying alternatives – process varies across cultures

o ringi systems = gives concern for Japanese sensitivity for maintaining group harmony – a (usually middle) manager draws up a problem statement and gives a proposed solution, this document



circles and can be accepted, rejected or modified until all agree and it is then accepted by a senior manager if all others have given approval

Step 3: Evaluating alternatives – also affected by cultural phenomena – evaluating alternatives is e.g. complicated in countries where people tend to avoid taking responsibility

Step 4: Selecting the best alternative – cultures differ in the perception of the best alternative (especially troublesome in joint ventures)

Step 5: Implementation – also depends on culture Step 6: Follow-up and evaluation – differences depend most notably on power orientation

Descriptive model across cultures - managers are affected by 2 important behavioral processes

o bounded rationality = decision makers are constrained in their ability to be objective and rational by limitations of the human mind (often use incomplete and imperfect information)

o satisficing = manages sometimes adopt the first minimally acceptable alternative

Groups and Teams in International Business

The Nature of Group Dynamics - firms frequently use groups because in theory, people working together as a group can accomplish more

than they can working individually - group = any collection of people working together to accomplish a common purpose - team = a specific type of group that assumes responsibility for its work (this term is used most often) ! a

mature team has certain characteristics o develops a well-defined role structure; establishes norms for its members; is cohesive; some teams

identify informal leaders - if a team’s role structure promotes efficiency, its norms reinforce high performance, it truly is cohesive and

its informal leaders support the firm’s goals, then it can potentially reach maximum effectiveness

Managing Cross-Cultural Teams - the composition of a team plays a major role in the dynamics that emerge form it - a relatively homogeneous tem generally has less conflict, better communication, less creativity, etc. and thus

is better suited for routine and straightforward tasks - a relatively heterogeneous tem often has more conflict, poorer communication, more creativity, etc. and thus

is better suited for nonroutine, complex and/or ambiguous tasks ! matching business behavior with the cultural values of the work force is a key ingredient to promoting

organizational performance

IB 2-1 Tasks 11,12 Week 4


Chapter 10 – International Strategic Management - to survive in the global marketplace, firms must be able to quickly exploit opportunities presented them

anywhere in the world and respond to changes in domestic and foreign markets as they arise

The Challenges of International Strategic Management - international strategic management = comprehensive and ongoing management planning process aimed at

formulating and implementing strategies that enable a firm to compete effectively internationally - strategic planning = process of developing a particular international strategy (usually responsibility of top-

level executives at headquarters and senior managers in domestic and foreign subsidiaries) - international strategies = comprehensive frameworks for achieving a firm’s fundamental goals – have to

answer fundamental questions: o What products/services to sell? Where and how to produce? Where and how to sell? Where and

how to acquire necessary resources? How to outperform competitors? - developing an international strategy is more complex than developing a domestic one (multiple overnments,

currencies, accounting systems, political systems, legal systems, languages, cultures…), but there are 3 sources of competitive advantage from international business unavailable to domestic firms:

o Global efficiencies: "# location efficiencies: facilities can be placed anywhere in the world to take advantage of

lowest total cost of production "# economies of scale: factories can be built to serve more than one country "# economies of scope: product lines can be broadened

o Multinational flexibility: "# Though wide variations in political, economic, legal and cultural environments exist and

they are not stable, international firms may respond to a change in one country by implementing a change in another country

o Worldwide learning: "# The diverse operating environments contribute to organizational learning and in

transferring the learning to its operations in other countries the firm gains - Unfortunately is it difficult to exploit all 3 factors simultaneously – centralization of control reduces

customization and worldwide learning, decentralization on the other hand increases multinational flexibility but global efficiencies are threatened and learning would be difficult to transfer

Strategic Alternatives - multinational corporations typically adopt 1 of 4 strategic alternatives to balance these 3 goals

o international strategy: the firm uses the core competency or firm-specific advantage it developed at home as its main competitive weapon in the foreign markets it enters ! pressures for local responsiveness & global integration are low

o multidomestic strategy: the firm views itself as a collection of relatively independent operation subsidiaries each of which focuses on a specific domestic market ! effective is clear differences exist, economies of scale are low and coordination costs would be high

o global strategy: the firm views the world as a single marketplace and its primary goal is to create standardized goods/services that will address the needs of customers worldwide

o transnational strategy: the firm attempts to combine the benefits of global scale efficiencies with the benefits of local responsiveness ! focus on integration and coordination among the various subsidiaries and power is neither fully centralized or decentralized, but carefully assigned by various organizational tasks to the unit of the organization best able to achieve the dual goals of efficiency and flexibility

- to promote global learning, the transnational strategy appears to be better as its structure already demands for an exchange between the parent and subsidiaries and between the different subsidiaries

Components of an International Strategy - after determining the overall international strategy, managers engaged in international strategic planning

need to address the 4 basic components of strategy development: o distinctive competence: “What do we do exceptionally well?” - the distinct advantage is a

necessary condition for a firm to compete successfully outside its home market;



"# to a large degree the internationalization strategy adopted by a company reflects the interplay between its distinctive competence and the business opportunities available in different countries

o scope of operations: “Where are we going to conduct business?” – may be defined in terms of geographical regions or in terms of markets or product niches

"# as all firms have finite resources and markets differ in attractiveness, managers have to decide which markets are most attractive to their firm (also tied to the firm’s distinctive advantage which might be only given for a certain region/product)

o resource deployment: “Given that we are going to compete in these markets, how will we allocate our resources to them?” – it determines relative priorities for the firm’s resources; resource deployment might be specified along product lines, geographical lines or both

o synergy: “How can different elements of our business benefit each other?” – goal is to create a situation where the whole is greater than the sum of the parts

Developing International Strategies - firms generally carry out international strategic management in 2 broad stages

o strategy formulation: firm establishes goals and the strategic plan that will lead to the achievement of those goals

o strategy implementation: firm develops the tactics for achieving the formulated international strategies

- while every strategic planning process is in many ways unique, there are a set of general steps that managers usually follow when developing international strategies

1. Develop a mission statement 2. SWOT analysis 3. Set strategic goals 4. Develop tactical goals and plans 5. Develop a strategic control framework

- mission statement = attempts to clarify the organization’s purpose, values and directions and clarifies what the firm’s distinctive competence is and what business it is in (MNCs may have multiple mission statements for their various subsidiaries)

- strategic goals = major objectives the firm wants to accomplish through pursuing a particular course of action (measurable, feasible and time-limited)

- tactics = usually involve middle managers and focus on the details of how to implement strategic plans - control framework = managerial and organizational process used to keep the firm on target toward its

strategic goals

SWOT Analysis and environmental scanning - environmental scanning = systematic collection of data about all elements of the firm’s external and

internal environments o when scanning external elements, they try to identify opportunities and threats for the firm o when scanning internal elements, they try to identify strengths (skills and resources and other

advantages the firm possesses relative to its competitors) and weaknesses (deficiencies and shortcomings relative to competitors)

- value chain = breakdown of the firm into its important activities (production, marketing, human resource, …) to enable strategists to identify competitive advantages and disadvantages (Porter)

- effective strategies are ones that exploit environmental opportunities and organizational strengths, neutralize environmental threats and protect or overcome organizational weaknesses

Levels of International Strategy - international businesses find it useful to develop strategies for 3 distinct levls within the organization

Corporate Strategy - corporate strategy attempts to define the domain of businesses the firm intends to operate – a firm might

adopt any of 3 forms of corporate strategy o single-business strategy: calls for reliance on a single business, product or service for all revenue

(advantage: concentration of resources and expertise; disadvantage: vulnerability) o related diversification: calls for operation in several different businesses, industries or markets at

the same time, however do operations related to each other in some fundamental way



"# advantages: fim can leverage a distinctive competence in one market in order to strengthen its competitiveness in others; reduces vulnerability (dependence on one product), may produce economies of scale, may allow a firm to use expertise developed in one market to cheaply enter another one ! synergy effects

"# disadvantages: coordiantation costs, economic contitions may affect all businesses at the same time

o unrelated diversification = operation in several unrelated industries and markets (was most popular in 60th, but as it does not produce synergy effects it is out of favor today)

"# conglomerate = firm comprising unrelated businesses "# advantages: raising of capital is easier, overall riskiness is reduced, new opertions can

easily be bought "# disadvantages: lack of synergy effects, difficult to manage

Business strategy - business strategy focuses on specific businesses, subsidiaries or operating units within the firm seeking to

answer how the firm should compete in each market it has chosen to enter - firms pursuing related diversification or unrelated diversification tend to budle sets of businesses into

strategic business units (SBUs) – focusing on the competitive environment of each business or SBU, business strategy helps to improve the distictive competence in each – 3 basic forms of business strategy:

o differentiation strategy: attempts to establish and aintain the image that the SBU’s products or services are fundametally unique form other products/services in the same market segment

o overall cost leadership strategy: calls for focus on achieving highly efficient operating procedures so that costs are loewr than for competitors ! sales volume will bring higher total profitability

o focus strategy: calls to targetspecific types of products for certain customer groups or regions to match the features to the needs

Functional Strategies - functional strategies attempt to answer the question of how the firm will manage its functions of finance,

marketing, operations, human resourcees and R&D consistent with its international corporate and business strategies

o international financial strategy ! capital structure, investment policies… o international marketing strategy ! distribution and selling of the firm’s products/services o international opeations strategy ! creation of the firm’s products/services o international human resource strategy ! focus on the people that work for the organization o international R&D strategy ! concerned with the magnitude and direction of R&D spending



Chapter 11 – Strategies for analyzing and entering foreign markets - in deciding whether and how to enter a market, a well-managed frim will match its internal strengths and

weaknesses to the unique opportunities and needs of that market

Foreign Market Analysis - to successfully increase market share, revenue and profits, firms must normally follow 3 steps:

o assess alternative markets o evaluate the respective costs, benefits and risks of entering each o select those that hold the most potential for entry or expansion

! number of factors that has to be analyzed is enormous, but if factors are not carefully analyzed, at best the firm looses an opportunity, at worst it may threaten its existance

Assessing alternative foreign markets ! the firm must consider a variety of factors, some can be analyzed objectively and are easy to obtain, others are not - market potential: with data on population, GDP, per capita GDP, public infrastructure, ownership of

consumer durables, etc. a first analysis can be made always with he positioning of the products relative to competitors in mind

o much of the data used reflects the past, but consideration has also been placed on the potential growth by using objective (GDP growth, changes in energy consumption) and subjective measures (to gain first mover advantage)

- levels of competition: both the current and likely future level have to be considered; the number of competitors, their relative market shares, their pricing and distribution strategies – their strengths and weaknesses

o even highly competitive, large prosperous markets can be very attractive if there is an underserved market niche

o successful firms continually monitor major markets in order to exploit opportunities a they become available (especially in industries undergoing technological or regulatory change)

- legal and political environment: a firm contemplating entry into a particular markets needs to understand the host-country’s trade policies & its general legal and political environments

o ownership issues, barriers to reparation of profits, tax policies, economic incentives, government stability, regulations concerning pricing, promotion, safety standards...

- sociocultural influences: to reduce the uncertainty, firms often focus their initial internationalization in countries culturally similar

o when exporting firms need to recognize the needs an preferences of the customers, but when engagement also includes investment, factors associated with employees also come into play

Evaluating costs, benefits and risks - costs: 2 types of costs are relevant

o direct costs: costs the firm incurs in entering a foreign market (e.g. costs of setting up operation) o opportunity costs: profits that could have been earned on the second best alternative

- benefits: entry into a new market must hold potential benefits (if not, why do it?) o e.g. expected sales and profits, lower acquisition and manufacturing costs, first mover advantage,

competitive advantage, access to new technology, synergy effects - risks: few benefits are achieved without risk, generally a firm incurs risks of:

o exchange rate fluctuations, additional operating complexity, direct financial losses, risk of government seizure or war/terrorism

Choosing a Mode of Entry - next choice a firm has to make is the mode of entry it chooses, Dunning’s eclectic theory provides useful

insights by considering 3 factors o ownership advantages: resources owned by a firm that grant it a competitive advantage (tangible

or intangible) ! the nature of the ownership advantage affects its selection in entry mode "# brand name = licensing franchising; technology = equity mode

o location advantages: actors that affect the desirability of host country production relative to home country production



"# attractiveness of the host country depends on its resources and their costs, on stability, etc. but also on the surplus or unused capacity available elsewhere

o internalization advantages: those factors that affect the desirability of a firm’s producing a good or service itself rather than contracting with a local host country firm to produce ! amount of transaction costs is critical

- like most business activities, the choice of the entry mode is a trade-of between the level of risk borne by the firm, the potential rewards to be obtained from a market, the magnitude of resource commitment necessary to compete effectively and the level of control the firm seeks

Exporting to Foreign Markets - exporting is the simplest and most common mode of internationalization, has relative low financial exposure

and permits gradual markets entry (acquire knowledge about the local market first and then increase commitment)

- motivations for exporting are twofold: o proactive motivations: those that pull a firm into a foreign market o reactive motivations: those that push a firm into foreign markets (e.g. decreasing opportunities at

home)

Forms of exporting - indirect exporting: occurs when a firm sells its product to a domestic customer, which in turn exports the

product, in either its original form or a modified form ! usually not part of a conscious internationalization strategy and as the firm passively relies on others the potential short- and long-term profits are limited

- direct exporting: sales to customers (distributors or end-users) located outside the firm’s home country ! firm gains valuable experience about international operations in general and the individual countries it exports to in specific

- intracorporate transfers: selling of goods by a firm in one country to an affiliated firm in another ! results in ex- and import activities, but revenues for the transaction remain within the same firm (became more important with growth of MNCs)

Additional considerations - in considering exporting as an entry mode, other factors also have to be considered:

o government policies: home country governments may encourage exporting, but importing countries may impose tariffs and NTBs on imported goods

o marketing concerns: image, distribution and responsiveness to the customer may also affect the decision to export

o logistical considerations: costs of physical distribution, warehousing, transporting, packaging... have to be considered as well as the decrease in consumer service due to long supply lines

o distribution issues: a firm large enough to operate its own distribution networks abroad captures additional revenues and maintains control, but smaller firms heavily rely on the services of distributors, whose selection is critical to the whole operation as his business judgments may differ substantially and might lead to lost sales and reputation

Export intermediaries - an exporter may also choose to use intermediaries to distribute and market its goods in international markets - intermediaries = third parties that specialize in facilitating imports and exports, their services may be

limited or very broad o export management company (EMC) = firm that acts as its client’s export department – often used

by smaller firms so they don’t need to develop in-house experts on legal, financial and logistical details of exporting ! operate in 2 ways

"# acting as commission agents (receive a fee) "# taken title of the goods and make money by buying from the firm and reselling at a higher

price o Webb-Pomerene Association = group of US firms that operate within the same industry and that

are allowed by law to coordinate their export activities without violating antitrust laws (no major role)

o international trading company = firm directly engaged in importing and exporting a wide variety of goods for its own account and provides all necessary export and import services (Japanese sogo soshas account for the 5 most important ones)

"# export trading company (ETC) = firm that may engage in various cooperative business practices without fear of violating US antitrust laws



o manufacturers’ agents: solicit domestic orders for foreign manufacturers usually on commission basis

o manufacturers’ export agents: act as foreign sales department for domestic manufacturers o export and import brokers: bring together international buyers and sellers of standardized

commodities o freight forwarders: specialize in physical transportation of goods

International Licensing - licensing = a firm (the licensor) leases the right to use its intellectual property to another firm (the licensee )

in return for a fee - this mode of entry is only advisable if the protection for intellectual property is enforced, but then allows a

firm to take advantage of any locational advantages of foreign production without incurring any ownership, managerial or investment obligations

Basic issues in international licensing - firms engaged in licensing negotiations have carefully to consider advantages and disadvantages – the terms

of the licensing agreement then usually reflect the relative bargaining power and negotiating skills - each licensing arrangement must address a number of basic issues – usually specified in a legal contract

o specifying the agreement’s boundaries: firms involved must determine which rights and privileges are and are not being covered in the agreement

o determining compensation: the royalty payment the licensor receives should exceed its opportunity costs, the licensee has to be careful to be able to reach the target levels of profitability after paying them

"# royalty = the compensation agreed upon in the license contract, can be a flat fee, amount per unit sold, percentage of sales... (often a minimum royalty is also agreed upon to ensure that the licensee takes full advantage of the market)

o establishing rights, privileges and constraints: licensee’s are usually legally restricted to divulge information, to adhere to defined standards and to keep records of sales

o defining dispute resolution methods o specifying the agreement’s duration: the greater the investment costs incurred by the licensee, the

longer is the likely duration of the licensing agreement

Advantages and disadvantages of international licensing - advantages: low financial risks; low-cost way to assess market potential; tariffs, NTBs, and investment

restrictions are avoided and licensee provides knowledge of local market - disadvantages: limits market opportunities and profits; dependency on licensee; potential conflicts with

licensee; may create a future competitor

International Franchising - franchising: a franchising agreement allows an independent entrepreneur or organization, called the

franchisee, to operate a business under the name of another, called the franchisor, in return for a fee – the franchisor provides its franchisees with trademarks, operating systems, product reputations, continuous support services (advertising, training, reservation services, quality assurance programs)

- international franchising is among the fastest-growing forms of ib activities - franchising is likely to succeed if: franchisor has been successful domestically and has experience in

franchising to domestic partners; factors that contributed to its success are transferable and that investors are interested

Advantages and disadvantages: - as it is essentially a special license agreement it has nearly the same features, it only offers more control

over the licensee

Specialized Entry Modes for International Business - firms may use any of several specialized strategies to participate in IB without making long-term

investments - contract manufacturing = used by firms who outsource most or all of their manufacturing needs to other

companies, thus reducing the amount of financial and human resources devoted to the physical production and being able to focus on that part of the value chain where their distinctive competence lies



- management contract = agreement whereby one firm provides managerial assistance, technical expertise or specialized services to a second firm for some agreed-upon time for monetary compensation – allows it to earn additional revenues without incurring any investment risks or obligations

- turnkey project = contract under which a firm agrees to fully design, construct and equip a facility and then turns the project over to the purchaser when it is ready for operation either for a fixed or a cost plus (shifts risk of cost overruns to purchaser) price

o B-O-T project = increasingly popular variant of the turnkey project, the firm builds a facility, operates it and later transfers ownership to some other party

Foreign Direct Investment - exporting, licensing, franchising and the specialized strategies allow a firm to internationalize without

investing in foreign factories or facilities, but firms may prefer either directly or later on to enter/continue operation through ownership and control of assets in the host countries

- FDI gives increased control and profit potential, but also carries much greater risk and far more complexity - control is particularly important to the firm if

o activities need to be closely coordinated to achieve strategic synergies o control is necessary in order to fully exploit the economic potential of technology, manufacturing

expertise or some other intellectual property - there are 3 methods for FDI:

o greenfield strategy: starting a new operation from scratch "# advantages: site and facility that meets fully the needs; firm starts with a clean slate; firm

can acclimate at its own pace "# disadvantages: takes time and patience, various regulations have to be overseen, new

workforce has to be recruited and trained; new facility may be more strongly be perceived as foreign

o acquisition strategy: acquisition of an existing firm conducting business in the host country, though quite a complex transaction

"# advantages: by acquiring a going concern, quick control and revenue; no new capacity in the industry

"# disadvantages: firm assumes all the liabilities; substantial spending up front o joint venture: two or more firms agree to work together and create a jointly owned separate firm to

promote their mutual interests



Chapter 12 – International Strategic Alliances

International Corporate Cooperation - strategic alliance = business arrangement whereby two or more firms choose to cooperate for their mutual

benefit (e.g. cross-licensing, sharing of production facilities, cofunding of research projects, marketing each other’s products using existing distribution networks, etc.)

o all alternatives involve a firm acting alone or hiring a second individual firm, but no cooperation - joint venture = special type of strategic alliance in which 2 or more firms join together to create a new

business entity that is legally separate and distinct from its parents – normally a corporation owned by the founding parents in whatever proportions negotiated

o may be managed in 3 ways: founding firms jointly share management; one parent assumes primary responsibility; an independent team of managers is hired

o because joint ventures are separate legal entities they generally have a longer duration (broader purpose and scope) than non-joint venture strategic alliances that are less stable

Benefits of Strategic Alliances - there are 4 potential benefits that international business may realize from strategic alliances

o ease of market entry "# even if foreign market analysis is favorable, factors like entrenched competition and

hostile government regulations may exist – strategic alliances can reduce these obstacles and thus costs (local partners can give information about local customers, distribution, laws, etc.)

"# costs of entering new foreign markets are often beyond the capabilities of a single firm – strategic alliances allow for rapid entry with low costs

"# regulations of national governments may also require/influence formation of joint ventures (e.g. Namibia, China)

o shared risk "# all major industries are so competitive that no firm has a guarantee of success when

entering a new market or developing a new product ! strategic alliances can be used to either reduce or to control individual firms’ risk

"# control over the risk can be achieved by diversification of risk "# is an important consideration if the target market is characterized y much uncertainty and

instability o shared knowledge and expertise

"# firms can gain knowledge and expertise they lack and use the newly acquired information for other purposes

o synergy and competitive advantage "# ides is that through some combination of market entry, risk sharing and learning potential,

each collaborating firm will be able to achieve more and to compete more effectively then if it had attempted to enter a new market or industry alone

Scope of Strategic Alliances - scope of cooperation may vary significantly – the degree depends on the basic goals of each partner

Comprehensive alliances - arise when the participating firms agree to perform together multiple states of the process by which goods or

services are brough to the market (R&D, design, production, marketing, distribution) - the broad scope demands for establishment of common procedures for intermeshing the functional areas

(finance, production, marketing…), which is difficult in the absence of a formal organization ! most comprehensive alliances are joint ventures

- joint ventures can adopt operating procedures that suit its specific needs rather than to accommodate the incompatible procedures of parents – thus achieving greater synergy

Functional alliances



- strategic alliances can also be narrow in scope, involving only a single functional area of the business – thus a informal organization is sufficient

- production alliance = functional alliance in which 2 or more firms each manufacture products or provide services in a shared or common facility

- marketing alliance = functional alliance in which 2 or more firms share marketing services or expertise o in most cases one partner who has already market presence helps a newcomer to promote, advertise

or distribute its products or services for a fee or percentage o firms may also agree to market each others’ products on a reciprocal basis ! partners must ensure

that their expectations and needs are mutually understood - financial alliance = functional alliance of firms that want to reduce the financial risks associated with a

project – partners may share equally in contributing financial resources, or one contributes bulk while the other(s) contribute special expertise or other contributions to offset its lack of financial investment

- research and development alliances o R&D alliance = partners agree to undertake joint research to develop new products or services –

usually not formed as joint ventures as scientific knowledge can be exchanged by other means and often partners simply agree to cross-license whatever new technology is developed

o R&D consortium = confederation of organizations that band together to research and develop new products and process for world markets – a special case in that governmental support plays a major role in its formation and continued operation

Implementation of Strategic Alliances - after the decision emerged from the strategic planning process to form an alliance, several critical issues

have to be addressed – most notably o selection of partners o form of ownership o joint management considerations

Selection of partners - success of any cooperative undertaking depends on choosing the appropriate partner ! strategic alliances

are more likely to be successful if skills and resources of partners are complementary - 4 factors have to be considered

o compatibility: a compatible partner with whom the firm can work efficiently and that it can trust should be selected

"# incompatibilities in corporate operating philosophies may doom an alliance o nature of a potential partner’s products or services: it is hard to cooperate with a firm in one

market, while battling in a second ! each partner may be unwilling to unveil its expertise "# experts believe a firm should ally itself with a partner whose products/services are

complementary and not in direct competition with its own o relative safeness of the alliance: firms should be carefully in selecting, negotiating and contracting

with a partner "# the complexities and potential costs of failed agreements ask for collecting as much

information as possible up front "# especially should managers analyze the deal form the other firm’s point of view !

probability of success rises if the deal makes good business for both parties o learning potential of the alliance: each partner should carefully asses the value of its own

information and not provide the other partner with any that will result in a competitive disadvantage for itself should the alliance dissolve

Form of ownership - a joint venture nearly always takes on the form of a corporation, allowing for a neutral setting and

decreasing the probability of conflict - in some cases, incorporating a joint venture is not possible/desirable ! one possibility

o limited partnership = one partner assumes full financial responsibility - public-private venture = partnership between a privately owned firm and a government (or state-owned

firms) ! used if o government controls a resource it wants developed o if the country does not allow wholly owned foreign operations and no suitable local partner is

available o when entering centrally planned economies (e.g. China)



Joint Management Considerations - shared management agreement = each partner fully and actively participates in managing the alliance – the

alliance managers have limited authority ! requires high level of coordination and an almost perfect agreement

- assigned arrangement = one partner assumes primary responsibility for the operations of the strategic alliance ! simplifies management, but is a source of conflict

- delegated arrangement = reserved for joint ventures - the partners agree not to get involved in ongoing operations and delegate management control to the executives of the joint venture

Pitfalls of Strategic Alliances - 5 fundamental sources of problems that threaten the viability of strategic alliances

o incompatibility of partners: primary cause of failures and bad performance – can stem from differences in corporate culture, national culture, goals and objectives…

o access to information: for a collaboration to work efficiently, partners have to provide information they would prefer to keep secret, if not regulated up front a source of conflict

o distribution of earnings: partners share risks and costs and profits; although profit distribution is usually negotiated up front, reinvestment proportions, transfer prices and accounting procedures can lead to conflicts

o potential loss of autonomy: in an alliance any change needs to be discussed and negotiated – control is shared and thus the partners are limited in their decisions

o changing circumstances: economic conditions or technological advances may change and render the agreement obsolete



Chapter 13 – Organization Design for International Business

The nature of international organization design - organization design (or organization structure) = overall pattern of structural components and

configurations used to manage the total organization – the basic vehicle through which strategy is implemented ! it:

o allocates resources o assigns tasks to people o instructs employees about rules, procedures, expectations about job performance o collects and transmits information necessary for decision making and problem solving ! of

particular importance to MNCs - early studies sought to identify a single best design all organizations should use

o bureaucratic design (Max Weber) = based on rational rules, regulations, standard operating procedures

- later research realized that there is no single best way, managers have to match the situation and context with the appropriate design

o key elements in selection: firm size, strategy, technology, environment, culture o organization design is an ongoing process – changes often result from changes in the firm’s

strategy

Initial Impacts of International Activity on Organization Design - when starting international expansion a firm will change its organization design to accommodate its

increased international activities - starting point is that there are no direct international sales, but some level of indirect exporting might be

already a routine part of the business ! several possible steps: o corollary approach = the firm delegates responsibility for processing a modest level of direct

exporting orders to individuals within an existing department, such as finance or marketing ! firm continues with its existing organizational design

o export department (for a more significant volume of exports): takes responsibility for overseeing international operations, marketing products, processing orders, working with foreign distributors, arranging financing

"# initially might not be at the same level as other departments, but as sales grow it may achieve equality on the organization chart with finance, marketing, human resources…

o international division: when international activity increases further and foreign subsidiaries are set up, the organization design needs to be changed and an international division specializing in managing foreign operations is needed

"# allows to concentrate resources, specialized programs and activities targeted on international business activity, while keeping it segregated from the domestic operations

Global Organization Designs - in becoming a true multinational corporation a firm typically abandons the international division approach

! it usually creates a design to achieve synergies among its operations by integrating 3 types of knowledge o area knowledge – cultural, commercial, social, economic conditions of the host countries o products knowledge – technological trends, customer needs, competitive forces o functional knowledge – coworkers’ experience in basic business functions

- 5 most common forms of global organization design: product, area, functional, customer, matrix ! all emphasize one type of knowledge, thus MNCs choose the global design which best fits its knowledge needs

- MNCs typically adopt 1 of 3 managerial philosophies that guide their approach to organization design and marketing:

o Ethnocentric approach: used by firms operating internationally the same way they do domestic o Polycentric approach: used by firms customizing their operations for each foreign market o Geocentric approach: used by firms that try to serve the market with standardized products



Global product design - global product design = assigns worldwide responsibility for specific products or product groups to separate

operating divisions within a firm (most common form), who are in charge for managing domestic and international production, marketing and distribution for their individual product lines

o M-form design = multidivisional design – the various divisions of the firm are self-contained operations with interrelated activities

o H-form design = holding design – the various unrelated businesses function with autonomy and little interdependence

Advantages Disadvantages - focus on a single product ! gain expertise in all

aspects of the product(s) and become more flexible and quick in reacting to changes

- facilitates efficiencies in production and coordination - facilitates global marketing of a product

- may encourage expensive duplication (functional area skills have to developed by each division)

- shared learning and sharing knowledge about cultural and environmental forces is difficult

Global area design - global area design = organizes the firm’s activities around specific areas or regions of the world (second

most common form) o particularly useful for firms with a polycentric or multidomestic corporate philosophy – whose

products are not readily transferable across nations – because their strategy is marketing-driven rather than predictated on manufacturing efficiencies or technological innovation

Advantages Disadvantages - allows to develop expertise

about local markets - product mix and products

can be tailored to the markets

- cost efficiencies are sacrificed - diffusion of technology is slowed – global product planning is

discouraged - duplication of resources (each division needs functional specialists)

Global functional design - global functional design = calls for a firm to create departments or divisions that have worldwide

responsibility for the common organization functions (finance, operation, marketing, R&D, human resources management)

- has limited applicability – firms needing to impose uniform standard on all operations, as well as firms with relatively narrow or similar product lines may adopt it Advantages 3 major shortcomings - expertise within each functional area is easily transferable - control can be highly centralized which results in efficient

usage of resources - focuses attention on key functions – helps to isolate

problems

- practical only when firm has relatively few products (or customers)

- coordination between divisions - duplication of resources (e.g. experts

on foreign markets)

Global customer design - global customer design = firm serves different customers or customer groups, each with specific needs

calling for special expertise or attention, through a separate division o allows to meet the specific needs of each customer segment, but may lead to duplication of

resources and coordination becomes difficult

Global matrix design - global matrix design = allows firms to take advantage of functional, area, customer and product

organization designs as needed while simultaneously minimizing the disadvantages of each as a result of superimposing one form of organization on top of an existing different form

o e.g. a firm can form specific product groups comprising members form existing functional departments allowing to draw on both the functional and the product expertise of the members, once a project is completed, the group can be dissolved

Advantages Disadvantages - promotes organizational flexibility - minimizes disadvantages of each

individual design - promotes coordination and

- not appropriate for firms with few products and stable markets

- employees may be accountable to more than one manager - may actually lead to slower decision making because



communication reporting relationships can be very complex - tends to promote compromises

Hybrid global designs - each global form of international organization described above represents an ideal ! most firms create

hybrid designs that best suit their purposes

Related Issues in Global Organization Design - MNCs also face a number of related organizational issues that must be carefully managed - Centralization versus Decentralization:

o the level of autonomy, power and control the MNC wants to grant to subsidiaries is a crucial decision, too much decentralization may lead to a lack of focus on the firm’s overall needs, too much centralization may hinder the ability of subsidiaries to quickly and effectively respond to changes in their local environment

o there seems to be a trend among some MNCs toward greater centralization, as they believe it is more important to address the specific needs of different customer groups across markets

o communication advances have made centralization easier - Role of Subsidiary Boards of Directors

o as typically an MNC incorporates its subsidiaries and most countries require the appointment of a board of directors which is meant to oversee the activities of top-level manages and respond to shareholders (appointed by the MNC / the MNC) the question of empowerment of the board arises

o empowering a board has the advantage of promoting decentralization, but the disadvantage that the level of independence might get too much

o most useful when the subsidiary has a great deal of autonomy, its own self-contained management structure and a business identity separate from the parent’s – active boards are particularly useful in H-form organizations

- Coordination in the Global Organization o coordination = process of linking and integrating functions and activities of different groups, units

or divisions o coordination needs vary as a function of interdependence among the firm’s divisions and functions

"# pooled interdependence = each division or activity functions with relatively little dependence (e.g. H-form organizations) ! less need for coordination

"# sequential interdependence = each division or activity is dependent on only some of the others (e.g. M-form organizations) ! moderate coordination needs

"# reciprocal interdependence = each division or activity is dependent on all other divisions or activities (e.g. U-form organization) ! highest coordination needs

o MNCs use several strategies to achieve and manage their desired level of communication "# organizational hierarchy itself helps managing interdependence and coordination "# rules and procedures facilitate coordination "# temporary or ad hoc coordination techniques, e.g. using employees in liaison roles "# task forces (each participating unit or division assigns one or more representatives to a

group) – when the magnitude of collaboration is significant "# informal management network = a group of managers from different parts of the world

who are connected to one another in some way (often resulting from personal contact) – powerful for short-circuiting bureaucracy

Corporate culture in International Business - corporate culture = set of shared values that defines for its members what the organization stands for, how

it functions and what it considers important (helps guide the behavior of managers and contributes to overall competitiveness)

- creating a corporate culture is difficult, but especially important for an MNC, where each unit will have its own unit culture partly defined by the national culture the unit is located in

Creating the corporate culture in IB - creation of corporate culture starts with the mission statement (spelling out the firm’s values, goals and basic

operating philosophy) - managers throughout the firms must accept and enact corporate culture ! needed are symbols, heroes,

legends and shared experiences - each corporate culture is different and there is no one best culture



Managing the corporate culture in IB - managing corporate culture is best approached from the standpoints of consistency and communication –

managers should take every opportunity to communicate the firm’s culture to others so as to keep it in the forefront of decision making and other activities

Managing Change in IB - organization change = any significant modification or alteration in the firm’s strategy, organization design,

technology, and/or employees - the international environment is never static, managing change in ways that enhance productivity and

profitability is a continual challenge - managing organizational change is complex and difficult, thus managers need to understand the

o Reasons for change in IB "# most significant forces for change in a firm: changes in the environment, in technology, in

cultural values and mores o Types of changes in IB

"# a significant change occurs when a firm alters its corporate strategy "# changes in corporate strategy often make changes in organization design necessary, as do

changes in market conditions "# change in or change of the attitudes of employees



Chapter 6 – Formulation of National Trade Policies - dumping = sale of imported goods either (1) t prices below what a company charges in its home market or

(2) at prices below costs - antidumping duty = tax on the dumped imported goods

Rationales for Trade Intervention - 2 principle issues shape the debate on trade policies:

o whether or not to intervene to protect domestic firms o whether or not to intervene to increase (promote) exports

- free trade = implis that the natioanl government exerts minimal influence on international trade - fair trade (or managed trade) = national government should activeley intervene to ensure that national firms

can capture foreign sales and protect local jobs – or also that foreign and domestic firms compete “on equal terms”

! the policies individual countries adopt affect the size and profitablitly of foreign markets and investments as well as national prices

Industry-level arguments - arguments for free trade are based on Adam Smith’s analysis that shows that voluntary exchange makes

both parties of the transaction better off and allocates goods to their highest valued use - however, may people believe that under certain circumstances deviations form free trade are appropriate,

here we focus on trade policies that focus on the needs of individual industries o National Defense Argument = country must be self-sufficient in critical raw materials, machinery

and technology as it is else vulnerable to foreign threats ! appeals to the general public o Infant Industry Argument = a country’s infant industry should be protected to survive its infancy

and be able to develop its comparative advantage ! this temporary protection can be a powerful strategy, but determining which industries to support is in reality not done by economic but political means

o Maintenance of existing jobs: politicians are often influenced by the pleas of firms and their employees facing import competition form low-wage countries

o Strategic Trade Theory = a deviation form classical trade theory focusing on firms in oligopolistic industries ! a government can make its country better off if it adopts trade policies that improve the competitiveness of its domestic firms

"# subsidy strengthens domestic firm, induce foreign firms to stay out of the market and capture profits for the local industry

"# however is the theory only limited to oligopolistic markets and favoring certain industries inevitably hurt others and the benefit of the strategy is neutralized if another country adopts a similar strategy

National trade policies - national government may also take a broader perspective on the needs of the economy and society as a

whole ! then adopting industry-by-industry policies to promote the country’s overall economic agenda o Economic Development Programs: international commerce can play a major role in economic

development programs ! generally export-promotion strategy has been more successful "# Export-promotion strategy = a country encourages firms to compete in foreign markets by

harnessing some advantage the country possesses "# Import-substitution strategy = encourages the growth of domestic industries by erecting

high barriers to import goods o Industrial Policy = national government identifies key domestic industries critical to the country’s

future economic growth and then formulates programs that promote their competitiveness – ideally assisting the firms to capture large shares of important, growing global markets

"# Experts though believe that the government’s ability to identify the right industries is too limited (and distorted) to make the policy work well

o Public Choice Analysis = branch of economics that analyzes public decision making ! special interest will often dominate the general interest on any given issue because special-interest groups are willing to work harder for the passage of laws favorable to their interests than the general public is willing to work for the defeat of laws unfavorable to its interest (typically, intervention hurts the general public overall)



"# Domestic trade policies that affect international business stem from the mundane interaction of politicians trying to get reelected!!!

Barriers to International Trade - barriers to trade can be divided into 2 categories: tariffs and Nontariff barriers - barriers are erected in hopes to: increase national income, promoting economic growth, raising the standard

of living (benefit special interest groups) Tariffs - tariff = tax placed on a good involved in international trade

o export tariff = levied on goods as they leave the country o transit tariff = levied on goods as they pass through one country from another o import tariff = levied on goods as they enter the country

- 3 forms of important tariffs (in practice most are ad valorem) o ad valorem tariff = assessed as a percentage of the market value of the imported good o specific tariff = assessed as a specific dollar amount per unit (weight or other measure) o compound tariff = has both an ad valorem component and a specific component

- harmonized tariff schedule (HTS) = classification scheme for imported goods, that is due to its complexity sometimes difficult to use

o as an importer’s expected profit margin can be largely affected by the classification, e.g. US importers can request an advance tariff classification

- tariffs historically have been imposed for 2 reasons: o tariffs raise revenue (especially important for less developed economies as collection is relatively

easy and adds to a progressive tax system as imports tend to be purchased by the wealthier) o tariffs act as trade barriers ! raise prices for foreign goods and increase the demand for

domestically produced substitute goods (consumers, foreign product retailers and foreign producers loose)

Nontariff Barriers - Nontariff barrier (NTB) = any government regulation, policy, or procedure other than a tariff that has the

effect of impeding international trade Quotas: - quota = a numerical limit on the quantity of a good that may be imported into a country during some time

period o tariff-rate quota = imposes a low tariff rate on a limited amount of imports of a specific good, but

then subjects all imports of the good above the threshold to a prohibitively high tariff ! seen as better as perceived as easier to eliminate in diplomatic negotiations

- helps domestic producers and the importers that are below the threshold, but hurts consumers and industries that use the limited good as an input

Numerical Export Controls - voluntary export restraint (VER) = a promise by a country to limit its exports of a good to another country to

a prespecified amount or percentage of the affected market ! often done to resolve or avoid trade conflicts - embargo = an absolute ban on the exporting (and/or importing) of goods to (from) a particular destination !

used to discipline another country, but you also hurt yourself Other nontariff barriers - some NTBs are adopted for legitimate domestic public policy reasons with the side effect of restricting

trade, but most NTBs are blatantly protectionist in nature - NTBs are more difficult to eliminate than tariffs as they are often embedded in bureaucratic procedures - Most common forms of nonquantitative NTBs

o product and testing standards: requirement that foreign goods meet a country’s domestic product standards or testing standards before they can be offered for sale ! firms often complain that they are discriminated against

o restricted access to distribution networks: can either be imposed by government or be historically o public-sector procurement policies: can give preferential treatment to domestic firms o local-purchase requirements: governments may hinder foreign firms from exporting to or operating

in their countries by requiring them to purchase goods or services from local suppliers



o regulatory controls: e.g. conducting health and safety inspections, enforcing environmental regulations, making licenses necessary for e.g. constructions; charging taxes and fees for public services, etc.

o currency controls: exporters of goods are allowed to exchange foreign currency at favorable rates, but importers are forced to purchase foreign exchange at unfavorable rates, if at all – tourists may be offered again a different rate

o investment controls: common particularly in key industries like broadcasting, utilities, air transportation, defense and financial services

Promotion of International Trade

Subsidies - subsidies reduce the firm’s cost of doing business or establishing production; competition among different

localities bidding for the place of a new business unit can be fierce o international trade is affected by artificially improving a firm’s competitiveness in export markets

or the home market (can be so large that the normal pattern of international trade is disrupted, e.g. wheat market)

Foreign Trade Zones - foreign trade zone (FTZ) = geographical area in which imported or exported goods receive preferential

tariff treatment – used worldwide by governments to spur regional economic development o through utilization of an FTZ firms can reduce, delay or sometimes totally eliminate customs duties o generally a firm can import components into an FTZ for processing and reexporting the finished

product without paying customs duties on the imported component - maquiladora = factory located in an FTZ in Mexico, most situated near the US border – no import duties on

inputs for goods being exported have to be paid, the US only levies import duties on the value added in Mexico

o NAFTA actually is the biggest threat, giving most of the preferential treatment to all companies in Mexico

Export financing programs - success on exports of big-ticket items (e.g. aircraft) often also depends on the attractiveness of the financing

terms offered ! most trading countries have created government-owned agencies to assist domestic firms arranging financing of exports sales

- Export-import Bank of the United States (Eximbank) = provides financing for US exports through direct loans and loan guarantees

o Government aid often goes beyond mere financing, e.g. political risk insurance o Overseas Private Investment Corporation (OPIC) = US government-sponsored organization

providing political risk insurance

Controlling Unfair Trade Practices - many countries have implemented laws protecting their domestic firms form unfair trade practices - in the US, if the International Trade Administration recognizes unfair trade and the International Trade

Commission decide US producers have suffered a material injury, the ITX imposes duties on the offending imports

- 2 types of unfair trade practices: government subsidies & unfair pricing practices

Countervailing duties - countervailing duty (CVD) = ad valorem tariff on an imported good that is imposed by the importing

country to counter the impact of foreign subsidies (calculated just to offset the advantage the exporter obtains form the subsidy)

o most countries impose CVDs only when foreign subsidization leads to a distortion in international trade

o CVD complaints are often triggered either by government action designed to overcome some other governmental action, or economic development incentives



Antidumping Regulations - many countries are concerned about their domestic firms being victimized by discriminatory (lower pricing

in foreign than in the home market) or predatory pricing practices (selling below cost) of foreign firms - determining if any of both forms of dumping has occurred is difficult, for discriminatory pricing not the

retail, but the prices charged at the factory gate are the determinant; for predatory pricing it is difficult to accurately measure the cost (and even what to include when assessing the costs)

Super 301 - Section 301 on government handling to combat unfair trading practices of foreign countries ! requires US

trade representative, member of the executive branch, to publicly list countries engaging in the most flagrant unfair trade practices and is required to negotiate the elimination of the alleged unfair practices; if negotiations are unsuccessful he must impose retaliatory restrictions (tariffs, quotas)

o has not won the US many friends, is controversial as it promotes unilateral attempts to redress problems facing international commerce



Chapter 20 – International Marketing - marketing = process of planning and executing the conception, pricing, promotion and distribution of ideas,

goods and services to create exchanges that satisfy individual and organizational objectives - international marketing = extension of marketing activities across national boundaries

o international marketing managers have 2 additional tasks: (1) capture synergies among various national markets; (2) coordinating marketing activities

International Marketing Management - marketing activities are often organized as a separate and self-contained function within the firm, yet that

function both affects and is affected by virtually every other organizational activity - (international) marketing activities have to comply with the firm’s corporate, business strategy and other

functional strategies

International marketing and business strategy - matching international marketing efforts with business strategies is a critical element to a firm’s success - business strategy can take on 3 forms: differentiation, cost leadership or focus ! for all, marketing efforts

have to stress different characteristics and/or different target groups - also the decision where to enter can be influenced by marketing considerations

The marketing mix - marketing mix (or colloquially referred to as the 4 P’s of marketing):

o How to develop the firm’s product(s) ! Product o How to price those products ! Price o How to sell those products ! Promotion o How to distribute those products to the firm’s customers ! Place

- international marketing-mix issues and decisions parallel those of domestic marketing in most ways, although they are more complex

Standardization versus customization !!!! see table 16.1 p. 590 - marketers usually choose among 3 basic approaches to decide on the grade of standardization:

o ethnocentric approach = simply market goods internationally the same way as domestically ! often used when firms first internationalize, but if sales are lost because of failure to account the idiosyncratic needs of the foreign customers then it needs to be altered

o polycentric approach = customize the marketing mix to meet the specific needs of each foreign market ! far more costly, often used by multidomestic firms – believe that customers will be more willing to buy and more willing to pay a higher price for a product that exactly meets their needs

o geocentric approach = analyze the needs of customers worldwide and then adopt a standardized marketing mix for all the markets it serves

- standardization: allows for economies of scale in manufacturing, distribution and promotion ! focuses on the cost side of the profit equation; implies power and control should be centralized

- customization: allows a firm to tailor its products to each market ! focuses on the revenue side of the profit equation; implies power and control should be decentralized

- in practice, firms avoid the extremes – the degree of standardization or customization is dependent on many factors and a firm may adopt one approach for one element of the marketing mix and another for a second element

- often international firms address organizational issues by a 2-step process: o decision to standardize some elements of marketing mix is made centrally o local managers are called to critique the global marketing program and to develop plans to

implement customized elements

Product Policy - product = comprises both the set of tangible and intangible factors ! success depends on ability to meet

the wants and needs of the customers in diverse markets - standardization versus customization: it depends on several factors



o nature of the product’ target customers ! industrial products are more likely to be standardized ! the closer to the body a product is consumed, the more likely it will need to be customized

- legal forces: laws and regulations also affect product policies, e.g. labeling requirements, health & technical standards

- cultural influences: products often have to adapted to meet the cultural needs, e.g. language of labeling - economic factors: countries’ economic development may affect the desired attributes of a product, e.g.

infrastructure and availability and cost of repair services may make changes necessary - brand names: firms often try to standardize the brand name of a product to reduce costs and capture

spillovers of its advertising

Pricing Issues and Decisions - international firms must decide whether to apply consistent prices across all markets or to customize prices

to meet the needs of each, watching competition, culture, distribution channels, income levels, legal requirements and exchange rate stability

- firms generally adopt one of 3 pricing policies: o standard price policy = same price for the product/service is charged regardless of where it is sold

or the nationality of the customer "# adopted by firms following a geocentric approach ! for easily tradable and transportable

goods; for commodity goods in competitive markets o two-tired pricing policy = firm sets one price for all its domestic sales and a second price for all its

international sales, commonly allocating all accounting charges associated with R&D, administrative overhead, capital depreciation, etc. to domestic sales, viewing foreign sales only as marginal (as only marginal costs are used for the calculation of the foreign price) (problem: dumping accusations)

"# adopted by firms following a ethnocentric approach o market pricing policy = adopted by a firm following a polycentric approach, where prices are

customized on a market-by-market basis to maximize profits in each market

Market pricing - profit maximizing output occurs at the intersection of the firm’s marginal revenue curve and its marginal

cost curve - for being able to charge different prices in different national markets, 2 conditions must be met:

o firm must face different demand and/or cost conditions in the countries in which it sells o firm must be able to prevent arbitrage – because of tariffs, transportation costs, etc. it is usually not

a problem if the price variations are small - if all conditions are met, the advantages are obvious, but besides exposure to dumping complaints, there are

3 kinds of other risks: o damage to the brand name – pricing also creates an image o development of gray market: a gray market is a market that results when products are imported into

a country legally, but outside the normal channels of distribution authorized by the manufacturer (also called parallel importing) – often occurs when firms fails to adjust to exchange rate changes

o consumer resentment against discriminatory prices

Promotion Issues and Decisions - promotion = encompasses all efforts by an international firm to enhance the desirability of its products

among potential buyers – thus not only have potential buyers to be targeted, but also distributors and the general public to create a favorable sentiment

- promotion mix = advertising, personal selling, sales promotion and public relations – international marketing managers must effectively blend and utilize the elements as promotion is the most culture-bound of the 4 Ps

Advertising - for most international firms, especially consumer oriented ones, advertising is the most important element - 3 factors have to be considered – along with relevant cultural, linguistic and legal constraints

o Message = refers to the facts or impressions the advertiser wants to convey (value, reliability, style) o Medium = communication channel used by the advertiser to convey the message – factors like

legal restrictions, standards of living, literacy rates, cultural homogeneity of the national market, etc. influence the availability of the different media



"# To help deal with issues related to message and media, many international firms use multinational advertising agencies, but sometimes also local ones

o Global versus local advertising: for goods with universal appeal, firms often advertise globally, utilizing the same advertising campaign in all of the markets, sometimes choosing to make subtle adaptations; other firms opt for a regionalization strategy, many use both approaches

"# What to chose is a function of the message the firm wants to covey – standardized advertisements contain less concrete information

Personal selling - personal selling = making sales on the basis of personal contacts ! use of sales representative is the most

common approach - importance of personal selling depends on whether industrial products or consumer products are concerned,

generally for industrial products the personal selling is more effective, as the customers want technical information, than for consumer products as advertising is a more efficient means of communication

- advantages of personal selling for international firms o local sales representatives understand local culture, norms and customs better o promotes close personal contact with customers, who associate that personal contact with the firm o makes it easier to obtain valuable market information

- disadvantage: relatively high-cost (sales representatives can only reach a limited number of customers and must be adequately compensated)

Sales promotion - sales promotion = comprises specialized marketing efforts such as coupons, in-store promotions, sampling,

direct mail, cooperative advertising, trade fair attendance… o flexible nature ! can be tailored to fit local customs and circumstances

Public relations - public relations = efforts aimed at enhancing a firm’s reputation and image with the general public – if it is

effective, the firm should be regarded as a good corporate citizen o reduces exposure to political risk

Distribution Issues and Decisions (Place) - distribution = getting products and services form the firm into the hands of the customers ! 2 important

sets of decisions

International distribution !!!! physical transportation - selection of the mode(s) of transportation ! clear trade-off between time and money; shelf life affects the

selection - international order cycle = time between the placement of an order and its receipt by the customer – the

slower the longer for any given level of inventories which lowers customer service levels and may induce customers to seek alternatives

Channels of distribution !!!! means by which the good/service is merchandised - a distribution channel can consist of as many as four basic parts: manufacturer; wholesaler; retailer; actual

customer - channel length = number of stages in the distribution channel - direct sales = firm is directly dealing with its final consumer – maintains control over retail distribution and

retains any retailing profits, but also bears costs and risks of retailing - selling to retailers – easiest when retailers in a given market are heavily concentrated - selling to wholesalers – for markets with many small producers / markets with many different retailers - international firm has to find the optimal distribution channel – mostly firms develop a flexible distribution

strategy – use different channels in different markets o should exercise caution when selecting a foreign distributor – the distributor is the firm from the

customer’s point of view

Chapter 17 – International Operations Management - regardless of a firm’s product, the goal of its international operations managers is to design, create and

distribute goods or services that meet the needs and wants of customers worldwide – and to do so profitably



The Nature of International Operations Management !!!! see figure 17.1 - operations management = the set of activities an organization uses to transform different kinds of inputs

into final goods and services o is closely linked with both quality and productivity o successful firms recognize that to survive they must continually adapt

- international operations management = relates to the transformation related activities of an international firm

The strategic context of international operations management - operations management is a value-added activity intended to create or add new value to the organizations

inputs in ways that directly impact outputs - operations management must be closely aligned with a firm’s business strategy – as it affects all facets of the

planning and implementation of operations management activities o differentiation strategy – operations management must be able to create goods/services that are

clearly different from those of competitors o cost leadership – operations management must be able to shave the costs of creation, so the firm

can lower prices (quality is less critical) - another factor affecting the firm’s choices is the extent to which it uses standardized or customized

production processes and technologies

Complexities of international operations management - operations management is the most complex and challenging set of tasks managers face today - they

typically must decide important and complex issues in 3 areas: o resources: where and how to obtain them (sourcing & vertical integration) o location: where to build and how to design facilities o logistics: modes of transportation and methods of inventory control

- resolving operations management issues is far more complex in an international setting

Production Management - service operations management = operations management decisions, processes and issues that involve the

creation of intangible goods - production management = operations management decisions, processes and issues that involve the creation

of tangible goods o requires transformation of raw materials/components in combination with capital, labor &

technology o 3 important dimensions of international production management:

"# international sourcing "# international facilities location "# international logistics

Sourcing and vertical integration - sourcing (or procuring) = the set of processes and steps a firm uses to acquire the various resources it

needs to create its own products – affects costs and quality of product and internal demand for capital ! most international firms approach sourcing as a strategic issue

- first step in developing a sourcing strategy is to determine the appropriate degree of vertical integration - vertical integration = extent to which a firm either provides its own resources or obtains them from other

sources o extent of vertical integration is result of series of sourcing decisions made by production managers

- make-or-buy decision = to acquire the necessary inputs, production managers can choose to make the inputs internally or buy from outside suppliers ! decision carries with it other decisions as well

o influences and is influenced by firm’s size, scope of operations and technological expertise o all else being equal: firm will make the make-or-buy decision dependent on whatever is cheaper,

but the all else being equal situation seldom occurs as strategic issues have to be considered o if high (low) potential for competitive advantage exists along with a high (low) degree of strategic

vulnerability, the firm is likely to maintain strategic control by producing internally (buying from suppliers)

- make-or-buy decision also depends on other factors and strategic considerations:



o control: making has the advantage of increasing control over product quality, delivery schedules, design changes and costs, being dependent on a supplier is especially problematic in an international setting when contracts are difficult to enforce

"# making also enables firms to develop new business opportunities o risk: buying has advantage of reducing the financial and operating risks, as well as the exposure to

political risk in a host country o investments in facilities, technology and people: buying lowers the necessary level of investment

and frees up capital for other productive uses and also reduces training costs and expertise requirements

o flexibility: buying ! flexibility to change suppliers as circumstances dictate "# old view was to have many suppliers to reduce dependence (problem: complexity) "# new view: engaging in exclusive or semi-exclusive long-term relationships with fewer

suppliers lets them benefit form supplier experience and product knowledge and thus saves money (first-tier suppliers)

Location decisions - when making inputs, the firm faces the decision where to locate its production facilities – thus it must

consider: o country-related issues: 3 major factors

"# resource availability – a suitable location for a facility must be given (H-O theory) "# infrastructure – production needs minimal level of infrastructural support "# country-of-origin effects – certain countries have brand images (stronger for products not

backed by strong brand name) o product-related issues: 3 major factors

"# value-to-weight ratio – affects importance of transportation costs (low value-to-weight ratio ! multiple locations to lower transportation costs)

"# production technology – firm must compare expected product sales with the efficient size of a facility in the industry

"# importance of customer feedback – products for which quick customers feedback is desired are often produced close to the point of final sale

o government policies: especially important are "# stability of the political process – political risk is reduces desirability of location "# national trade policies – barriers might force firms to produce locally "# economic development incentives – influence location decision by affecting costs "# foreign trade zones (FTZ) – usage of FTZs can reduce costs

o organizational issues: "# business strategy – price leadership strategy demands for low-cost locations, another

focusing on quality demands for locations with skilled labor and managerial talent; other firms find that strategic goals can be better met by dispersing facilities in various foreign locations (e.g. to protect against exchange-rate fluctuations)

"# organizational structure – global area structure decentralizes authority to area managers who will favor local production; a global product structure as all others have different requirements

"# inventory management policies – complex task affected by plant locations and costs of running out of materials/finished goods

!#costs include: storage, spoilage, loss, opportunity costs !#factory location determines distances and transit time !#location is very critical for JIT – suppliers often locate their facilities close to

their major customer

International logistics and materials management - international logistics = managing of the flow of materials, parts, supplies and other resources form

suppliers to the firm, resources within and between units of the firm itself and finished products, services and goods from the firm to customers

o materials management = logistics concerning suppliers and internal transfers o physical distribution = from firm to customer

- international materials management differs in 3 basic factors form domestic: o distance involved is larger o number of transport modes likely to be involved is higher o regulatory context is much more complex as different countries have different regulations –

especially packaging and taxing regulations



- logistical considerations may play a critical role in the decision of where to locate a factory; typically logistical costs are higher for exported goods than for locally produced goods, but there are logistical considerations other than costs:

o longer supply lines and increased difficulties in communicating with foreign customers result in lower levels of customer service for foreign customers

o by integrating technological changes (IT!) into logistics operations, productivity and efficiency can be analyzed and increased and inventories and warehousing capacity cut

International Service Operations - service sector plays an increasingly important part of national economies and is becoming an integral part of

international trade - international service business = firm that transforms resources into an intangible output that creates utility

for its customers

Characteristics of international services - the unique characteristics create special challenges:

o intangibility: services consist of knowledge that cannot be held or seen (what we can see are just symbols or representations of the service product itself)

o generally not storable: cannot be created ahead of time and inventoried (high degree of perishability makes capacity planning difficult)

"# capacity planning = deciding how many customers a firm will be able to serve at a given time

o customer participation: many services cannot occur without customer presence (e.g. tourism); and an identical service can be perceived quire different by the individual customers

- product-support services = assistance with operating, maintaining, and/or repairing products for customers ! may be critical to the sale of the related product

The role of government in international service trade - many governments seek to protect local professionals to ensure domestic standards, some areas are heavily

regulated, for others the firm first needs a permission - past decade has seen a reduction in domestic and international regulation of many service industries (high

priority to WTO)

Managing service operations - basic issues in managing international service operations involve:

o capacity planning – affects quality of the service o location planning – by definition, most providers must be close to the customer o facilities design and layout – have to blend into the local culture o operations scheduling – need to best meet customer needs

IB 2-1 Tasks 1, 2 & 3 Week 2 Literature Summary

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