ADMS 3960 IB Notes Ch 1- Globalization and International Business Globalization- the integration of world economies through the elimination

of barriers to movements of goods, services, capital, technology and people How Does International Business Fit In? -globalization enables us to get more variety, better quality, lower prices IB- all commercial transactions that take place between 2+ countries -goal of private business is to make profits -government business may or may not be motivated by profit Study of IB -managers need to consider where to obtain the inputs needed of the required quality at the best price -and also where they can best sell the product Understanding the Environment/Operations Relationship -companies operating internationally have more diverse and complex operating environments than those at home due to cultures and values Forces Driving Globalization -import restrictions have been decreasing, and output from foreign-owned investments as a percentage of world production has increased -world trade has grown more rapidly than world production -only a few counties sell over half their production abroad/ depend on foreign output for their cnsmpn -the Foreign Policy Globalization Index ranks countries across four dimensions: Economicintl trade and investment TechnologicalInternect connectivity Personal contactintl travel/ tourism, intl telephone traffic, personal transfers of funds abroad Politicalparticipation in intl orgs and gov monetary transfers Factors in Increased Globalization Increase in and the application of technology -advances in technology in many dff countries -is due to population growth, economic growth, freeing up more people to develop new products -innovations in transportation mean more countries can compete for sales to any market -it can speed up interactions, enhance a managers ability to oversee foreign operations Liberalization of Cross-Border Trade and Resource Movements -over time, most governments have reduced restrictions for three main reasons: -citizens want a greater variety of goods -competition spurs domestic producers to become more efficient -they hope other countries will reduce barriers as well Development of Services that Support Intl Business -bank credit agreements, clearing arrangements that convert one currency into another Growing Consumer Pressures

-we want more, newer, better products that are also differentiated from others -it has spurred companies to spend more on R&D for innovations Greater Global Competition -present pressures can persuade companies to buy/sell abroad -a firm might introduce products in markets where competitors are already gaining sales Born-global companies- start out with a global focus because of their founders intl experience -many new companies locate in areas with numerous competitors and suppliers (clustering) Changing Political Situations -end of communist countries and the rest of the world -willingness of governments to support programs to foster speed and cost efficiencies -help domestic companies sell abroad more Expanded Cross-National Cooperation -govs have recognized their interests can be addressed through treaties, agreements, consultation Pursuing these policies is due to the three needs: Gain reciprocal advantagesgovs join orgs for a variety of commercial activities -allows the countries commercial ships & planes to use certain seaports for reciprocal port use Multinational problem solvingthe resources needed to solve issue may be too big for one to handle -one countrys policies may also affect those of others (Eg. Interest rate) Areas outside national territoriesnobody owns the oceans, outerspace or Antarctica -agreements are needed to specify the amounts and rights of taking those resources Costs of Globalization -antiglobalization can sometimes lead to protests and violent lashes Threats to National Sovereignty Sovereignty- freedom to act locally and without externally imposed restrictions Local Objectives and Policies -countries fulfill their citizens objectives by setting rules reflecting national priorities -some argue that countries priorities are undermined by opening borders to trade Small Economies Overdependence -small economics depend so much on larger ones for supplies and sales -intl companies are powerful enough to dictate their operating terms Cultural Homogeneity - of products, cos, work methods, social structures, language -it is harder to maintain the traditional ways of life Economic Growth and Environmental Stress Argument for Global Growth and Global Cooperation -some argue globalization has positive results; it fosters uniform standards for combating environmental problems so everybody can act together -sustaining economic growth will continue to be a problem in the future though Growing Income Inequality and Personal Stress Income Inequality

-global superstar system, creating access to a greater supply of low-cost labour -in sports where stars earn more than other professionals in sports -profits have disproportionately gone to the top execs -the challenge is to maximize the gains from globalization while minimizing the costs by the losers Personal Stress -some are stressed from social status suffers, and those who fear the loss of their jobs Why Companies Engage in IB Expanding Sales -higher sales create value only if the costs of making the addl sales dont increase disproportionately -increased sales are a major motive for expanding into intl markets Acquiring Resources -distributors seek out products from foreign countries because domestic supplies are inadequate -they look for anything that will create a competitive advantage, by improving the quality of their product of by differentiating it Reducing Risk -operating in countries with diff business cycles can minimize swings in sales -by obtaining products domestically and internationally,companies can soften the impact of price swings Modes of Operations in IB Merchandise Imports and Exports Merchandise imports- goods brought into a country Merchandise exports- tangible goods sent out of a country Service Imports and Exports Service import-recipient and payer of payment Service export- provider and receiver of payment -service exports take many forms: Tourism and Transportationairlines, shipping companies, travel agencies, hotels Service Performance performance of those services Turnkey operations- construction projects done under contract &transferred to owners when completed Management contracts- one company provides personnel to perform management fnctions for another Asset useLicensing agreements-when a company allows another to use its assets Royalties- earnings that are received Franchising- when one party allows another to use a trademark as an asset of the franchisees business Investments -dividends and interest paid represent the use of assets Direct InvestmentFDI- investor takes a controlling interest in a foreign company Joint venture- when 2+ companies share ownership of an FDI Portfolio InvestmentDefn- financial interest in another entity -is either through stock in a company, or loans to a company in bonds, bills, or notes

Types of International Organizations Collaborative arrangements- companies who work together Strategic alliance- an agreement that doesnt involve joint ownership Multinational enterprise (MNE)- company with FDI; also called MNCompany Why IB Differs from Domestic Business Physical and Social Factors Geographic Influences -location, quantity, quality and availability of the worlds resources, and ways to exploit them -since smaller countries have less access to domestic resources, theyre usually more dependent on international trade than larger countries -geographic barriers like mountains and deserts affect communications and distribution channels -chance of natural disasters can make business riskier Political Policies -influences how IB takes place within its borders -political disputes can disrupt trade and investment (eg. Terrorist bombing) Legal Policies -domestic law includes regulations on taxation, employment, foreign-exchange transactions -international law determines how earnings area taxed by all jurisdictions -may also determine how companies can operate in certain places -it can affect a firms foreign operations Behavioral Factors -different values, attitudes, beliefs -can help managers make operational decisions abroad Economic Forces -why countries exchange goods and services, why capital and people travel among countries -helps explain why some countries can produce goods for less The Competitive Environment Competitive Strategy for Products -products compete by cost or differentiation; differentiation by: -favorable brand image through advertising -unique characteristics -mass-market or selling to a niche market -different strategies may be used for different products Company Resources and Experience -a companys size and resources compared to those of its competitors -companies have to invest more resources to secure national distribution than in small markets -they face more competitors in large markets -a company with a dominant market position uses operating tactics differently from one whos new Competitors Faced in Each Market

-success in a market depends on whether the competition is also international, or local -what they learn about each other in one country is useful in predicting the others strategies elsewhere Ch 6- International Trade and Factor-Mobility Theory Laissez-Faire vs. Interventionist Approaches to Exports and Imports -policies influence which countries can produce given products more efficiently and whether countries will permit imports to compete against domestically produced goods -with the laissez faire approach, it allows market forces to determine trading relations -in free trade theories, the gov shouldnt intervene -mercantilism and neomercantilism are the opposite extreme; prescribing government intervention Interventionist Theories Mercantilism Defn- theory that states countries should export more than they import Governmental Policies -for this to happen, govs restricted imports and subsidized production -some countries used their colonies to support this trade objective by having them supply commodities that theyd otherwise have to buy from a nonassociated country as mercantilism weakened after 1800, home based companies had technological leadership, ownership of resources abroad, and also protection from foreign competition; which continued to make colonies tie their trade to their mother country Concept of Balance of Trade Trade surplus- when a country exports more than it imports Trade deficit- when a country imports more than it exports -during mercantilism, the difference was made up by a transfer of gold; today it is granting credit Neomercantilism Defn- the approach of countries that try to run favorable balances of trade to achieve some social or political objective Free-Trade Theories -holds that nations shouldnt limit imports, nor promote exports -markets will determine which producers survive based on specialization Theory of Absolute Advantage (Adam Smith) Defn- holds that diff countries produce some goods more efficiently than others, and because of this, citizens can buy them abroad rather than domestically since it costs less Through specialization, it can increase efficiency for three reasons: -labour could become more skilled -labour wouldnt lose time in switching production -it would give incentives for developing more effective working methods Natural advantage- comes from climatic conditions, access to certain resources and labour force -can help explain where certain manufactured items might be best produced

Acquired Advantage Defn- consists of either product or process technology adv of product technology enables a country to produce a product that is easily distinguished from those of competitors adv of process technologycountrys ability to efficiently produce a homogenous product -acquired advantage through tech has created new products and also changed trading-partner r/ns Resource Efficiency -specialization increases the production of both products -global efficiency is optimized, and countries can have more than they would without trade Theory of Comparative Advantage (David Ricardo) Defn- global efficiency gains can still result if a country specializes in what it can produce most efficiently, regardless of whether other countries can produce the same prods more efficiently -a country can have C.A in both goods, whereas A.A is just one -a country gains if it concentrates its resources on the commodities it can produce most efficiently Theories of Specialization: Some Assumptions and Limitations -the theories make assumptions that arent always correct Full employment both assume that resources are fully employed; when countries have many unemployed resources, they might begin to restrict imports Economic efficiencycountries also pursue objectives other than output efficiency; they might avoid overspecialization because of the vulnerability by changes in technology -countries goals may not be limited to economic efficiency Division of gainsif they perceive a trading partner is gaining too large a share of benefits, they may prefer to forgo absolute gains to prevent others from gaining an economic adv Two countries, two commoditiesthe same theory can be applied to multiproduct and multicountry trade relationships to show the efficiency adv Transport costsas long as the diversion reduces output by less than what the two countries gain, there are still gains from trade Statics and dynamicsmost trade today is due to acquired adv; technical dynamics cause countries to gain or lose both absolutely and relatively Servicestheories apply because resources must also go into the service production -offering education to foreign countries, credit card systems Production networkscosts are saved by having activities take place in countries where there is an absolute or comparative adv for their production Mobilitythe theories assume resources can move domestically from the production of one good to another at no cost, but its not all true Eg. steelworkers dont easily move into software jobs due to diff skills -it also assumes the resources cant move internationally Trade Pattern Theories How Much Does a Country Trade?

Nontradable goods- products that are rarely practical to export because of high transportation costs are produced in every country Theory of Country Size Defn- large countries usually depend less on trade than small ones -varied climates and different natural resources make large countries more self sufficient -distance to foreign markets affects large and small countries differently -the farther the distance, the higher the cost, and the greater the uncertainty Size of the Economy -developed countries produce so much that they have more to sell, and because they have so much to sell, incomes are often higher and people can buy more from domestic/foreign sources What Types of Products Does a Country Trade Factor Proportions Theory Defn- differences in countries funding of labour compared to land explains the differences in the cost of production factors People and Landcountries that have many ppl have high land price because its so limited Manufacturing Locationsmost successful industries in small countries are those that uses the least amount of land relative to the number of people employed Capital, Labour Rates, Specializationin countries with little capital for investment, managers might find cheap labour rates and export competitiveness in products that need large amounts of labour -labour skills vary among countries because of training and education differences -a company may locate its R&D in countries with a highly educated population Process Technologybecomes more complicated when the same product can be created by different methods, such as with labour or capital -companies may substitute capital for labour, depending on its costs -cos may locate long production runs in small countries if they expect to export from them -bigger countries depend more on products requiring longer production runs Product Technologytechnology depends on high educated people and a large amount of capital to invest in R&D With Whom Do Countries Trade Country-Similarity Theory Defn- companies create new products in response to market conditions in their home market -they turn to markets they see as most similar to what theyre accustomed to -devped countries trade with each other because they produce and consume more -emphasize technical breakthroughs -produce differentiated products and services Specialization and acquired advto export, a company must provide consumers abroad with an adv over what they could buy from their domestic producers -trade occurs because countries specialize to gain acquired adv Product differentiationcompanies differentiate products, creating two-way trade in similar products Effects of cultural similarityit is easier to do business in countries perceived as similar to home

-is easier to continue business ties than to develop new arrangements Effects of political r/n and economic agreementspolitical r/n and agreements among countries can discourage or encourage trade between tem Effects of distancegeographic distance between two countries; big distance = big transportation cost Overcoming distancemethods to overcome distance drawbacks are difficult to maintain -they can sell the good to a country, but the transportation costs are really high Statics and Dynamics of Trade Product Life Cycle (PLC) Theory Defn- the production location for mayn products moves from one country to another as they go through their life cycle; consists of four stages: Changes Over the Cycle -companies develop new products because they see needs for them Introductioninnovation, exporting by the country thats innovating it, dvpmt of prod traits Growthincrease in exports, more competition, increased capital intensity, some foreign production Maturitydecline in exports, more product standardization, more capital intensity, increased competitiveness of price, production start ups in emerging economies Decline- concentration of production in developing countries, country now becomes an importer Verification and Limitations of PLC Theory -many products where locations usually dont shift: -products with high transport costs, with short life cycles (some fashion) -luxury products for which cost is of little concern to the consumer -products for which a company can use a differentiation strategy to maintain consumer demand without competing on the basis of price -products that require specialized technical labour near the production Diamond of National Competitive Advantage Defn- theory showing four important features for competitive superiority: -all four need to be favourable for an industry to maintain global supremacy Demand Conditions new products arise from companies observation of need or demand Factor Conditionscan influence choice of product to the choice of country; production factors Related and supporting industriesimportance of transport costs in the theory of country size Firm strategy, structure, rivalryability of the cos to develop and sustain a C.A; barriers to entry Limitations of the Diamond of National Advantage Theory -it doesnt guarantee an industry will develop in a given locale -resource limitations may cause a countrys firms to avoid competing, despite an A.A -growth of globalization; foreign/demand conditions have spurred much of the Asian export growth -companies may depend on foreign locations for portions of their production -materials and components are more easily brought in from abroad -prior domestic absence of any of the four conditions may not hinder companies from gaining these conditions and becoming globally competitive

Factor-Mobility Theory Defn- the mobility of capital, technology and people affect trade and relative competitive positios Why Production Factors Move Capital -most mobile production factor -companies transfer capital because of differences in expected return (accounting for risk) -ST capital is more mobile than LG -businesses dont make all intl capital movements though; govs give foreign aid and loans, NFP, family People -if they move legally, there is a lot of paperwork, a lot of new adjusting and accommodating -migration was major in globalization; of people who went abroad to work, some left permanently Economic motivesthey may leave because the new country allows them to earn way more Political motiveswar dangers; it is sometimes hard to distinguish because poor economic conditions are often parallel with poor political conditions Effects of Factor Movements -many immigrants brought human capital with them, thus adding to the base of skills -some countries received foreign capital to develop infrastructure and natural resources What Happens when People Move -factor movements are substantial for many countries and insignificant for others -labour and capital are diff production factors, but are still intertwined Brain drain- when highly educated and skilled people leave a country -the outward movement and remittances of people leads to an increase in start-up companies and capital in their home countries -on one side, there is a need for immigrants but on the other, theyre placing barriers to entry too Relationship Between Trade and Factor Mobility Substitution -there are pressures for the most abundant factors to move to countries with greater scarcity, where they can command a better return (move to a country where it is needed, where in turn they can command a better pay) -in countries where labour > capital, laborers are usually poorly paid -there are restrictions on factor movements that make them only partially mobile internationally though; immigration restrictions, capital ownership restrictions -the lower costs occur when trade and production factors are both mobile -the inability to gain access to foreign production factors may stimulate efficient methods of substitution, like alternatives for traditional production methods -many other jobs that dont need mechanization (busboys) are largely filled by unskilled immigrants Complementarity -many exports wouldnt occur without foreign investments -domestic operating units may export materials to foreign facilities for use in a finished produce -a companys foreign facility may produce part of the product line while serving as another position of

its parents other products -factor mobility through foreign investment often stimulates trade because of the need for components; the parents ability to sell complementary products

Ch 2- The Cultural Environments Facing Business Culture- learned norms based on the values, attitudes, beliefs of a group of people The People Factor -business employs, sells to, buys from, owned and regulated by people -every business function is therefore subject to potential cultural differences Cultural Diversity -to gain global competitive adv, companies can foster cultural diversity -bringing together people of diverse backgrounds and experience Cultural Collision -when divergent cultures come into contact -the major problems arise when; when a co implements practices that are less effective than intended -and when employees are distressed from trying to adjust to foreign behaviours Sensitivity and Adjustment -company must determine which of the host nations business practices differ from its own, and decide what adjustments need to be made to operate efficiently Cultural Awareness -there isnt a single method for building cultural awareness -people disagree on what they are; widespread/limited, deep-seated/superficial -its not also easy to isolate culture from economic and political conditions -some cultural differences are obvious, while others arent -ppl in every culture react to situations by expecting the same responses they get in their own cultures A Little Learning Goes a Long Way -business people can learn to improve awareness and enhance their chance of succeeding this way -languages, pronouns and verb forms can vary b/n countries using the same language -businesses can consult with knowledgeable people at home and abroad -comparing countries by what people say can be risky though; diff cultures may express things differently (one culture complain when theyre happy, etc) -when researches focus on national differences in terms of averages, they may overlook specific variations within countries and thus believe in unrealistic stereotypes -since cultures evolve, behaviour that reflects current attitudes can change in the future The Idea of a Nation: Delineating Cultures -the idea of a nation gives a defn of a culture; a nations people share the same values, race, language -nations include diff subcultures, ethnic groups, races -a national culture must be flexible enough to accommodate this combo

-certain cultural attributes can link groups from diff nations more closely than groups in one nation -so when business people compare nations, they need to compare relevant groups How Cultures Form and Change Sources of Change Change by Choice -it may occur as a reaction to social and economic situations Change by Imposition Cultural imperialism- a forced change in laws that becomes part of the subject culture over time -cultural diffusion occurs when contact among countries brings change -creolization occurs when the change results in mixing cultural elements Language as Both a Diffuser and Stabilizer of Culture -language limits peoples contact with other cultures -when people speak the same language from diff areas, culture is more easily spread -nations that share the same language makes commerce easier Why English Travels so Well -it is the worlds most important second language -MNEs decide on the language to use for communicating among their employees in diff countries -is usually English; making it the intl language of business -linguist predicts that English speakers will experience more difficulty in communicating worldwide -with India and China growing rapidly, they will soon take over -English is so successful because US media is so influential and originates a large % of new products -when a US good enters a foreign market, its vocab enters the language as well -some countries still prefer to coin their own terms rather than accept the English versions though Religion as a Cultural Stabilizer -profound religious influence continue to shape cultural values -many of the dominant religions influence specific beliefs that may affect business, like inhibiting the sale of certain products or the performance of work at certain times -if cos dont take these into account, the ones theyre trying to work with may not look at them seriously Behavioural Practices Affecting Business Issues in Social Stratification -social stratification dictates a persons class, status, and financial rewards within that culture -it is determines by an individuals achievements/qualifications, and their affiliation in certain groups Individual Qualifications and Their Limitations -in most societies, individual achievement is important -to conduct business, people are chosen to best match the intended audience Ascribed group memberships are based on gender, family, age, ethnic, racial origin Acquired group memberships are based on religion, political affiliation, professional, other associations -the more open a society is, the less importance group membership is in determining rewards -there may also be opposition to certain groups from other workers

-two other factors are important; education, and social connections (networks) Ethnic and Racial Groups -in less open societies, laws may be designed to reinforce rigid stratification -imposing racial or ethnic quotas for hiring purposes -there may also be quotas in universities, government jobs, tv soap operas Gender-Based Groups -barriers to gender-based employment practices are decreasing in many areas of the world -this is due to changes in attitudes and work requirements (eg Nurses) Age-Based Groups -age related laws are employed, like employment, driving, rights to obtain products, civic duty -national differences toward age of employment practices do exist Family-Based Groups -in some cultures, the most important group membership is family -a persons position in society is dependent upon the social status of the family -in these cultures, there are many family run companies who end up successful Work Motivation -motivated employees are more productive than those who arent Materialism and Motivation -work is a pathway to salvation and material success doesnt impede salvation -self discipline, hard work in a just world will foster work motivation, and in the end, economic growth -there is proof that the individual desire for material wealth is a prime incentive to perform he kind of work that leads to community wide economic development Productivity/Leisure Trade-Off -some cultures place less value on leisure time; they have longer work hours, less holidays -most people today regard personal economic advancement as a worthwhile goal in life Expectation of Success and Reward -motivation toward work is influenced by the perceived likelihood of success and its rewards -people have little enthusiasm when success seems to be too easy or difficult Success and Reward across Borders -in diff countries, the same tasks come with diff probabilities of success -in countries with high economic failure, people do the work, but are unsatisfied with it -if theres just a small diff in reward b/n working hard and not, theres also less motivation Performance and Achievement Masculinity-Femininity Index -it compares the attitudes of employees toward work and achievement -those with a high masculinity score are successful work achievers, with little sympathy for unfortunate -they focus more on money-and-things orientation -the degree to which people are assertive or confrontational with others will vary across borders

Hierarchies of Needs -according to this theory, people fulfill lower needs before moving onto the higher ones Physiological food, water Esteemboosting self-esteem Securitysafe physical environments Self-actualizationself fulfillment Affiliation security needs -theory can help distinguish among the reward preferences of employees in different parts of the world -compensation cant fully explain the differences in work motivation though -the job may just be a stepping stone to higher level positions -those from one culture may look at it as a casual job, while another may dress formal for it Relationship Preferences Power Distance -employee preferences differ in terms of interacting with bosses -people perform better when the nature of their interactions fits their preferencespower distance -high power distance means people prefer little consultation -two management styles fall under this; autocratic, and paternalistic -lower power distance means they prefer consultations Individualism vs Collectivism Individualism- employees preference to fulfill leisure time outside the org -receive direct monetary compensation instead of fringe benefits -challenges motivate individualists Collectivism- employee has a dependence o the org through training and good benefits -a safe work environment is what motivates them Situational Differences: The Family -individualists may be less motivated to receive material rewards b/c they have to divide among fam -workers geographic mobility may be limited due to their family -interrelated familial roles may complicate purchasing decisions -security/social needs may be met more effectively at home than the workplace Risk Taking Behaviour -cultures differ in peoples willingness to accept things the way they are Uncertainty Avoidance -when it is high, employees prefer to follow the set rules, even if breaking them is better -they stay with current employers rather than moving elsewhere for their future Trust -when trust is high, the cost of doing business is lower because managers dont spend much time caring for every contingency, or looking over every action for compliance Future Orientation -living for the future; employers may find it easier to motivate employees through compensation programs for the future, like a retirement plan Fatalism -if people believe every event in life is inevitable, theyre less likely to accept the cause-and-effect r/n

b/n work and reward -countries with a high rate of fatalism plan less for contingencies, like insurance -religious differences will place an emphasis on God; to motivate them, use cause-and-effect logic Information and Task Processing Perception of Cues -cultural differences, especially language, may also reflect differences in perception of cues -a deep vocab allows speakers to express subtle differences -diff cultures will then perceive subjects more precisely than others Obtaining Info: Low Context vs. High Context Cultures -in low context cultures, people only look at info that is relevant to whats at hand; theyre more direct -in high context cultures, people infer meanings from things that are said indirectly -when people from the two diff cultures deal with each other, there may be disagreements; one may think the other is inefficient, while the other thinks it is too aggressive Info Processing -every culture has its own systems for ordering and classifying info; some by last name, others by first -different processing systems create challenges in sharing global data Monochronic vs Polychronic Cultures Monochronic- people prefer to work sequentially; one after another Polychronic- multitasking, simultaneously working on diff things -some may be offended that theyre not getting their whole undivided attention Idealism vs Pragmatism Idealism- cultures that establish overall principles before they solve small issues Pragmatism- those who focus on details before the general picture Communications Spoken and Written Language -some words dont have direct translations; they transform into insults -grammar or misuse of a word internationally can bring a different meaning -references should be gathered for the people whos doing your companys translating -make sure the tone will fit both own and recipients expectations -use simple words, avoid slang -recognize the need and budget for the extra time to translate the text Silent Language (nonverbal cues) Colors -colours must be consistent with the consumers frame of reference -it invokes associations in diff countries, or being associated with diff business Distance -the accustomed distance people maintain during convos are different around the world Time and Punctuality -diff perceptions of time/punctuality may create confusion internationally -diff ways of looking at time; some stick to schedules, some are late

Body Language -the way people talk, touch, move their bodies vary among countries as well Prestige -a persons status in an orgl setting; some may invest in material things, others may not Dealing with Cultural Differences Host Society Acceptance -host cultures dont always expect foreigners to adjust to them -since what theyre introducing doesnt run counter to deep-seated attitudes, the culture will accept the foreign product for what it is -the local society regards foreigners and domestic citizens differently Degree of Cultural Differences Cultural Distance -the number of countries apart -when a company moves into a culturally similar foreign country, they will encounter less cultural adjustments than entering a dissimilar country -managers may assume that closely clustered countries are more alike than they really are -may make them overlook important subtleties Hidden Cultural Attitudes -even if a home and host country have similar cultures, people in the host country may reject forein practices because they see them as ways to threaten their self-identities -there may also be operating impediments that arent easily discerned by comparing countries on cultural dimensions Ability to Adjust: Culture Shock -companies must decide if theyre ready to do business in places that countenance such practices Culture shock- the frustration from having to absorb a large amount of new cultural cues -people working in a culture thats different than their own go through stages: -first theyre delighted to be somewhere new, and then they encounter culture shock -they adjust to the new surroundings, and then reverse culture shock when they return home Company and Management Orientations Polycentrism -polycentric org believes their bus units abroad should act like local companies -management may be so overwhelmed by national differences that it wont introduce workable changes -an intl company must perform some functions differently to have an adv -they may need to produce old products diff, or bring out new prods -because the firm is less receptive to the idea of risking such innovation, it may rely on host-country practices instead of adopting new ones Ethnocentrism -they believe that their own culture is superior to that of other countries -they think what works at home will work elsewhere -it underestimates the complexity of introducing new management methods

Geocentrism -integrates company and host country practices, as well as new ones -it encourages innovation and improves success Strategies for Instituting Change Value Systems -the more something contradicts our value system, the harder it is to accept Cost-Benefit Analysis of Change -companies introduction of practices abroad may be costly, or cheap -some result in a huge improved performance, while others only improve a bit Resistance to Too Much Change -morale declines will lead to greater turnover if too much change at once -firms should phase their change plans gradually Participation -firms should discuss proposed changes with stakeholders -can stimulate stakeholders to recognize need for change, and ease their fears about the consequences Reward Sharing -sometimes a proposed change may have no benefit for those whose support is needed -an employer might develop bonus programs based on the new approach Opinion Leadership -by making use of local channels of influence, a firm may be able to facilitate the acceptance of change Timing -many well conceived changes fail because theyre ill-timed -in more instances, many families dont run for the bus anymore, but is on the board of directors Learning Abroad -since companies gain more experience overseas, they should learn more about methods that work in the host country so they can see if it works in the home country -companies should examine economies abroad that are performing well to determine whether there are practices that they can emulate back home Ch 3- Political and Legal Environments Facing Business The Political Environment -the interplay of political ideologies, conceptions of freedoms, legacies of legality, presumptions of fairness, exercise of power make for challenging political environments around the world -execs see how gov officials exercise authority/ punish wrongdoers, monitor how politicians are elected -then they decide whether freedom is a practical ideal or just wishful thinking, then forecast business scenarios Political system- the structural dimensions and power dynamics of its gov that specify institutions and orgs, and define the norms that govern political activities -its goal is to integrate the diverse elements of a society Individualism vs Collectivism Individualism

-it focuses on the primacy of indiv freedom, self-expression, personal independence -opposes the rules that a political system uses to constrain them -the political system encourages a gov that protects the liberty of individuals to act as they wish -the business implications of individualism hold that each person has the right to make economic decisions free of rules and regulations (laissez faire) Collectivism -focuses on the primacy of the collective (a group) over the interests of the individual -it stresses the interdependence within the context of the community -the whole of the collective is greater than the sum of its individual parts -in the bus world, it holds that the ownership of assets, allocation of resources, actions of managers improves societal welfare; bus decisions are made by the group (joint responsibility) -gov regulates the market to ensure that business benefits society -it promotes social and income equality, labour rights Political Ideology Defn- outlines the procedures for converting ideas into actions Pluralism- when 2+ groups in a country differ in language, class structure, ethnic bg, religion -multiple opinions about an issue, each containing part of the truth but none the whole -pluralism requires managers to assess the interplay among groups Spectrum Analysis *Figure 3.2 for political spectrum of various forms of political ideologies -it guides the assessment of a complex issue; in this case, political ideology -cultural perspectives are help interpret these choices Political freedom- measures the degree to which fair and competitive elections occur, the extent to which freedoms are guaranteed, and existence of freedom for the press -for managers, a key concern is how the political system determines the freedom that they have to make investments and operational decisions -where, how, why a company invests, how its managers run operations Democracy Defn- participation by citizens in a fair and just decision making process -all citizens are politically and legally equal -the scale and scope of modern society limits the practice of democracy Business Implications -democracy supports individualistic attitudes that permit MNEs to invest and operate based on economic standards -promotes commerce, expand trade, streamline exchange -managers and consumers are free to do as they see fit Totalarianism Defn- subordinates the individual to the interests of the collective -consolidates power in a single agent who then controls the political, economic, social activities

-includes a persons occupation, income level, personal interests, religion -tolerates few to no ideas; there is no alternative -the state uses propaganda and incarceration to make citizens conform to laws; state controlled media -citizens have few personal freedoms and civil liberties Business Implications -managers in this face markets that are diff from those in democracies -endorses a statis approach, where private capitalism plays a supporting role to state control -managers operating in these sorts of markets must adjust decision making to account for the intricacies of political activities -govs goal is to sustain state power; will favour local companies at the expense of foreign competitors Standard of Freedom Three types of freedom worldwide: Free countryopen political competition, respect for civil liberties, independent civic life/media Partly free countrylimited political rights and civil liberties, corruption, weak rule of law, censorship Not free countryfew to no political rights, gov allows minimal to no exercise of personal choice, constrains religious freedoms, controls a large share of business activity Trends in Political Ideologies The Third Wave of Democratization -more people live in countries with democratic govs than at any time in history -third major surge of democracy in the 20th century doubled the number of countries w/ democratic gov Engines of Democracy -failure of totalitarian regimes to deliver economic progress undermined their legitimacy; citizens contested the right of officials to govern -improved communications eroded totalitarian states control of info; things that used to take weeks could now take hours to send across -freedom yielded economic dividends -growing wealth correlated with property rights, more education, gender equality, rule of law -this trend stabilized operating conditions and encouraged them to expand their investment horizon -this in turn accelerated the globalization of business Democracy: Recession and Retreat -over the past 5 years, gains in freedom have given way to declines -most countries want it for the wealth, education, expanding middle class -studies have shown a shift over past few yrs;gains in freedom have given way to declines in freedom -Economist Intelligence Unit confirms democracys retreat -EIU assesses the texture of democracy, and found many of the worlds democracies are just democracies in name; majority are flawed democracies, while only some are full Economic Development -growing uncertainty of the r/n b/n economic development and democracy -classic modernization hypothesis holds that economic development is a pre-condition of democracy Inconsistencies and Double Standards

-democracy setbacks; if democracy cant work there, why would it work here -double standards in foreign policy eroded the credibility of democracy-promoters Economic Problems -global financial crisis has declined confidence in institutions throughout the west -less people believe that political policies in democratic states will lead to a better future -right wing totalitarian draw popular support from the middle class to preserve the status quo -left wing develops from working class movements seeking to overthrow wealthy oppressors Who Defines Democracy -democracy has a diff meaning from the one understood by Westerners to others -every country has their own meaning for it Political Risk -at diff times, diff parties champion diff ideologies that endorse diff political systems -investing and operating internationally exposes companies to risks that arise from a countrys political system Political risk- potential loss arising from a change in gov policy -the threat that decisions in a country will negatively affect the profitability of an investment -two trends are increasing political risk; many fast growing markets are on par with political risks, weak legal systems, fragile regimes, volatile cities -operating in these markets is diff from the more predictable politics in Western countries -also, the global credit crisis aggravates political risk in developed and developing markets Classifying Political Risks (4 classes) Systemic Political Risk -as a rule, a countrys political processes dont punish specific companies -investors face political risk that follow from shifts in public policy -new political leadership reduces individual benefit of business activity -a gov may target an economic sector that it sees dominated by foreign interests -politically motivated policies alter the macro-env, thus creating systemic risks -if democracy continues struggling, systemic political risk will increase Procedural Political Risk -people, products, funds, move from point to point -each move makes a procedural transaction; political actions impose frictions that slow these transns -they may raise business costs, make them pay additional monies -in some states, governors have to personally sign off on every property sale Distributive Political Risk -the gradual elimination of the local property rights of foreign companies -as they generate profits, the host country may begin to question the distributive justice of rewards -they may wonder if theyre getting their fair share of MNEs growing profits -political officials launch programs where they take a bigger share of the rewards -they may increase barriers to transfer personnel into the country, or profits out Catastrophic Political Risk

-political developments that affect the operations of every company in a country -it usually arises from ethnic discord, illegal regime change, civil disorder that disrupts society Legal Environment Legal Systems -specifies the rules that regulate behaviour, the processes by which laws are enforced, the procedures used to resolve grievances -it may differ across countries due to tradition, usage, custom, religion -a legal system aims to support business formation, regulate transactions, stabilize relationships Modern legal systems have three components: Constitutional lawsets framework for the system of gov, defines authority to establish laws Criminalspecifies what conduct is criminal, punishment to those who breach it Civil and commercialfairness and efficiency in business transactions -regulates conduct b/n individuals or organizations Types of Legal Systems -the type determines the conduct of business transactions, who has which rights and obligations Common Law -relies on tradition, judge-made precedent -statutory codes and legislation -common-law courts base their decisions on prior judicial pronouncements Civil Law -relies on systematic codification of accessible, detailed laws -it assigns political officials to translate legal principles into statues -judges apply the relevant statues to resolve disputes; most widespread type Theocratic Law -relies on religious doctrine, there is no separation of church and state -law and religion are one Customary Law -reflects the wisdom of daily experience or philosophical traditions -conforms to community standards; prevails in many developing counties -also plays a role in countries that have a mixed legal system Mixed System -when a nation uses 2+ preceding types; found in Africa and Asia Trends in Legal Systems Rule of Man -holds that power resides in a person whose word is the law -it is an instrumental device of totalitarianism; there is no justice -it gives government free rein to suppress threats, or reward support for state authority Rule of Law -holds a just political and social environment; no indiv is above laws that are clearly specified -safeguards property rights and individual freedom

-citizens rely on it to validate laws; the law is independent of the state -officials are accountable to the law of the hand -laws are clearly developed and enforced transparently -all citizens have access to a competent and ethical judiciary; justice is omnipresent Implications for Managers -rule of man anchors the legal systems of many emerging countries -tendency toward totalitarianism in developing countries complicates matters -operating in western economies grants the benefit of a consistent application of legitimate laws -few developing countries offer such safeguards Legal Issues in International Business Operational Concerns -companies comply with local laws on starting, running, closing a business Getting Startedregistering its name, tax structure, licenses and permits, insurance, credit -some countries expedite this process, while others dont Making/Enforcing Contractswith buyers and sellers; it is a legal agreement that exchanges promises, the breach of which triggers legal actions Hiring and Firinglegal issues around the world are rarely straightforward -some may restrict firing employees and impose generous severance payments Getting Out/Going Underreporting sale of assets, $ to subcontractors, termination of retirement plans -some countries close the doors fast, while others take a long time, and is expensive Key Relationshipsr/n b/n a nations general wealth and its tendencies to regulate business activity -overall, richer countries regulate less -legal systems in wealthier nations regular operational activities more consistently than poor Strategic Concerns -it shifts managers interest to long term issues Country of Origin and Local Content -national laws affect the flow of products across borders -to determine charges for the right to import a product, host governments device laws that consider the products country of origin (where it was grown, produced, manufactured) -govs prefer MNEs make a greater share of a product in the local market -politicians mandate buy-local programs to protect jobs, appease voters, preserve tax rev Marketplace Behaviour -national laws stipulate practices in all business activities, including sourcing, distributing, pricing prods -MNEs adjust their manufacturing strategy accordingly -countries where the rule of man is the basis of law, acceptable marketplace behaviour is unpredictable -MNEs complain of trumped-up charges, bribes, favoritism, lack of intellectual property Product Safety and Liability -intl cos customize products to comply with local standards

-countries often impose product safety laws that require a co to adapt -wealthier countries impose stringent standards, while poor countries inconsistent ones Legal Jurisdiction -countries stipulate the criteria for litigation when agents are unable tore solve a dispute -each company petitions its home country court in hopes of favorable treatment -the choice of law clause stipulates whose laws govern dispute resolution -obliges both parties to negotiate a compromise Intellectual Property: Rights and Protection Intellectual property- creative ideas, expertise, intangible insights that grant its owner a C.A International Property Rights -it grants the registered owner of inventions the symbols, names, images and the right to determine the use of their property -the legal authority to decide who can use the property -it specifies a period that others cant copy it (patents, trademark, copyrights) -piracy shows how hard it is to enforce IPRs -theres no shortcut to worldwide protection; there is no global patent, etc -companies can go after makers and sellers of counterfeit products, not the users Big Business, Big Money -intellectual property theft is big business -costs of counterfeit intellectual property is 5-7% of world trade Legal Legacies -counterfeit products is made in countries where the rule of man prevails -there is sluggishness in protecting intellectual property in these countries -many Chinese question he legitimacy of laws passed by foreign govs; hence, foreign made laws are inconsistently enforced in the local marketplace -countries that observe the rule of law more aggressively protect intellectual property rights Wealth, Poverty, and Protection -developed countries reason that protecting intellectual property is the best way to energize innovation -developed countries hold 95% of patents worldwide -developing countries argue that intellectual property rights are better thought of as intellectual monopoly rights that impose costs by -stifling the creativity and innovation; lowering global welfare -inflating prices that poor nations pay for -stipulating licensing fees that increase the cost Cultural Orientation -individualist countries regard individual ownership as intrinsically legitimate; if you create something then you should have say in who can use/copy it -collectivist countries prefer sharing; if you create something then it should improve societys welfare -piracy is an increasingly mainstream behaviour -on one hand, economics spurs piracy, but the piracy among teenagers in rich and poor countries

reflects technological opportunism Improving Protection -WTO gives wealthy countries a year to comply with its new rules; poorer countries longer grace period -countries that create intellectual property ultimately enforce property rights -as countries evolve from idea consumers to idea creators, they market products based on own property -at some point, the benefits of protection exceed the gains from piracy Ch 5- Globalization and Society Foundations of Ethical Behaviour -companies try to hire individuals willing to work in the type of ethical env theyre trying to make 3 levels of moral development: Preconventional they know whats right and wrong, but dont know why Conventionalthey learn role-conformity from peers, and then from society Postconventionalindividuals internalize moral behaviour because they believe the behaviour is right Teleological approach- decisions are based on the consequences of the action Utilitarianism- an action is right if it produces the greatest amount of good Deontological approach- moral judgments are made, moral reasoning occurs Why Do Companies Care about Ethical Behaviour -it can be instrumental in achieving these objectives: -to develop C.A; to avoid being perceived as irresponsible -responsible behaviour fosters trust, which encourages commitment -NGOs are becoming more active in monitoring corporate practices; they rank companies according to their carbon emissions -govs want to ensure corporate behaviour are consistent with the best interest of community Cultural Foundations of Ethical Behaviour Relativism vs Normativism Relativism Defn- ethical truths depend on the groups holding them -adjust to what makes sense in diff environments -you adapt to local customs out of respect for them -values may vary from on society or country to another Normativism Defn- there are universal standards of behaviour that should be accepted by everybody -there are other values and norms that people adopt as their own distinguish between what is common and what is unique Walking the Fine Line b/n Relative and Normative -a company often faces pressures to comply with local norms, but these may take the form of laws that permit practices that grant C.A -orgs have laid out minimum levels of bus practices they say a company must follow, regardless of the legal requirements

Legal Foundations for Ethical Behaviour Legal Justification: Pros and Cons Cons: things that are unethical arent illegal; law isnt appropriate standard for regulating all bus activity -it takes time to pass laws and test them in courts -we must consider moral concepts whenever were considering legal ones -the law often undergoes scrutiny by the courts -the law isnt so efficient; its impossible to solve every ethical dilemma with a law Pros: the law embodies many of a countrys moral principles -provides a clearly defined set of rules that applies to everyone -it represents a consensus derived from widely shared experience Extraterritoriality Defn- imposing domestic legal and ethical practices on foreign companies Corruption and Bribery -determinants of corruption include cultural, legal, political forces -is the misuse of entrusted power for private gain -bribery takes place to obtain gov contracts, or to get officials to do what they should be doing anyways Consequences of Corruption -bribed are payments or promises to pay cash or anything of value -affects both company performance and country economies -lower national growth rates, low levels of per capita income -downfall of numerous heads of state, gov officials and business execs resign -corruption is expensive, inflating a companys costs and bloating its prices Whats Being Done About Corruption -international multilateral accords for combating bribery at the global level; Organization for Economic Cooperation and Development (OECD) sets legally binding standards to criminalize bribery of foreign public officials in intl bus transactions -member countries have too implement recommendations into national law International Chamber of Commerce (ICC) issues a code of rules against corrupt practices, and is in support of other multilateral approaches to combating bribery United Nations Convention against Corruption (UNCAC) covers a broad range of corruption issues, and doesnt just focus on bribery Regional Initiative: European Union -exec branch of the EU supports strong anti-corruption measures within the EU -sanctions the work of the Commissions office of antifraud, OLAF -has an internal auditing service -a concern within the EU is the lack of uniformity and transparency of laws though; most antibribery provisions are left up to the member govs -regional approaches to antibribery within the EU remain ineffective National Initiative: US Foreign Corrupt Practices Act (US) -sometimes behaviours that might be considered inappropriate by individuals in one country would be

considered fine in another -US gov continues to step up anticorruption efforts at home and abroad Industry Initiatives -industries have stepped up their own efforts against bribery and corruption -construction and natural resources cos signed a zero-tolerance pact against extortion by bribery -called the Partnering Against Corruption Initiative (PACI) Relativism, the Rule of Law, and Responsibility -companies are now freer to establish policies and procedures that are consistent with both their own domestic laws and those of other countries -companies are finding that laws that once varied have become more uniform and easier to implement Ethics and the Environment What is Sustainability Defn- meeting the needs of the present without compromising the ability of future generations to meet their own needs while taking into account what is the best for the people and environment -is important that bus that affect the env establish policies for responsible behaviour towards the earth -multinational cos are emerging to address the needs of intl bus and society by offering solutions that address the worlds environmental concerns -includes renewable energy services and production to environmental cleanup Global Warming and the Kyoto Protocol Kyoto Protocol -theory that global climate change results from an increase in carbon dioxide that traps heat that would normally be radiated back into space and thereby warming the planet -the protocol reduces greenhouse gas emissions; it committed countries to reduce emissions -one approach favored by many is to invest more in alternative and renewable energy National and Regional Initiatives -firms operating in countries that have adopted the Kyoto Protocol are under pressure to either reduce emissions, or buy credits from companies that have reduced emissions Company-Specific Initiatives -voluntary emissions-reduction program -companies are changing the way they do business, regardless of whether theyre bound by Protocol Ethical Dilemmas and Other Business Practices Ethical Dilemmas in the Pharmaceutical Industry -GSK focuses on pharmaceuticals, and consumer healthcare products -to continue developing new products, GSK spends 14% of its rev on R&D -to fund their R&D, they sell their drugs at high prices as long as theyre covered by patents -after a patent expires, the drug becomes generic and manufacturing is done at low costs Tiered Pricing and Other Price-Related Issues -tiered pricing is when a product is charged differently in a developed and developing country -often theyre simply pirated versions of the real thing, which lacks key ingredients Taking TRIPS for What Its Worth

-WTO agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) allows poor countries to counter the high cost of patented drugs by either producing general products for local consumption; -or import generic products from other countries if they dont have the capacity in their own country to produce the generics -in both cases though, the developing nation is compelled to license patented drugs from legal patent holders so patent holders can generate revenue R&D and the Bottom Line -drugs are very expensive to develop -India is a thriving industry in unlicensed generic drugs, but when it refused to secure patents by foreign companies, they chose to leave the country -many Indian R&D facilities have sprung up to develop drugs that can be legitimately produced and sold by Indian companies Ethical Dimensions of Labor Conditions -major challenge facing MNEs is the problem of globalized supply chains and the labor conditions of foreign workers (wages, child labour, working conditions, working hours, freedom of association) -retail, clothing, footwear, agricultural industries *Figure 5.3 -Ethical Trading Initiative (ETI) focuses on MNEs employment practices -objective is to get companies to adopt ethical employment policies Problem of Child Labour -two arguments for the use of children in the Indian carpet industry -theyre better suited than adults to perform certain tasks -if they werent employed theyd be worse off -Bangladesh was forced to stop employing child workers; these girls moved to prostitution instead -for MNEs, the basic challenge is negotiating business environments with diff rules than those at home What MNEs Can and Cant Do -frequently, MNEs operating in countries with diff labour policies fall to the pressure to leave the market Corporate Code of Ethics: How Should a Company Behave -UN Global Compact identifies 10 broad principles in human rights, labour, environment, anti-corruption Motivations for Corporate Responsibility -companies experience four motivations for acting responsibly: -unethical behaviour can result in legal fights -can result in consumer action; boycotts -can affect employee morale -you never know when bad publicity is going to cost you sales Developing a Code of Conduct Set one with global policies which everyone working anywhere for the company must comply Communicate company policies to all employees, suppliers, subcontractors Ensure the policies laid out are carried out -GSK needs employees to confirm in writing -Fair Labor Association submits its operations to external monitoring Report the results to external stakeholders

Ch 7- Governmental Influence on Trade -governmental policies can affect the ability of foreign producers to complete in a home market -they can limit or enhance a companys ability to sell abroad, or acquire needed foreign supplies Protectionism- gov restrictions on imports/exports that give subsidies to industries to allow them to compete with foreign production either at home or abroad Conflicting Results of Trade Policies -govs intervene to attain economic, social, political objectives -determining how to influence trade is complicated by conflicting policy outcomes Role of Stakeholders Consumers- they buy the best product they can find for its price -they dont realize how much retail prices rise because of import restrictions though Economic Rationales for Governmental Intervention Fighting Unemployment -workers that are displaced due to imports are often the least able to find alternative work -even when they do, they may earn less -they often need to spend their unemployment benefits to survive ST -when they do find retraining, they often lack the educational bg needed to gain the skills -gaining jobs by limiting imports might not work; even if successful, the cost may be high -import restrictions are less likely retaliated against by small economies -less like to be met with retaliation if theyre implemented by small economies Prospect of Retaliation -other countries normally retaliate with their own restrictions -fewer imports of a product mean few import-handling jobs -restrictions might cause lower sales in other industries; they need to incur higher costs for components -imports stimulate exports by increasing foreign income,which foreign consumers spend on new imports -restricting earnings abroad will negatively affect domestic earnings/employment Analyzing Trade-Offs -costs of import restrictions include higher prices and higher taxes -comparing the costs of limiting imports with costs of unemployment from freer trade -hard to put a price on people who lose their jobs due to import competition -persistent unemployment pushes many groups to call for protectionism Protecting Infant Industries Infant-industry argument- a gov should shield an emerging industry from foreign competition by guaranteeing a share of the domestic market until it can compete on its own -presumes the output costs for an industry is so high that its output is noncompetitive in world markets -eventual competitiveness is the result of the efficiency gains that take time -production costs may decrease over time, but it doesnt always fall enough to create competitive products, posing two problems: 1) Govs must identify the industries that have a high probability of success -if infant-industry protection cant reduce costs to compete against imports, chances are its owners will

constitute a pressure group that prevents the importation of the lower priced products -the gov protection against import competition may also deter managers from adopting the innovations needed to complete globally 2) If policy makers can determine the infant industries that can succeed, it doesnt fully mean they should receive governmental assistance -some segment of the economy must incur the higher cost when local production is still inefficient to improve overall competitiveness Developing an Industrial Base -countries seek protection to promote industrialization -it brings more income than primary products do Surplus workers -disguised unemployment is high where people from developing countries can move into the industrial sector without reducing agricultural output Industrialization argument- unregulated importation of lower-priced products prevents the development of a domestic industry -shifting people can create problems though: -the underemployed may lose the safety net of their extended families; many wont find suitable jobs, housing or social services -improved agriculture practices may be better than a drastic shift to industry -few countries farm their land efficiently; they lose out on high benefits at low cost Investment Flows -it can increase FDI if import restrictions keep out foreign made goods -foreign cos may transfer manufacturing to a country if they cant trade there Diversification -a greater dependence on manufacturing doesnt guarantee diversification of export earnings -can face competitive risks and potential obsolescence Growth in Manufactured Goods Terms of trade- quantity of imports that a quantity of a countrys exports can buy -takes more low-priced primary products to buy the same amount of high-priced manufactured goods -the quantity of primary products demanded doesnt rise as quick as manufactured p&s Import Substitution and Export-Led Development Export led development- rapid economic growth by promoting the development of industries that export their output Nation Building -strong r/n b/n industrialization and aspects of nation building process -industrialization helps countries build infrastructure and boost workforce skills Economic Relationships with Other Countries Balance-of-Trade Adjustments -deficit creates problems for nations with low foreign exchange reserves; the funds that help finance priority foreign goods and maintain the trustworthiness of a currency

-if balance-of-trade difficulties arise, a gov may: -devalue its currency, making its products cheaper in relation to foreign products -rely on fiscal/monetary policy to bring lower price increases than other countries -both those options take time to implement though Comparable Access of Fairness Comparable access argument- companies have the same access to foreign markets as foreign markets have access to the companies markets -domestic producers may be disadvantaged if their access is less than foreign producers access though -two main reasons for rejecting the idea of fairness: -can lead to restrictions that deny ones own consumers lower prices -is impractical to negotiate and separate agreements for each diff prod&service Restrictions as a Bargaining Tool -the threat of important restrictions may be a retaliatory measure for persuading other countries to lower their import barriers -countries levy trade restrictions to coerce other countries to change their policies To use restrictions successfully: Believabilityhave access to alternative sources or be sure consumers can do without it Importanceexports of the restricted product are significant to certain parties in the producer country Price Control Objectives -countries will withhold goods from intl markets to raise prices abroad -this encourages smuggling, the development of technology, or diff ways to make the same product -is ineffective for digital products -if prices are too high, people will seek substitutes -a country may also limit exports to favor domestic consumers -favoring domestic consumers disfavors domestic producers -foreign products may also price their exports low that they end up driving producers out of business in the importing country -if this successfully happens; there are consequences: -foreign producers may be shifting their countries unemployment abroad, but taxpayers are subsidizing the purchases by consumers abroad -if there are high entry barriers, foreign producers can charge exorbitant prices once competitors go out of business Dumping- countries that export below cost of home-country price -enforcement occurs if the imported product disrupts domestic production -import restrictions may prevent dumping -get foreign producers to lower their prices Optimum-tariff theory- foreign producer will lower its prices if importing country places tax on its prods -if this occurs then benefits shift to the importing country Noneconomic Rationales for Government Intervention Maintaining Essential Industries Essential industry argument- states that govs apply trade restrictions to protect essential domestic

industries during peacetime so the country isnt dependent on foreign supplies during war -because of a high cost, the argument shouldnt be accepted without a careful evaluation of costs, real needs and alternatives -govs stockpile supplies of raw materials that might be in future short supply Promoting Acceptable Practices Abroad -govs limit trade to promote changes in foreign countries political policies -export constraints are valid if exporting country assumes there wont be any retaliation -import trade controls can also be used as a foreign policy weapon (placing sanctions) -trade controls are also used to pressure foreign govs to alter their stances on issues from human rights to environmental protection Maintaining or Extending Spheres of Influence -govs give aid and encourage imports from countries that join a political alliance or vote a preferred way - the Cotonou Agreement formalized preferential trade relationships that strengthened political ties Preserving National Culture -prohibiting exports of art that deem to be part of their national heritage -imports may be limited that conflict with their dominant values, or replace domestic sources of production hat uphold these traditional values Instruments of Trade Control Two types: -those that indirectly affect the amount traded by directly influencing the prices of exports/imports -those that directly limit the amount of a good that can be traded Tariffs Defn- a tax that govs place o a good thats shipped internationally Export tariffs- tariffs collected by the exporting country Transit tariffs- those collected by countries that the goods pass through Import tariffs- collected by importing countries Import tariffs give domestically produced goods a price adv; a tariff might be protective if it raises the price of some foreign production -import tariffs in dvpg countries dont mean much, since it usually costs more to collect than they yield -in many developing countries though, they are a big source of rev; gives the gov more control over determining the types of goods crossing and collecting a tax than individual and corporate income tax Specific duty- when the gov assesses a tariff on a per unit basis Ad valorem duty- assessed as a percentage of the items value Compound duty- combo of the two -raw materials usually enter developed countries free of duty, but if they are processed, then developing countries will assign an import tariff -since ad valorem is based on the total value of the product, others argue that the effective tariff is higher than the published tariff rate -it challenges developing countries to find markets for their manufactured products

-at the same time, the govs cant remove barriers easily because these imports are more likely to displace workers who are least equipped to move to new jobs Nontariff Barriers: Direct Price Influences Subsidies Defn- direct assistance to companies to make them more competitive -not everyone agrees that companies are being subsidized just because they lose money, nor that all types of gov loans or grants are subsidies; leads to controversies -agricultural products is one area that everybody agrees receives subsidies in developed countries -food supplies are too critical; better for surplus than a shortage -it doesnt give an excuse for agricultural subsidies for non-food products though -rural areas have a disproportionately high representation in gov decision making -internal politics prevents price supports for farmers, gov agencies and low interest loans to farmers -most countries offer potential exports services to help their business, like market info, trade expositions, foreign contracts, business development services Aids and Loans -govs also give aid and loans to other countries Tied aidwhen the recipient is required to spend the funds in the donor country -some products can compete abroad that might otherwise be noncompetitive -tied aid can slow the development of local suppliers in developing countries though Customs Valuation -tariffs depend on the product, price, origin -there is temptation for exports and importers to declare them wrongly on forms -since its hard for officials to determine the honesty of these invoices, they may increase the value, or valuation procedures have been developed -there are so many diff products that it may be easy to misclassify a product and its corresponding tariff -the disparity in duties can cost companies millions -customs must also determine products origins since countries treat products from diff countries diffly Other Direct-Price Influences -special fees, requirements that customs deposits be placed in advance, minimum price levels at which goods can be sold after they have customs clearance Nontariff Barriers: Quantity Controls Quota Defn- limit of a quantity of a product hat can be imported or exported in a given time frame Import quotas raise prices for two main reasons: -to limit supply -to give little incentive to use price competition to increase sales -tariffs generate revenue for the government -quotas generate revenue for companies that sell a portion of the limited supply of the product -import quotas arent imposed to protect domestic producers Voluntary export restraint (VER)- when country A asks country B to voluntarily reduce its exports to A

Adv: easier to switch off than an import quota -can do less damage to political relations than an import quota -country can set export quotas to assure domestic consumers a sufficient supply of goods at a low price Embargo- a quota that prohibits all trade -govs impose embargoes to use economic means to achieve political goals Buy Local Legislation -govs favor domestic producers -sometimes they specify a domestic content restriction; a % of product has to be from local origin Standards and Labels -classification, labeling, testing standards to allow selling domestic products but reject foreign-made -these technicalities add to a firms production costs, esp if the labels need to be translated -purpose of standards is to protect the safety or health of the domestic population -some companies argue that standards are just to protect domestic producers though Specific Permission Requirements -importers or exporters secure permission from gov authorities before conducting trade transactions -aka import or export license -they give the gov authorities samples to obtain the license -it can restrict the import/export by directly denying permission, or indirectly due to time and cost Foreign exchange control- requires an importer to apply to a gov agency to secure the foreign currency to pay for the product Administrative Delays -intentional administrative delays or those caused by inefficiency -competitive pressure moves countries to improve their administrative systems Reciprocal Requirements -because of gov regulations, exporters sometimes take merchandise in exchange of receiving cash -they buy something to export something Countertrade- gov requirements I the importing country where the exporter has to give additional economic benefits as part of the transactions (Eg. Jobs, technology) -this has been criticized because large contractors usually keep their own sales in tact while transferring their purchases from smaller domestic contractors to those in foreign countries, thus weakening domestic defense capabilities Restrictions on Services -countries typically consider four factors: Essentialityservice ahs to be essential; govs may prohibit private companies in some secotrs because they feel the services shouldnt be sold for profit Eg. Communications, banking, utilities, domestic transport NFP Serviceswhere few foreign firms compete; when a gov privatizes these, it prefers local ownership and control (Eg. Mail, education, hospital health services) Standardsgovs limit entry into many service professions to ensure practice by qualified personne Eg. Accountants, electricians, engineers, hairstylists, lawyers Immigrationgov regulations require an org to search for local qualified personnel before going abroad

Dealing with Governmental Trade Influences -government intervention affects the flow of imports and exports -companies can move operations to another country; -concentrate on market niches that attract less international competition; -adopts internal innovations (greater efficiency, superior products); -try to get governmental protection Tactics for Dealing with Import Competition -companies often ask their govs to restrict imports or open export markets Convincing Decision Makers -helping one industry may hurt another; companies must convince officials that their situation warrants particular policies using economic and noneconomic arguments Involving the Industry and Stakeholders -a company can improve its odds of success if it can ally most domestic companies in its industry -otherwise,officials might feel its problems are due to its specific inefficiencies rather than general issues Preparing for Changes in the Competitive Environment -those that depend on freer trade or have integrated their production and supply chains among countries oppose protectionism -those with single or multi-domestic production facilities support protectionism Ch 8- Cross-National Cooperation and Agreements Economic integration- political and monetary agreements among nations in which preference is given to member countries Bilateral integration- 2 countries decide to cooperate closer together Regional integration- group of countries in the same geographic proximity deciding to cooperate Global integration- countries all over the world to cooperate through WTO -they can define the size of the regional markets and the rules under which a company must operate -MNEs are interested in regional trade groups because they tend to be regional as well Triad regions- mostly generate their revenues in their home regions -managers are interested in trade agreements because of the potential impact where they source their purchases to reduce costs and improve quality World Trade Organization -GATT was made to abolish quotas and reduce tariffs -its contribution to trade liberalization led to the expansion of world trade Most favored nation (MNE)- once a country agrees to reduce a tariff, the tariff cut is automatically extended to ever other member country -GATT slowly ran into problems; govs created craftier methods of trade protection -world trade grew more complex and it couldnt enforce compliance with agreements What does the WTO do? -it expands on GATT; includes trade in services, investment, intellectual property -is the major body for reciprocal trade negotiations, enforcement of trade agreements -entire membership makes most of its decisions by consensus

Most Favored Nation -member countries should trade without discrimination, but with some exceptions: -dvpg countries manufactured prods are given preferential treatment over those from industrial cntries -concessions granted to members within a regional trading alliance havent been extended to countries outside the alliance -countries can raise barriers against member countries who they feel arent trading fairly Dispute Settlement -countries can bring it to a WTO panel; accused countries can appeal -there are time limits on the stages of the deliberations -if the offending country doesnt comply with the panels judgment, its trading partners have the right to compensation, and if it is still ineffective, trading partners can impose countervailing sanctions Doha Round -focused on giving a boost to developing countries on the world scene -resulted in a split between developed members and developing countries over the large agricultural subsidies by the richer nations -focused on better coordinated exports rules and export incentive for developing countries -this Doha Lite was approved but not completely finalized Criticism -include critical issues related to trade, like labour and environmental conditions -they argue that WTO doesnt do enough to protect against exploitive industrial development that threatens labor rights and environment around the world -agreement implementation has been slow, denying developing nations the incentives they joined for Rise of Bilateral Agreements -Brazil and EU; Brazil and China; South Korea and US -there is an increasing willingness of individual countries to engage in bilateral agreements -engage in PTA (preferential trade agreements); FTA (free trade agreements) with each other to meet their global trade objectives Regional Economic Integration -EU; NAFTA; ASEAN; PTAs -signatory countries give preferential treatment to those in the group -major reason o establish a regional trade group is to increase market size -two basic types of regional trade agreements; FTAgoal is to rid all tariffs b/n member countries -eliminates tariffs on goods that already have low tariffs, and eventually all tariffs Customs unionin addition to eliminating tariffs, they place a common external tariff on goods being imported from nonmembers Common Market (Economic Integration Agreement) -EU allows free mobility of production actors like labour and capital

Common market- adding free mobility of factors of production to a customs union -EU has harmonized its monetary policies through a common currency (Euro) Effects of Integration Static and Dynamic Effects Static effects- the shifting of resources from inefficient to efficient companies Dynamic effects- overall growth in the market and impact on a co caused by expanding production Static Effects develop when: Trade creation when producers have a CA and can allow consumers to access more goods at lower $ -companies protected face real problems when the barriers are eliminated and they try to compete with more efficient producers -investment might also shift to countries that are more efficient or have a CA Trade diversiontrade shifts to countries in the group at the expensive of trade with other countries, even though nonmembers might be more efficient -criticized by RTA because the agreements result in greater trade among a few WTO members but not among all Economies of Scale -when trade barriers come down and markets grow Defn- companies can increase production that results in lower costs per unit -could result in more trade or an increase in FDI Increased Competition -greater efficiency due to increased competition -could result in investment from less efficient to more efficient companies or existing companies becoming more efficient Major Regional Trading Groups -by location and by type -most regional groups are free trade agreements -cos are interested in regional trading groups for their markets, raw materials, production locations European Union -the most successful regional trade group -uses common external tariff -has a common currency, the Euro Predecessors -after WWII, European political leaders realized the greater cooperation among their countries would help speed the recovery process -the European Economic Community (EEC), and European FTA (EFTA) was made -EEC turned to EC, and then EU Organizational Structure -European Commission gives EUs political leadership and direction -commissioners run the programs on a daily basis, drafts laws -Council of the EU is composed of representatives of each member country

-passes laws and makes major policies -the presidents meet up few times each year to set a broad policy -Parliament is elected every five years, and has three main roles -legislative power, control over the budget, supervision of executive decisions -European Court of Justice ensures consistent interpretation and application of EU treaties Antitrust Investigations -EU has been aggressive in enforcing antitrust laws where intellectual property is a sensitive issue as countries move to protect their own industries from violations by foreign companies Single European Act and Lisbon Treaty -designed to eliminate the remaining barriers to a free market -resulted in closer cooperation in trade, foreign policy, the environment Lisbon Treaty- made to strengthen the governance process of the EU and improve ability of EU to make and implement decisions Monetary Union -having a common currency eliminated currency as a barrier to trade; Expansion -one of EUs major challenges is the 2004 expansion; went from 15 to 27 countries -the acquisition of 12 new countries added economic output, but it brought in poour countries with a high dependence on agriculture -the free movement of people is one of the four freedoms of movement of the EU -other three are goods, services, capital Bilateral Agreements -EU signed FTA with 6 central American countries, as well as signing with Brazil -EU entered an agreement with EFTA to form EEA (European Economic Area) -EFTA wants adv of the free flow of food, labor, services and capital How to do Business with EU; Implications for Corporate Strategy -doing business in EU can influence corporate strategy in three ways: Determining where to produce -produce in a central location to minimize transportation costs; highest costs are in central Europe Determine whether to grow through new investments, expanding existing investments, or with joint ventures and mergers -mergers/acquisitions have really increased; US companies buying European cos to gain market presence as well as getting rid of competition Balancing common denominators with national differences -widely diff growth rates -many smaller nations are experiencing growth because their membership has increased FDI NAFTA -involves free trade in goods, services, investment -large trading bloc that includes countries of diff sizes and wealth -US-Cdn trade is the largest bilateral trade in the world -US is Mexico and Canadas largest trading partner

-there is a logical rationale in geographic location and trading importance -US had key trade relationships with each of them -the agreement establishes a new dispute resolution process -Cdn and US consumers benefit from lower cost agricultural products from Mexico (static) -US producers benefit from the large Mexican market (dynamic) -prior to the agreement, many US/Cdn companies established manufacturing facilities in Asia because of its low cost labour, now they got o Mexico -since its a FTA and not customs union, each country sets its own tariffs to the rest of the world -goods and services must originate in NA to get access to lower tariffs -regional content says that 50% must come from NAFTA region; 62.5% for autos Special Provisions -US forced the inclusion of labour standards, the right to unionize, upgrade of environmental standards in Mexico and the strengthening of compliance Impact of NAFTA -trade and investment have increased significantly -because of the its size, the US is important to Canada and Mexico for imports and exports as well -as agricultural trade increases, farm jobs disappeared in Mexico due to US competition -there is a lot of illegal immigration due to this; many farmers ended up as undocumented workers in US, sending home money in wire transfers How to do Business with NAFTA: Implications for Corporate Strategy -each member has entered into bilateral agreements with other countries Predictions and Outcomes: -one of the predictions was companies would look at NAFTA as a big regional market, allowing them to rationalize production, products, financing -it happened in automotive and electronics; each NAFTA member ships more automotive products to the other two countries than any other manufactured goods -lost of investment expanded throughout NAFTA; many jobs left Canada and US for Mexico -FDI in Canada and Mexico has increased 125% -some US industries (cars) have moved to the south where wages are cheaper -second prediction is US companies would run Cdn and Mexican companies out of business; not true -Cdn cos are generating more competition than Mexican cos -third prediction is looking at Mexico as a consumer market rather than just a production location -as Mexican income increases, demand is also rising for foreign products Regional Economic Integration in the Americas CARICOMCaribbean Community CACMCentral American Common Market CAFTA-DRCentral American Free Trade Agreement including Honduras and Dominican Republic CANAndean Community MERCOSURSouthern Common Market UNASUR Union of South American Nations -major reason for these collaborative groups is the market size

Caricom: Benchmarking the EU Model -CARICOM established an EU style form of collaboration -classified as an economic integration agreement -the initiatives have come through one called CSME (CARICOM Single Market & Economy) -is important for CARICOM to succeed to expand market size and attract more investment and jobs -countries in Latin America and the Caribbean rely heavily on countries outside the region for trade -US and EU represent significant markets for most of its countries Mercosur -major trade group in SA; established by Brazil, Argentina, Paraguay, Uruguay -major goal is customs union with free trade and common external tariff -generates 75% of SAs GDP; 3rd largest trading bloc in the world in GDP terms -slow in implementing programs; due to Brazils disputes with Argentina CAN -focus shifted from isolationism to being open to foreign trade and investment LAIA (Latin American Integration Association) -includes members of MERCOSUR and CAN and Chile, Cube, Mexico -predecessor was Latin American Free Trade Association Regional Economic Integration in Asia ASEAN -fourth largest FTA in the world; promotes cooperation in many areas, including industry and trade -countries are protected in tariff and nontariff barriers -1993 ASEAN Free Trade Area was created with the goal of cutting tariffs -free trade is crucial to member countries because their ratio of exports to GDP is almost 70% -best achievement of AFTA turning the region into a huge network of production -China is not a part of ASEAN, but it is essential to its future Asia Pacific Economic Cooperation (APEC) -promotes multilateral economic cooperation in trade and investment in the Pacific Rim -progress toward free trade is hampered by size and distance b/n member countries and lack of a treaty -focused on trade and investment, security, sustainability, anti-corruption, energy -goal is to try to establish open regionalism where individual member countries can determine whether to apply trade liberalization to non=APEX countries on a MFN or FTA basis Regional Economic Integration in Africa -complicated because of the large number of countries -African countries have been struggling to establish a political identity -some countries are member of more than one RTA Pan Arab Free Trade Area (PAFTA) has members that span North Africa and Middle Easy -recognized by WTO as an RTA; goal is to reduce trade barriers among its member countries -the Arab League reps more countries but with political objectives, less economic -Gulf Cooperation Council (GCC) is more effective because of the smaller number of countries involved -has huge oil and natural gas reserves

-political instability makes economic collaboration a huge challenge African Union (AU) -focuses on political issues, colonialism and racism -includes every African country except Morocco;pushes to promote peace &security through democracy Other Forms of International Cooperation United Nations -established in 1945 after WWII; promotes intl peace and security to help solve global problems in economic development, antiterrorism, humanitarian actions -UN includes the WTO, IMF and World Bank -5 main permanent members of security council; China, France, Russian Federation, UK, US UNCTAD (UN Conference on Trade and Development) -helps developing countries participate in intl trade -tackes the problems of those countries in intl trade NGOS -private institutions that are independent of any government -concerned about humanitarian issues -came about as a response to whats perceived as a negative side of globalization -concerned about workers rights; is very narrowly focused on a specific issue Global Compact -is an initiative for businesses in the areas of human rights, labor, environment, anticorruption Commodities and the World Economy -commodities are the raw materials or primary products that enter into trade (metals, agri prods) -fluctuations in commodity prices have important consequences for the world economy Demand sideaffects the rate of growth of prices Supply sideprimary products account for a huge portion of GDP Consumers and Producers -for many years, countries tried to band together to try to stabilize commodity prices -not so successful though -many original commodity agreements were designed to influence price through market-interfering mechanisms, but most of the existing ones discuss issues, disseminate info, improve prod safety -commodity prices fluctuated but didnt increase dramatically -during the 2000s though the global economic growth pulled the prices up -China was growing so fast that it led to trade agreements b/n them and commodity-producing countries, as well as foreign investment Organization of the Petroleum Exporting Countries (OPEC) -it relies on quotas to influence prices -is a group of commodity-producing countries that band together to control output and price Price Controls and Politics -establishes production quotas on member countries -member countries with large populations need large oil revenues to fund government programs

-are often tempted to exceed their export quotas to generate more revenues Output and Exports -OPEC has 80% of the worlds oil reserves; can have a strong influence on the oil market -events beyond its control can also influence prices -price of crude oil has increased due to rising demand, political instability, shortage of refining capacity, environmental rules in countries Downside of High Prices -competition from non-OPEC countries rise because the revs accruing to the competitors are higher -political and social forces also affect oil prices -producers may be investing in countries outside of OPEC Ch 9- Global Foreign Exchange Markets What is Foreign Exchange? Foreign exchange- money denominated in the currency of another nation or group of nations Foreign exchange market- the market in which foreign exchange takes place -foreign exchange can be in the form of cash, funds on credit/debit, bank deposits, ST claims Exchange rate- price of a currency; this number can change daily Players on the Foreign-Exchange Market Bank for International Settlements (BIS)- divides the foreign exchange market into reporting dealers (dealer banks), other financial institutions, and nonfinancial institutions Reporting dealersparticipate in local and global foreign exchange and derivative markets -are mainly large commercial and investment banks -influences price setting and are the market makers Other financial institutionssmaller commercial banks, investment banks, specialized foreign-exchange trading companies Nonfinancial institutionsany nonfinancial end user, such governments and companies -dealers can trade foreign exchange through electronic methods, directly with customers, through the interbank market, through voice brokers Some Aspects of the Foreign Exchange Market -two major segments; over the counter, and exchange traded Global OTC Foreign-Exchange Instruments -are traded in both over the counter and exchange traded markets Spot transactions- involve the exchange of currency at an agreed rate for delivery within 2 business days Spot rate- the exchange rate for transactions that require delivery within 2 days Outright forward transactions- the exchange of currency on a future date beyond 2 business days -is for future delivery; forward raterate at which the transaction is settled FX Swap- one currency is swapped for another on one date and then back on a future date Currency swaps- deal more with interest-bearing financial instruments, involving the exchange of principal and interest payments Options- the right (not obligation) to trade foreign currency in the future

Futures contract- agreement between two parties to buy/sell a particular currency at a particular price on a future date Size, Composition, and Location of the Foreign-Exchange Market -reason for the increase in trading activity is due to a large emphasis on hedge funds- funds are used by wealthy individuals that are allowed to use aggressive strategies unavailable to mutual funds Using the US Dollar on the Foreign-Exchange Market -it is the most important currency on the foreign exchange market Reasons why the dollar is so widely traded: -it is an investment currency in many capital markets -it is a reserve currency held by many central banks -is a transaction currency in international commodity markets -is an invoice currency in many contracts -is an intervention currency employed by monetary authorities in market operations to influence their own exchange rates Frequently Traded Currency Pairs Cross rate- the exchange rate between two currencies other than the US dollar -Japanese yen is important in Asia because its value reflects the competitive positions of other countries -it is also freely traded, unlike the yuan where it is tightly controlled Carry trade- when you borrow a currency at a low interest rate and invest it in a currency with a higher interest rate -investors will borrow in yen and invest the proceeds in other countries (Eg. Brazil) The Euro -is slowly increasing in importance as a trading currency -foreign exchange trading is biggest in the UK Major Foreign Exchange Markets The Spot Market -foreign exchange dealers are the ones who quote the rates Bid(buy) rate- price at which the dealer is willing to buy foreign currency Offer (sell) rate- price at which the dealer is willing to sell foreign currency Spread- difference between the bid and offer rates, as well as dealers profit margin Direct and Indirect Quotes Eg. US dealer quotes British pound $1.6339/41 -dealer buys pounds at $1.6339, and sells them for $1.6341 -buying low and selling high Direct quote- the number of units of the domestic currency for one unit of foreign currency -aka American terms Indirect quote- the number of units of the foreign currency for one unit of domestic currency -aka European terms Base and Team Currencies Base currency- currency whose value is implicitly 1 when a quote is made between 2 currencies

Eg. If Brazilian real is trading at 1.9 reals per dollar; dollar is base currency, real is quoted -is the denominator Terms currency- gives the number of units of that currency per 1 unit of the base currency -is the numerator -the exchange rate in American terms is the reciprocal of the exchange rate in European terms Interbank Transactions Defn- foreign exchange transactions that take pale between commercial banks -retail transactions provide fewer foreign currency units per dollar than interbank transactions The Forward Market -forward contracts are available from dealers in many other currencies -the more exotic the currency, the more difficult it is to get a forward quote out in the future Forward Discounts and Premiums -the difference between the spot and forward rates is either the -forward discount (forward rate < spot rate) -forward premium (forward rate > spot rate) -the discount percentage is found by multiplying the difference between the spot and forward rates by 12 months divided by the number of months forward Options -is the right, but not the obligation, to buy or sell a foreign currency within a certain time period at a specific exchange rate -can be purchased OTV from a commercial or investment bank or on an exchange -the more likely the option is to benefit the company, the higher the free -the rate is called the strike price for the option; the fee/cost is the premium -a forward contract is cheaper, but less flexible than an option Futures -resembles a forward contract as it specifies an exchange rate some time in advance of the actual exchange of currency -a future is traded on an exchange though, not OTC -instead of working with a bank, companies work with exchange brokers -forward contract is tailored to the amount and time frame the company needs, where a futures contract is for a specific amount and maturity date The Foreign Exchange Trading Process -the conversion usually takes place between the company and its bank *Figure 9.6 -if the MNE is large, it will directly deal with a money centre bank -because the MNE already has a strong banking relationship with its money center bank, the bank trades foreign exchange for the client as one of the services it offers -companies below the Fortune 500 level operate through local or regional banks

Banks and Exchanges Top Foreign-Exchange Dealers -in addition to examining transaction volumes and quality of services, the criteria for selecting top foreign exchange dealers include: -ranking of banks by corporations -capability of handling major currencies, like US and Euro -handling major cross-trades -handling specific currencies -handling derivatives- forwards, swaps, futures, options -engaging in research and analytics -large companies may use several banks to deal in foreign exchange, selecting those that specialize in specific geographic areas Top Exchanges for Trading Foreign Exchange -three of the best known are Chicago Mercantile Exchange (CME); NASDAQ OMX, NYSE Liffe CME Group -operates according to an open outcry; traders stand in a pit and call out prices and quantities -CME entered into an agreement with Reuters to have its futures contracts quoted, which should increase the access of trades to futures contracts -2007 CME and Reuters launched the worlds first centrally cleared global foreign exchange platform -allows customers to buy and sell currencies anonymously NASDAQ OMX -merged with PHLX, formed a new hybrid of trading of both floor and online trading NYSE Liffe -is the global derivatives business of the NYSE Euronext Group -the electronic platform where its derivatives products traded on member exchanges -is an international derivatives business How Companies use Foreign Exchange -to facilitate regular business transactions and/or to speculate -establishing policies for trading currency and managing banking relationships -also used for imports/exports, and buying/selling goods and services Business Purposes (I): Cash Flow Aspects of Imports and Exports Commercial Bills of Exchange -an individual or co that pays a bill in a domestic setting can pay cash; though checks are mostly used Draft- an instrument in which one party directs another to make a payment -is the check thats used; aka commercial bill of exchange -used to protect both buyer and seller Sight draft- if the exporter requests payment to be made immediately Time draft- if the payment is to be made later Letters of Credit

Defn- obligates the buyers bank in the importing country to honor a draft presented to it -exporter still needs to be sure the banks credit is valid; could be a forgery -could be denominated in the currency of either party -if its in the importers currency, theyd have to convert it through its commercial bank -for the L/C to be valid, all the conditions described in the documents must be adhered to Confirmed Letter of Credit -may include a confirming bank in addition to the parties mentioned Confirmed L/C- exporter has the guarantee of an additional bank -rarely happens that the exporter establishes the confirming relationship -usually the opening bank seeks confirmation of L/C w/ a bank with which it already has a credit r/n Business Purposes (II): Other Financial Flows Speculation -companies sometimes deal in foreign exchange for profit Speculation- buying or selling of a commodity -speculators take positions in foreign-exchange markets/other capital markets to earn a profit -speculators spot trends and try to take advantage of them -they can create demand by purchasing it in the market, or create a supply by selling it in the market -speculation is very risky though Arbitrage Defn- buying and selling of foreign currencies at a profit due to price discrepancies Interest arbitrage- investing in debt instruments, in different countries -investing in interest bearing instruments in foreign exchange to earn a profit due to int rate differentials Ch 10- Determination of Exchange Rates International Monetary Fund -ensures stability in the international monetary system -promotes international monetary cooperation and exchange-rate stability -facilitate the balanced growth of international trade -provide resources to help members in balance-of-payments difficulties, assist in poverty reduction -aka make loans Bretton Woods and the Principle of Par Value Bretton Woods Agreement- established a par value for each currency initially quoted in terms of gold and the U.S dollar -is the benchmark value of a currency quoted in terms of US dollar The IMF Today Quota System -when a country joins the IMF, it gives a certain sum of money based on its size in the global economy -called a quota; this IMF quota becomes a pool of money that the IMF can lend to other countries -quota determines the voting rights of the individual members -2010 the Board of Governors shifted more of the quota shares to developing countries -US would still have the largest quota; China #3, BRIC countries among the top ten

Assistance Programs -negotiating to provide financial assistance if they agree to adopt certain economic stabilization policies -this arrangement is presented in a letter Special Drawing Rights (SDRs) -is an international reserve given to each country to help increase its reserves -is the unit of account in which IMF keeps its financial records -a country could use only US dollars of gold to buy currency -b/c of the lack of sufficient gold, the SDR could provide member countries with instant reserve assets -currencies making up the SDR are US dollar, Euro, yen, and pound Global Financial Crisis and IMF -in 2008, G8 countries injected hundreds of billions to get their economies moving -also injected cash into the IMF -2009, G20 voted to the IMF to raise $250B by issuing SDRs and to put another $500B into IMF -IMF played important role in Greek financial crisis as well -Greece is a member of EU; adopted Euro as its currency -piled up huge sovereign debt that exceeds 160% of GDP -Greek economy is in recession -IMF partnered with EU and European Central Bank to give loans to them on the condition it would take severe measures to solve its budget crisis Evolution to Floating Exchange Rates -US balance of trade deficit continued to worsen Smithsonian Agreement Defn- had several important aspects; 8% devaluation of the dollar -revaluation of some other currencies -widening of exchange-rate flexibility Jamaica Agreement -eliminated par values and permit greater exchange-rate flexibility Exchange Rate Agreements -IMF allowed countries to select an exchange-rate arrangement of their choice, provided they communicate their decision to the IMF -the formal decision of a country to adopt a particular exchange-0rate is called a de jure system, -IMF surveillance program determines the de facto exchange-rate system that a country uses -IMF requires countries to identify how they base their exchange rate mechanism Three Choices: Hard Peg, Soft Peg, Floating Hard Peg -two possibilities for countries that adopt this; is the least flexible -they may have no separate legal tender but adopt the US dollar as their currency -idea is for a country to take all of its currency out of circulation and replace it with dollars, allowing US greater control

-this would result in a loss of sovereignty though, and lead to economic issues if the US decided to tighten their monetary policy -currency board is the second possibility; an organization separate from a countrys central bank that is responsible for issuing domestic currency anchored to a foreign currency -if it doesnt have deposits on hand in the foreign currency, it cant issue more domestic currency Soft Peg -countries who use this have adopted a conventional fixed-peg arrangement -a country pegs its currency to another currency & allows the exchange rate to vary +/- 1 from that value Floating Arrangement -are either floating, or free floating Floatingthe currencies change according to market forces, but may be subject to market intervention -the intervention serves to moderate the rate of change Free floatingsubject to intervention only in exception circumstances -countries may change the exchange-rate regime,so managers need to monitor country policies carefully -imp for MNEs to understand the exchange-rate arrangements so they can forecast trends accurately -is easier to forecast a future exchange rate for a stable currency, than for a currency that freely floats Euro -Treaty of Maastricht had two goals; political union, monetary union -moving to a common currency has eliminated currency as a trade barrier European Monetary System and the European Monetary Union EMS- set up as a means of creating exchange-rate stability within the European Community (EC) -countries had to meet certain criteria to comply with the ERM and be a part of the European Monetary Union (EMU) -the criteria include measures of deficits, debt, inflation, interest rates, exchange rate stability -11 of the 15 countries in the EU joined EMU European Central Bank (ECB)- sets monetary policy for the adopters of the euro -manages the exchange-rate system for all of Europe -it can focus on its mandate of controlling inflation Pluses and Minuses of the Conversion to the Euro -banks have to update their electronic networks to systems that trade global currencies, buy and sell stocks, print out bank statements, manage customer accounts -euro will increase price transparency costs and risks Euro and Global Financial Crisis -the currency has steadily grown in strength and importance -collapse of US stock market resulted in a value drop of euro against dollar, triggering two occurrences: -global investors put money into US dollars as a safe-haven currency, thus pushing euro down -euro value began to track with the fortunes of the US stock Issues wrong with the euro: -lack of uniform standards of fiscal regulation among member nations, allowing nations to spend beyond their budgets to support their welfare systems with few actual checks from the ECB -this drags down the currencys value

-the inability for them to adjust their own interest rates to counter inflation -cultural differences can conflict on issues like labor reform and social welfare systems Determining Exchange Rates Nonintervention: Currency in a Floating-Rate World -currencies that float freely respond to supply and demand conditions uncontrolled by gov intervention -demand for a countrys currency is a function of the demand for that countrys goods and services and financial assets Intervention: Currency in a Fixed-Rate or Managed Floating-Rate World -can be times when one or both countries might not want exchange rates to change -the role of central banks is to control policies that affect the value of currencies Central Bank Reserve Assets -are kept in thee major forms: foreign exchange reserves, IMF-related assets, and gold -foreign exchange comprises over 90% of total reserves worldwide -having strong central bank reserve assets is essential to a countrys fiscal strength How Central Banks Intervene in the Market -they buy and sell currency to affect its price -U.S fed uses foreign currencies to buy dollars when the dollar is weak, or sells dollars for foreign currency when the dollar is strong A central bank may do any of the following depending on market conditions: -coordinate its action with other central banks -enter the market aggressively to change attitudes -call for reassuring action to calm markets -intervene to reverse, resist, support a market trend -announce or not announce its operations -operate openly or indirectly through brokers -if a country determines that intervention will not work, it must adjust its currencys value -if the currency freely floats, the exchange rate will seek the correct level to the laws of supply/demand Diff attitudes toward interventiongov policies change over time, depending on economic conditions and the attitude of the prevailing administration in power -governments vary in their intervention policies by country and by administration Challenges with Intervention -is hard for intervention to have a lasting impact on the value of a currency -cant force the market to move in a direction it doesnt want to go for the long run -thus important for countries to focus on correcting economic fundamentals instead of intervention Revisiting the BIS -coordination of central bank intervention can take place bilaterally or multilaterally -the Bank for International Settlements (BIS) links the central banks around the world together -objective is to promote the cooperation of central banks to facilitate international financial stability -it essentially acts as the central bankers bank

Black Markets Defn- closely approximates a price based on supply and demand for a currency instead of a government controlled price -it can parallel the official market and be more aligned with the official market in countries that dont allow their currencies to float according to market forces -the less flexible a countrys exchange-rate, the more likely there will be a black market -it exists when people are willing to pay more for dollars than the official rate Foreign-Exchange Convertibility and Controls Hard and Soft Currencies Hard currencies- usually fully convertible and strong, or relatively stable in value in comparison with other currencies Soft currencies- not fully convertible, aka weak currency -countries restrict convertibility of their currencies is theyre short on foreign-exchange reserves and try to use those reserves for essential transactions -the higher the reserves, the less a country has to resort to restricting convertibility Controlling Convertibility -govs impose exchange restrictions on companies who want to exchange money Licensesgov licenses require all recipients who receive foreign currency to sell it to its central bank at the official buying rate -the bank than sells it at fixed rates to those who need it to make payment abroad for essentials Multiple Exchange Rates Multiple exchange-rate system- gov sets diff exchange rates for diff types of transactions -countries who use this have a floating rate for luxury goods, and a fixed lower rate for imports of essential commodities Import Deposits Advance import deposit- the government requires deposit of money prior to foreign exchange release to pay for imports -requires importers to make a deposit with a central bank, covering the full price if the manufactured goods they would purchase from abroad Quantity controlsforeign travel; gov may limit the amount of exchange thats often from tourism -limits the amt of foreign currency that can be used in a specific transaction Exchange Rates and Purchasing Power Parity PPP- seeks to define the relationships between currencies based on relative inflation -claims that a change in inflation rate between two countries must cause a change in exchange rates to keep the prices of goods in the countries similar Big Mac Index -uses the price of a Big Mac to estimate the exchange rate b/n dollar and another currency -PPP would suggest the exchange rate should leave hamburgers costing the same in US as abroad -if the domestic inflation rate is lower than that in the foreign country, the domestic currency should be stronger than that of the foreign country

ST problems that affect PPP: -the theory falsely assumes there aren't any barriers to trade, and transportation costs are 0 -prices of the big mac are distorted by taxes -big mac isnt just a basket of commodities; its price also includes non-traded costs like rent, insurance, which are usually lower in developing countries -profit margins vary by the strength of the competition -price differences arent sustainable in the long run Exchange Rates and Interest Rates -interest rate differentials have both ST and LT components -in ST, exchange rates are strongly influences by interest rates -in LT, there is a strong r/n b/n inflation, interest rates, exchange rates Fisher Effect Defn- the nominal interest rate is the real interest rate plus inflation -because the real interest rate should be the same in every country, the country with the higher interest rate should have higher inflation (1+r) = (1+R)(1+i) OR r = (1+R)(1+i) 1 International Fisher Effect Defn- currency of the country with the lower interest rate will strengthen in the future -theory that the interest-rate differential is an unbiased predictor of future changes in the spot exchange rate -the country with the higher inflation should have the weaker currency -during price stability, a country that raises its interest rates is likely to attract capital and see its currency rise Other Factors in Exchange-Rate Determination Confidence -in times of turmoil, people prefer to hold currencies considered safe Appetite for Risk vs. Safe Haven -as soon as the markets began to recover, money began to flow into euros and back into the emerging markets, reducing the value of the dollar Information -the release of information; can be found on Bloomberg -traders can follow the info and try to figure out what will happen to exchange rates Forecasting Exchange-Rate Movements Fundamental and Technical Forecasting Fundamental forecasting- uses trends in economic variables to predict future rates Technical forecasting- uses past rends in exchange rates to spot future rate trends -technical forecasters assume if current exchange rates reflect all factors in the market, future rate will follow the same patterns Dealing with Biases

-overreaction to unexpected news -tendency to see correlations in data that arent statistically present, but expected to occur -focusing on a subset of info at the expense of the overall set of info -insufficient adjustment for subjective matters -inability to learn from past mistakes -overconfidence in forecasting currencies accurately Timing, Direction, Magnitude -for countries whose currencies arent freely floating, timing isnt easy to predict -is hard to predict what will happen to currencies and to use those predictions to forecast profits and establish operating strategies Fundamental Factors to Monitor -the best predictors of future exchange rates are interest rates for ST movements, inflation for medium term movements, and current account balances for LT movements Institutional Settingdoes the currency float, or is it managed -what are the intervention practices Fundamental Analysesdoes the currency appear undervalued/overvalued in terms of PPP -what is the cyclical situation -prospects for government monetary Confidence factorsmarket views and expectations with respect to the political environment Circumstancesincidents in the news, crises, meetings coming up Technical Analysestrends that the charts show, what rates appear to be important buy -the thinking and what are the expectations of other market players Business Implications of Exchange-Rate Changes Marketing Decisions -can affect demand for a companys products at home and abroad -strengthening of a countrys currency value could create problems for exporters as their products become more expensive in global markets Product Decisions -a manufacturer in a country where wages and expenses are high might want to relocate production to a country with a currency that is rapidly losing value Financial Decisions -sourcing financial resources, remitting funds, reporting financial results -company may be tempted to borrow money in places where interest rates are lowest -a company would want to convert local currency into its own home-country currency when exchange rates are most favorable so it can maximize its return -exchange-rate changes can influence the reporting of financial results

Ch 11- The Strategy of International Business Industry Structure Defn- represents the relationships among stakeholders within a company Five-forces model- helps managers assess the dimension and their dynamics that determine the attractiveness of an industry -the relationships among suppliers of inputs, buyers of outputs, substitute products, potential new entrants, rivalry among competing firms -it holds that firm performance is a function of its strategy, which is determined by industry factors Competitive Disruptionsbig mergers, sudden acquisitions Product Disruptionsinnovations make alternatives obsolete while new processes take place Process disruptionsinnovations in management processes -new business models, resetting standards of innovation -using existing tech in new ways or applying mass production techniques to new areas Political disruptionsfallout global financial crisis from continues to reset the structure of industries -dislocations in financial markets altered credit terms -sovereign debt problems changed buyers and suppliers powers Telltale markschange in LT growth rate for an industry -new techs, consumer purchase and usage patterns -manufacturing innovations, diffusion of business -change in gov regulation, entry/exit of firms Perspectives on Strategy Industry Organization Paradigm (IO)- belief that it directly influences a companys profitability -it presumes that markets demonstrate perfect competition Perfect competition- presumes there are many buyers and sellers; no indiv affects price/quantity -there are very few barriers to entry/exit -full mobility of resources -perfect knowledge among firms and buyers -an unattractive industry is one where perfect competition drives down profitability -in reality, many industries arent fully perfect competitions -different companies in diff industries sustain diff levels of profitability in ways that are shaped Great by Choiceindustry structure matters, but some companies thrive on execs decision to be great -their competency in achieving their ambitions Strategys Hallmarksdefines the perspectives an MNE applies to deal with industry structure, optimally allocate resources and progress toward objectives -also dealing with different consumers, industries, institutions Value- measure of a firms capability of selling what it makes for more than the costs incurred Strategy- commitment to excellence framework that exploits industry conditions

Approaches to Value Creation Cost Leadership Defn- aims to be the low cost producer in an industry for a given level of quality -offers standardized products to the largest market at the lowest price -lowers costs by streamlining prod design, investing in manufacturing techs, running efficient facilities -is an adv in highly competitive industries -Chinese companies use this strategy -they combine manufacturing operations, inexpensive labour, global distribution Differentiation Defn- creating value by generating customer insights, developing innovative products, moving products to markets quickly -fixates on accelerating innovation, not reducing costs -offers unique attributes to customers -requires MNEs to develop competencies that rivals find hard to match -main key threat is that products will become obsolete quick The Firm as a Value Chain -MNE can opt for cost leadership or differentiation -whatever its choice, a co earns higher profits than its rivals when it creates more value for its customers Value chain- set of linked activities the company performs to design, produce, market, distribute, support a product *Fig 11.4 that shows value chain Primary activities- core business functions; developing a product, marketing, distributing, servicing Support activities- applies to each primary activity Managing the Value Chain Configuration- distributing value activities around the world Coordination- linking these activities together Configuration -every MNE looks to put value activities in the highest productivity spot in the world Concentrated- performing all value chain activities in one location Dispersed- performing tem in diff locations Location economies- those that arise from performing a value activity in the most productive location Where to Go -location decisions are subject to the unpredictability of economic, legal, political, cultural conditions -companies consider aspects of logistics, digitization, economies of scale Business Environment Quality -countries recognize MNEs sensitivity and take steps to improve their location economies -they may reduce capital requirements, streamline property registration, expediting regulatory review, liberalize labour regulations -doing business is easiest in high income countries

Innovation Context -benefits consumers, companies, countries Singularity principle- projects that in the next 30yrs the pace of techl will expand at infinite speed -this race spurs govs to build knowledge-intensive business environments -promoting techs, expanding human capacities, streamlining organizational capabilities Resource Costs -cost differentials in wages, worker productivity, gov regulations in diff countries -projected wage differences shape how MNEs configure their value chains Eg. The low wages in China has led many MNEs to open operations there -the demography of labour influences location economics, and configuration choices -countries with the largest labour forces indicate where MNEs will seek inexpensive workers Logistics -value chains, whether centralized or dispersed generate transfers among primary/support activities Logistics- involves how companies obtain, produce, exchange material and services in the proper place and in proper quantities for the proper activity Digitization Defn- creates new sources of competencies -things like software, music, books, services are being digitized -workers move goods and services anywhere in the world at negligible cost -the narrowing digital divide plugs more people into the global network -location economics change and configuration choices evolve Economies of Scale Defn- the efficiency when large operations increase inputs to decrease per unit cost Coordination -it arranges the architecture of the value chain -making it perform requires coordinating how activities transact with each other -coordination ranges from not at all to extensive -coordinating activities requires adeptly moving ideas, materials and people -if done well, the MNE improves its performance Operational Obstacles -MNEs run into problems because of time zones, differing languages, ambiguous meanings electronic transactions boost efficiency Core Competency Defn- the special outlook that runs through the firms operations, threading disconnected activities into an integrated value chain -it can emerge from diff activities; product development, employee productivity, manufacturing expertise, marketing imagination, executive leadership -MNEs core competency allows everybody to coordinate transactions among value activities

Subsidiary Networks -tech trends have built a world marked by real-time connectivity with anyone, anywhere -Internet is the most powerful force for globalization, democratization, economic growth -LinkedIn, Facebook are examples of this -rather than traditional business directives, social networking shows that information flows better in a collaborative format Change and the Value Chain -execs resist seeing the value chain thats set and unchanged -product features and functions continually change -configuration and coordination of a value chain responds to changes in customers, industries, envs Global Integration vs Local Responsiveness Global integration- process of combining differentiated parts into a standardized whole Local responsiveness- disaggregating a whole into differentiated parts Pressures for Global Integration (2 drivers) Globalization of Markets -global buying patterns indicate that consumers worldwide seek global products -consumer behaviour moves national markets to a global standard -two conditions drive this; demand-pull, and supply-push -intrinsic functions of money power demand-pull -money has three main features; it is hard to acquire -hard to save -is scarce in supply -those functions push worldwide consumers to maximize their purchasing power by buying highest quality product for lowest price -assorted techs standardize consumer preferences across countries -improving communications promote standardized products worldwide -shrinking the digital divide exposes more people to common media -expanding globalization makes the same products available everywhere Standardization and Efficiency -drives companies to produce low-cost, high-quality products that differ little -repeatedly doing the same task the same way will transfer these efficiencies into lower prices without sacrificing the quality standards -an MNE mass-producing applies standardization to make high-quality, lower cost prods -it quickens globalization, persuading more consumers to buy foreign-made prods rather than local subs -scale economies power the push dynamic that compels mass production

Pressures for Local Responsiveness Consumer Divergence -some argue that stubborn divergences in consumer preferences across countries necessitate locally responsive value chains -differences occur due to cultural predisposition -consumers prefer products that are sensitive to their needs; willing to pay more for them -adapting to local preferences compels MNEs to sacrifice degrees of standardization -making products that local customers prefer, tailoring channel structures, adapting marketing Host-Government Policies -global financial crisis resulted diff countries to take diff paths to reset fiscal, monetary, bus regulations -these trends push many MNEs to localize value activities -it essentially spurred govs to make MNEs locally responsive -host govs have forceful tools to prod MNEs to adapt activities -activities include protectionism, regulations to constrain market moves When Pressures Interact -no global industry exists where there is complete standardization or full adaptation -they must deal with the interaction of global integration and local responsiveness Integration-Responsiveness (IR) grid- relates global and local pressures that influence MNEs strategy *Figure 11.5 for the grid -strong pressures for local responsiveness but low pressures to integrate globally encourage adapting value activities to host country conditions -high pressure to integrate globally with little pressure for local responsiveness encourages standardization -a third class falls in the centre of the IR grid; strong pressures for global integration along with powerful demands for local responsiveness -IR grid helps managers map strategy given prevailing pressures for standardization and adaptation in their particular industry Types of Strategy International Strategy Defn- adopted by companies when they leverage core competencies internationally in an industry marked by low pressure for global integration and local responsiveness -relies on local subsidiaries International Strategy and the Value Chain -critical elements of the cos value chain are centralized at headquarters Benefits of the Intl Strategy -transfers core competencies to units in foreign markets where rivals lack a competitive alternative -headquarters transfers skills and ideas to foreign operations; doesnt transfer control -incurs moderate operational costs, and earns high profits

Limitations of the Intl Strategy -discourages local adaptation -the testing ground for new ideas is the home market, not foreign countries -it is useful for an MNE that has a core competency that foreign rivals lack, and doesnt face strong demands for global integration/local responsiveness Multidomestic Strategy Defn- unique local conditions differentiate national markets, thwarting headquarters ambition to supervise foreign operations -aka the uniqueness of local conditions can create exceptions that exceed home country managers competencies Multidomestic Strategy and the Value Chain -firms maintain that unique conditions make value-chain design the prerogative of the local subsidiary -it adjust value activities to local circumstances -if the host gov offers incentives for local manufacturing, the subsidiary can build its own plant -if locals prefer directly dealing with sales people, they can build a sales force -if the country changes laws, the subsidiary can adjust HR policies Benefits -makes sense when MNE faces high pressure for local responsiveness and a low need to reduce costs via global integration -reduces political risk, lowers exchange rate risk, improves prestige, boosts growth potential Limitations -encourages replicating value activities from subsidiary to subsidiary -customizing value activities to local markets is costly -is impractical in cost-sensitive situations Global Strategy Defn- drives worldwide performance by making and selling common products that vary little from country to country -high pressures for global integration, low pressures for local responsiveness -MNEs follow absolute production and marketing standards as they battle for cost leadership -exploit location economies, sell standardized products that require little adaptation -China Price phenomenonsituations where Chinese firms make something for less than can be done in western countries Commodities- products that serve a universal need -is the only strategy used for global strategy -consumer preferences in diff countries are highly similar -global strategy converts global efficiency into price competitiveness Global Strategy and the Value Chain -firms choosing this face strong pressure for cost reductions but weak pressure for local responsiveness -the MNE is the cost leader; requires building global-scale factories in superior locations that support efficient operations -once configured, headquarters coordinates activities by standardizing practices and processes

Benefits -suited to industries that emphasize efficient operations and local responsiveness pressures dont exist -prevails in manufacturing and service industries Limitations -gives MNEs little latitude to adapt value activities to local conditions Transactional Strategy Defn- todays env of interconnected consumers requires an MNE configure a value chain that exploits location economies to leverage core competencies while reconciling global and local pressures -compromise between global integration and local responsiveness with a mindset of leveraging MNEs specialized knowledge to wherever and whenever possible -spurs an MNE to adapt its activities from country to country according to prevailing cultural conditions Transnational Strategy and the Value Chain -promotes integration, responsiveness, learning -combines the market sensitivity of local responsiveness with global integration -champtions global learning, where MNE learns new ways to leverage its core competencies -it then diffuses the innovations throughout its global operations -ideas are constantly tested, enhanced, exchanged; and managers would continually translate the ideas into better designs to make more profitable decisions Benefits -helps balance the competing pressures for global integration vs local responsiveness -encourages sophisticated coordination methods to diffuse the lessons learned at one unit with all units -those facing pressures for global integration and local responsiveness but see the opportunity to leverage knowledge that permeates their value chain are those that use this method -in the beginning it only attracted a few companies; recently, industry conditions and environmental trends support this strategy Limitations -hard to configure, tough to coordinate, prone to shortfalls -the need to manage knowledge worldwide can overwhelm MNEs -developing a network mindset and installing new information systems can be expensive Ch 13- Export and Import -exporting and importing are the most common modes of ib -both impose minimum bus risk, requires low resource commitment, improves marketplace flexibility -helps companies increase sales, reduce dependence on the home market, stabilize seasonal fluctuation Exporting Defn- sale of goods based in one country to customers that reside in another - product doesnt need to physically leave a country to be an export; needs to only earn foreign currency Eg. Education, banking, tourism, financial insurance services

Who are Exporters? Occasionalunderstand the basics of export process, but dont see it vital to their strategy Regularaggressively pursues export sales, has lots of experience -sees it as a productive, profitable activity Non-Exporterslittle knowledge about exporting, no intention to do so -many firms grow in their domestic market without exporting because they make goods that dont travel well to foreign markets Matter of Advantages Ownership advantages -firms outlook, skill, capability, technology -companies that command weak ownership advantages disregard export Location advantages -markets with many consumers that will likely buy your product -a favourable business environment attracts exporters Internalization advantages -companies often respond to market imperfections by internalizing market processes -directly controlling marketing activities inside the company reduce risk and exploit gaps Characteristics of Exporters -company size matters; large MNEs are big exporters -the size of their ownership, location, internalization helps identify markets -there is also potential for SMEs; have fewer than 500 employees -firm size matters in explaining who exports, but not in determining who exports -specific characteristics; core competencies, competitive prices, efficient production, executive leadership, better predict export activity -firm competencies influenced Canadian cos propensity to export, the number of countries they export to, and their export intensity Export intensity- share of a firms output thats exported Why Export? -cos that are capital and research intensive export to amortize the steep costs of product development -many export their services to meet the needs of clients working abroad Profitability -potential to increase profitability; cos sell their goods for a higher price abroad than at home -mature products at home trigger price competition, where growth stages in foreign markets allow for prices to go up -also allows firms to expand its sales frontier Productivity -helps cos improve productivity, knowledge flows spurs exporters to innovate -is tied to increasing scale effects, by spreading research costs over more customers, companies improve their operational efficiency

Diversification -enables companies to diversify their activities, fortifying their adaptability to changes in marketplace -improves bargaining power with existing suppliers -enables a company to use storng sales in one country to offset weak sales in another Exporters: Initiation and Development Sequences and Increments Incremental internationalization- sees physical distance, cultural ties, market similarities to shape how companies approach export -exporting leads a company to export initially from its home market to the most geographically proximate countries -companies find it easier to trade with customers in countries that share commonalities -initial success trading with similar foreign customers moderates ensuing export activity -follows a learning process where a managers growing experience creates the confidence to export to countries that share fewer commonalities Born Globals Defn- they immediately step onto the world stage, exporting from inception -regards the domestic market as just one of many opportunities in the world -execs take a global focus from the outset and embark on quick internationalization -managers can implement their vision quickly and cheaply given technological advances and the increasing openness of countries to international trade Interaction Effects -trade data suggests increasing interaction b/n incremental international and born global perspectives -we anticipate stronger interaction effects -e-commerce continues charging the born global trend -e-commerce gives small startups global reach -for exporters more inclined toward incremental expansion, the Internet provides cheap and easy means to analyze and access dissimilar markets Wildcard Role of Serendipity -accidental exporters who successfully enter overseas markets in response to odd circumstances -unsolicited order in the mail; new hire that has connections to foreign buyers Serendipity- making fortunate discoveries by accident Approaches to Exporting Direct Exporting -company directly sells its products to an independent intermediary, who then sells it to end consumer Company DistributerConsumer -requires the company to manage the export process, making and marketing the product -requires executive commitment

Indirect Exporting -company sells its products to an independent intermediary in the domestic market, who then exports the product to its foreign agents, who then sell it to the end consumer China Wal-Mart Customer -exporter relies on the intermediary to supervise marketing, terms of sale, packaging, distribution Passively filling orders from domestic buyers who then export the product -buyer contacts the company, submits an order, takes delivery, exports the product -company may be unaware that its products has been shipped abroad Selling to domestic buyers who represent foreign end users/customers -MNEs, general contractors, foreign trading companies purchase goods for export -they buy it here and ship it there Which Approach When -no one approach is superior in all situations, depends on companys ownership, location, internalization advantages, managements outlook -tech changes the merits of the diff approaches -firm can engage diff methods to serve diff markets Importing Defn- purchase of a good or service by a buyer in one country from a seller in another -import of services has subtle characteristics -is any transaction that doesnt result in ownership, and is rendered by nonresidents to residents Who are Importers? Input optimizers -uses foreign sourcing to optimize the inputs fed into a supply chain -company scours for optimal inputs, directs them to various production points among various countries, the factories assemble them into finished goods that are then imported by markets worldwide Opportunistic -looks for products around the world that it can import and profitably sell to local citizens -the traders see a gap in the local marketplace; whether real or perceived -for importer, the prod is unimportant; rather using imports to profitably fill gaps in local marketplace Arbitrageurs -looks to foreign sourcing to get the highest quality product at the lowest possible price -agent takes advantage of a price b/n two or more markets, transacting deals that exploit the imbalance, profiting from the difference Characteristics of Importers -importers are also likely to be exporters -these firms account for the bulk of exports and imports -importers tailor international activity to reflect their ownership, localization -importers historically traded relatively few products with few developing countries

-the emergence of emerging economies quickens this relationship -they increasingly produce more goods that beat local choices in advanced markets Why Import? Specialization of Labour -enables organizing production to exploit location economics; diff wage rates, across countries -improved efficiencies reduce costs that encourage companies to import cheaper products Global Rivalry -industries with a high degree of global competitive rivalry impose cost pressures -companies use foreign suppliers to lower input costs or boost the quality of its finished products Local Unavailability -companies import products that they cant obtain locally Diversification -importers diversify operating risks by entering international markets -makes the company less vulnerable to the dictates/fortunes of a local supplier Importing and Exporting: Problems and Pitfalls Financial Risks -financial constraints are the greatest impediment to international traders -there is always a shortage of working capital to finance export -some say exports/imports offer low profitability given unexpected costs, which are aggravated by fluctuating exchange rates -completing international sales may require helping foreign customers obtain credit -firms accustomed to offering financing at home see the need for different arrangements abroad Customer Management -contacting vendors via e-mail or VOIP gives customers real-time access -it reduces the appeal of international trade -their orientation toward specialized opportunities push SMEs to customize services &marketing support Scant International Business Expertise -limited knowledge of foreign competitors, local custom regulations, price to quality relationship -a barrier to exporting is misunderstanding difficulty of profitably serving consumers in foreign markets Marketing Barriers -high shipment costs; difficulties matching foreign rivals prices, effectively promoting products, weak foreign market connections Top Management Commitment -management characteristics (intl outlook) influence import activity -most companies focus on domestic rather than foreign markets -its riskiness and resource demands dissuade most from internationalizing operations Trade Regulation -export and import inefficiencies occur due to delays and fees; rules and regulations governing trade -import regulations differ from one country to the next -moving goods across borders takes longer today than it did before, to homeland security procedures

Trade Documentation -documents regulates intl trade; duty rates customs clearance, entry processes differ across countries -customs impose regulations on international traders -completing these are tedious and burdensome -mistakes often arise from exporters that use incorrect International Commercial Terms; the correct Incoterm helps exporters avoid disputes by specifying each partys responsibilities -the wrong description can lead to higher duty charges Importing and Exporting: Resources and Assistance -problems complicate activities of committed internationalists globals -SMEs are vulnerable -most SMEs are removed from intl bus activities that promote helpful trade relationships -public agencies provide exporters a wealth of resources -freight forwarders, custom brokers, trade intermediaries Government Agencies -public officials champion export given its macroeconomic and microeconomic benefits -export helps countries generate jobs, build foreign exchange reserves, improve balance of trade -governments in every country assist potential and active exporters -public agencies help firms initiate and develop exports and imports -there are export financing programs, post-shipment working-capital loans, export insurance Export Intermediaries Defn- third party firms that market products on behalf of manufacturers -they offer an easier approach to manage the intricacies of international trade Export Management Companies (EMC) -helps US manufacturers establish overseas market for their products -acts as the export arm of the company, but may also deal in imports -acts as an unofficial marketing department -they generate orders, organize distribution channels, develop promotions, verify credit information, advise on payment terms -they operate on a contractual basis, might operate on a commission basis -many EMCs are entrepreneurial ventures that specialize by product, function, market area -EMCs arent the solution for all situations though -they are typically small stand alone companies with limited resources -they focus on products that bring them the most profit, avoiding sketchy prospects Export Trading Companies (ETC) -groups of direct competitors were allowed to form ETCs to develop exports jointly without fear -they differ from EMC in they operate based on demand rather than supply -ETC brings buyers and sellers together, functioning as a trade matchmaker -determines what customers want, finding domestic suppliers, expediting transactions -ETCs avoid carrying inventory in their name or performing post-sales service

Fees -they operate on a commission rate ranging from 10-15% -also a buy-sell basis for a firms best home country discount, with an extra discount for a product thats market up -contributions for special events Customs Brokers Custom agents- enforce the rules of trade for particular countries -controls the flow of goods moving in and out a country -assesses and collects duties, taxes, fees, customs and related laws, polices smuggling operations -countries vary to the degree their customs agencies help international traders -irregular customs practices in African/South Asian markets hamper exports/imports -importing requires understanding relevant customs regulations and policies Finding Help -when merchandise reaches its port of entry, the importer files documents with customs officials -the agents assign a provisional value and tariff classification Custom broker- helps an importer navigate the regulations imposed by customs agencies They help with: Qualifying duty refunds through drawback provisions -exporters who use imported inputs may have to pay a custom duty; drawback provisions give a refund on these imported goods Defer duties by using bonded warehouses and foreign trade zones -companies dont need to pay duties on imports stores in bonded warehouses and FTZs until goods are removed for sale Value products so they qualify for favourable duty treatment -diff products havge diff duties; brokers find the optimal classification Manage trade documentation -broker obtains gov permissions before forwarding paperwork to the carrier Limit liability by properly marking an imports country of origin Freight Forwarders Defn- specializes in moving goods from sellers to buyers -arranges the fastest, cheapest transportation method -identifies the optimal path to move produce to the foreign buyer -arranges storage prior to shipment, verifies letters of credit, obtains export licenses, advise on packing -doesnt take ownership title or act as a sales representative (is the job of EMC/ETC) -offers fewer services than the latter two intermediaries -they charge the exporter a % of shipment value along with a minimum charge

Third-Party Logistics Defn- applies sophisticated techs to supervise trade logistics -move cargo and provide a range of logistic options -they work in partnership with manufacturers, shippers, retailers to relieve them of logistics resps -offer integration mechanisms that help the co and customer track shipments -they consolidate billing, handle product returns -are helpful to the born global company Reconciling Opportunity and Challenge: Export Plan Transaction chain- shapes each firms respective strategy Export plan- used by successful exporters; defines its current resources, specifying objectives, sequence tactics, set deadlines, assign responsibility, stipulate control -managers develop an export plan in an open process -consulting gov agencies and third-party intermediates clarifies problems and avoids pitfalls -element of an export plan that troubles companies is to select the right market -instead of using standards that made them successful, they follow things about foreign markets -export plan defines a companys intent to leverage resources in initiating export activity Questions that they ask while developing export plan: -am I committed to exporting -what do we want to gain; is exporting consistent with LT goals -what does the product fill in the targeted foreign market -how much will it cost; does it leverage the cos core competency -managers stress test an export plan by consulting trade specialists and public agencies Countertrade Defn- several sorts of trade; barter in which the seller accepts goods rather than currency as payment -inconsistent disclosure hinders estimating the volume of countertrade -secretive gov-to-gov deals arent unusual -countertrade increases in economies that experience economic problems Costs -inefficient way of doing business -the goods sent as payment may be of poor quality, packaged bad, hard to sell/service -it allows for a lot of room for price and distortion Benefits -good for buyers who have limited or no access to cash or credit -companies use it to generate jobs, preserve foreign exchange holdings, develop trade relationships -helps countries reduce their need to borrow and gives them aces to MNEs tech skills -can help them resolve bad debts, or build customer relationships

Ch 14- Direct Investment and Collaborative Strategies Advantages of Actually Producing in Foreign Countries Cheaper to produce abroad- producing them in home markets may be too expensive, especially if other companies can make substitutes abroad at a lower cost Transportation costs- can make it impractical to export when added to production costs as well -the transport costs are dynamic, depending on fuel prices, new infrastructure, risk factors, climate changes When domestic capacity isnt enough- as long as a company has excess capacity, its average cost of production per unit usually goes down as foreign sales increase When products and services need altering- altering products to gain sufficient sales in a foreign market affects production costs in two ways; 1) firms must make an additional investment 2) they lose some of the economies from large-scale production -the more a product must be altered for foreign markets, the more likely some production will shift abroad When trade restrictions hinder imports- import barriers restrict imports -companies may find that they must produce in a foreign country if theyre to sell there -regional or bilateral trade agreements may also attract direct investment, because they create an expanded market that may justify scale economies When country of origin becomes an issue- consumers prefer buying things made in their own country -they may push for identification labels to show where theyre made -they prefer goods from certain countries in the belief that theyre superior -they may also fear that service for imported products will be harder to obtain Noncollaborative Foreign Equity Arrangements -where exporting is not feasible, a company may choose to contract with another company to produce services on its behalf -contracting another co may be appealing, but only if they can find a provider at acceptable terms Taking Control: FDI 3 main explanations for companies to want a controlling interest: Internalization Defn- control through self-handling of operations -comes from transactions cost theory; that companies should seek the power cost between conducting operations internally and contracting another party It can reduce costs for several reasons: -diff operating units within the same company are likely to share a common corporate culture, expediting communications -the company can use its own managers -company can avoid negotiations with another co in terms of compensation -co can avoid possible enforcement problems Appropriability Appropriability theory- denying rivals access to resources

-companies may choose to operate through FDI to lessen the chance of developing competitors Freedom to Pursue a Global Strategy -wholly owned foreign operation may find it easier to allow the opn to participate in a global strategy -could deal more effectively with actual or potential competitors and customers globally How to Make FDI Acquisition -direct investment by acquisition or start-up -acquisitions may occur to obtain some vital resource that may otherwise be slow or difficult to secure -buyer is able to acquire an existing org with experiencing in coordinating -company can gain the goodwill thats important to marketing its products -company may find local capital suppliers more willing to put money into a known ongoing operation -by doing so an investor can avoid start-up costs Making Greenfield Investments -a co may choose to build if there isnt a co thats available for acquisition; -if acquisition will lead to carryover problems -if acquisition is harder to finance -turning around an already poorly performing operation is hard due to personnel/labour r/ns problems -diff management styles, diff cultures can result in a low performance rate Why Companies Collaborate *Figure 14.3 for reasons for collaborative arrangements* Alliance Types Scale alliances- provide efficiency by pooling similar assets so partners can carry out activities in which they already have experience Link alliances- use complementary resources so participating cos can expand into new business areas General Motives for Collaborative Arrangements To spread and reduce costs -at a small volume of business, a specialist can spread the fixed costs to more than one company -individual companies might lack the resources to do it alone; esp small companies -large companies may also benefit when the cost of development is high; they share ownership To specialize in competencies Resource-based view- each co has a unique combo of competencies -a company may seek to improve its performance by concentrating on activities that best fit its competencies, while depending on other firms to supply it with products -it has a limited time frame though, allowing a company to exploit a particular product To avoid or counter competition -when markets arent big enough to accommodate many competitors, companies may band together to not compete together -they may also band together to fight a market leader, or to raise everybodys profits To secure vertical and horizontal links -cost savings and supply assurances can be attainted through vertical integration

-both small and large cos may lack the competence to own/manage the full value chain of activities -horizontal links may provide economies of scope in distribution, like having a full line of products to sell, thus increasing the sales per fixed cost To gain knowledge -learn about partners tech, operating methods, home mkt to make them more competitive in future International Motives for Collaborative Arrangements To gain location-specific assets -differences among countries in culture, economies, competition create barriers for firms abroad -the differences may seek collaboration with local firms that will help them To overcome governmental constraints -virtually all countries limit foreign ownership -there are long negotiations with govs to determine the operating terms -companies may have to collaborate if they want to serve certain foreign markets -government procurement (acquisition) is given to national companies -to protect assets, there are trademarks, patents, copyrights -to prevent pirating, companies make collaborative agreements with local companies, which then monitor so that no one uses the asset -in other cases, local citizens register rights to the unused trademarks, then negotiate sales to the original owners when they try to enter the market To diversify graphically -to pursue this strategy, countries enter different markets since they each contribute diff resources To minimize risk exposure -it allows for greater spreading of assets among countries -to minimize loss from foreign political occurrences is to minimize the base of assets located abroad, or to share them -another way to spread risk is to place operations in diff countries; this can reduce the chance that foreign assets will encounter trouble at the same time Types of Collaborative Agreements -the higher managers perceive the risk to be in a foreign market, the greater their desire to form collaborative arrangements Some Considerations in Collaborative Arrangements -two factors influence managers choice of arrangement type: Control -the more a co depends on collaboration, the more likely it is to lose decision-making control -this is because each partner will favor its own performance over the other -there will be a loss of control mover flexibility; is an important consideration to guide a co into selection the right type of foreign operation Prior Company Expansion -when a co already has operations abroad, they know how to operate already, and may have extra plant or human resource capacity

-the new production will be handled internally if there is similarity with producing things in the foreign country, but if the product is dissimilar, collaborating with an experienced company may be more advantageous Licensing -under this, a company grants intangible property rights to another company to use in a specific geographic area for a specific period -intangible property is classified into five categories: Patents Trademarks Methods Copyrights Franchises Major motives for Licensing Cross-licensing- companies in various countries that often exchange other intangible property rather than competing with each other Payment Considerations -payment for arrangements vary; potential sales depend on factors like the geographic scope, the length of time the asset will have market value, and the market experience -companies commonly negotiate a front-end payment to cover tech transfer costs -licensors of tech do this b/c there is more than just transferring explicit knowledge; tacit also needed Selling to Subsidiaries -licensing is common b/n parents and their foreign subsidiaries as well -operations in a foreign country even if fully owned by the parent are usually subsidiaries, which are legally separate companies Franchising -franchisor grants the use of the intangible property, as well as assist the business through sales promotion and training; provides supplies -franchising is mostly associated with US fast-food operations Franchise Organization -franchisor may deal directly with individual franchisees or setting up a master franchise and giving that org the rights to open outlets -cos are most apt to use a master franchise system when theyre not confident about evaluating potential individual franchisees -lesser-known franchisors commonly enter with some co-owned outlets that serve as a showcase to attract franchisees Operational Modifications -franchisors success generally depends on product and service standardization, high identification through promotion, effective cost controls -dilemma when operating abroad is standardization; when a company enters a foreign country, preferences may differ Management Contracts -a company is paid a fee to transfer management personnel abroad to assist a company

-usually covers from 3-5 years, and fees are mostly based on volume rather than profits -mostly used when the foreign co can manage better than the owner can -owners and host country get the assistance they want without the foreign companies control; adv Turnkey Operations -when a company contracts with another to build complete, ready to operate utilities -the customer is often a governmental agency Contracting to Scale -the size of contracts are usually highly priced; to the billions -smaller firms either serve as subcontractors for turnkey suppliers or specialize in a particular sector Making Contracts -important to hire execs with top gov contacts abroad -though public relations is important, other factors like price, export financing, managerial quality are also needed to sell contracts that are worth so much Marshaling Resources -turnkey operators must have expertise in hiring people willing to work in remote areas for extended periods and using supplies under very adverse conditions -companies from developed countries moved toward projects involving high techs, whereas others like China and India are better able to compete for projects that require low labor costs Arranging Payment -occurs in stages as a project develops, with a final payment once the facility is operating in accordance with the contract -contracts commonly include price escalation clauses or cost plus pricing Joint Ventures -ownership by more than one organization Consortium- when more than two orgs participate Possible Combinations -intl joint venture is possible as long as at least one partner is foreign -the more cos in the joint venture, the more complex its management -companies favor joint ventures, such as those new at foreign operations or having decentralized domestic decision making Equity Alliances Defn- collaborative arrangement in which at least one of the companies takes an ownership position -purpose of the equity ownership is to solidify a collaborating contract so that its more difficult to break Problems with Collaborative Arrangements -problems can develop that lead partners to renegotiate in terms of responsibilities, ownership -many agreements break down b/c 1+ partner becomes dissatisfied -a partner will often buy out the others interest and the operation continues as a wholly foreign subsid Relative Importance -one partner may give more management attention than the other

-if things go wrong, the active partner blames the less active partner -the difference in attention may be due to partners diff sizes -if disagreements need to be settled legally, the smaller will lack the resources to fight it Divergent Objectives -although companies enter collaborative arrangements due to complementary goals, they may grow apart later on -one partner may want to reinvest earnings while the other wants to receive dividends -if one partner wants to sell/buy from the venture, the other might disagree -partners may also differ over performance standards Questions of Control -sharing asses with another co can generate confusion of control over it -when companies license their logos for use on products that they didnt even produce, they can lack the ability to control its quality -can have a negative effect on sales of all products using the same brand name -though control is given to one partner, both may be responsible for the problem -if one partner dominates, it must still consider the others interests Comparative Contributions and Appropriations -partners capabilities of distributing tech, capital may change over time -it may also change when partners alter their strategy -many companies do it alone after they dont need their partner; esp if the purpose of the collab was to gain knowledge Culture Clashes Differences in Country Cultures -managers and companies alike are affected by their national cultures -they may diff in preferences in the method, timing, frequency they report to management -may result in one partner to be satisfied, and another thats not -some companies dont like to collab with those that are too diff from them Differences in Corporate Cultures -similar corp cultures will help companies ability to communicate to each other, where collabs can experience issues when the corp cultures differ -this is why many cos develop joint ventures only after they have had enough experience w/ each other Managing International Collaborations Dynamics of Collaborative Arrangements -collab may allow a company to learn from its partner, enabling it to make a deeper commitment -switching from one form to another may incur high costs though Country attractiveness and operational options *Figure 14.7 for matrix that relates country attractiveness with operating firms* -a co that has high country attractiveness but weak competitive strength may be better to partner with

another co whose assets are complementary -a co might divest in countries in the bottom right corner, or engage in nonequity arrangements to generate income without investing a lot -managers must use the matrix with caution; separating the attractiveness of a country from a cos position is often difficult Changing Conditions -tension may develop as operations changes and indivs gain/lose responsibilities -companies should evaluate things that personnel in diff divisons can control -as companies gain experience by entering more collab arrangements, they perform better too Finding Compatible Partners -must evaluate the potential partner for the resources it can supply but also for its motivation -managers can find them through conferences, academic institutions, trade fairs, contacts -once into a collaboration, partners can build trust through actions Negotiating the Arrangement -a seller doesnt want to give info without assurance of payment -a buyer doesnt want to pay without evaluating the info as well -the set-up of pre agreements are common so all parties are protected -in some countries, licensing contracts must be approved by governmental agencies -many MNEs object to this because they think that contract terms b/n two companies are proprietary info with competitive importance, and market conditions dictate the need for diff terms in diff countries Drawing up the Contract -contracts with other cos cause some loss of control over the asset being transferred -it creates problems that must be settled by setting mutual goals, writing out expectations in contract -honest communications is useful -contracts should address what methods to be used to test quality -what geographic limitations should be placed -which co will manage which parts -what will be each cos future commitments -cultures with similar levels of trust that come together will more likely agree on similar things Improving Performance -managers must continue to monitor performance -assess whether to change the form of operations -develop competency -an agreement must be run effectively -management should estimate potential sales and costs

Ch 15- Organization of International Business Changing Situations, Changing Organizations Expansion of IB -markets that were once predominant have now taken new positions, while markets that were once on the periphery like China and India have moved toward centre stage -MNEs by choice, or by force respond to this Internet as a Design Standard -Internet pushes managers to rethink their assumptions of how they arrange work, roles, responsibilities -Internet is efficient and effective; has no formal structure, no board, is self-organizing -managing new workplace arrangements require managers to set new structural formats Managerial Standards -change in the nature of work changes the nature of management -real-time access to info eliminates knowledge gaps -b/c of this, there are less jobs that senior managers can standardize or subsidiary managers cant do -managing new workplace standards calls for managing control systems Social Contract -competitive changes change the social contract between high potential executives and MNEs -tradl concerns for security&benefits have expanded to expectations of participating in decision making -MNEs develop org cultures that people not just want to work for, but belong in Building a Magical Organization -the trends push MNEs to rethink the best mix of structure, systems and values in building a magical org -by doing so it helps employees perform creatively and responsibly -it clarifies the work environment, improve systems, streamline info tech, minimize duplication Organization Structure Defn- formal arrangements of roles and responsibilities in the MNE -identifies lines of authority, assigns rights and duties -first step is to determine the best structure for arranging individuals to implement the firms strategy -the choice of this depends on diff factors; env and workplace trends -there are also constraints that affect MNEs -there are also conditions that specifically influence an MNEs situation, and managers sort through them by working through two diff issues: Vertical differentiation- balance b/n centralization and decentralization of authority Horizontal differentiation- specifying which people do which jobs in which units Vertical Differentiation -MNEs face competing calls for global integration and local responsiveness -gets reconciled by specifying who has the authority to make what decisions -managers can vertically differentiate the cos structure in centralization (how high up) and decentralization (how low down) of decision making -they both advocate diff practices and emphasize diff objectives (centralize vs decentralize)

-centralized structure focuses decision-making in the top layer of management; tight control -mostly used when MNEs are implementing an intl or global strategy -decisions are made above the subsidiary level -Internet also changes who should have the authority to make decisions Globality- business flows in every direction, with no centres or idea of foreignness Dynamic Balance -balance between centralize and decentralize; MNE is never fully one or the other -evolution of the global market makes for a continuous balance of the two Horizontal Differentiation -deals with the separate tasks that run sideways in the company -MNE horizontally differentiates its structure to specify the set of tasks that must be done; -to also divide the tasks among SBUs -to stipulate superior relationships -aka classical structures Functional Structure Defn- ideal way when global integration trumps local responsiveness, and companies have anchored value chains in an intl strategy -helps managers efficiently arrange responsibilities and relationships -it groups people based on common expertise and resources -are popular among companies that have narrow product lines Disadv; goal to maximize efficiency may miss local opportunities -slows the development of broader knowledge-generating -as data volume expands faster than processing capacity of multi-layered hierarchy, decision-making will progressively slow down Divisional Structures Defn- divide employees based on the product or geographical location -duplicat functions and resources across divisions -each division has a responsibility for a diff set of products or markets International Division -responds quick to foreign events -best suited for strategies that demand modest integration between domestic and foreign operations -but segregating an MNE into divisions can create tension in domestic vs. international -domestic managers may withhold resources from intl division to boost domestic performance Product Division -most MNEs make and sell a broad portfolio of products -the broader the portfolio, the more likely an MNE looks to arrange its structure of prod divisions -independence means diff subsidiaries from diff product divisions within the same foreign country often report to diff execs at headquarters Geographic (Area) Division

-used when MNE has large foreign operations that aren't dominated by a single country or region Eg. Division A is responsible for Europe, B for North America, etc -more common among European MNEs than US -geographic division is associated with cos that pursue multidomestic strategies on a country/regional basis, like Nike and differentiating b/n Europe and China -gives local managers more authority to adapt value activities -are popular foreign operations are large and no single country dominates sales Disadv; duplication due to configuring similar activities in several places -each area essentially builds its own operation Matrix Structure -some strategies constantly face high pressures for global integration and local responsiveness Matrix structure gives functional, product, geographic groups a common focus -it horizontally differentiates the org so a subsidiary reports to 2 diff execs -a subsidiary would have two bosses; one to rep a business function, one that reps a sales region -collaboration also fans competition; groups compete for resources and rewards -disputes among managers may lead them to favour a certain group -matrix structure violates the unity-of-command principle, which says that an unbroken chain of command should flow from the CEO to the entry-level worker -creates conflicting lines of command Mixed Structure Defn- combines features of functional, geographic, product structures -changes in industry conditions and companies can change a structure -each MNEs structure will reflect its exec preferences, value chain configuration, market circumstances Neoclassical Structures Defn- stipulates how a co utilizes its resources, install communication platforms, indicate authority -they apply diff devices to resolve the shortcomings that limit the versatility of classical functional and divisional formats -intricate and complex workflow pattern calls for new approaches to coordination, collaboration though -due to improving telecom capabilities, globally dispersed execs can still manage effective activities Changing Times, Changing Strategies, Changing Structures -new markets/techs today enable moving work to places where it will be done most efficiently and to the highest quality -some committees do without a formal leader and behave more like a team, relying on a collab culture Boundary Busting -classical structures vertically and horizontally differentiate activities to arrange rules -differentiation imposes boundaries Boundaries- vertical constraints that separate employees into specific slots -horizontal constraints that follow from having specific employees do specific jobs in spec units -sophisticated strategies require improving collaboration across the MNE

Difficulties Posed by Boundaries -boundaries of classical structures impede knowledge flows and interrupt coordination -to resolve those is to bust the boundaries b/n vertical ranks, b/n horizontal units in different functions, and b/n the firm and its suppliers Boundaryless- eliminating vertical, horizontal, external boundaries that hinder the flow of info and formation of relationships -everyone has access to the same info, everybody pulls in the same direction -neoclassical structures move the MNE toward these outcomes -they promote self-organizing agents -neoclassical structures spurs people to share info, to collab on projects, to promote innovation Network Structure Defn- provides an efficient format to manage interdependent value activities -arranges differentiated elements that allocates people to problems in a decentralized way -is anchored by a core org that outsources activities in which it has no core competency to firms that do -relationships in the network cultivate specialized decision making relationships -each contracts with other cos to produce and distribute goods and components -each organizes its alliances with the communication tech to link partners in its network Virtual Organization Defn- temporary arrangement among independent companies, suppliers, customers, rivals that works across space and organizational boundaries -efficiently adapts to market change -improving techs ease cultivating relationships, acquiring resources, developing strategic capabilities -it consists of a core of FT employees that rely on outside specialists to work on opportunities -flexibility of virtual orgs enables easily replacing poor performers Pitfalls of Neoclassical Structures -difficulty of formatting something that is constantly changing -execs may root for self-organization, yet intrude in decision-making -intervening in workers creative independence and self direction -it can cause motivational problems -it can also develop hidden hierarchies that arise as workers organize around rules Coordination Systems -changing pressures for global integration push MNEs to device sophisticated strategies -requires coordination methods and control measures -MNE uses coordination and control systems to synchronize, integrate, regular value activities so MNE can use its resources efficiently -without the means to coordinate activities, the competitiveness of a strategy will not carry out, no matter how brightly conceived it is There are three prevalent approaches: Coordination by Standardization

-applying precise procedures helps MNE leverage its core competency and minimize inefficiencies -specifies the way employees do their jobs, work with one another, deal with customers -ideally suited for MNEs implementing intl or global strategies -standardizing coordination preempts irregularities -standardizing activities controls the influence of national cultures on coordination systems -differences in industry conduct and host-government attitudes complicate coordination by standardn -routines are disrupted as rules and procedures dont apply to every situation in every country -ongoing exceptions undermine the authority of standardization Coordination by Plan Defn- gives managers of interdependent units to mutually adjust goals and schedules, provided they still meet deadlines and hit targets -general objectives and detailed schedules are the basis of this method -critical success factors are defined, expectations specified, hard deadlines are set -market disruptions, gov intervention, conflict with local partners will always call for an adjustment in objectives and schedules, complication coordination by plan -geographic distance and cultural divergence also increases the errors in cross-national communications -coordinating planning activities requires synchronizing people across countries and cultures -national cultures pose complications; many differ in their orientation toward trust, exchange -useful tool is building teams with members from diff countries with diff responsibilities to imagine future market scenarios -some MNEs locate intl and domestic personnel in proximity to each other to promote networks that facilitate coordination by plan Coordination by Mutual Adjustment -rather than rules and regulations, they rely on social networking/interactions, web-based collaboration -managers say that promoting collaboration among coworkers helps implement their strategy -collab among associates in diff parts of the world is key in this method -geographic constraints means teams must alternate meetings to adjust for time zones -decision making often slows as views evolve -managers commitment may decrease as they get tired of ongoing negotiations -the process of mutual adjustment blurs authority, collaboration requires cooperation, not control -this method also requires senior managers to break down boundaries, resetting their role from telling people what to do to helping them with their success -MNEs choose managers from diff units to solve cross-national questions -they also rotate managers b/n domestic and intl position so they can cultivate collaboration -it also promotes relationships that reinforces idea sharing Control Systems Defn- means of forceful change are part of a well-designed org -defines how managers compare performance to plans, identify differences -they regular executive efforts, resource allocation, self interest Bureaucratic Control

-MNE uses centralized authority to install rules to govern activities -is highly effective in some situations, which rely on precise directions to process map an activity -requires a good deal of resources though; it shares organizing principles with coordination by standn Market Control -uses external market mechanisms to establish objective standards -relying on market standards creates universal metrics that work in all countries Clan Control -situations where an MNE relies on shared values among employees to idealize its preferred way of doing business -it relies on values, beliefs to regulate employee behaviours and facilitate goal achievement -is hard in any context but specifically in MNE; its presumed commonality of vision conflicts with the values held by subsidiary-level managers Control Mechanisms -objective of control encourages engineering precise mechanisms Reports -intricacies of intl business make reports a vial control method -it allows managers to respond effectively -they function as early warning systems, alerting managers to plan deviations -MNEs use report formats and schedules for foreign operations that resemble those uses domestically Visits to Subsidiaries -many senior managers often visit subsidiaries; face to face meetings and budget reviews help promote direct credible communication between headquarters and local managers Evaluative Metrics -financial metrics in measuring performance on budget compared with profit, and sales values -nonfinancial criteria include market share, quality control, turnover ratios -MNEs adjust evaluation metrics to avoid penalizing/rewarding mgrs for conditions beyond their control Information Systems -most MNEs use enterprise resource planning to monitor activities -a system that relies on a combo of measurements is more reliable than one that doesnt -MNEs face constraints in acquiring info; esp the cost of the info compared to its value Which Control System When? -MNE tailors its control system to support its strategy -MNEs prefer market controls when following a global strategy -transnational companies find value in clan control Organization Culture Defn- coherent set of assumptions about an MNE and its goals/practices shared by its members -shapes how managers make decisions, take actions, sustain a common cause Key Piece of the Puzzle

-multinational operations involve a difficult balancing act; giving people around the world the freedom to develop new ideas but ensuring they implement them with global objectives in mind -execs now see org culture important to implement their strategy -it stimulates people to engage the cos vision, do their jobs well, collaborate with others -is a critical component of an MNEs transition from good to great -it depends on a culture of faith and passion, discipline and focus, clearly communicated core values Cultures Increasing Importance -rise in emerging economies and maturing growth in the West push managers to question strategies and reposition operations -reinventing systems of production, distribution and experimenting with entirely new business models -sophisticated value chain configurations escalate demands on the organization; lower success chance -improving compatibility between MNEs culture and its strategy proves a more effective approach to superior performance Building an Organization Culture -corporate culture is as important as a strategy for business success -makes culture a key aspect of an MNEs organization design -organizing a globally integrated enterprise requires extensive coordination/collab among workers Techniques and Tools -values and outlooks of managers often differ; diff values impose boundaries that undercut coordination -managers therefore use a variety of techniques; cross national teams are a prevalent tool -others take a more comprehensive approach, rotating high performing execs from headquarters and subsidiaries throughout global units -MNEs from other cultures share parallel outlooks and apply similar practices -socializing employees with management secrets enables everyone in the co to base decisions on a philosophical sense of purpose to think long term, and to add value to the org -instead of letting an orgs culture emerge naturally, many mngrs do as they do with structure&systems Organization Culture and Strategy -strategy imposes requirements that call for certain configuration of structures -the preferred principles of org culture vary with the requirements of the MNEs strategy -an orgs culture shapes its strategic moves -an MNE implementing a global strategy may enforce a forceful culture that insists on universal goals -it spurs employees worldwide to accept and adopt the MNEs standards -will result in a lower tolerance for different perspectives -companies implementing a multidomestic strategy will encourage local interpretation of global goals -adapting these value activities to local standards requires decentralization -people in diff units share fewer common values

Ch 17- Global Manufacturing and Supply-Chain Management Supply chain- coordination of materials, info, funds from the raw-material supplier to end consumer -supply chain management is the design, operation and improvement of the systems that create and deliver the firms primary products and services Logistics/materials management- inbound movement and handling of materials and products from purchasing through production to meet consumer demands -logistics focuses on transporting and storing materials and final goods -supply chain management includes logistics, and handling supplier/customer relations Global Manufacturing Strategies Factors in Manufacturing Strategy Compatibility -consistency b/n foreign investment decision and companys competitive strategy -managers must consider: Efficiency/cost strategiescost minimization strategies Offshore manufacturing- investment that takes place in a country other than the home country -China has become the hot spot for manufacturing, known as the worlds factory floor -its output is so big that is exerts deflationary pressure around the world on products like textiles, tv, furniture, auto parts, mobile phones -total cost analysis; when implementing cost minimization, managers must take into consideration all other costs as well, like shipping distances, extra inventory, security risks, availability of skilled workers -total cost analysis takes into account the costs of ownership like storing/transporting inv, and disposal Dependability strategiesgrowing customer demand for dependability and prompt deliveries has caused companies to locate plants closer to customers Innovation and quality strategiesas long as foreign operations ensure high quality and contribute to innovation, companies will keep setting up operations abroad Flexibility strategiesneed for responsiveness or flexibility in national market differences may result in regional manufacturing to service local markets Changes in strategyas a companys competitive strategies change, so do its manufacturing -a company may use diff strategies for diff product lines Manufacturing Configuration (3) Centralized manufacturingmanufacture and export strategy that offers standard, lower priced products to diff markets Regional manufacturingserves customers within a specific region Multi-domestic manufacturingmarket expansion in individual countries might use this approach where a firm manufactures products close to its customers using country-specific manufacturing facilities to meet local needs -the reduction of trade barriers reduces the need to have manufacturing facilities in every country but country size may result in companies establishing manufacturing facilities to supply the local market -countries specialize in the production of parts or final goods, aka rationalization

Coordination and Control -integrating activities into a unified system -it includes everything along the global supply chain -it must adopt a control system to ensure company strategies are carried out -it measures performance so companies can respond appropriately Information Technology and Global Supply-Chain Management Electronic Data Interchange (EDI)- electronic linkage of suppliers, customers, 3rd party intermediaries to expedite documents and financial flows -used to link exporters with customs to speed up cross border deliveries Enterprise resource planning (ERP)- software that links info flows from diff parts of a business and from diff geographic areas -disadv is its inability to tie in to the customer and take advantage of e-commerce -material requirements planning (MRP) addresses complex inventory situations and calculates the demand for parts from production schedules -RFID labels a product with an electronic tag that stores and transmits info on the product -the real time info allows manufacturers, suppliers, distributors to keep track of products throughout their manufacturing processes E-commerce- use of Internet to join together suppliers with companies, companies with customers Extranet- provides a linkage to info system via the Internet to those outside the organization Intranet- helps automate and speed up internal processes in a company Private technology exchange (PTX)- collaboration model that brings manufacturers, distributors, value added resellers, customers together through the Internet to execute trading transactions The Digital Divide demonstrates that while some networks can be managed through the Internet, some cant due to the lack of technology or low Internet speeds -the use of Internet varies by location and country -it has created difficulties for companies to implement info systems with its suppliers -IT can help cos manage global supply chains, but must carefully integrate it into their overall strategy -it is esp true internationally, where diff countries are used to their own IT systems and have difficulties adapting to a global IT format Quality Defn- meeting or exceeding the expectations of a customer -its conformance to specifications, value, fitness for use, support -ensures that the orgs systems can consistently produce the design Zero defects- refusal to tolerate defects of any kind Acceptably quality level (AQL)- tolerable level of defects that can be corrected through repair warranties -was used before zero defects was created -it required rework stations and the goal of pushing through products as fast as possible, and then dealing with the mistakes later Demings 14 Points- approach to quality that emphasizes the responsibility for quality to be within the policies and practices of managers

-was designed to reduce the variance in the manufacturing process through statistical control, design, training, and through the policies of managers -higher quality would lead to lower costs and better acceptance by the consumer -various regions of the world have approached the concept of quality management in diff ways -lean production process, statistically based, standards of quality Total Quality Management (TQM) Defn- stresses 3 principles of customer satisfaction, continuous improvement, employee involvement -goal is to eliminate all defects -focuses on benchmarking world-class standards, product and service design, process design, purchasing -difference b/n AQL and TQM: -in AQL quality is a characteristic -in TQM quality makes the product so good consumers wont buy anywhere else -it is a process of continuous improvement at every orgl level -key is to make continuous improvement a part of every employees daily work -TQM in a global setting is hard because of cultural differences Six Sigma Defn- aims to eliminate defects, slash product cycle times, cut costs across the board, reduce defects -uses data and statistical analysis to identify defects in a product, reduce variability, and achieve as close to zero defects as possible -acronym DMAIC: define; measure; analyze; improve; control Quality Standards (3) General Level Standards ISO- facilitates the intl coordination and unification of industrial standards -ISO 9000 is a global set of quality standards to promote quality at every level of an organization -adv; documentation process since it requires workers to examine what they do to improve quality, but also ensures continuity as workers change positions -ISO 14000 is the standard concerned with environmental management -disadv; process can be expensive and time consuming -ISO isnt te solution to all quality issues; some countries falsify ISO certifications Industry Specific Standards -specific standards to fit the industry Company-Specific Standards -companies may set their own standards for suppliers to meet if they are to supply them Supplier Networks Sourcing- a firm that has inputs supplied from outside suppliers for its production process *Figure 17.4 for basic operating env choices -global sourcing is the first step in the process of materials management, including sourcing, inv management, transportation between suppliers, manufacturers, customers

Global Sourcing -three flatteners that are relevant; outsourcing, offshoring, supply-chaining -offshoring is when a company moves from its home country to manufacture abroad Outsourcing- when a company externalizes a process to another business -occurs most with IT in research, service centres, accounting and tax functions Supply chaining- when a co decides to outsource its parts, products or manufacturing to an external co -relates more to the final product -sourcing in the home country allows companies to avoid language barriers, long distances, exchange rates, wars, strikes, tariffs, policies Why Global Sourcing -to reduce costs through cheaper labour, to improve quality -to increase exposure to worldwide tech -to improve the delivery of supplies process -to gain access to goods that are only available abroad -to establish presence in a foreign market -to react to competitors offshore sourcing practices -global sourcing is more expensive than domestic; transportation and communications cost more, and companies will often have to pay broker and agent fees Concerns in Global Sourcing -quality and safety -supply chain is often so long and complex its hard to find who the original producer is -companies must pay attention to natural disasters that can affect countries where they get their goods Major Sourcing Configurations Vertical integration- when a company owns the entire supplier network -company may have to purchase raw materials from outside, but it produces most of the parts -it allows for lower transaction costs Industrial clusters- when buyers and suppliers locate close to each other to do business -Japanese keiretsus are groups of independent companies that work together to manage flow of g&s along the whole value chain -it borders on vertical integration because suppliers set up shop close to assembly operations Make-or-Buy Decision -in subcontracting, cos must decide whether activities should be carried out in home market or abroad -to determine to make or buy, MNE needs to determine manufacturing capabilities of potential suppliers compared to its own capabilities Supplier Relations -are important but sometimes complicated for MNEs trying to manage them around the world

Purchasing Function -purchasing agent is the link b/n the cos outsourcing decision and its supplier relationships -there are four phases before becoming global: -domestic purchasing only -foreign buying as part of procurement strategy -foreign buying based on need -integration of global procurement strategy -when purchasing becomes global, MNEs face the centralize/decentralize option Adv of decentralizationincreased production-facility control over purchases -better responsiveness to facility needs -effective use of local suppliers Adv of centralizationincreased leverage with suppliers -better prices, elimination of administrative duplication Major Sourcing Strategies -assigning domestic buyers for international purchasing -using foreign subsidiaries or business agents -establishing international purchasing offices -assigning responsibility for global sourcing -integrating and coordinating global sourcing -the key is for managers to choose the best supplier, establish a relationship, and continuously evaluate the suppliers performance to ensure the best price, quality, delivery Inventory Management Lean Manufacturing and JIT Systems -lean manufacturing focuses on optimizing processes through the philosophy of continual improvement -emphasizes waste reduction, optimizing quality processes -closely tied to quality management -JIT reduces inefficiency -it gets raw materials, parts and components to the buyer just in time for its use -use of JIT means that parts must have few defects, and have to arrive on time Risk in Foreign Sourcing -it can create big risk for companies that use lean manufacturing and JIT because interruptions in the supply chain will affect everything -it is hard to combine foreign sourcing and JIT production without having safety stocks of inventory on hand, which defeats the purpose of JIT Kanban System -facilitates JIT by using cards to control the flow of production through a factory -when the assembly process begins, a production-order card signifies a bin needs to be moved to the assembly line, and when the bin is emptied, it is moved o a storage area and replaced with another -the kanban card is then removed from the empty bin, and used to order a replacement Foreign Trade Zones Defn- special locations for storing inv to avoid paying duties until the inv is used or sold -intended to encourage companies to locate in the country by allowing them to defer duties

-one place of stockpile inventory is in a warehouse in an FTZ General-Purpose Zones and Subzones -general-purpose FTZ is established near a port of entry -shipping port, border crossing, airport -subzone is physically separate from a general purpose but under the same structure -manufacturing facility -there is growth in subzones rather than general purpose Adv; complete ownership of enterprise, no minimum capital investment, no corp/personal tax -major growth in subzones are in automobile, as well as shipbuilding, pharmaceuticals, home appliances Benefits to a zone user: -no duties or quota charges on goods imported into a zone and then re-exported -customs duties and federal excise tax deferred until it is used -duties reduced if foreign inputs that enter the zone at one duty are higher than what the duty wouldve been on the finished good leaving the zone -streamlined customs procedures -elimination of state and local inventory taxes Transportation Networks -transportation of goods in an intl context is complicated in documentation, carrier -is a crucial element of a logistics system -the key is to link together suppliers and manufacturers on the one hand and manufacturers and final consumers on the other -to be effective, companies need to implement communication systems, satellite tracking systems, barcoding applications, and automated materials-handling systems