PRINCIPLE OF INTERNATIONAL

BUSINESS
o (T) There is less difference
CHAPTER 1 in culture for domestic
business
International business
o (T) For international
- consists of business transactions business, market culture
between parties from more than varies among different
one country. nations and regions
- Examples:
4) Legal system
o Borrowing money from a
bank in one country to - Adjust practices to comply with a
finance operation in another country’s law / local law
country - (T) Affects the attractiveness of a
International business VS domestic country as market
business - (T) Law regulates business
practices and is enforced by
They differ in terms of: government
1) Boundaries - (T) Based on a country’s legal
history
- International - (T) Based on religion
o crossing national
boundaries 5) Availability of resources
o buy products from china - Every country has their own
(Taobao) natural resources
o buy material from other - (T) Every country has their
countries different ways of producing their
- Domestic products and the type of products
o Local transaction (KL to produced also vary.
Malacca / KL to KL) - For example, Malaysia produces
palm oil, rubber, but lack of
2) Currencies
labours but another country may
- Different countries have different enjoy a productive, well-trained
currencies, forcing one party to workforce but lacking of natural
convert its currency to another resources
o (T) Domestic business will -
only use currency of
6) Skills and knowledge
domestic country
o (T) International business - Both businesses needed basic skills
will use currencies of more and knowledge to be successful
than one country - Analyse latest trend to adjust the
product
3) Cultures
o (T) Need to be
- Adjust behaviours to meet knowledgeable on the
expectations of others cultural, political, legal, and
 social differences among China. Another example is
countries mobile phone (providers
open in USA, but wanted to
open stores in China)
Pros:
International business activities
 Improve capital
1) Exporting and importing flow
 Increase
- Import – take product from other employment
country and sell it in our country opportunities
- Export – take product in our  Increased
country and sell to other countries competition that
- Divided into 2 groups: benefits the
o One group of activities is economy
trade in goods – tangible
products (physical object Cons:
that can be touched) such as  Risks of increase
clothing, computers, raw capital outflows
materials.  Low levels of
o Another group of activities research and
is trade in services – development
intangible products (cannot  Risk of interference
be touched physically) by foreign
2) International investment governments
- Foreign portfolio investments
(T) two primary methods for conducting o Purchases of foreign
international business – FDI & FPI financial assets for a
- Foreign direct investments (FDI) purpose other than control
o An investment made by a o consists of securities and
firm or individual in one other financial assets held
country into business by investors in another
interests located in another country.
country o Investors participate
o Purpose is to actively passively in foreign
control property, assets, countries
establishes foreign business o Investors only purchase
operations / acquires equities of foreign-based
foreign business assets companies
o Malaysia (home country) o Relatively liquid depending
and want to invest in China on the volatility of the
(host country) market
o For example, in 2017, U.S.- o Investors done FPI with the
based Apple announced a intention to increase the
$507.1 million investment rate of return on a
to boost its research and portfolio of assets
development work in
 o Buy 1000 share from
SONY, but have no control
over the company (do not
own any property of the
company)
Pros:
 Feasible for retail
investors
 Highly liquid
(company have a lot
of cash)
 Quick return on
investment
Cons:
 no direct control of
investments
 volatile
 case of economic
disruption if
withdrawn
3) International licensing
- (textbook) one country licenses the
use of its intellectual property to a
firm in a second country in return
for a royalty payment OR
- (T) A business arrangement in
which one company gives other
company permission to
manufacture its products for a
specified payment
- Example:
o (T) A company using the
design of a Mickey Mouse
on their products
4) International franchising
- Firm in one country (franchisor)
authorizes a firm in a second
country (franchisee) to use its
operating systems / brand names /
logos, etc in return for a royalty
payment.
- Example: McDonald franchises its
fast-food restaurant worldwide
5) International management contract
- (T) Hire a company to help the
host company to run the business /
a service contract where the
manager manages day to day
operations of a business in
exchange for agreed upon
compensation and benefits
- (textbook) A firm in one country
agrees to operate facilities /
management services to another
firm in another country for an
agreed-on fee
o JW Marriot under YTL
corporation, YTL is
managing it
Type of international business
1) Multinational corporation (MNC)
- (textbook) firms that owns and
controls value-adding activities in
more than one country
- (easy) Corporate organization that
owns / controls production of
goods in at least one country other
than its home country (own &
control foreign assets)
- Has a centralized management
system (coordinate activities from a
central headquarters)
- Allow subsidiaries ( 分 行 ) for
considerable latitudes (freedom to
choose the way to do something) to
adjust their operation to local
circumstances
o McDonald does not sell
pork in Malaysia due to
cultural reasons, but is sold
in many other countries
 - MNCs also buy resources in
variety of countries, and sell those
goods and services in a variety of
countries
o Adidas, Niki (assembles in
different countries)
2) Multinational enterprise (MNE)
- For large MNCs, MNEs is used
instead of MNCs because they are
not true corporations.
- Manage from a global perspective
- Have many companies around the
world
- No centralized management system
- IKEA, HSBC Bank, Tesco, etc
3) Multinational organization (MNO)
- Refers to both non-profit and profit
seeking organization. Because they
are not true enterprises, hence the
MNO is used
- Huawei, Philips (profit seeking)
- UNICEF (non-for-profits)
Contemporary (relate to present time)
cause of globalization
Definition of Globalization
- According to Friedman (2000), is
the inexorable integration of
markets, nation-states and
technologies ....... in a way is
enabling individuals, corporations
& nation states to reach around the
world farther, faster, deeper &
cheaper
- (T) enables resources and
technologies from a country to
reach around the world faster,
deeper and cheaper through import
and export
o It is attractive for business
to establish import and
export operations
Manifestation (one of the different ways
in which it can appear) of globalization
- Intensification of the role of
international trade
- Growing importance of FDI
Causes of globalization
1) Strategic imperatives (factors that
motivate globalization)
- To leverage (ability to influence
situations/people so that you can
control what happens) core
competencies
o Core competency are
resources and capabilities
that comprise the strategic
advantages of a business.
o Core competency is used to
increase revenues and
profits.
o For example, Samsung has
a thing called Chaebol
family (control South
Korea). Everything is
Samsung because Samsung
is the main contributor to
Korea (17% of Korea’s
GDP).
 They recognised the
potential of
increasing their
revenue by
expanding their
operations and sales
in other countries.
2) To acquire resources and supplies
- Expanding into new markets to
generate high revenue and profit
growth
- To get resources because certain
products / services are either scarce
or unavailable locally.
3) To seek new markets
- It is the changes that facilitate
globalization
 - When a firm’s domestic market
matures, it is difficult to generate
revenue and profit.
o For example, the market for
toothpaste is mature in
certain country in such a
way that everyone has had
the financial resources to
regularly purchase
toothpaste.
- Expansion into new markets bring
two benefits, that is:
o Able to achieve economies
of scale, lowering average
costs as a company’s
production increases
o Diversifies a firm’s revenue
stream, meaning that when
a firm has its markets in
other countries, the firm
become less dependent on
its sale in any one country,
thus protecting itself should
that country’s economy
turns sour
4) To better compete with rivals
- (T) an organization needs to be
well prepared for their rivals
o being aggressive and
defensive at the same time
to ensure the product
doesn’t lead by others.
- For example, Coca-Cola expands
aggressively around the world, and
its rival, Pepsi-Cola has no choice
but to keep up with the pace.
o Pepsi-Cola cannot allow
Coca-Cola to dominate the
market because if it does,
Coca-Cola will use profits
from those markets to
finance attack on Pepsi in
still other markets
The environmental causes of
globalization
1) changes in political environment
a. reduction of trade and
investment barriers
b. the collapse of European
Communism
c. the ideological and policy
changes undertaken by China
and India
2) changes in technological environments
a. advances in transportation
b. improvements in information
processing
c. changes in communication
technology
Globalization and emerging markets
1) BRIC
2) Big Ten
3) Non-high-Income countries
TUTORIAL 1
1. Why is it relevant for today's business
students to study international business
and to become culturally literate?
Solution:
a) Students can develop their cultural
knowledge
b) Cultural literacy enables them to
interact with people from diverse
backgrounds
c) Diverse cultures have different
business values and practices
o Some cultures are more
straightforward, some are
more reserved
d) Using internationally accepted
words / phrases can avoid
misunderstanding and create
business communications that have
a positive impact
e) Small businesses are becoming
more involved in international
business
 f) Students may work for a company precedents (any act /
headquartered in another country decision / cases that
g) To better assess career serves as a guide or
opportunities, interact more justification for
effectively with other managers subsequent
and keep pace with competitors situations)
h) Have knowledge of how a country - Civil law
or company fits into the global o A law that is concerned
economy can help all business with the private affairs of
person earn respect, confidence and citizens
a competitive edge  It is a codification
(act, process or
CHAPTER2: LEGAL,
result of arranging
TECHNOLOGICAL, ACCOUNTING,
in a systematic form
APOLITICAL ENVIRONMENT
or code) of what is
2.1 LEGAL SYSTEM and is not
permissible
- Vary dramatically for historical,
(acceptable)
cultural, political and religious
 For example, this
reasons
law deals with
- Rule of law, role of lawyers,
marriage and
burden of proof, judicial review
property ownership,
and laws differs in each country
etc
2.1.1 Laws  This law DOES
NOT deal with
- Common law
criminal cases
o Based on cumulative
o A distinctive difference
wisdom of judges’
between civil and common
decisions on individual
law is on the roles of judges
cases through history
and lawyers
 Relies on detailed
 In common law 
records of similar
judges serve as a
situation and
neutral referee and
statutes (laws that
judges based on the
has been made by a
lawyers who is
government and are
responsible for
formally written
developing their
down) because there
clients' cases and
is no official legal
choosing which
code that can apply
evidence to submit
to a case at hand
on their clients’
 Judges that in
behalf
charge over a case
determine which
  In civil law  purpose behind it) of those
judges take on in power
many of the task of o It is a law which is defined
the lawyers, by complexity, division of
determining the labour, permanence,
scope of the professional management,
evidence to be hierarchical coordination
collected and and control, strict chain of
presented to the command and legal
court authority
- Religious law
2.1.1(A) Impacts on domestically
o Based on officially
oriented law
established rules governing
the faith and practice of a - Firm’s domestic operations
particular religion o Workforce
o For example, Malaysia has  recruitment,
Sharia court for Muslims condensation,
only (Islamic sharia); Hindu labour relations law
law, Christian canon law o Financing
o A country that applies  Securities, banking,
religious law to civil and credit laws
criminal acts is called o Marketing
theocracy  Advertising,
 Theocracy is distribution,
defined as a form of consumer protection
government in law
which God is o Technology
recognized as the  patent, copyright,
supreme civil ruler and trademark laws
o Countries relying on - International competitiveness of
religious law domestic firms
 Having absence of o The laws aforementioned
process and appeal may indirectly affect the
procedures ability of domestic firms to
- Bureaucratic law compete internationally by
o Whatever the country’s increasing their cost,
bureaucrats say it is / yes, leading to reduction of their
regardless of the formal law price competitiveness
of the land, contracts may relative to foreign firms.
be made or broken at the - Business practices of foreign firms
whim (a wish to do operating outside the country’s
something that seems to borders
have no serious reason or
 o Firms whose product are activities outside the US
geared to export market will that will diminish
have to alter their competition in the US
production techniques to market
meet with the regulations of
2.1.1(C) Laws directed against foreign
importing countries even if
firms
the firm’s operations are
legal within their home - Nationalization
country o Transfer of ownership of
resources from the private
2.1.1(B) Laws directly affecting
to the public sector
international business transactions
o This often happens when
- Sanctions the leftist government [aka
o Restraints against left-wing government who
commerce with that country emphasis on ideas such as
(boycott) freedom, equality, rights,
o Restricting access to high progress, internationalism,
technology goods, and fraternity (love and
withdrawing preferential sympathy between 2
tariff treatment, boycotting parties)] obtain power
the country’s goods, and - Expropriation
denying new loans o Host government
- Embargo compensates (pay) the
o Comprehensive sanction private owners for their
against all commerce with a losses
given country - Confiscation
 May be imposed by o Host government offers no
countries acting in compensation
unison or alone - Privatization
- Export control o Conversion of state-owned
o Upon dual-use product property to privately owned
 Exert export control property
on high tech goods o Opposite of nationalization
that used for both o Creates opportunities for
civilian and military international businesses
purposes o Sometimes resulted from
- Extraterritoriality the competitive pressures
o Regulate business activities that a firm face in global
that are conducted outside market
their borders o Argentina, Mexico
o For example, firms are  Privatised
vulnerable to US antitrust telecommunication
lawsuits if they engage in because the
 government are
facing enormous
budgetary pressure
and deficits, and
have found it
difficult to raise the
capital required to
upgrade and expand
state-owned
telecommunication
- Repatriation
o Constrain foreign MNCs by
imposing restrictions on
their ability to repatriate
(return to their home
countries) the profits earned
in the host country
o This restriction is common
in 1980s
o Repatriation control is lifted
as a country adopts more
free market-oriented
policies
2.1.1(D) Impact of MNCs on host
countries
Impact in terms of economic (E), political
(P) and cultural (C)
- Positive effect
o (E) Greater selections,
national brands, high
standards of hygiene, direct
investments in new plant
and factories  thus
creating local jobs
o (E) MNCs also pay taxes
 benefits the local
economy
 help to improve
educational,
transportation
 municipal services
o (E) technology transfer
- Negative effect
o (E) MNCs compete directly
with local firms
 Cause these firms to
lose both jobs and
profit
o (P) MNCs able to counter
efforts (an effort made in
order to oppose another
effort) by host governments
to restrict their activities
 Threaten to shift
production and jobs
to other locations 
(C) raising local
standards of living
and introduce new
products and
services previously
unavailable
 (C) This cause the
people in host
cultures to develop
new norms,
standards, and
behaviours
2.1.1(E) Dispute resolution in
international business
Typically, 4 questions must be answered
for an international dispute to be resolved
1. Which country’s law applies?
2. In which country should the issue
be resolved?
3. Which technique should be used to
resolve the conflict:
a. Litigation
b. Arbitration
c. Mediation
d. Negotiation
4. How will the settlement be
enforced?
Normally, many international business o Some countries invest in
contracts specify answers to these human capital by improving
questions their citizens’ knowledge
and skills
- To reduce uncertainty and expense
 This allows the
(pay money) in resolving disputes
improvement in
2.2 TECHNOLOGICAL productivity and
ENVIRONMENT efficiency of their
workforce
A foundation of a country’s technological
- Technology transfer
environment is its
o Hungary, Poland promoted
- Resource base technology transfer by
o Some countries are blessed encouraging FDI using tax
with resources and other incentives to
 Australia and entice (persuade) firms to
Argentina have build new factories
fertile agricultural - Protection of intellectual property
land rights
 Russia, Saudi o Intellectual property such as
Arabia and South patents, copyrights,
Africa are blessed trademarks, brand names is
with oil, gold, an important asset of most
diamond MNCs.
o Some countries has  It forms the basis of
abundant workforce while a firm’s advantage
some don’t or core competency
 Bangladesh and in the global
Indonesian (labour marketplace
supplies) o Countries that provide weak
 Iceland and New protection for intellectual
Zealand (no labour property is less likely to
supplies) attract technology intensive
o The availability or foreign investments.
unavailability of resources  It also discourages
affect what products are local firms from
being made in a given developing
country intellectual property
- Investments in infrastructure and of their own
human capital
o Canada, Germany and 2.3 ACCOUNTING ENVIRONMENT
Japan invest heavily on
2.3.1 Roots of national differences
highways, waterworks,
communication systems
Factors that influence a country’s o Likely to codify their
accounting system accounting procedures and
standards
- Legal system
 Accounting
- Cultural values and attitudes
practices are
- International political ties
determined by law,
- Sources of capitals not by groups of
- Economic system professional
These factors vary by country. B) National culture
- Detailed accounting procedures
A) Legal system: laid down by French government
Common law and code law countries (code law) reflects France’s statist
- Common law countries (states which has a lot of control
o practiced in US and UK, over the economy) tradition
accounting procedures C) International political ties
evolve based on the a. Most member of British
decision of independent Commonwealth have adopted
standards-setting boards accounting principles and
 UK Accounting procedures of the UK
Standard Board b. France and Netherlands
 US Financial adopted those of their colonial
Accounting rulers
Standard Board D) Economic system
(FASB) - In a centrally planned economy
o Each board work in o Accounting is driven by the
consultation with need to provide output-
professional accounting oriented information to the
groups state planners
 UK Institutes of o Such accounting system
Chartered focus on how state funds
Accountants are used and whether state-
 American Institute mandated production
of Certified Public quotas are being met.
Accountants - In market-oriented system
o Accounting in common law o Managers and investors
countries follow require profit- and cost-
 Generally accepted oriented information
accounting principle E) Capital markets
(GAAP)
- Business entities within different
 Provide true and fair
accounting system rely on earned
view of a firm’s
capital.
performance
- There are 3 main source of finance
- Code law countries
who provides capital to a firm
 o Bank
o Government
o Shareholders
- Contribution of each of these
sources to the creation of a firm’s
capital varies from country to
country
o This means that accounting
practices will differ in order
to satisfy the needs of
financial providers
These factors affect a firm’s decision on
- Reported income and profits
- Valuation of assets and inventories
- Tax reporting
- Desire to operate in a given country
2.3.2 Difference in accounting practices
that will affect international business
A) valuation and revaluation of assets
- most countries accounting system
assume that a firm’s assets should
be valued on a historical cost basis
o this means that an asset is
carried on the firm’s books
according to the asset’s
original cost, less
depreciation
- However, due to inflation, the
market value of an asset is often
higher as compared to its historical
cost
- Resolution of this problem differs
among national accounting systems
B) Valuation of inventories
- Inventory valuation has two
methods
o LIFO
 Raise a firm’s
reported costs of
goods sold,
lowering the book
value of its
inventories, and
reduce its reported
profits
o FIFO
 Provides clearer
estimate of the value
of the firm’s
existing inventories
C) Dealing with tax authorities
- Accounting records form the basis
of assessing a firm’s income tax
burden
- In German, accounting procedures
are detailed explicitly in German
Commercial Code and follow the
requirement of German tax laws.
o Taxable income is
measured by the content of
a firm’s financial records
o There is no difference in the
financial statement reported
to shareholders and to
German tax authorities
- In US, a firm commonly reports
two different sets of financial
statements to their shareholders and
tax authorities (Internal Revenue
Service  IRS)
D) Accounting reverses
- Accounts created in a firm’s
financial reports to record
foreseeable future expenses that
might affect its operations
- For example, a firm might establish
a reverse account for bad debts and
for returned goods, knowing that
when it ships goods, some retailers
might ship the goods back and
some will fail to pay their bills for
the goods.
2.3.3 how will the variation in employees are
accounting practices creates an impact threatened through
on capital market? change in laws,
environmental
- It distorts the measured
standards, tax codes,
performance of firms incorporated
terrorism, armed
in different countries
insurrection
o In Japan, price to earning
o transfer risk
ratios of Japanese firms are
 government
higher compared to US
interfere with a
firms
firm’s ability to shift
 because the
funds into and out
accounting practices
of the country
in Japan often
substantially reduce 2.4.2 how does political risk creates an
reported profits impact on firms?

2.4 POLITICAL ENVIRONMENT - Expropriation

o Loss of future profits
- Most experienced international
- Confiscation
business will engage in political
o Loss of future profits
risk assessment
o Loss of assets
2.4.1 Political risk - Kidnapping, terrorist threats or any
- any changes in the political other form of violence
environment that may affect the o Disrupted production
value of a firm’s business activities o Increased security cost
- it affects from the perspective of o Increased managerial cost
o macropolitical o Lower productivity
 affect all firms in - Increased taxation
country o Lower after-tax profit
o micropolitical
2.4.3 Questions regarding political risk
 affect specific firm
and technological environment that a
in a specific
new firm should consider before
industry
entering a new market
- divided into three
o ownership risk Firms contemplating entering new markets
 the property of a should consider
firm is threatened - Whether the country is a
through confiscation democracy or a dictatorship
or expropriation
- Whether the country relies on free
o operating risk
market or government controls to
 ongoing operations allocate resources
of a firm or the
safety of its
 - Whether the firm’s customers are intervene to protect
in the public sector or the private domestic firms by taxing
sector foreign goods entering
- Whether the government makes domestic markets /
arbitrary policy changes or follows constructing other barriers
the rule of the law against imports
- whether or not the existing o Whether a national
government is stable government should directly
help the country’s domestic
In terms of technological environment, a
firms increase their foreign
firm should
sales through export
- consider the degree of protection subsidies, government-to-
that the law offers to intellectual government negotiations
property (IP) rights. Weak and guaranteed loan
protection for IP rights or programs
inconsistent protection can have - Trade policy debate in North
high costs for international America recently focused on the
business issue whether the government
should promote
o Free trade
 National
government exerts
minimal influence
on exporting and
importing decisions
of private firms and
individuals
o Fair trade
 Aka managed trade
 National
government should
actively intervene to
CHAPTER 3: FORMULATION IN ensure that domestic
TRADE POLICIES firms’ export
receive an equitable
3.1 rationales for trade invention
share of foreign
- Politicians, economists and markets
businesspeople have been arguing  Imports are
for centuries over government controlled to
policy towards international trade. minimize losses of
Two principal issues are domestic jobs and
o Whether a national market share in
government should specific industries
  Some also argued o (/) Governmental nurturing
that government domestic industries will
should ensure a have a comparative
‘level playing field’ advantage
on which foreign  It can be a powerful
and domestic firms economic
can compete on development
equal terms strategy
o Deciding which industries
3.1.1 industry level arguments
deserve infant-industry
(T) What arguments are used to justify protection is often done on
government intervention in foreign trade? a political rather than an
economic basis
- (/) National defence argument
o (/) Many industries that
o (/) A reason to support
deserves protection is not
governmental protection of
willing to give up, thus
specific industries
many infant industries are
o (/) A country must be self-
well-protected into their
sufficient in these things as
old age
listed below to protect their
- Maintenance of existing jobs
industries from foreign
o (/) To maintain employment
competition
levels, firms and workers
 Raw materials
often petition their
 Machinery
governments for relief from
 Technology
foreign competition
o Otherwise, a country will
 Because well-
be pushed around by other
developed firms and
countries that control
their workers in
critical resources
high-wage countries
- (/) Infant industry arguments
often threatened by
o Argued that young nation’s
imports from low-
manufacturers would not
wage countries
survive because of fierce
o (/) Government provide
competition from more
assistance such as
mature firms
 Tariffs
 (/) Government
 Quotas
protection – Impose
- (/) Strategic trade arguments
of tariffs on
o Supports firm’s request for
numerous goods to
protection
protect certain firms
o Apply to those industries
from foreign
competition until capable of supporting only
they could fully a few firms worldwide
establish themselves
  Due to high product
development costs
or strong experience
curve effect
3.2.2 industrial policy
o A national government can
make its country better off
if it adopts trade policies
that improve the
competitiveness of its
domestic firms
3.2 national trade policies
- Besides focusing on individual
industries’ policies that are just
discussed above, a national
government will also develop trade
policies by
o Accessing the needs of the
national economy
o And then adopts industry-
by-industry policies to
promote the country’s
overall economic agenda
3.3 barriers to international trade
3.2.1 economic development programs
3.3.1 Tariffs
- Export promotion strategy
(T) What tools are used to restrict trade
o A country encourages firms
to compete in foreign
markets by harnessing
some advantage the
country possesses
 Such as low labour
cost
o This strategy is used in
Singapore, South Korea,
Taiwan
- Import substitution strategy
o Encourages the growth of
domestic manufacturing
by erecting high barriers
to imported goods
o MNEs respond by locating
production facilities
within these countries to
avoid the costs resulting
from high barriers
- This policy identifies domestic
industries that are critical to the
country’s future economic
growth and then formulate
programs to make them more
competitive
- It assists a country’s firms in
capturing larger share of
important, growing markets
- Some expert thinks that this policy
cannot solve all the problems to
improve global competitiveness of
a country’s firm
o Debate is established on the
question of what is the
proper role of government
in a market economy
- A tax placed on a good that is
traded internationally
- It has been imposed for 2 reasons
o Raises revenue for the
national government
 Imported goods tend
to be purchased by
the wealthier
members of the
society
o Act as trade barrier
 Tariffs raises the
prices paid by
 domestic consumers sold for $1000 or
for foreign goods $2000 each
 Increase the demand o compound tariff
for domestically  comprise of the
produced substitute above two tariffs
goods  6.9 cents per
kilogram + 4.5% of
(T) What are the different types of tariffs?
the product price
- (/) Consist of export tariffs, transit
3.3.2 Nontariff barriers (NTBs)
tariffs and import tariffs
o Export tariffs - these barriers include any
 tariffs that are government regulation, policy or
applied on goods as procedure (other than a tariff) that
they leave the impedes (make progress difficult)
country international trade
o Transit tariffs
(/) three kind of NTBs
 tariffs imposed on
goods that passes - quotas
through one country o (/) a numerical limit on
bound for another the quantity of a good that
 For example, reduce may be imported into a
amount of country during some time
commodities period
o Import tariffs o used to protect politically
 tariffs collected on powerful industries from
imported goods the threat of competition
- (/) Import tariffs consist of three  such as agriculture
o Ad valorem tariff  automobile
 Percentage of the  textile
market value of the o (/) some countries replaced
imported good quotas with tariff rate
 For example, 10, 25 quotas
or 35% depending  imposes a low tariff
on the country rate on a limited
o specific tariff amount of imports
 specific dollar of a specific good
amount per unit of under quota’s
weight or other threshold
standard measure  impose a
 For example, $300 prohibitively high
dollar per car tariff rate on the
whether the car is good
- (/) numerical export controls
 o impose quantitative barriers o Product and testing
to trade, in the form of standards
numerical limits on the  A common form of
amount of a good it will NTB is a
export requirement that
 those quantitative foreign goods meet
trade barriers are a country’s
voluntary export product standards
restraint and or testing standards
embargo before the goods can
o voluntary export restraint be offered for sale
(VER) in that country.
 a promise by a o Restricted access to
country to limit its distribution networks
exports of a good  Restricting foreign
to another country suppliers’ access to
to a pre-specified the normal
amount / percentage channels of
of the affected distribution may
market also function as an
 this is done to NTB.
resolve / avoid o Public-sector
trade conflicts with procurement policies
an otherwise  Public-sector
friendly trade procurement
partner policies that give
o embargo preferential
 adopted to punish a treatment to
country’s political domestic firms are
enemies another form of
 it is an absolute NTB.
ban on the o Local-purchase
exporting (and / or requirements
importing) of  Host governments
goods to a particular may hinder foreign
destination firms from
o Numerical export control is exporting to or
also used to promote a operating in the host
country’s industrial policy countries
or the competitiveness of  By requiring the
its other industries firms to purchase
- (/) other NTBs goods or services
from local suppliers.
 sales outlets for
o Regulatory controls domestic producers.
 Governments can  Importers are
create NTBs by forced to purchase
adopting regulatory foreign exchange
controls, such as from the central
conducting health bank at
and safety unfavorable
inspections, exchange rates,
enforcing thus raising the
environmental domestic prices of
regulations, foreign goods.
requiring firms
 to obtain licenses o Investment controls
before beginning  Controls on foreign
operations or investment and
constructing new ownership are
plants, and charging common.
taxes and fees for  Normally the
public services that controls are applied
affect the ability of in key industries
international such as
businesses to broadcasting,
compete in host utilities, air
markets. transportation,
o Currency controls defense
 Many countries, contracting, and
particularly financial services.
developing  Such controls often
countries and those make it difficult for
with centrally foreign firms to
planned economies, develop an
raise barriers to effective presence
international trade in such markets
through currency
3.4 (T) Promotion of international trade
controls.
 Exporters of goods - Promotion of international trade
are allowed to can be done through
exchange foreign o Subsidies
currency at o Establishment of foreign
favorable rates so trade zone
as to make foreign o Export financing program
markets attractive - Promotion is done for two reasons
 o To create jobs in the export
sector
o To attract investment to
economically depressed
area
- Subsidies
o Countries often seek to
stimulate exports by
offering subsidies
 To reduce firms’
cost of doing
business
o National, state, and local
government often provide
economic development
incentives to entice firms to
locate or expand facilities in
their communities
 To provide jobs and
increase local tax
bases
o It may affect international
trade by artificially
improving a firm’s
competitiveness in export
markets or by helping
domestic firms fight off
foreign imports
o may grow so large as to
disrupt the normal pattern
of international trade
- foreign trade zone (FTZ)
o a geographic area where
imported or exported goods
receive preferential tariff
treatment
o Used to spur regional
economic development
o Utilization of FTZ typically
can reduce, delay, or
sometimes totally
eliminate customs duties
 For instance, a firm
can import a
component into an
FTZ, process it
further, and then
export the processed
good abroad and
avoid paying
customs duties on
the value of the
imported component
- Export financing programs
o For big-ticket items such as
aircraft or offshore drilling
rigs, success or failure in
exporting depends on a
firm’s producing a high-
quality product, providing
reliable repair service
after the sale, and offering
an attractive financing
package
 Importance of
financing package
has led most major
trading countries to
create government-
owned agencies to
assist their domestic
firms in financing
export sales.
 For example,
export-import bank
of U.S (Eximbank)
provides financing
for U.S exports
through direct loans
and loans guarantees
3.5 Controlling unfair trade practices
- Countervailing duty (CVD)
o Ad valorem tariff imposed
on imported goods
 o Imposed by importing and charge
country to counter the monopoly prices to
impact of foreign host country
subsidies consumers once
o It is calculated to just offset competitors have
the advantage the exporter been eliminated
obtains from the subsidy CHAPTER 4 – THE ROLE OF
o To ensure trade can still be CULTURE
driven by the competitive
strengths of individual 4.1 Characteristics of culture
firms and the laws of (T) Discuss the primary characteristics of
comparative advantage, culture
rather than driven by the
subsidies that governments - Learning behaviour
offer their firms o can be transmitted from one
- Antidumping laws member of the society to
 This law protects local industries another
from dumping by foreign firms. o Transmitted
There are two types of dumping intergenerationally
o First type of dumping  Parents teach their
occurs when a firm sells its children table
goods in a foreign market manners and
at a price below what it language
charges in its home o Transmitted
market intragenerationally
 Known as  Seniors educate
international price incoming freshman
discrimination about a school’s
o Second type involve the tradition
firm’s selling its goods - Interrelated
below cost in the foreign o Hierarchical society that
market stresses harmony and
 Also known as loyalty
predatory pricing  For example,
 However, the Japan’s group-
concern of this oriented stresses
predatory pricing is harmony and loyalty
that a foreign which historically
company may lower translated into
its prices in the lifetime
host country, drive employment and
host country firms minimal job
out of the market switching
- Adaptive defines the membership in
o Culture changes in the society
response to external o Individuals who share a
forces that affect the culture are a member of
society the society and those who
o Adapt means people are do not are not a member of
willing to apply and use the the society
culture in their living  We take off our
environment shoes when entering
 For example, after the house, but some
World War II, culture does not
Germany was 4.2 elements of culture
divided into free- 1. Social structure
market-oriented - also known as social difference
West Germany and - It is a society’s basic social
communist- organization, which includes
controlled East o Social structure, overall
Germany. framework that determine
 Despite their having the role of individuals
a common heritage within the society, the
developed over stratification of the society,
centuries, this and individuals’ mobility
division created within the society
large cultural - Individual, families and groups
differences between o Differ in the way they
Ossis (East define family
Germans) and o and in the relative
Wessis (West importance they place on
Germans). the individual’s role
 The differences within groups
resulted from o Also differ in the
adaptations of the importance of the
East German culture individual relative to the
to the dictates of group
communist ideology  U.S culture promote
regarding attitudes individualistic, that
toward work, risk is – encourages
taking, and fairness independent talent
of reward systems  Japan – children are
- Shared taught to serve a
o Culture is shared by the group
member of the society and o Cultures are differed by
social stratification
  Society categorise communicate with each
people to some other
extent on the basis - Provide clues about the cultural
of their- values of the society
 Birth - Offers indications about the
 Occupation diversity of a country’s
 Educational population
achievement o It suggests that there may
 The importance of also be differences in the
these categories in income, cultural values,
defining how and educational
individuals interact environments
with each other - Language as a competitive
within and between weapon
these groups varies o Linguistic ties often create
by society competitive advantages
- Social mobility because the ability to
o Ability of individual to communicate in many
move from one stratum of different languages is
society to other important in business
 Caste system transactions
 Class system - Lingua Franca
 In Malaysia, o To conduct business,
education is international
believed to be able businesspeople must be
to change a person’s able to communicate
class of society from o English as the predominant
one to another common language
2. Language - Translation
- Shape one’s perception of the o Linguistic differences may
world be overcome by translation
- It organizes the wat members of a o But it requires more than
society think about the world. just merely substituting one
- It filters observations and word of a language to
perceptions and thus another
o Affect unpredictably the  Translators are
messages that are sent when sensitive to
two individuals try to subtleties in the
communicate connotations of
- It is a primary delineator of words and focus on
cultural groups translating ideas and
o Important means by which not the words
a society’ member themselves
  Create marketing o Have different give giving
disasters etiquettes
 For instance, KFC o Japan business etiquette
Finger Licking good requires solicitous
 into Chinese = hospitality – elaborated
Eat your fingers off meals and after-hour
(less appetizing) entertainment serve to build
o It affects in two different personal bond and group
ways harmony
 Take the language  Personal bonds are
of their foreign strengthened by
clients into account exchange of gifts
 Using native  Business gifts are
languages in their opened in private to
internal avoid the giver to
communication lose face should the
 Avoid unexpected, gift be too
unwanted or adverse expensive or too
reactions cheap relative to the
- Back-translation gift in return
o Reduce the chances of o Some hospitality affects the
sending wrong message by way bad news is delivered
a firm to a customer  In US, bad news is
o One person translates a delivered asap
document, and another  In Korea, it is
person will translate back delivered at the end
to the original language of the day to avoid
o Saying No: Cultural ruining the
difficulty that recipient’s whole
businesspeople face is that day
words may have different  In Japan, bad news
meaning to person with are delivered by
diverse cultural background junior member of
3. Communication one negotiating
- Nonverbal communication group to another
o Facial expression junior member of
o Hand gestures the other team or
o Intonation through third party
to maintain
o Eye contact
harmony among
o Body positioning
participants in a
o Body posture
project
- Gift giving and hospitality 4. Religion
 - Religion shapes the attitudes of
adherent work, consumption,
responsibility and future planning
- It often imposes constraints on the
role of individual
- It will affect consumer’s buying
behaviour
- Impact on international business
o Depending on the country’s
legal system
o Homogeneity of religious
belief
o Toleration of other religious
viewpoint
5. Values and attitudes
- Attitude about times
o US view time as money
o Arab view it otherwise
- Age
o US  youthfulness is a
virtue
o Arab & Asian - age is
respected & reflect
manager’s stature
- Education
o US  higher education
- status
o refers to personal
accomplishments,
professional achievements
o US  hard work are
honoured
4.3 low-context-high-context approach
- useful way of characterizing
differences in culture
- low-context culture
o words used by speaker
explicitly convey the
speaker’s message to the
listener
o place more importance on
the specific terms of a
transaction
- high-context culture
o the context in which a
conversation occurs is just
as important as the words
that are actually spoken
o place higher value on
interpersonal relations in
deciding whether to enter a
business arrangement
 meetings are often
held to determine
whether the parties
can trust each other
and work together
comfortably
4.4 (T) The cultural cluster approach
- A technique for classifying and
making sense of national
cultures.
- Similarities exist among many
cultures, thereby reducing some of
the need to customize business
practices to meet the demands of
local cultures.
- Anthropologists, sociologists, and
international business scholars
have analyzed such factors as job
satisfaction, work roles, and
interpersonal work relations in
an attempt to identify clusters of
countries that share similar
cultural values that can affect
business practices
- Many clusters are based on
language similarities, history,
religion and economic
development
 - Cultural clusters comprise of
countries that share many
cultural similarities
o For example, the Anglo
cluster comprises of
 Great Britain,
 Australia,
 South Africa,
Canada,
4.5 (T) Hofstede’s five dimension
 New Zealand,
 Ireland
 United States,
 Germanic,
 Latin American,
 Middle East
(excepting Turkey)
 to a lesser extent, in
the Nordic and Latin
European clusters.
o The Anglo cluster have a
cultural emphasis on
individualism, assertiveness
and indulgence
o One can disagree with some
placements of countries
within clusters. Spain and
the countries of Latin
America share many culture
values.
4.4.1 (T) how does understanding
cultural clusters are useful for business
manager?
- able to develop the low-context-
high-context classification scheme,
which focuses on the importance of
context within a culture.
- countries with cultural clusters
share a common language and this
helps the international business
managers to overcome the
language barrier which would ease
the difficulties of doing business
internationally.
- helps international business
managers to formulate their
internationalization strategies.
- helps international business
managers to classify and make
sense of national cultures
- Social orientation
o Divided into collectivism
and individualism
o Individualism is the
cultural belief that the
person comes first.
 These people often
put their own career
interests before the
good of their
organization
 they tend to assess
decisions in terms of
how those decisions
affect them as
individuals.
 Individualism thinks
in terms of ‘I’
o Collectivism is the belief
that the group comes first.
 Societies that tend
to be collectivistic
are usually
characterized by
well-defined social
networks, including
extended families,
tribes, and
coworkers.
 People are expected
to put the good of
the group ahead of
their own personal
 welfare, interests, or behaviour behaviour
success. comfortable with fear of ambiguous
 Collectivism thinks ambiguous situations and
in terms of ‘we’ situations and with unfamiliar risk.
- Power orientation unfamiliar risk. Students prefer
o Power respect Students prefer structured learning
 For collectivism open-ended situations and are
individuals learning situations concerned with the
 Accept the power right answer
and authority of
their superior Tolerance for Need for precision
o Power tolerance ambiguity and and formalization
 For individualism chaos
individuals
 Likely to question a - Goal orientation
decision from o Manner in which people are
someone at a higher motivated to work towards
level different kinds of goals
- Uncertainty orientation o Divided into passive goal
o Divided into uncertainty behaviour and aggressive
acceptance and uncertainty goal behaviour
avoidance o aggressive goal behavior
o Uncertainty acceptance  tend to place a high
 are stimulated by premium on
change and thrive material
on new possessions, money,
opportunities. and assertiveness.
 Ambiguity is seen o passive goal behavior
as a context within  place a higher value
which an individual on social
can grow, develop, relationships,
and carve out new quality of life, and
opportunities. concern for others
o Uncertainty avoidance
 dislike ambiguity Passive goal Aggressive goal
Individualism collectivism
and will avoid it
behaviour behaviour
whenever possible.
Relationship and Challenge, earning,
 Ambiguity and
quality of life are recognition, and
change are seen as
important advancement are
undesirable.
important
Uncertainty Uncertainty Failing in school Failing in school is
acceptance avoidance is a minor a disaster
Individualism Collectivism incident
People work to People live to work  a process by which
live people not only
understand a foreign
culture but also
- Time orientation
modify and adapt
o (T) Divided into long-term
their behaviour to
and short-term time
make it compatible
orientation
with that culture
o (T) long-term orientation
 tends to be
pragmatic, modest,
and more thrifty
o (T) short-term orientation
 tend to place more
emphasis on
principles,
consistency and
truth, and are
typically religious
and nationalistic

o Businesspeople tend to
make mistake of relying on
self-reference criterion CHAPTER 6: INTERNATIONAL
 Unconscious of the TRADE INVESTMENT
use of one’s own 6.1 difference between trade and
culture to help international trade
assess new
surrounding - trade is the voluntary exchange of
o To be successful, goods, services, assets, or money
international between one person or organization
businesspeople must and another
remember that they are a o barter system
foreigner and must attempt - international trade is the trade
to behave according to the between residents of two countries.
rules of the culture at hand. The residents may be individuals,
They are many ways in firms, not-for-profit organization,
which to obtain knowledge or other forms of association
about other culture to
6.2 classical country-based trade
achieve cross-cultural
theories
literacy
 it is the first step in 1. early country-based trade theories
acculturation
 - focused on the individual country therefore should export that
- useful in describing trade in good
commodities – standardized, - Adam Smith (the father of free-
undifferentiated goods (oil, sugar) market economics)
- price is an important component of o Advocate free trade among
the customer’s purchase decision countries
o He believed that it can
2. modern firm-based theories enlarge a country’s wealth
- focus on the firm’s role in o And be able to expand the
promoting international trade amount of goods and
- useful in describing patterns of services available to it by
trade in differentiated goods ‘specializing’ in the
(consumer electronic, personal care production of some goods
products) and services and trading for
- brand name is an important others
component of the customer’s  Malaysia has the
purchase decision absolute advantage
on rubber
3. mercantilism - For instance, assuming that we
- a country’s goal should be to have France and Japan
enlarge these holdings by o France
promoting exports and  One hour of labour
discouraging imports can produce either
- increased exports two bottles of wine
- reduced imports or three clock radios
- it benefits certain members of
society
o Japan
o so mercantilist policies are
 One hour of labour
still politically attractive to
can produce either
some firms and their
one bottle of wine
workers.
or five clock ratios
o Modern supporters of such
o France has an absolute
policies are called
advantage in production of
neomercantilists or
wine over Japan
protentionists
o Japan has an absolute
4. Absolute advantage advantage in production of
clock radios over France
- Definition of absolute advantage
o trade between nations Country’s Import Export
occurs when one nation is level of goods and goods and
absolutely more productive
productivit services services
than other nations in the
production of a good & y
More /
 productive many clock radios as
than other France does but only 0.5
countries times as much wine. Hence,
Less Japan is relatively more
productive productive in clock radios.
/
than other - Suppose productivity stays the
countries same in Japan but doubles in
France as the result of new job
5. Comparative advantage training programs.
- David Ricardo’s comparative o France now can produce
advantage theory four bottles of wine or six
o Talks about relative clock radios per hour of
productivity differences labor.
o Opportunity cost in  France now has an
absolute advantage
determine which good a
in both wine and
country should produce
clock radios: For
o A country should produce
each hour of labor,
and export those goods and
France can produce
services for which it is
three more bottles of
relatively more productive
wine (four minus
than other countries are and
one) or one more
import those goods and
clock radio (six
services for which other
minus five) than
countries are relatively
Japan can.
more productive than it is
o According to the theory of
- For instance, the theory of absolute
absolute advantage, no
advantage says that France should
trade should occur because
export wine to Japan and Japan
France is more productive
should export clock radios to
than Japan in producing
France.
both goods.
o France also has a
o The theory of comparative
comparative advantage in
advantage, on the other
wine: With 1 hour of labor
hand, indicates that trade
it produces 2 times as much
should still occur.
wine as Japan does but only
 France is 4 times
0.6 times as many clock
better than Japan is
radios. Thus, France is
in wine production
relatively more productive
but only 1.2 times
in wine
better in clock radio
o Japan has a comparative
production.
advantage in clock radios:
(Alternatively,
With 1 hour of labor it
Japan is only 0.25
produces 1.67 times as
 times as good as productive
France in wine than other
production but 0.83 countries
times as good in Relatively
clock radio less
production.) France productive /
is comparatively than other
better than Japan in countries
wine production,
whereas Japan is 6. Relative factor endowments
comparatively better - Heckscher-Ohlin theory
than France in clock
o Factor endowments (or
radio production. By
types of resources) vary
the theory of
among countries.
comparative
 For example,
advantage,
Argentina has much
 France should
fertile land, Saudi
export wine to Japan
Arabia has large
and Japan should
crude oil reserves,
export clock radios
and Bangladesh has
to France.
a large pool of
 If they do so, both
unskilled labor.
will be better off.
o Goods differ according to
- Conclusion of theory of
the types of factors that are
comparative advantage
used to produce them.
o You are better off
 For example, wheat
specializing in what you do
requires fertile land,
relatively best.
oil production
o Produce (and export) those
requires crude oil
goods and services you are reserves, and
relatively best able to apparel
produce, and manufacturing
o buy other goods and requires unskilled
services from people who labor
are relatively better at - Pattern of comparative advantage
producing them than you o Differences in relative
are.
factor endowment
Country’s Import Export  Export products that
level of goods and goods and use relatively
productivit services services abundant factors of
y production
Relatively /  Import products that
more need relatively scare
 factors of marketing
production executives must
- From these observations, they monitor customer
developed a theory reactions closely.
o A country will have a  Furthermore, the
comparative advantage in firm often
producing products that minimizes its
intensively use resources investment in
(factors of production) it manufacturing
has in abundance. capacity for the
- However, results were tested and it product, and sells
is the opposite of what Heckscher- mostly to the
Ohlin theory suggested domestic market.
o Known as the Leontief o In Stage 2, the maturing
Paradox product stage,
 demand for the
U.S Export U.S Import product expands
Heckscher- Capital- Labour-
dramatically as
Ohlin intensive intensive
consumers
theory goods goods
recognize its value.
(abundant (labour
 The innovating firm
capital) scarcity)
builds new factories
Leontief U.S imports were more
to expand its
Paradox capital-intensive than
capacity and satisfy
were U.S exports
domestic and
foreign demand for
the product.
 Domestic and
6.3 modern firm-based trade theories
foreign competitors
- Vernon’s product life cycle begin to emerge,
theory consists of three stages lured by the
o In Stage 1, the new product prospect of lucrative
stage, earnings.
 a firm develops and  For example, Apple
introduces an II at San Francisco
innovative product in 1977- within 3
in response to a years, Apple had
perceived need in sold 130,000 units
the domestic and expanded
market. production facilities
 The existence of a o In Stage 3, the
profitable market standardized product stage,
for the product is  the market for the
uncertain, so product stabilizes.
 The product o Intraindustry trade
becomes more of a  international trade
commodity, and in manufactured
firms are pressured goods results from
to lower their similarities of
manufacturing costs preferences among
as much as possible consumers in
by shifting countries that are at
production to the same stage of
facilities in economic
countries with low development.
labor costs. o This theory suggests that
 As a result, the most trade in manufactured
product begins to be goods should be between
imported into the countries with similar per
innovating firm’s capita incomes and that
home market (by intraindustry trade in
either the firm or its manufactured goods should
competitors). be common
 In some cases,  Particularly useful
imports may result in explaining trade
in the complete in differentiated
elimination of good
domestic o differentiated goods are
production. those such as automobiles,
- Linder’s country similarity expensive electronics
theory equipment, and personal
(T) what is the difference care products,
between interindustry trade and  for which brand
intraindustry trade? Provide an names and product
example to illustrate your reputations play an
answer. important role in
o Interindustry trade consumer decision
 is the exchange of making.
goods produced by o Undifferentiated goods,
one industry in such as coal, petroleum
country A for goods products, and sugar,
produced by a  are those for which
different industry in brand names and
country B, such as product reputations
the exchange of play a minor role at
French wines for best in consumer
Japanese clock purchase decisions.)
radios.
- new trade theory flows may be
o firms competing in global determined by
marketplace have numerous which firms make
ways of obtaining a the necessary R&D
sustainable competitive expenditures.
advantage  Thus, the firm that
 The more popular acts first often gains
ones are owning a first-mover
intellectual property advantage.
rights, o Achieving economies of
 investing in research scope.
and development  Economies of scope
(R&D), occur when a firm’s
 achieving average costs
economies of scope, decrease as the
and number of different
 exploiting the products it sells
experience curve. increases. These
o Owning intellectual lower costs give the
property rights. firm a competitive
 A firm that owns an advantage over
intellectual property global rivals.
right—a trademark, o Exploiting the experience
brand name, patent, curve.
or copyright—often  For certain types of
gains advantages products, production
over its competitors. costs decline as the
o Investing in research and firm gains more
development. R&D experience in
 is a major manufacturing the
component of the product.
total cost of high-  Experience curves
technology may be so
products. significant that they
 Because of such govern global
large “entry” costs, competition within
other firms often an industry.
hesitate to compete  For example,
against established Samsung dominate
firms. production of low-
 According to the cost, standardize
global strategic semiconductor chip.
rivalry theory, trade US company
such as Intel use the
 experience curve to tune products that
maintain leadership also can be
in the production of marketed
high-priced, internationally.
proprietary chips o Related and supporting
that form the brains industries
of newer  The emergence of
microcomputers an industry often
- Porter’s theory of national stimulates the
competitive advantage development of
o Porter's work stresses the local suppliers
role of factor creation eager to meet that
through training, research industry’s business
and innovation needs.
o Factor conditions
 Competition among
 A country’s factors
input suppliers leads
of production affect
to lower prices,
its ability to
higher-quality
compete.
products, and
 Porter goes beyond
technological
the basic factors
innovations in the
(land, labor, and
input market, all of
capital) to include
which reinforce the
the educational level
industry’s
of the workforce
competitive
and the quality of
advantage in world
the country’s
markets.
infrastructure.
o Firm strategy, structure,
o Demand Conditions
and rivalry
 The existence of a
 Firms overcome
large, sophisticated vigorous domestic
consumer base often
competition by
stimulates the reducing costs,
development and
boosting product
distribution of quality, raising
innovative
productivity, and
products as firms developing
struggle for
innovative
dominance in their products.
domestic markets.
 Firms that have
 In meeting their been tested in this
domestic customers’
way often develop
needs, firms the skills needed to
develop and fine-
 succeed - For example, Caterpillar enjoys all
internationally. 3 of these advantages in competing
 Further, many of the in Brazil against local firms
investments they o Ownership advantage
have made in the  firm must own some
domestic market are unique competitive
transferable to advantages that can
international overcome the
markets. disadvantages of
competing with
6.4 types of international investments
foreign firms on
- Foreign portfolio investment their home turfs,
(FPI)  This advantage may
o represents passive holdings be a brand name,
of securities such as foreign ownership of
stocks, bonds, or other proprietary
financial assets. technology, the
o Modern finance theory benefit of
suggests that foreign economies scales,
portfolio investments etc.
 will be motivated by o location advantage
attempts to seek an  undertaking the
attractive rate of business activity
return while must be more
 reducing the risk profitable in a
that can come from foreign location
geographically than undertaking it
diversifying one’s in domestic
investment location. For
portfolio. instance, Caterpillar
- Foreign direct investment (FDI) produces bulldozers
o acquisition of foreign assets in Brazil to enjoy
for the purpose of lower labour costs
controlling them. and avoid high tariff
o FDI may take many forms, walls on goods
including purchase of exported from its
existing assets in a foreign US factories
country; new investment in o internalization advantage
property, plant, and  the firm must
equipment; and benefit more from
participation in a joint controlling the
venture with a local partner. foreign business
activity than from
6.5 international investment theories
 hiring an supply factors include production
independent local costs, logistics, availability of
company to provide natural resources, and access to key
the service control is technology.
advantageous. - The decision to engage in FDI may
 For example, when be  affected  by  such  demand 
monitoring & factors  as developing access to
enforcing the new customers, obtaining
contractual marketing advantages through local
performance of the production,   exploiting  
local company is competitive   advantages,   and  
exp. when the local maintainingnearness   to customers
company may as they internationalize their
misappropriate operations.
proprietary - Political considerations may also
technology or when play a role in FDI. Often firms use
the firm's reputation FDI to avoid host country trade
and brand name barriers or to capture economic
could be jeopardised development incentives offered by
by poor behaviour host country governments.
of local company  ---------------------------------------------------
all those are vital for -
Caterpillar The supply factors that encourage FDI
include:
6.6 Numerous factors influence a firm’s
decision to undertake FDI - Production costs.
o Firms often undertake
--------------------------------------------------- FDI to lower
- production costs.
(T) What motivates firms to become o Foreign locations may
involved in international trade and be attractive because of
foreign direct investment? lower land prices, tax
rates, commercial real
- MNEs engage in international trade estate rents, or because
for a variety of reasons but mainly of better availability and
because both parties to the lower cost of labor.
transaction, who happen to reside - Logistics
in two different countries, believe o If transportation costs
they benefit from the voluntary are significant, a firm
exchange. may choose to produce
- Numerous factors can influence a in the foreign market
firm's decision to undertake FDI. rather than export
Some FDI may be undertaken to from domestic
reduce the firm's costs. Such factories.
 o International businesses their outlets for
also often make host- competitive reasons.
country investments to - Marketing Advantages
reduce distribution o The physical presence
costs. of a factory can enhance
- Availability of Natural the visibility of a
Resources foreign firm’s products
o Firms may utilize FDI in the host market.
to access natural o The foreign firm also
resources that are gains from “buy local”
critical to their attitudes of host
operations. country consumers.
o Often international o Firms may also engage
businesses negotiate in FDI to improve
with host governments customer service.
to obtain access to raw - Exploitation of Competitive
materials in return for Advantages
FDI o FDI may be a firm’s
- Access to Key Technology best means to exploit a
o Another motive for FDI competitive advantage
is to gain access to that it already enjoys.
technology. o An owner of a valuable
o Firms may find it more trademark, brand name,
advantageous to acquire or technology may
ownership interests in choose to operate in
an existing firm than to foreign countries rather
assemble an in-house than export to them.
group to develop or - Customer Mobility
reproduce an emerging o A firm’s FDI also may
technology. be motivated by its
customers or clients.
The demand factors that encourage FDI
o If one of a firm’s
include:
existing customers
- Customer Access builds a foreign factory,
o Many types of the firm may decide to
international business locate a new facility of
require firms to have a its own nearby.
physical presence in the o Thus, the firm could
market. enhance its level of
o For example, fast-food support for that
restaurants and retailers customer.
must provide o Equally important,
convenient access to establishing the new
 factory will reduce the
possibility that a
competitor in the host
country will step in
and steal the
customer.
The political factors that encourage FDI
include:

- Avoidance of Trade Barriers

o Firms often build
foreign facilities to
avoid trade barriers,
such as high tariffs on
CHAPTER 8 – FOREIGN
imported consumer
EXCHANGE AND INTERNATIONAL
electronics goods.
FINANCIAL MARKETS
o For example, a leading
Taiwanese contract 8.1 The eonomics of foreign exchange
manufacturing firm, - Foreign exchange
Hon Hai Precision
o commodity that consists of
industries, announced
currencies issued by
that it would build a
countries other than one’s
new electronic plant in
own.
Brazil
- Price of foreign exchange
 To avoid that
o set by demand and supply
country’s high
in the marketplace. (given a
tariffs on
flexible exchange rate
importer
system
consumer
- foreign exchange rate quotas
electronic goods
o direct exchange rate (direct
- Economic Development
Incentives quote)
o Most democratically  price of the foreign
currency in terms of
elected governments
the home currency
intend to promote the
o An indirect exchange rate
economic welfare of
their citizens. (or indirect quote)
o Those governments  price of the home
currency in terms of
offer incentives to
the foreign currency
firms to induce them to
locate new facilities and 8.2 Structure of foreign exchange
provide jobs in their market
jurisdictions.
- The foreign-exchange market
 o consists of buyers and
sellers of currencies issued
by the world’s countries.
o Anyone who owns money
denominated in one
currency and wants to
convert that money to a
second currency
participates in the foreign-
exchange market.
8.2.1 The role of bank
- These banks stand ready to buy or
sell the major traded currencies.
o They profit from the spread
between the bid and ask prices
for foreign exchange.
o Act as speculators, betting that
they can guess in which
direction exchange rates are
headed. Such speculation can
be enormously profitable,
although it is always risky.
o Interbank transactions
 typically involving at
least $1 million (or the
foreign currency
equivalent), account for
a majority of foreign-
exchange transactions.
- Major players in the foreign exchange
market
o Corporate treasurers
o pension funds
o hedge funds
o insurance companies
o central banks
o treasury department
o international banks
- clients of the foreign-exchange
departments of banks
o commercial customers
 engage in foreign-
exchange transactions
as part of their normal
business activities.
 These activities include
exporting or importing
goods and services,
paying or receiving
dividends and interest
from foreign sources,
and purchasing or
selling foreign assets
and investments.
 Some commercial
customers use the
market to hedge against
unfavorable changes in
foreign-exchange rates
for moneys to be paid or
received in the future.
o exchange rate speculators
 assume exchange rate
risks by acquiring
positions in a currency,
hoping that they can
correctly predict
changes in the
currency’s market
value.
 Foreign-exchange
speculation can be very
lucrative if one guesses
correctly, but it is also
extremely risky.
o currency arbitrageurs
 attempt to exploit small
differences in the price
of a currency between
markets.
 They seek to obtain
riskless profits by
simultaneously buying
the currency in the
lower-priced market and
 selling it in the higher- o Prices are often published
priced market. for foreign exchange that
- Type of currencies will be delivered one
o convertible currencies. month, three months, and
 Also called hard six months in the future.
currencies - swap transactions
 these include the euro, o A swap transaction is a
the British pound, the transaction in which the
Swedish krona, the same currency is bought
Canadian dollar, the and sold simultaneously,
Swiss franc, the but delivery is made at
Japanese yen, and the two different points in
U.S. dollar. time.
o inconvertible currencies, - The foreign-exchange market has
 Currencies that are not developed two other mechanisms
freely tradable because to allow firms to obtain foreign
of domestic laws or the exchange in the future. Neither,
unwillingness of however, provides the flexibility in
foreigners to hold them amount and in timing that
are called international banks offer.
 Aka soft currencies. o The first mechanism is the
 The currencies of many currency future.
developing countries  Publicly traded on
fall into the soft many exchanges
category. worldwide, a
currency future is a
8.2.2 Hedging foreign-exchange risks
contract that
- The spot market resembles a
o consists of foreign- forward contract.
exchange transactions that  However, unlike
are to be consummated the forward
immediately (normally contract, the
defined as two days after currency future is
the trade date). for a standard
o Spot transactions account amount on a
for 38 percent of all standard delivery
foreign-exchange date (for example,
transactions. the third Wednesday
- The forward market of the contract’s
o consists of foreign- maturity month).
exchange transactions that - The second mechanism, the
will occur sometime in the currency option
future.
 o allows, but does not o subsidiary bank
require, a firm to buy or  separately
sell a specified amount of incorporated from
a foreign currency at a the parent
specified price on a o branch bank.
specified date.  not separately
o Call option incorporated,
 grants the right to o affiliated bank
buy the foreign  an overseas
currency in operation in which it
question takes part
o Put option ownership in
 grants the right to conjunction with a
sell the foreign local or foreign
currency. partner.
 Currency options - International banks and their
are publicly traded overseas operations are important
on organized providers of international
exchanges commercial banking services.
worldwide o Exporters and tourists use
such banking services when
they exchange their home
currency or traveler’s
checks for local currency.
8.3 international capital market
o Although the physical
8.3.1 Major international banks exchange of one country’s
- International banking takes many paper currency for
another’s is part of
forms.
international banking
- Originally, most international
operations, a far more
banking was done through
important part entails
reciprocal correspondent
financing and facilitating
relationships among banks located
everyday commercial
in different countries.
transactions.
o A correspondent
- In addition to commercial banking
relationship is an agent
services, most international banks
relationship whereby one
provide investment banking
bank acts as a
services.
correspondent, or agent,
for another bank in the 8.3.2 international bond market
first bank’s home
- The international bond market
country, and vice versa.
represents a major source of
- An overseas banking operation can
debt financing for the world’s
be established in several ways.
 governments, international firms, and commercial banks
organizations, and larger firms. put together complex packages
- This market has traditionally of international bonds to serve
consisted of two types of the borrowing needs of major
bonds: MNEs, national governments,
1. Foreign bonds and international organizations.
 are issued by a 1. One such innovative
resident of financial instrument is a
country “A” but global bond—a large,
sold to residents liquid financial asset
of country “B” that can be traded
and anywhere at any time.
denominated in
the currency of
country “B.”
 For example, the
Nestlé
Corporation, a
Swiss resident,
might issue a
foreign bond
denominated in
yen and sold
primarily to
residents of
Japan.

- A Eurobond
1. is a bond issued in the CHAPTER 10: INTERNATIONAL
currency of country “A” COOPERATION AMONG NATIONS
but sold to residents of
10.1 The General Agreement on Tariffs
other countries.
and Trade and the World Trade
2. For example, American
Organization (GATT & WTO)
Airlines could borrow
$500 million by selling - To ensure that the post–World
Eurobonds denominated War II international peace
in dollars to residents of would not be threatened by
Denmark and Germany. trade wars, representatives of
- The international bond market the leading trading nations met
has grown increasingly in Havana, Cuba, in 1947 to
sophisticated. Syndicates of create the International Trade
investment banks, securities Organization (ITO).
 - The ITO’s mission was to trade disputes among
promote trade; however, the members.
organization never came into
10.2 WTO’s Principles of the trading
being.
system
- Instead its mission was taken
over by the General Agreement - Without discrimination
on Tariffs and Trade (GATT), 1. Members should not
which had been developed as discriminate between
part of the preparations for the their trading partners
Havana conference.  All are granted
1. The GATT provided a ‘most favoured
forum for trade nation status’
ministers to discuss 2. Nor discriminate
policies and problems between their own
of common concern. products, services or
- In January 1995, it was nationals
replaced by the World Trade  Who receive
Organization (WTO), which ‘national
adopted the GATT’s mission. treatment’
- Freer
WTO
1. Members lower trade
- Headquartered in Geneva, barriers through
Switzerland, the WTO includes negotiations
153 member and 30 observer - Predictable
countries. 1. Members agree not to
- Members are required to open arbitrarily raise trade
their markets to international barriers (including
trade and to follow the WTO’s tariffs and nontariff
rules. The WTO has three barriers) against foreign
primary goals: companies, investors
1. Promote trade flows by and governments
encouraging nations to - More competitive
adopt 1. Discourages ‘unfair’
nondiscriminatory, practices such as export
predictable trade subsidies and dumping
policies. products below cost to
2. Reduce remaining trade gain market share
barriers through - Beneficial for less-developed
multilateral countries
negotiations. 1. Gives less-developed
3. Establish impartial nations more time to
procedures for resolving adjust, greater
 flexibility. And special barriers among
privileges its members and
adopts common
10.3 Regional economic integration
external trade
- This graphic represents the five policies toward
forms of regional economic nonmembers.
integration, starting at the  The uniform
bottom with the least integrated treatment of
form. products from
1. A free trade area nonmember
 eliminates trade countries
barriers among minimizes the
its members; trade deflection
 however, each problem.
member 3. A common market
establishes its  eliminates
own trade internal trade
policies against barriers among
nonmembers. members and
 As a result, they adopts a
are vulnerable to common
trade deflection, external trade
in which policy toward
nonmembers nonmembers.
reroute exports  It also
to the member eliminates
nation with the barriers that
lowest external inhibit the
trade barriers. movement of
 To counter this factors of
problem, most production
free trade among
agreements members.
specify rules of 4. An economic union
origin, which  represents full
detail how a integration of
good is the economies
classified as a of two or more
member good or countries.
a nonmember  Members
good. eliminate
2. A customs union internal trade
 eliminates barriers, adopt
internal trade common
 external trade - lowering tariffs within the
policies, and regional trading bloc opens the
abolish markets of member countries to
restrictions on all member country firms.
the mobility of - Firms lower their average
factors of production and distribution
production costs by capturing economies
among of scale as they expand their
members. customer base within the
 In addition, an trading bloc. Lower costs also
economic union help the firms compete in
requires its markets outside the trading
members to bloc.
coordinate their - However, elimination of trade
economic barriers also exposes a firm’s
policies in order home market to competition
to blend their from firms located in other
economies into a member countries, thus
single entity. threatening less-efficient firms.
5. A political union
 complete Cons:
political and - harm specific sectors within
economic that economy. Negotiating any
integration of form of economic integration,
two or more therefore, is not easy.
countries, - Special-interest groups may
thereby lobby against it. As a result of
effectively such internal political
making them pressures, few economic
one country. integration treaties are pure, as
 Example, most contain some exemptions
political union is to quiet politically powerful
the integration domestic special-interest
of 13 colonies groups.
under the
Articles of
Confederation in
a new country ,
USA

10.4 Impact of economic integration o

nfirms
Pros:
CHAPTER 12 – STRATEGIES FOR
ANALYZING AND ENTERING
FOREIGN MARKETS
12.1 foreign market analysis
Regardless of their strategies, most
international businesses have the
fundamental goals of expanding market
share, revenues, and profits. They often
achieve these goals by entering new
markets or by introducing new products
into markets where they already have a
presence. In order to increase market
share, revenue, and profits, firms must
follow three steps:
- assess alternative markets
- evaluate the respective costs,
benefits, and risks of entering each
one, and
- select those with the most potential
for entry or expansion.
12.2 assessing alternatice foreign
markets
- The first step involves assessing
market potential.
o Data about population, per
capita GDP, and public
infrastructure permit firms
to screen various foreign
markets.
o The decisions a firm draws
from this information often
depend upon the
positioning of its products
relative to those of its
competitors.  
- Another factor in selecting a
foreign market is the level of
competition in the market.
o To assess the competitive
environment, a firm should
identify the number and
sizes of firms competing in
the target market, their
relative market shares, their
pricing and distribution
strategies, and their relative
strengths and weaknesses.
o It must then weigh these
factors against actual
market conditions and its
own competitive position.  
- A firm contemplating entry into a
particular market must also
understand the host country’s
general legal and political
environment.
o A firm may choose to forgo
exporting its goods to a
country that has high tariffs,
in favor of exporting to one
that has fewer barriers.
o Government stability also is
an important factor in
foreign market assessment.
o Some less developed
countries have been prone
to military coups and
similar disruptions.
- Managers assessing foreign
markets must also consider
sociocultural influences.
o Firms that fail to recognize
the needs and preferences
of host country consumers
often run into trouble.
o Firms must also evaluate
sociocultural factors
associated with potential
employees.
12.3 evaluating costs, benefits, and risks
- The next step in foreign market
assessment is a careful evaluation
of the costs, risks, and benefits
 associated with doing business in a o Others include lower
particular foreign market. acquisition and
- Two types of costs are relevant at manufacturing costs (if
this point: direct and opportunity. materials or labor are
o Direct costs are incurred cheap),
when a firm enters a new o foreclosing of markets to
foreign market. competitors (which limits
 Such costs are competitors’ ability to earn
associated with profits),
setting up a business o competitive advantage
operation, (which allows the firm to
transferring keep ahead of or abreast
managers to run it, with its competition),
and shipping o access to new technology
equipment and o opportunity to achieve
merchandise. synergy with other
o The firm also incurs operations.
opportunity costs. - Generally, a firm entering a new
 Because a firm has market incurs the risks such as
limited resources, o exchange rate
entering one market fluctuations,
may preclude or o additional operating
delay its entry into complexity
another. o direct financial losses
 The profits it would
resulting from inaccurate
have earned in that
assessment of market
second market are
potential.
its opportunity costs
o In extreme cases, it also
—the organization
faces the risk of loss
has forfeited or
through government
delayed its
seizure of property or as a
opportunity to earn
result of war or terrorism.
those profits by
choosing to enter 12.4 choosing an entry mode
another market first.
Having decided which markets to enter,
- Entering a new market presumably
the firm is now faced with another
offers a firm many potential
decision: Which mode of entry should it
benefits
use?
o Among the most obvious
potential benefits are the - factors that affect the choice among
expected sales and profits either home country production
from the market. (exporting),
- host country production in firm-
owned factories (FDI and joint
ventures), or
- host country production performed
by others (licensing, franchising,
and contract manufacturing).
- Recall that the eclectic theory
considers three factors:
o ownership advantages,
o location advantages, and
o internalization
advantages.
o Other factors include the
firm’s need for control,
 availability of
resources, and
global strategy.

- Ownership advantages
o are resources owned by a
firm that give it a
competitive advantage over
its industry rivals.
o Because ownership
advantages often determine
a firm’s bargaining
 strength, they can influence
the outcome of entry mode
negotiations.
- Location advantages
o affect the desirability of
host country production
relative to home country
production.
o If home country production
is found to be more
desirable than host country
production, the firm will
choose to enter the host
country market via
exporting.
o Conversely, if host country
production is more
desirable, the firm may
invest in foreign facilities
or license the use of its
technology and brand
names to existing host
country producers.
- Internalization advantages make
it desirable for a firm to produce a
good or service itself, rather than
contracting with another firm to
produce it.
o Transaction costs are
critical to this decision. If
such costs are high, the firm
may rely on FDI and joint
ventures as entry modes.
o If they are low, the firm
12.5 exporting to foreign markets
may use franchising,
licensing, or contract
manufacturing.
- Other factors may affect the choice
of entry mode. For example, a firm
is likely to consider its need for
control and the availability of
resources.
o To reduce uncertainty, a
firm may prefer an initial
entry mode that offers a
high degree of control.
o However, if capital and
executive talent are in short
supply, that firm may not
be able to afford the large
capital investments this
control entails.
o Therefore, the firm may
use an entry mode such as
licensing that will be less
costly.
o A firm’s overall global
strategy also may affect the
choice of entry mode.
o If it intends to exploit
economies of scale and
synergies between its
domestic and international
operations, the firm may
prefer ownership-oriented
entry modes.
o Conversely, if the firm’s
competitive strengths are
flexibility and
responsiveness to changing
market conditions, it can
consider all entry modes
warranted by local
conditions in a given host
country.
- Exporting offers a firm several
advantages.
o First, the firm can control
its financial exposure to
the host country market.
 If the firm chooses
to hire a host
country firm to
 distribute its
products, its
financial exposure
may be limited to
start-up costs for
marketing research,
selecting a local
distributor, and
advertising.
 If the firm chooses
to distribute its
products itself,
financial exposure
may rise
substantially; since
it will have to equip
and operate
distribution centers,
hire employees, and
market products.
o Second, exporting permits
a firm to enter a foreign
market gradually, thereby
allowing it to assess local
conditions and fine-tune its
products to meet the needs
of host country consumers. 12.6 forms of exporting – indirect
 If its exports are exporting, direct exporting, and intra-
well received by corporate transfers
foreign consumers,
the firm may use
this experience as a
basis for a more
extensive entry into
that market.
- Disadvantages
o Vulnerability to tariffs and
nontariff barriers
o Logistical complexities
o Potential conflicts with
distributors
- Firms may have proactive or
reactive motivations for exporting.
o Proactive motivations are
those that pull a firm into
foreign markets as a result
of opportunities available
there.
o For example, San Antonio’s
Pace, Inc. – a maker of Tex-
Mex food products take
proactive approach by
introducing Picante sauce
because their consumers
very much like it
- Reactive motivations for
exporting are those that push a firm
into foreign markets, often because
opportunities are decreasing in the
domestic market.
o Some firms turn to
exporting because their
production lines are running
below capacity or because
they seek higher profit
margins in foreign markets
in the face of downturns in
domestic demand.
- Indirect exporting occurs in
several ways.
o For example, a firm may
sell its product to a
domestic customer, a
domestic wholesaler, or a
foreign firm’s local
subsidiary.
o All of them which will
export the product, in either
its original form or a
modified form.
o In most cases, indirect
exporting activities are not
 part of a conscious o Many MNEs import and
internationalization strategy export semi-finished
by a firm. products and component
o Thus, the firm will gain parts constantly.
little international business o By so doing, they use the
experience from indirect productive capacity of both
exporting. their domestic and foreign
o Example – the Association factories more efficiently.
of Guatemala Coffee
12.7 additional consideration besides
Producers sells bags of
exporting
coffee to passengers
boarding international A firm must consider many other factors
flights in Guatemala city to besides which form of exporting to use:
gain export sales and build
- Government policies such as
consumer awareness of its
financing programs and other
products
forms of home country
- Direct exporting occurs through
subsidization can encourage
sales to customers located outside
exporting as an entry mode.
the firm’s home country.
o Conversely, host countries
o Initially, direct exporting to
may discourage exports by
a foreign market is often the
imposing tariffs and NTBs
result of an unsolicited
on imported goods.
order.
- Marketing concerns such as image,
o Subsequent direct exporting
distribution, and customer service,
typically results from the
may also affect the decision to
company’s deliberate
export.
efforts to expand its
o Often foreign goods have a
business internationally.
certain product image or
o Through direct exporting,
cachet that domestically
the firm will learn about
produced goods cannot
operating internationally.
duplicate.
o Such expertise can
o In addition, the firm’s need
encourage it to become
for quick and constant
more aggressive in
feedback from customers
exploiting new international
will influence how it
exporting opportunities.
handles exports.
- An intra-corporate transfer is the
- Logistical considerations also enter
sale of goods by a firm in one
into the decision to export.
country to an affiliated firm in
o The firm must consider the
another country.
physical distribution costs
o Such transfers are an
of warehousing, packaging,
important part of
transporting, and
international trade.
distributing its goods, as
 well as inventory carrying ownership of foreign-bound goods
costs for itself and its or assuming total responsibility for
customers. marketing and financing exports.
o Firms choosing to export
12.8.1 export management company
from domestic factories
(EMC)
must also maintain
competitive levels of - An export management company
customer service for their (EMC) acts as its client’s export
foreign customers. department.
- Distribution issues also influence a o An EMC’s staff is
firm’s decision to export knowledgeable about the
o A firm experienced in legal, financial, and
exporting may establish its logistical details of
own distribution networks exporting, so the exporter
in key markets. does not need to develop
o If a firm lacks the expertise this expertise in-house.
to market its products o The EMC may also provide
abroad, it will seek a local advice about consumer
distributor in its target needs and available
market. distribution channels in the
o The importance of selecting foreign markets the
a distributor whose goals exporter wants to penetrate.
and business methods are - EMCs usually operate in one of
compatible with those of two ways.
the exporter cannot be o Some act as commission
overstated. agents for exporters.
 They handle the
12.8 export intermediaries
details of shipping,
- An exporter may market and clearing customs,
distribute its goods in international and preparing
markets by using one or more documents in return
intermediaries, third parties that for an agreed-upon
specialize in facilitating imports fee.
and exports.  In this case, the
- Intermediaries include export exporter normally
management companies, Webb- invoices the client
Pomerene associations, and and provides any
international trading companies. financing it may
- These specialists may offer limited need.
services, such as handling o Others take title to the
transportation and documentation. goods.
- Or they may perform more  They make money
extensive roles, including taking by reselling them at
 a higher price to o However, these associations
foreign customers. don’t play a major role in
 These EMCs may international business.
offer customer o Fewer than 25 such
financing or design associations exist today,
and implement and they tend to be
advertising and concentrated in raw
promotional materials such as wood
campaigns for the pulp, sulfur, and phosphate
product rock.
12.8.2 Webb-Pomerene Association 12.8.3 international trading company
- First authorized by the Export - An international trading
Trade Act of 1918 company is a firm directly
- a Webb-Pomerene association is a engaged in importing and
group of U.S. firms that operate exporting a wide variety of goods
within the same industry. for its own account.
o Members of this association o It provides a full gamut of
are allowed by law to services; including market
coordinate their export research, customs
activities without fear of documentation,
violating U.S. antitrust international transportation,
laws. and host country
o In addition, a Webb- distribution, marketing, and
Pomerene association financing.
engages in market research. o Typically, international
o It also oversees promotional trading companies have
activities, freight agents and offices
consolidation, contract worldwide.
negotiations, and other o The economic intelligence
services for its members. information they glean from
o It may also directly engage these international
in exporting—buying goods operations is one of their
from members and selling most potent competitive
them in foreign markets on weapons.
the association’s behalf. - The most important international
- Although these associations were trading companies in the global
originally designed to allow marketplace are Japan’s sogo
smaller, related firms to cooperate shosha, an integral part of Japan’s
in promoting exports, most are now keiretsu system.
dominated by larger firms. o The sogo shosha have
prospered for several
reasons.
 o Because of their global
operations, they
continuously obtain
12.10 international liciensing
information about
economic conditions and
business opportunities in
virtually every corner of the
world.
o Furthermore, they have
ready access to financing
(from the keiretsu’s lead
bank) and a built-in source
of customers (fellow
keiretsu members).
12.9 other intermediaries
- numerous other types offer
specialized services.
- Manufacturers’ agents solicit
domestic orders for foreign
manufacturers, usually on a
commission basis.
- Manufacturers’ export agents
act as a foreign sales
department for domestic
manufacturers by selling their
goods in foreign markets.
- Export and import brokers
bring together international
buyers and sellers of
12.10.1 basic issues in international
standardized commodities, such
liciensing
as coffee, cocoa, and grains.
- Freight forwarders specialize
in the physical transportation of
goods, arranging customs
documentation and obtaining
transportation services for their
clients.
o This list is by no means
complete. Indeed,
specialists are available
to provide virtually
every service needed by
exporters and importers
in international trade.
- Another means of entering a
foreign market is licensing.
- With this method, a firm, called the
licensor, leases the right to use its
intellectual property (such as
patents, brand names, or
trademarks) to another firm, called
the licensee, in return for a fee.
- Licensing is a popular mode for
entering foreign markets because it
involves little out-of-pocket cost.
o Since a firm has already
incurred the costs of
developing the intellectual
property, revenues received
through a licensing
agreement often go straight
to the firm’s bottom line.
o Licensing also allows a
firm to obtain location
advantages of foreign
production without
incurring ownership,
managerial, or investment
obligations.
- Specifying the boundaries of the
agreement.
o The licensor and licensee
must determine which
rights and privileges are and
are not being conveyed in
the agreement.
- Determining Compensation.
o Obviously, the licensor
wants to receive as much
compensation as possible,
 while the licensee wants to
pay as little as possible.
o Yet each also wants the
agreement to be profitable
for the other, so that both
parties will willingly
perform their contractual
obligations.
o Under a licensing
agreement, a royalty is paid
to the licensor in the form
of a flat fee or a percentage
of the sales of the licensed
product or service.
- Establishing rights, privileges,
and constraints.
o Licensing agreements
usually limit the licensee’s
freedom to divulge
information it has obtained
from the licensor to third
parties.
o They also specify the type
of records the licensee must
keep regarding sales of the
licensed products or
services, and define
standards regarding product
and service quality.
o The agreement also details
how disagreements will be
resolved.
- Specifying the agreement’s
duration.
o The licensor may view the
agreement as a short-term,
low-cost strategy designed
to obtain knowledge about
the foreign market.
o However, if the contract’s
duration is too short, the
licensee may be unwilling
to invest in consumer
research, distribution
networks, or production
facilities.
o As a rule, the greater the
investment costs incurred
by the licensee, the longer
the duration of the licensing
agreement.
12.10.2 advantages and disadvantages of
international licensing
Advantages
- Licensing carries relatively low
financial risk, provided the
licensor fully investigates its
market opportunities and the
abilities of its licensees.
- Market assessment - it also allows
the licensor to learn more about
the sales potential of its products
and services in a new market,
without a significant
commitment of financial and
managerial resources.
- Licensees benefit through the
opportunity to make and sell
products and services that have
been successful in other
international markets.
Disadvantages
- Licensing limits the market
opportunities for both parties.
o The licensor and licensee
depend on each other to
maintain product quality
and promote the product's
brand image. Improper
actions by one party can
damage the other party.
- Potential Litigation
 o if the licensee or licensor
does not adhere to the
agreement, costly and
tedious litigation may hurt
both parties.
- A final concern is the long-term
strategic implications of licensing a
firm's technology.
o Many firms are concerned
that sharing technology will
create a future competitor.
o The licensee may be able to
learn the manufacturing
secrets of the licensor or
develop new production
tricks of its own.
o The licensee can also build
an independent reputation
for manufacturing quality
and service excellence,
while operating under the
contract.
o After the licensing
agreement has expired, the
former licensee may choose
to expand its operations
into the licensor's existing
territory.
12.11 international licensing
- Franchising is among the fastest-
growing forms of international
business activity today. It is
actually a special form of licensing.
- Franchising allows the franchisor
more control over the franchisee
and provides more support from
the franchisor to the franchisee
than is the case in the licensor-
licensee relationship.
- A franchising agreement allows an
independent entrepreneur or
organization, called the franchisee,
to operate a business under the
name of another, called the
franchisor, in return for a fee.
- The franchisor provides its
franchisees with trademarks,
operating systems, and well-known
product reputations, as well as
continuous support services such as
advertising, training, reservation
services, and quality assurance
programs.
12.11.1 basic issues in international
licensing
- International franchising is likely to
succeed when certain market
conditions exist.
- First, it may work when the
franchisor has been successful
domestically because of unique
products and advantageous
operating procedures and
systems.
- Franchising may also be effective
when the factors that contributed
to domestic success are
transferable to foreign locations.
- Third, this may be a viable option
if the franchisor has already
achieved considerable success in
franchising in its domestic
market.
- Finally, foreign investors must be
interested in entering into
franchise agreements. For well-
established franchisors, this is
typically not a problem.
12.11.2 advantages and disadvantages of
international franchising
Advantages o By using this approach,
international businesses can
- On the plus side, franchisees can
focus on that part of the
enter a business that has an
value chain where their
established and proven product
distinctive competence lies.
and operating system, and
o They also can benefit from
- franchisors can expand
any location advantages
internationally with relatively low
generated by host country
risk and cost.
production.
- A franchisor also can obtain
o However, they also
critical information about local-
surrender control over the
market customs and cultures
production process, which
from host country entrepreneurs,
can lead to quality issues or
that it otherwise might have
other unexpected problems.
difficulty obtaining.
- A management contract is an
- Furthermore, the firm can learn
agreement whereby one firm
valuable lessons from franchisees
provides managerial assistance,
that apply to more than the host
technical expertise, or specialized
country.
services to a second firm for some
Disadvantages agreed-upon time, in return for
monetary compensation.
- On the negative side, as with
o For its services, the first
licensing, both parties to a
firm may receive either a
franchising agreement must share
flat fee or a percentage of
the revenues earned at the
sales.
franchised location.
o The management contract
- International franchising may also
may also specify
be more complicated than
performance bonuses based
domestic franchising.
on profitability, sales
- Maintaining control over quality
growth, or quality
standards is also an issue.
measures.
12.12 specialized entry modes for o Management contracts
international business allow firms to earn
additional revenues without
- Firms of all sizes can use contract
incurring investment risks
manufacturing to outsource most
or obligations.
or all of their manufacturing needs
- A turnkey project is a contract
to other companies.
under which a firm agrees to fully
o This strategy reduces the
design, construct, and equip a
costs that firms need to
facility and then turn the project
devote to the physical
over to the purchaser when it is
production of their
ready for operation.
products.
o The turnkey contract may 12.13 foreign direct investment
be for a fixed price, in
- Exporting, licensing, franchising,
which case the firm makes
and the specialized strategies just
its profit by keeping its
discussed all allow a firm to
costs below the fixed price.
internationalize its business
o Or the contract may provide
without investing in foreign
for payment on a cost-plus
factories or facilities.
basis, which shifts the risk
- However, many firms prefer to
of cost overruns from the
enter international markets through
contractor to the purchaser.
ownership and control of assets in
o International turnkey
host countries.
contracts often involve
- Other firms may first establish
large, complex, multiyear
themselves in a foreign market
projects such as
through exporting, licensing,
construction of a nuclear
franchising, or contract
power plant, an airport, or
manufacturing.
an oil refinery.
- Then, after learning how to operate
o Managing such complex
in the host country, they can
construction projects
expand in the market through
requires special expertise.
ownership of production or
o A popular variant of the
distribution facilities.
turnkey project is the so-
- There are three methods for FDI:
called B-O-T project.
o (1) building new facilities
 In this arrangement,
(called the greenfield
the firm builds a
strategy),
facility, operates it,
o (2) buying existing assets in
and then transfers
a foreign country (called the
ownership of the
acquisition strategy or the
project to some
brownfield strategy), and
other party.
o (3) participating in joint
 Through this
approach, the ventures.
contractor profits 12.13.1 benefits and challenges of FDI
from operation and
ownership of the Benefits
project for some - Foreign Direct Investment offers
period of time; the firm increased control over its
however, it also international business operations
bears any financial o Control is particularly
risks associated with important to the firm, if it
owning and needs to closely coordinate
operating it during the activities of its foreign
this period.
 subsidiaries to achieve direct controls on foreign
strategic synergies. capital, bans on the
o It may also determine that acquisition of local
the control is necessary in companies by foreigners, or
order to fully exploit the restrictions on repatriation
economic potential of of dividends and capital;
proprietary technology, home countries can
manufacturing expertise, or promote FDI through such
some other intellectual devices as political risk
property. insurance.
- as well as increased profit o Firms using FDI must also
potential. meet the standard
- FDI is also beneficial if host challenges of managing,
country customers prefer dealing operating, and financing
with local factories. their foreign subsidiaries
o Many firms and while facing the additional
governments participate in hurdle of doing so in
programs that favor locally political, legal, and cultural
made products, in order to milieus different from their
promote their local own.
economies. 12.13.2 Greenfield strategy
o Equally important, many
purchasing managers - Research indicates that the greater
perceive that local the cultural differences between the
production implies more home and host countries, the more
reliable supply, faster likely a firm is to choose to build a
service, and better new factory rather than purchase an
communication with existing firm.
suppliers. - The greenfield strategy involves
starting a new operation from
Risks scratch.
- On the other hand, FDI exposes the o The firm buys or leases
firm to greater economic and land, constructs new
political risks and operating facilities, hires and/or
complexity, as well as the transfers managers and
potential erosion of the value of employees, and then
its foreign investments if launches the new operation.
exchange rates change adversely. - This strategy has several
- A firm’s decision to engage in FDI advantages.
may also be influenced by o For one thing, the firm can
government policies. select the site that best
o Host countries may meets its needs and
discourage FDI through
 construct modern, up-to- be more strongly perceived
date facilities. as a foreign enterprise.
o Local communities often
12.13.3 acquisition strategy
offer economic
development incentives to - A second FDI strategy is
attract such facilities acquisition of an existing firm
because they will create conducting business in the host
new jobs; these incentives country.
lower the firm’s costs. o Sometimes international
o The firm also starts with a businesses acquire local
clean slate. Managers do firms simply as a means of
not have to deal with entering a new market.
existing debts, nurse o At other times, acquisitions
outmoded equipment, or may be undertaken by a
struggle to modify work firm as a means of
rules protected by labor implementing a major
unions. strategic change.
o In addition, the firm can - Advantages are
acclimate itself to the new o Although the actual
business culture at its own transaction may be
pace, rather than having the complex, the basic
instant responsibility of motivation for it is quite
managing a newly acquired, simple.
ongoing business. o By acquiring a going
- The disadvantages are concern, the purchaser
o successful implementation quickly obtains control
takes time and patience. over the acquired firm’s
o land in the desired location factories, employees,
may be unavailable or technologies, brand
very expensive. names, and distribution
o In building the new factory, networks.
the firm must also comply o The acquired firm can
with various local and continue to generate
national regulations and revenues as the purchaser
oversee the factory’s integrates the firm into its
construction. overall international
o It must also recruit a local strategy.
workforce and train those o And, unlike the greenfield
workers to meet the firm’s strategy, the acquisition
performance standards. strategy adds no new
o Finally, by constructing a capacity to the industry.
new facility, the firm may - Disadvantages are
 o The acquiring firm
assumes all the liabilities
—financial, managerial,
and otherwise—of the
acquired firm.
o For example, if the acquired
firm has poor labor
relations, unfunded pension
obligations, or hidden
environmental cleanup
liabilities, the acquiring
firm becomes responsible
for solving those problems.
o The acquiring firm usually
must also spend
substantial sums of money
to finalize the acquisition.
12.14 Joint Venture
- A joint venture involves two or
more firms that agree to work
together and create a jointly-
owned, separate firm to promote
their mutual interests.
- The number of such arrangements
is burgeoning as rapid changes in
technology, telecommunications,
and government policies outstrip
the ability of international firms to
exploit opportunities on their own.
- Because of the growing importance
of inter-corporate cooperation, as
well as the unique challenges it
presents to international firms.
CHAPTER 13 – INTERNATIONAL
STRATEGIC ALLIANCES
13.1 international corporate cooperation
- Cooperation between international
firms can take many forms, such as
cross-licensing of proprietary
technology, sharing of production
facilities, co-funding of research
projects, and marketing of each
other’s products using existing
distribution networks.
- Such forms of cooperation are
known collectively as strategic
alliances
o business arrangements
whereby two or more firms
choose to cooperate for
their mutual benefit.
o The partners in a strategic
alliance may agree to pool
R&D activities, marketing
expertise, or managerial
talent.
- A joint venture (JV)
o is a special type of strategic
alliance in which two or
more firms join together to
create a new business entity
that is legally separate and
distinct from its parents.
o Joint ventures are normally
established as corporations
and are owned by the
founding parents in
whatever proportions they
negotiate.
o Although unequal
ownership is common,
many are owned equally by
the founding firms.
o Each participant in a
strategic alliance is
motivated to promote its
own self-interest, but each
one has determined that
cooperation is the best way
to achieve its goals.
o A joint venture, as a
separate legal entity, must
 have its own set of the two firms plan a
managers and board of more extensive and
directors. It may be long-term
managed in one of three relationship.
ways.  A typical non–joint
 The founding firms venture strategic
may jointly share alliance has a
management, with narrow purpose and
each appointing key scope.
personnel who  Because of their
report back to narrow mission and
officers of the lack of a formal
parent. organizational
 One parent may structure, non–joint
assume primary ventures are
responsibility. relatively less stable
 An independent than joint ventures.
team of managers
13.2 benefits of strategic alliances
may be hired to run
it. The third - Ease of market entry
approach is often o Main points are:
preferred, because  Overcome
independent entrenched
managers focus on competition
what is best for the  Deal with
joint venture rather government
than attempting to regulations
placate bosses from  Get economies of
the founding firms. scale and scope
o A formal management  Manage costs of
organization allows a joint doing business
venture to be broader in o Explanation:
purpose, scope, and  A firm wishing to
duration than other types of enter a new market
strategic alliances. often faces major
o In contrast, a non–joint obstacles, such as
venture strategic alliance entrenched
may be formed merely to competition or
allow the partners to hostile government
overcome a particular regulations.
hurdle that each faces in the  Partnering with a
short run. local firm can often
 A joint venture will help it navigate
be more helpful if
 around such o A firm may want to learn
barriers. more about how to produce
 In other cases, a product or service,
economies of scale acquire certain resources,
and scope in deal with local
marketing and governments’ regulations,
distribution confer or manage in a different
benefits on firms environment.
that aggressively o A business partner can
and quickly enter often provide such
numerous markets. information.
 Yet the costs of - Synergy and competitive advantage
speed and boldness o Firms may also enter into
are often high and strategic alliances in order
beyond the to attain synergy and
capabilities of a competitive advantage.
single firm. o These related advantages
 A strategic alliance reflect combinations of the
may allow the firm other advantages discussed
to achieve the in this section.
benefits of rapid o The idea is that through
entry, while keeping some combination of
costs down. market entry, risk sharing,
- Shared risk and learning potential, each
o Today’s major industries collaborating firm will be
are so competitive that no able to achieve more than if
firm has a guarantee of it had attempted to enter a
success when it enters a new market or industry
new market or develops a alone.
new product.
o Strategic alliances can be 13.3 scope of strategic alliances
used to either reduce or - Consist of a comprehensive
control individual firms’ alliance
risks. o The partners participate in
o Shared risk is an especially all facets of conducting
important consideration business, ranging from
when a firm is entering a product design to
market that has just opened manufacturing to
up or that is characterized marketing.
by uncertainty and o Or it may consist of a more
instability. narrowly defined alliance
- Shared knowledge and expertise that focuses on only one
 element of the business,
such as R&D.
o The degree of collaboration
will depend on the basic
goals of each partner.
13.4 comprehensive alliances
- Comprehensive alliances
o arise when the participating
firms work together to
perform multiple stages of
the process by which goods
or services are brought to
the market.
- Because of the broad scope of
comprehensive alliances, the firms
must establish procedures for
meshing functional areas as
finance, production, and marketing
for the alliance to succeed.
o As a result, most
comprehensive alliances are
organized as joint ventures.
- As an independent entity, the joint
venture can adopt operating
procedures that suit its specific
needs, rather than attempting to
accommodate the procedures of the
parents, as might be the case with
another type of strategic alliance.
o Moreover, by fully
integrating their efforts,
participating firms in a
comprehensive alliance are
able to achieve greater
synergy through sheer size
and total resources.
13.5 functional alliances
- Strategic alliances may also be
narrow in scope, involving only a
single functional area of the
business.
- In such cases, integrating the needs
of the parent firms is less complex.
For this reason, functionally based
alliances often do not take the form
of a joint venture.
- Types of functional alliances
include production alliances,
marketing alliances, financial
alliances, and R&D alliances.
- Production alliance
o two or more firms
manufacture products or
provide services in a shared
or common facility.
o A production alliance may
utilize a facility one partner
already owns.
- marketing alliance
o functional alliance in which
two or more firms share
marketing services or
expertise.
o In most cases, one partner
introduces its products or
services into a market in
which the other partner
already has a presence.
o The established firm helps
the newcomer by
promoting, advertising, or
distributing its products or
services.
o The established firm may
negotiate a fixed price for
its assistance, or it may
share in a percentage of the
newcomer’s sales or profits.
o As an alternative, the firms
may agree to market each
others’ products on a
reciprocal basis.
o No matter what the
arrangements of a
 marketing alliance may be,
all partners must ensure that
their expectations and needs
are mutually understood.
- financial alliance
o formed by firms that want
to reduce financial risks
associated with a project.
o Partners may share equally
in contributing financial
resources to the project.
o On the other hand, one
partner may contribute the
bulk of the financing, while
special expertise or other
contributions are provided
by its partner (or partners)
in lieu of financial
investments.
- R&D alliance
o the partners agree to
undertake joint research to
develop new products or
services.
o Such alliances are usually
not formed as joint
ventures, since scientific
knowledge can be
transmitted through private
research conferences,
exchange of scientific
papers, and laboratory
visits. Instead, each partner
may simply agree to cross-
license whatever new
technology is developed in
its labs.
o That way, each partner will
have equal access to all
technology developed by
the alliance, an arrangement
that guarantees none of the
partners will fall behind in
the technological race.
o In addition, partners are
freed from legal disputes
among themselves over
ownership and validity of
patents.
o Because of the importance
of high-tech industries to
the world economy, many
countries are supporting the
efforts of R&D consortia as
part of their industrial
policies.
o An R&D consortium is a
confederation of
organizations that band
together to research and
develop new products and
processes for world
markets.
o It represents a special case
of strategic alliance, in that
governmental support plays
a major role in its formation
and continued operation.
13.6 implementation of strategic
alliances
- The decision to form a strategic
alliance should develop from the
firm’s strategic planning process.
- Having made this decision,
managers must then address several
significant issues, which set the
stage for how the arrangement will
be managed.
- Some of the most critical issues are
the selection of partners, the form
of ownership, and joint
management considerations.
13.7 selection of partners
- Research suggests that strategic
alliances are more likely to be
successful if the skills and
resources of the partners are
complementary—each must bring
to the alliance some organizational
13.8 forms of ownership
strength the other lacks.
- In addition, a firm should select a
compatible partner that it can trust
and with whom it can work
effectively.
- Another factor to consider is the
nature of a potential partner’s
products or services.
o A firm should ally itself
with a partner whose
products or services are
complementary to (but not
directly competitive with)
its own.
- Managers should gather as much
information as possible about a
potential partner before entering
into a strategic alliance.
o For example, managers
should assess the success or
failure of previous strategic
alliances formed by the
potential partner.
o Also, it often makes sense
to analyze the prospective
deal from the other firm’s
side. The probability of
success will increase if the
alliance makes good
business sense for both
parties.
- Before establishing a strategic
alliance, partners should also assess
the potential to learn from each
other.
o At the same time, each
partner should protect
proprietary information and
not offer information that
will result in competitive
disadvantages for itself,
should the alliance dissolve.
- Another issue in establishing a
strategic alliance is the exact form
of ownership that is to be used.
- A joint venture almost always takes
the form of a corporation, usually
incorporated in the country in
which it will be doing business.
- The corporate form enables the
partners to arrange a beneficial tax
structure, implement novel
ownership arrangements, and
protect their other assets.
- This form also allows the joint
venture to create its own identity
apart from those of the partners. Of
course, if either or both of the
partners have favorable reputations,
the new corporation may choose to
rely on them, perhaps by including
the partners’ names as part of its
name.
- In isolated cases, incorporating a
joint venture may not be possible
or desirable. In such cases, the
partners usually operate under a
limited partnership. In a limited
partnership, the managing partner
assumes full financial
responsibility for the venture,
regardless of the amount of its own
investment.
o The liability of other
partners is limited to the
amount of their
investments.
 o Obviously, such
arrangements are riskier for
the managing partner.
13.8.1 forms of ownership: public-
private venture
- Another form of joint venture is a
public-private venture.
o This arrangement involves
a partnership between a
privately owned firm and a
government entity.
13.9 joint management considerations
o When the government of a
country controls a resource,
it may enlist the assistance
of a firm with expertise
related to that resource.
o Similarly, a firm may
pursue a public-private
venture if a particular
country does not allow
wholly-owned foreign
operations.
o Such arrangements are
typical in the oil industry.
- In assessing such a venture, a firm
should consider the political and
legal environment it will be facing.
Foremost is the stability of the
government.
o If the existing government
is replaced with another, the
firm may face serious
challenges.
o At best, the venture will be
considered less important
by the new government.
o At worst, the firm’s
investment may be wiped
out, its assets seized, and its
operation shut down.
- However, if the local government
is relatively stable, public-private
ventures can be quite beneficial.
o The government may act
benignly and allow the firm
to run the joint venture.
o It may also use its position
to protect its own
investment (and its partner)
by restricting competing
business activity.
- Further issues and questions are
associated with how a strategic
alliance will be managed.
- Three standard approaches are
often used to jointly manage a
strategic alliance
o shared management
agreements
o assigned arrangements
o delegated arrangements.
- Under a shared management
agreement, each partner fully and
actively participates in managing
the alliance.
o The partners run the
alliance, and their managers
regularly pass on
instructions and details to
the alliance’s managers.
o The alliance’s managers
have limited authority of
their own and must defer
most decisions to managers
from the parent firms.
o This type of agreement
requires a high level of
coordination and near-
perfect agreement between
the participating partners.
 o As such, it is the most
difficult to maintain and the
one most prone to conflict
among the partners.
- Under an assigned arrangement,
one partner assumes primary
13.10 pitfalls of strategic alliances
responsibility for the operations of
the strategic alliance.
o Management of the alliance
is greatly simplified
because the dominant
partner has the power to set
its own agenda for the new
unit, break ties among
decision makers, and even
overrule its partner(s).
o Of course, these actions
may create conflict, but
they keep the alliance from
becoming paralyzed, which
may happen if equal
partners cannot agree on a
decision.
- Under a delegated arrangement,
which is reserved for joint
ventures, the partners agree not to
get involved in ongoing operations.
o Instead, the partners
delegate management
control to the executives of
the joint venture itself.
o These executives may be
hired to run the new
operation or may be
transferred from the
participating firms.
o They are responsible for
making day-to-day
decisions, managing the
venture, and implementing
its strategy.
o Because they have the
power and autonomy
needed to make significant
decisions, these executives
are much less accountable
to managers in the partners’
firms.
- Regardless of the care and
deliberation a firm puts into
constructing a strategic alliance, it
still must consider limitations and
pitfalls.
- five fundamental sources of
problems that often threaten the
viability of strategic alliances:
o incompatibility of partners
o access to information
o conflicts over distributing
earnings
o loss of autonomy
o changing circumstances.
- Incompatibility among the
partners of a strategic alliance
o is a primary cause of the
failure of such
arrangements.
o At times, incompatibility
can lead to outright conflict,
although typically it merely
leads to poor performance
of the alliance.
- Limited access to information
o For a collaboration to work
effectively, one partner (or
both) may have to provide
the other with information
it would prefer to keep
secret.
o Each firm may have to be
forthcoming with the
information or else
compromise the
 effectiveness of the
collaboration.
- distribution of earning.
o Because the partners share
risks and costs, they also
share profits.
o The partners must agree on
the ratio of earnings that
will be distributed as
opposed to being reinvested
in the business.
o They must also agree on
accounting procedures that
will be used to calculate
earnings or profits, and the
way transfer pricing will be
handled.
- loss of autonomy
o Just as firms share risks and
profits, they also share
control, thereby limiting
what each can do.
- Changing circumstances
o The economic conditions
that motivated the
cooperative arrangement
may no longer exist, or
technological advances may
have rendered the
agreement obsolete.
CHAPTER 16 – INTERNATIONAL
MARKETING
16.1 international marketing
management
- An international firm’s marketing
activities often are organized as a
separate and self-contained
function within the firm.
- Yet that function both affects and is
affected by virtually every other
organizational activity, such as
operating management, accounting,
finance and human resource
management.
- These interrelationships make
international marketing
management a critical component
of international business success.
International marketing
management encompasses a firm’s
efforts
o ensure that its international
marketing activities mesh
with the firm’s corporate
strategy, business strategy,
and other functional
strategies.
16.2 international marketing and
business strategies
- A key challenge for a firm’s
marketing managers is to adopt an
international marketing strategy
that supports the firm’s overall
business strategy.
- A differentiation strategy
o requires marketing
managers to differentiate
the firm’s products or
services from those of its
competitors.
o Differentiation can be based
on perceived quality,
fashion, reliability, or other
salient characteristics.
- Alternatively, a firm may adopt an
international business strategy that
stresses its overall cost leadership.
o Cost leadership can be
pursued and achieved
through systematic
reductions in production
and manufacturing costs,
reductions in sales costs,
 acceptance of lower profit domestic marketing in many ways,
margins, use of less although they are more complex.
expensive materials and - The array of variables international
component parts, or other marketing managers must consider
means. is far broader, and the
- A firm also may adopt a focus interrelationships among those
strategy. variables far more intricate, than is
o In this case marketers will the case for domestic marketing
concentrate their efforts on managers.
particular segments of the
16.4 standardization vs customization
consumer market or on
particular areas or regions - A firm’s marketers usually choose
within a market.   from three basic approaches in
- Having adopted an overall deciding whether to standardize or
international business strategy, a customize their firm’s marketing
firm must assess where it wants to mix:
do business. - The ethnocentric approach
o is relatively easy to adopt.
16.3 Marketing Mix
The firm simply markets its
- After an international firm has goods internationally by
decided to enter a particular foreign using the same marketing
market, further marketing decisions mix it uses domestically.
must be made. This approach avoids the
- In particular, international expense of
marketing managers must address
four issues:
o How to develop the firm’s
product(s)
o How to price those products
o How to sell those products
o How to distribute those
products to the firm’s
customers
- These elements are known as the
marketing mix and often referred
to as the four Ps of marketing:
product, pricing, promotion, and
place (or distribution).
- The role of the four Ps in
international marketing is
illustrated below.
- International marketing-mix issues
and decisions parallel those of
 developing new marketing. o This approach allows the
- techniques to serve foreign firm (1) to provide
customers. However, the firm may essentially the same product
lose sales because it fails to or service in different
consider the needs of its foreign markets and (2) to use
customers. essentially the same
- The polycentric approach marketing approach to sell
o is expensive, since that product or service
international marketers globally.
attempt to customize the o Standardization can create
firm’s marketing mix to huge economies of scale
meet the needs of customers (and competitive
in each market. advantages) in production,
o In spite of its increased distribution, and promotion.
costs, customization can
16.4.1 advantages and disadvantaged of
increase the firm’s
standardization vs customization
revenues, if marketers are
successful.
o Often international firms
that view themselves as
multidomestic adopt this
approach.
- The geocentric approach
o calls for standardization of
the marketing mix.

16.5 product policy
- The first “P” of the international
marketing mix is the product itself.
- Here, the term product represents
both the set of tangible factors that
the consumer can see or touch (the
physical product and its packaging)
and numerous intangible factors
such as image, installation,
warranties, and credit terms.
- In order to succeed, companies
must create products with tangible
and intangible features that meet
the wants and needs of customers
in diverse national markets.
16.5.1 Standadized products or
customized products?
- A vital product policy decision
facing international marketers is
the extent to which their firms’
products should be standardized
across markets or customized
within individual markets.
o For example, Toyota, like
many international firms,
has adopted a blend of
customization and
standardization.
- The extent to which products
should be customized to meet local
needs varies according to several
factors.
o One is the nature of the
product’s target customers
—are they industrial users
or are they individual
consumers?
o Although some industrial
products are customized
and some consumer
products are standardized,
generally speaking,
industrial products are more
likely to be standardized
than consumer products.
16.5.2 Legal Forces
- The laws and regulations of host
countries also may affect the
product policies adopted by
international firms.
o Some countries, for
instance, have imposed
detailed labeling
requirements and health
standards on consumer
products.
o International firms must
adjust the packaging and
even the products
themselves to meet these
consumer protection
regulations.
 - Countries also may regulate the
design of consumer products to
simplify purchase and replacement
decisions.
- Furthermore, the wide variety of
technical standards for such
products as telecommunications
equipment and electrical
appliances also force firms to
customize their products.
16.5.3 cultural influences
- International firms often must
adapt their products to meet the
cultural needs of local markets.
o One typical adaptation is to
change the labeling on the
product’s package into the
primary language of the
host country.
o In some cases, however, a
foreign language may be
used to connote quality or
fashion.
- Culture may affect product policy
in other ways.
o For example, foreign
automobile makers have
learned that Japanese
consumers are extremely
quality conscious.
o Many German consumers
are environmentally
conscious.
o As a result, firms often
must redesign products they
sell in Germany to allow for
easier disposal and
recycling.
- Culture may force changes in the
way a foreign product is presented.
o For example, local morals
and sensibilities will
determine whether the
content of movies, music,
or other forms of artistic
expression will be
permissible.
16.5.4 economic factors
- A country’s level of economic
development may affect the desired
attributes of a product.
o Consumers in richer
countries often favor
products loaded with extra
performance features; more
price-sensitive consumers
in poorer countries typically
opt for stripped-down
versions of the same
products.
o Sometimes, a firm may
have to adjust the size or
design of packaging to meet
local conditions.
- The quality of a country’s
infrastructure also may affect the
customization decision.
o For instance,
manufacturers may
reinforce the suspension
systems of motor vehicles
sold in countries where
road maintenance is poor.
o The availability and cost of
repair services also can
affect product design.
o Automobiles sold in poorer
countries often use simpler
technology, which allows
more repairs to be done by
backyard mechanics.
16.5.5 brand names
- International firms often like to Spider-Man comics had
standardize the brand name of a reasonable sales levels.
product. o But Marvel decided to
o A firm that does this can introduce a new version of
reduce its packaging, Spider-Man in that country.
design, and advertising o The “new” Spider-Man’s
production costs. alter ego is Pavitr
o It also can capture Prabhakar (not Peter
spillovers of its advertising Parker), he got his powers
messages from one market from a yogi (instead of a
to the next. radioactive spider), and he
 For example, wears a loincloth into battle
Avon’s entry into (instead of the famous
the marketplace in spider suit).
China was o As a result, sales of Spider-
expedited because Man comics and Spider-
millions of Man licensed merchandise
consumers had seen in India have skyrocketed.
its products o Certain characters from
advertised on Hong Disney, Sesame Street, and
Kong television. the Powerpuff Girls have
- However, sometimes legal or also been modified to better
cultural factors force a firm to alter fit the Indian market.
the brand names under which it
16.6 pricing issues
sells its products.
o For example, Grupo - The second P of the international
Modelo SA markets Corona marketing mix is pricing.
beer in Spain as Coronita o Developing effective
because a Spanish vineyard pricing policies is a critical
owns the Corona brand determinant of any firm’s
name. success.
o Coca-Cola calls its low- o Pricing policies directly
calorie soft drink Diet Coke affect the size of the
in weight-conscious North revenues earned by a firm.
America but Coca-Cola o The policies also serve as
Light in other markets. an important strategic
- Marvel Comics has recently weapon by allowing the
undertaken an interesting approach firm to shape the
to customizing a brand name to competitive environment in
local markets. which it does business.
o Its popular character - Both domestic and international
Spider-Man was already firms must strive to develop pricing
well-known in India, and strategies that will produce
 profitable operations, but the task
facing an international firm is more
complex.
o To begin with, a firm’s
costs of doing business vary
widely by country.
o Differences in the
transportation charges and
tariffs of various countries
affect the landed price of
goods.
o Differences in distribution
practices also affect the
final price the end customer
pays.
o Exchange rate fluctuations
also can create pricing
problems.
o If an exporter’s home
currency rises in value, the
exporter could maintain its
prices in the home
currency.
o This would make its goods
more expensive in the
importing country.
o On the other hand, the
exporter could maintain its
prices in the host currency.
o This would cut its profit
margins by lowering the
amount of home country
currency it receives for each
unit sold.
- International firms must consider
these factors when developing
pricing policies for each national
market they serve.
16.6.1 pricing issues
- International firms generally
adopt one of three pricing
policies
o standard, two-tiered or
market driven.
- An international firm following
a geocentric approach to
marketing will adopt a standard
price policy.
o The firm will charge the
same price for its
products and services
regardless of where they
are sold.
o Firms that sell goods
which are easily
tradable and
transportable often
adopt this pricing
approach out of
necessity. 
- An international firm that
follows an ethnocentric
marketing approach will use
a two-tiered pricing policy.
o The firm will set one
price for all its domestic
sales and a second price
to account for the
marginal costs of its
international sales.
o However, it is not a
suitable long-run
pricing strategy.
o A firm that views
foreign customers as
marginal—rather than
integral—to its business
is unlikely to compete
successfully in the
international
marketplace.
o Furthermore, firms that
adopt a two-tiered
pricing policy also are
vulnerable to charges of
 dumping their products
in a foreign market.
- A firm that follows a
polycentric approach to
international marketing will use
a market pricing policy.
o Market pricing is the
most complex of the
three pricing policies
and the one most
commonly adopted.
o A firm using market
pricing customizes its
prices on a market-by-
market basis to
maximize its profits in
each market.
16.6.2 market pricing

- In the figure (a) below, the

intersection of the marginal
revenue curve (MR) and the
marginal cost curve (MC) occurs at
Q, which is the profit-maximizing
output.
o If you read straight up from
Q until
 you reach the demand curve
(D), then move left to the
y-axis, you find the profit-
maximizing price, P, the
maximum price at which
quantity Q of the good can
be sold.
- With market pricing the firm
calculates and charges the profit-
maximizing price in each market it
serves.
o Figure (b) shows two
markets in which a firm has
identical demand and
marginal revenue curves
but faces different marginal
cost curves. The firm faces
higher marginal costs in
country 1 (MC1) than in
country 2 (MC2).
Accordingly, its profit-
maximizing price in
country 1 (P1) is higher
than that in country 2 (P2).
- Two conditions must be met if a
firm is to successfully practice
market pricing:
o First, the firm must face
different demand and/or
cost conditions in the
countries in which it sells
its products.
o This condition usually is
met because taxes, tariffs,
living standards,
competition, infrastructure,
and other factors will vary
from country-to-country.
- Second, the firm must be able to
prevent arbitrage.
o In short, the firm’s market
pricing policy will unravel
if customers are able to buy
the firm’s products in a
low-price country and resell
them profitably in a high-
price country
- Assuming these conditions are met,
the advantages of this polycentric
approach are obvious.
 o The firm can set higher o A firm must take special
prices where markets will care to ensure that the
tolerate them and lower message host country
prices where necessary to audiences receive is in fact
remain competitive. the message the firm
o It also can directly allocate intended to send.
relevant local costs against o International marketing
local sales within each managers must therefore
foreign market, thereby effectively blend and utilize
allowing corporate the four elements of the
strategists and planners to promotion mix
better allocate the firm’s  advertising
resources across markets.  personal selling,
- A market pricing policy can expose  sales promotion
a firm to complaints about  public relations
dumping (as discussed earlier), as  to motivate
well as to three other risks potential
o damage to its brand name, customers to
o development of a gray buy their
market for its products, and firms’
o consumer resentment products.
against discriminatory 16.7.1 advertising
prices.
- For most international firms,
16.7 promotion issues and decisions especially those selling consumer
- Promotion, the third “P” of the products and services, advertising
international marketing mix, is the most important element in
encompasses all efforts by an the promotion mix. As a firm
international firm to enhance the develops its advertising strategy, it
desirability of its products among must consider three factors:
potential buyers. o The message of an
- Although many promotional advertisement is the facts or
activities are specifically targeted impressions the advertiser
at buyers, successful firms must wants to convey to potential
communicate with their distributors customers.
and the general public to ensure  The message
favorable sentiment toward reflects the way the
themselves and their products. firm sees its
- Because promotion relies on products and
communication with audiences in services, and the
the host country, it is the most way it wants them
culture bound of the four Ps. to be seen by
customers.
 o The medium is the
communication channel
used by the advertiser to
convey a message. - For industrial products (such as
 A firm’s
international
marketing manager
must alter the media
used to convey its
message from
market to market
based on
availability, legal
restrictions, living
standards, literacy
rates, cultural
expectations, and - For consumer products, personal
other factors.
o A firm also must evaluate
global versus local
advertising techniques; that
is, whether its product or
service can be advertised
the same everywhere or
must be tailored to each
local market the firm
serves.
 The choice of a
standardized or a
specialized
advertising
campaign also is a
function of the - Personal selling has several
message the firm
wants to convey.
16.7.2 personal selling
- The second element of the
promotion mix is personal selling
o making sales on the basis of
personal contacts.
o The importance of personal
selling as an element of the
promotion mix differs for
industrial products and
consumer products.
complex machinery, electronic
equipment, and customized
computer software) customers
often need technical information
about product characteristics,
usage, maintenance requirements,
and after-sales support.
o Well-trained sales
representatives are needed
to explain these elements of
industrial products to
customers.
selling normally is directed toward
wholesalers and retailers.
o Firms that sell consumer
products often find that
advertising is more efficient
than personal selling at
reaching customers.
o However, companies such
as Avon and Amway have
successfully exported to the
Asian and European
markets the personal selling
techniques developed and
perfected in the United
States.
advantages for an international
firm.
o Firms that hire local sales
representatives can be
reasonably confident that
they understand the local
culture, norms, and
customs.
o Furthermore, personal
selling promotes close,
 personal contact with to generate new
customers who come to business.
associate that contact with - Furthermore, many international
the firm. firms find it necessary to establish
o In addition, personal selling regional sales offices and then staff
makes it easier for the firm them with sales managers and other
to obtain valuable market support personnel.
information. o The expenses associated
o Local sales representatives these facilities and
are an excellent source of personnel must be deduced
information that can be from gross sales revenue.
used to develop new
16.7.3 sales promotion
products or improve
existing products for the - Sales promotion comprises
local market. specialized marketing efforts such
- Disadvantages: as coupons, in-store promotions,
o personal selling is a sampling, direct mail campaigns,
relatively high-cost cooperative advertising, and trade
strategy. fair attendance.
 Each sales - Sales promotion activities focused
representative must on wholesalers and retailers are
be adequately designed to persuade them to
compensated, even increase their commitment to the
though he or she firm and its products.
may reach relatively - In addition, companies may
few customers. develop cooperative advertising
 An industrial campaigns or provide advertising
products sales allowances to encourage retailers to
representative, for promote their products.
example, may need - Sales promotion activities may be
a full day or more to narrowly targeted to consumers.
see just one o They also may be offered
potential customer. for only a short time before
 After a sale is being dropped or replaced
closed, the sales with more permanent
representative may efforts.
still need to spend o This flexibility makes sales
large blocks of time promotions an ideal tool for
with the customer, tailoring a marketing
explaining how to campaign to fit local
operate or maintain customs and circumstances.
a product and trying
16.7.4 public relations
- Public relations consists of efforts
aimed at enhancing a firm’s
reputation and image with the
general public, as opposed to
touting the specific advantages of
16.8 distribution issues and decisions
an individual product or service.
o The consequence of
effective public relations is
a general belief that the
firm is a good “ corporate
citizen,” that it is reputable,
and that it can be trusted.
- Savvy international firms recognize
that money spent on public
relations is money well spent
because it earns them political
allies and makes it easier to
communicate the firms’ needs to
the general public.
o They also recognize that, as
“foreigners,” they often are
appealing political targets;
thus, the firms attempt to
reduce their exposure to
political attacks.
- The impact of good public relations
is hard to quantify, but over time
an international firm’s positive
image and reputation are likely to
benefit the firm in a host country.
o Consumers are more likely
to resist “buy local” pitches
when the foreign firm also
is perceived to be a good
guy.
o Good public relations also
can help the firm when it
has to negotiate with a host
country government for a
zoning permit or an
operating license or when it
encounters a crisis or
unfavorable publicity.
o On the other hand, it can
take a company a long time
to overcome botched public
relations efforts.
- The fourth “P” of the international
marketing mix is place
o more commonly referred to
as distribution.
o Distribution is the process
of getting products and
services from the firm into
the hands of customers.
o An international firm faces
two important sets of
distribution issues:
- Physically transporting its goods
and services from where they are
created to the various markets in
which they are to be sold.
- Selecting the means by which to
merchandise its goods in the
markets it wants to serve.
16.8.1 international distribution
- The most obvious issue an
international firm’s distribution
managers must address is the
selection of a mode (or modes)
of transportation for shipping
the firm’s goods from their
point of origin to their
destination.
- This choice entails a clear
trade-off between time and
money, as the table below
indicates.
- Faster modes of transportation,
such as air freight and motor
carrier, are more expensive
than slower modes, such as
 ocean shipping, railroad,
pipeline, and barge.
- In addition, the transportation
mode selected affects the firm’s
inventory costs and customer
service levels, as well as the
product’s useful shelf life,
exposure to damage, and
packaging requirements.
16.8.2 channels of distribution o This is easiest to do when
retailers in a given market
- An international firm’s marketing
are heavily concentrated.
managers also must determine
o When there are relatively
which distribution channels to use
few large retailers, selling
to merchandise the firm’s products
directly to each one is
in each national market it serves.
easier for manufacturers;
Figure below shows the basic
when a larger number of
channel options used by most
smaller retailers are present,
international manufacturing firms.
selling to each of them is
- One important factor illustrated by
more complex.
the figure below is channel length
- The use of wholesalers is the
o the number of stages in the
longest distribution channel.
distribution channel.
o Wholesalers are separate
o A firm that sells directly to
businesses that buy from
its customers, which then
manufacturers and then
pay the business directly,
resell to retailers or, in
bypasses wholesalers and
some cases, to other
retailers and therefore has a
wholesalers.
short distribution channel.
o The use of wholesalers
o This approach is called
makes it easier to market in
direct sales because the
countries with little retail
firm is dealing directly with
concentration.
its final consumer. 
o It also allows the firm to
- A slightly longer channel of
maintain a smaller sales
distribution involves selling to
staff.
retailers, which then market and
sell the products to customers.
 o On the other hand, profit competitive strengths and
margins tend to be smaller weaknesses with the requirements
because there are more of each national market it serves. In
businesses involved, each practice, as with other elements of
of which expects to make a international marketing, most
profit. international firms develop a
- The challenge for international flexible distribution strategy—they
marketing managers is to find the may use a short channel in some
optimal distribution channel to markets and a longer channel in
match the firm’s unique others