1a. Explain the agency problem of MNCs.

ANSWER: The agency problem reflects a conflict of interests between decisionmakingmanagers and the owners of the MNC. Agency costs occur in an effort to assure that managersact in the best interest of the owners. 1b. Why might agency costs be larger for an MNC than for a purely domestic firm? ANSWER: The agency costs are normally larger for MNCs than purely domestic firms for thefollowing reasons. First, MNCs incur larger agency costs in monitoring managers of distantforeign subsidiaries. Second, foreign subsidiary managers raised in different cultures may notfollow uniform goals. Third, the sheer size of the larger MNCs would also create large agency problems. 2 a. Explain how the theory of comparative advantage relates to the need for international business. ANSWER: The theory of comparative advantage implies that countries should specialize in production, thereby relying on other countries for some products. Consequently, there is a needfor international business. 2 b. Explain how the product cycle theory relates to the growth of an MNC. ANSWER: The product cycle theory suggests that at some point in time, the firm will attempt tocapitalize on its perceived advantages in markets other than where it was initially established. 3a. Explain how the existence of imperfect markets has led to the establishment of subsidiaries in foreign markets. ANSWER: Because of imperfect markets, resources cannot be easily and freely retrieved by theMNC. Consequently, the MNC must sometimes go to the resources rather than retrieve resources(such as land, labor, etc.). 3b. If perfect markets existed, would wages, prices, and interest rates among countriesbe more similar or less similar than under conditions of imperfect markets? Why? ANSWER: If perfect markets existed, resources would be more mobile and could therefore betransferred to those countries more willing to pay a high price for them. As this occurred,shortages of resources in any particular country would be alleviated and the costs of suchresources would be similar across countries.4a, Product cycle theoryTheory suggesting that afirminitially establish itself locally and expand intoforeign marketsin response to foreign demand for its product; over time, theMNCwill grow in foreignmarkets; after some point, its foreign business may decline unless it can differentiate its product fromcompetitors.Product CycleThe period of time from the introduction of a product to its decline and stagnation. Differentanalyses posit different numbers of stages in a product cycle (usually four to five), but allemphasize that a product has a beginning, with technological innovation; a period of rapidgrowth; maturity and consolidation; and, finally, decline and possibly death. For example, in thevideo cassette recording (VCR) industry, the mid-1970s were a period of decentralizedtechnological innovation, with VHS and Betamax formats vying for dominance. Later, videocassettes very quickly became a common household item. In the

maturity phase, differentcompanies selling VCRs attempted to corner a greater market sharefor their own (identical)

versions of the product. Finally, the industry declined and was eventually supplanted by DVD players. Factors that may prolong a product cycle include the opening of new markets for the product, finding new uses for the same product, or even attaining government subsidies. Theconcept of product cycles applies most readily to the sale of goods and it is difficult to gaugehow it works in a service economy. 10.a.What Is the objects of IMF? ANSWER: Promote international monitory supportexpansion of international tradepromotion and maintenance of high levels of employment and real incomepromote exchange stabilityto remove foreign exchange restriction's that hinders economic growth 10.b.What Is the objects of WB? ANSWER: The term "World Bank" generally refers to the IBRD and IDA, whereas the WorldBank Group is used to refer to the institutions collectively. [2] The World Bank's (i.e. the IBRD and IDA's) activities are focused on developing countries, infields such as human development (e.g. education, health), agriculture and rural development(e.g. irrigation, rural services), environmental protection (e.g. pollution reduction, establishingand enforcing regulations), infrastructure (e.g. roads, urban regeneration, electricity), andgovernance (e.g. anti-corruption, legal institutions development). The IBRD and IDA provideloans at preferential rates to member countries, as well as grants to the poorest countries. Loansor grants for specific projects are often linked to wider policy changes in the sector or theeconomy. For example, a loan to improve coastal environmental management may be linked todevelopment of new environmental institutions at national and local levels and theimplementation of new regulations to limit pollution. 10.c.What Is the objects of IFC? ANSWER: 1a.List some of the important characteristics of bank foreign exchange servicesthat MNCs should consider ANSWER: The important characteristics are (1) competitiveness of the quote, (2) the firmsrelationship with the bank, (3) speed of execution, (4) advice about current market conditions,and (5) forecasting advice. THE MULTINATIONAL ENTERPRISE Intra-corporate Structure: Structure that deals with what is happening inside of a corporation. An intra-company analysis considers those areas that are internal. The specific areas that are addressed are the anatomy of the corporation, the overall goals, objectives and mission of the company, the products and services that the company

offers, and get to the root consideration of why the company is looking to go international and its position in the industry. Once the company analyzes these, it can gain a better understanding of whether or not a global or international strategy makes sense. A company should go global, then, to reduce costs of purchasing materials, get suppliers to compete for your business, enlarge the market, increase profits, the product require new skill or technology, and the company wants to stay ahead of the competition. Intercorporate Structure: The relationship of the corporation and its environments. What is outside of the corporation. This method of analyzing the company switches the focus from internal working to external factors. Some examples of external areas analyzed here are external variables, government policies, geo-cultural and political/legal environments, and market opportunities. This second area looks into how international business strategies will be affected by things outside the companys control. Although the items identified during the intercorporate analysis are not immediately controllable by the company, they can take action that will enable them to adjust to these factors. M.N.E. (Multinational Enterprise): Large firms whose operations and functions span national borders. Operates in different countries and adjusts products and practices to each at a higher relative costs. Transnational Corporation (TNC): Corporations owned and managed by nationals in different countries. Criteria Identifying a Multinational: Structure (anatomy itself), performance, coordination, and behavior. Microeconomic advantages of the firm operating internationally: Cost reduction, sales expansion, income and sales smoothing, and variety. A. Anatomy of a corporation There are promoters and sponsors. 1. The promoters or founders create the corporation. They have the ideas of type of industry, products, no liability unless corporation once formed assumes it. 2. The sponsors back the ideas of the promoters and incur no liability. Three requirements must be met to form a corporation: 1. The Charter of the Corporation must be written 2. The Articles of the Corporation, stating the relation between the corporation and the State. This must be filed with the Secretary of the State. 3. The by-laws, constitution and regulations of the corporation. Then the corporation comes into existence. CORPORATE STRUCTURE: Shareholders and, stockholders who do not intervene in the day to day operations of the corporation but the only interest is in the return of their investments , bondholders, Board of Directors, CEOs, management, supervisors, foremen, and employees. The purpose of the corporation is to make a profit (goals and objectives). The board of directors is responsible to the shareholders with right to dividends not the investment per se, they are the legal representatives, and can be sued. There are a minimum of three members on the Board (President, Treasurer, and Secretary), and usually there are seven, nine, or thirteen members. The board acts as a whole, and should be insured because propensity of legal issues such as derivative suits. The anatomy of the corporation differs from the international markets vs. the domestic

market. It also differs among the various industries and how they serve the global markets. Variables "outside" of the corporation include the consumers (actual customers and potential customers), suppliers, alliances and partners, the investment community, distributors, the media community, trade and professional organizations, international organizations, government, unions and competition, and the public in general. Minimization of costs is the goal of cost-seeking corporations. In an inelastic market demand, corporations may control price and are sometimes impenetrable. They control quantities geographically. Since tariffs are expensive, foreigners are prevented from entering the markets. PHASE I: INTRACORPORATE RESEARCH There are two analyses: Inter- and intracorporate research and analysis. The corporation's purpose is to interact with the environment. When doing this, the corporate "bubble" is pierced. We need to understand and recognize the anatomy of the corporation, how to enter, why to go international, and how it answers the basic economic questions. Firms continually enact strategies to improve their cash flows and therefore enhance shareholder's wealth. Some strategies involve the penetration of foreign markets. Since foreign markets can be distinctly different from local markets, they create opportunities for improving the firm's cash flows. Many barriers to entry into foreign markets have been reduced or removed recently, thereby encouraging firms to pursue international business (producing and/or selling goods in foreign countries). Consequently, many firms have evolved into multinational corporations (MNCs), which are defined as firms that engage in some form of international business. Initially, firms may merely attempt to export products to a particular country or import supplies from a foreign manufacturer. Over time, however, many of them recognize additional foreign opportunities and eventually establish subsidiaries in foreign countries. Some businesses, such as Dow Chemical, Exxon, Intel, and Proctor and Gamble, commonly generate more than half their sales in foreign countries. A prime example is the Coca-Cola Company, which distributes its products in more than 180 countries and uses 53 different currencies; over 65 percent of its total annual operating income is typically generated outside the United States. Source: corporate information; http://www.corporateinformation.com; corporate world: www.kotra.co.kr/e_main/links/bizlink/. Click on "biz_corp1.html." A. Anatomy of a corporation: The composition of industry differs. It differs in the domestic market vs. the international market and it differs among businesses. We will use Ohio as the home state of incorporation. A domestic corporation is any business that is incorporated within the state of Ohio. A foreign corporation is any business outside the state of Ohio (for example, California). An international corporation is any business outside of the United States. B. Definitions of multinationals: An understanding of international financial management is crucial to not only the large MNCs with numerous foreign subsidiaries but also to the small firms that conduct international business. Many small U.S. firms generate more than 20 percent of their sales in foreign markets, for example, Ferro and BPL International (Ohio). The small U.S. firms that conduct international business tend to focus on the niches that have made

them successful in the United States. They tend to penetrate specialty markets where they will not have to compete with large firms that could capitalize on economies of scale, for example, specialized computer chips and products for small markets such as computers for disable consumers.While some of the small firms have established subsidiaries, many of them use exporting to penetrate foreign markets. Seventy-five percent of U.S. firms that export have fewer than 100 employees. This s more prominent today with e-comerce. International business is even important to companies that have no intention of engaging in international business, since these companies must recognize how their foreign competitors will be affected by movements in exchange rates, foreign interest rates, labor costs, and and any other type of short run macroeconomic fluctuatuins such as inflation. Such economic characteristics can affect the foreign competitors' cost of production and pricing policy. Companies must also recognize how domestic competitors that obtain foreign supplies or foreign financing will be affected by economic conditions in foreign countries. If these domestic competitors are able to reduce their costs by capitalizing on opportunities in international markets, they may be able to reduce their prices without reducing their profit margins. This could allow them to increase market share at the expense of the purely domestic companies. MNC: ( multinational corporation) is a firm having operations in more than one country, international sales and a multinational mix of managers and owners. (e.g., Ford, Toyota, GE, IBM, Intel, Sony with headquarters both in N.Y. and Tokyo). A MNE ordinarily consists of a parent company and at least six subsidiaries typically with a high degree of strategic interaction among the units. Some MNC have more than a hundred subsidiaries and follow absolute and comparative advantages policies. MNC also have different number of foreign production sites and thus different numbers of international markets. This company earns profits in different markets and not only operates in different countries but, owns alliances in other countries and has no allegiance to a particular country. MNC are based and owned in one country with manufacturing facilities in two or more countries in which profits are not invested. The company is owned by stockholders in several countries and is based in two or more countries. Multidomestic corporations: are corporations that operate production facilities in different countries but make no attempt to integrate overall operations. Global Corporation: operates beyond national borders and in more than one country, sees the globe as one single market without borders, and earns profits in a global basis. It pursues integrated activities on a worldwide scale, sees the whole globe as one market and moves products, manufacturing, capital and even personnel wherever they can gain advantages. They operate with resolute consistency with relative price as if the whole world or large areas are single ones. They sell the commodity the same way everywhere, that is a standardized commodity. They usually have strong base on economic regions such as the Pacific Rim, NAFTA, and EU. Products are developed for the entire globe market and the company gives changes in order to be able to move from regional to product line based on profits. Centers and senior executives are from different countries. For example; GE, Texas Instruments, Hitachi, ICI British Chemical, Daewoo, and Hyundai.

MNE: (Multinational enterprise) is any business which has productive activities in two or more countries and manufactures and markets products and services in different countries. MNE is an efficient agent for transferring capital, managerial skills, culture, technology, industrial know how, product design, line and brand name, and goods and services across countries. MNE also transfers information such as its superior information gathering ability, headquarters discoveries, and exploit opportunities beyond the domestic market. MNE can bear the risks of ventures great size and financial strengths better than the domestic company can do. In the 1980's, there was a rise of non U.S. MNEs and the growth of the mini multinationals in the 1990's. United States. MNEs account for 2/3 of all direct investment, but in 2000, of the 260 largest MNE, only 48.5% were U.S. owned multinationals; Great Britain had 18.8%; Japan had 3.5%, and Latin America had 5%. Other countries with MNEs are: France, Germany, Canada, Sweden, Netherlands, Switzerland, Hong Kong, Singapore. Countries with mini multinationals in 2000's are Israel, Germany, United States, Australia, Italy, Brazil and Mexico with medium to small size companies such as Lubricating Systems of Kent, Ohio, Swan Optical and Cardiac Science. Multinationals do extensive overseas operations including manufacturing in different countries. The UNCTAD ( United Nations Conference on Trade and Development) in 1999 reported that about 40,000 MNE have about 378,000 affiliates with more than $318 trillion in investment. Source: UNCTAD Economic Report, 2002. Service Companies: such as banks, investment financial companies, brokerage houses, legal, airlines, hotels, health, entertainment, travel agencies, tourism, and accounting are the growing multinationals of the 21th. Century. For example, orchestras easily make contracts for one performance for over $150,000.00 ( e.g., The Cleveland Orchestra with $350,000.00 per performance). Internationally oriented firms - Garcias Rule of Thumb which covers all small firms engaged in international business. Whereby international sales are considered as an expansion of domestic sales. Corporations of approximately $120 million who want to enter the international market (mid-size corporations), and export less10% of sales, should be considered an international organization (Business should be handled internally). For example, the companies have on retainer to help with sales, or they hire one internal person for international business. Not profitable. ? (Indirect exporting of indirect investment). If a company's volume of sales is more10% but less 20% of total sales, it should have a separate department within the company, internally controlled. This department will specialize in handling the international sales. ? (Direct exporting of indirect investment). If its volume of sales is more 20%, it will have an international division, consistent in elements of finance, marketing, accounting, engineering, and, so on. The facility is separate physically and it has more control over the production schedules. If sales continue over 40%, a subsidiary is formed. There is a separate plant, in form of a joint venture. ? (Direct investment). The larger the firm, the more variables involved. Export Traffic Publications - Department of Commerce - helps with international corporations, exportations. Other organizations which affect the corporation are: International Organizations; Common Markets, Free Trade Zones; Financial and Investment Institutions; Alliances

and Partners; Distributors; Trade and Professional Organizations; Custom Unions; Constituency; General Public, Media; and Trade Areas. World Class Organizations (WCO): Quality is having a major impact on international operations. One reason is because it transcends national boundaries and allows firms to compete in a borderless world. Another is because, paradoxically, as technology increases, costs tend to be driven down, and only the most effective MNCs succeed. This emphasis on quality is leading MNCs to become increasingly more competitive in terms of both products and services. One way in which successful MNCs are going beyond total quality to sustain, and even increase. Their world competitiveness is through learning. Total quality has become just the cost of entry into today's highly competitive world economy. Now, MNCs not only must adapt, they must anticipate and even create change. They must transform themselves into learning organizations. Three of the major characteristics of learning organizations are openness, creativity, and self-efficacy. World-class organizations (WCOs) are able to compete with anybody, anywhere, anytime. There are several major pillars that form the basis for WCOs: customer-based focus, continuous improvement, flexible or virtual organizations, creative human resource management practices, an egalitarian climate, and technological support. Today, more and more firms are adopting the characteristics of WCOs, because they realize this is the only way of ensuring that they can compete, and in the long run even survive, in today's environment. Examples of WCO are: IBM, Sony, Hewlett-Packard, GE, Honda, Xerox, Ritz-Carlton and Walt-Mart. Main Characteristics of WCO: 1. Customer based focus 2. Continuous improvements 3. Fluid, flexible, and virtual organization. 4. Global outsourcing: use of worldwide suppliers regardless of where they are geographically able to conduct business as if it were a very large corporate enterprise when in fact small, but able to make competencies, outsource or partner 5. Creative human resources 6. Egalitarian climate 7. Technological support. Multinational Enterprise (MNE): This company conducts business in more than one country or market area. MNEs are generally large firms whose operations and functions expand beyond the spectrum of national boundaries. They do not have to be a large corporation. However, PeatMarwick is an MNE, but it is also a partnership. Transnational corporations ( TNCs) are corporations owned and managed by the United States in different countries. Transnational corporations also tend to view the world as one giant market for purpose of business. TNCs combine elements of function, product, and geographic designs, while relying on network arrangements to link worldwide subsidiaries. Advantages of MNE: 1. Advance Technology: It has better access to advance technological levels which makes them extremely competitive when entering new foreign markets.

2. Learning Curve: Productivity of the MNE in manufacturing industries increases through the experience production. 3. Product Development: It can capitalize in development of products in one market, and; if successful, uses that success to exploit other foreign markets. 4. Financial Strength: Because of its sheer size, MNEs can be larger than governments of countries in which they operate. (g. GM is larger than fifty countries. They are able to capitalize easier, at a lower costs, than local foreign companies. The issue of control is important. 5. Management: Being large organizations, MNEs have depth in management ranks. MNCs can afford to employ individuals with specialized business skills to enhance companys profits and/or effectiveness. 6. Reduction of Political Risk: Because there are different political and economic systems in existence there is more risk involve for the MNCs, but MNEs do business in many different sovereignties and therefore, they are able to spread the risk over many other locations. 7. Rationalized Production and Global Sourcing: MNEs are able to produce different components in different markets and sell their products in different markets. 8. Less Interdependence: Because of regionalization and because of realignments at the macro and micro levels. GOAL OF THE MNC The commonly accepted goal of an MNC is to maximize shareholder's wealth. Developing a goal is necessary since all decisions should contribute to its accomplishment. Thus, if the objective were to maximize earnings in the near future, the firm's policies would be different than if the objective were to maximize shareholders' wealth. The focus of this course is on U.S. based MNCs. Most of the concepts are generally transferable to MNCs that are based in other countries, but there are several exceptions that would have to be considered if the focus was not on MNCs based in the United States. For example, even a general statement about the goal of the MNC might be questioned when considering MNCs based in other countries; some MNCs based outside the United States tend to focus more on satisfying the respective goals of their respective governments, banks, or employees. The focus is also on MNCs, whose parents completely own any foreign subsidiaries. This implies that the U.S. parent is the sole owner of the subsidiaries. This is the most common form of ownership of U.S.-based MNCs, and it enables financial managers throughout the MNC to have a single goal of maximizing the value of the entire MNC instead of maximizing the value of any particular foreign subsidiary. Conflicts Against the Goals of MNC: It has often been argued that managers of a firm may make decisions that conflict with the firm's goal to maximize shareholders' wealth. For example, a decision to establish a subsidiary in one location versus another may be base on the location's appeal to a particular manager rather than on its potential benefits to shareholders. Decisions to expand may be determined by the desires of managers to make their respective divisions grow, in order to receive more responsibility and compensation. If a firm were composed of only one owner who was also the sole manager (sole propiertorship), a conflict of goals would not occur. However, for corporations with

shareholders who differ from their managers, a conflict of goals can exist. This conflict is often referred to as the agency problem. The costs of ensuring that managers maximize shareholders' wealth (referred to as agency costs) are normally larger for MNCs than for purely domestic firms, for the following reasons. First, MNCs that have subsidiaries scattered around the world may experience larger agency problems because monitoring managers of distant subsidiaries in foreign countries is more difficult. Second, foreign subsidiary managers raised in different cultures may not follow uniform goals. Third, the sheer size of the larger MNCs can also create large agency problems. Fourth, some non-U.S. managers tend to downplay the short-term effects of decisions, which may result in decisions for foreign subsidiaries of the U.S.-based MNCs that are inconsistent with maximizing shareholder wealth. Financial managers of an MNC with several subsidiaries may be tempted to make decisions that maximize the values of their respective subsidiaries. This objective will not necessarily coincide with maximizing the value of the overall MNC. Consider a subsidiary manager who obtained financing from the parent firm (headquarters) to develop and sell a new product. The manager estimated the costs and benefits of the project from the subsidiary's perspective and determined that the project was feasible. However, the manager neglected to realize that any earnings from this project remitted to the parent would be taxed heavily by the host government. The estimated after-tax benefits received by the parent were more than offset by the cost of financing the project. While the subsidiary's individual value was enhanced, the MNC's overall value was reduced. If financial managers are to maximize the wealth of their MNC's shareholders, they must implement policies that maximize the value of the overall MNC rather than the value of their respective subsidiaries. For many MNCs, major decisions by subsidiary managers must be approved by the parent. However, it is difficult for the parent to monitor all decisions made by subsidiary managers. Financial Management of the Multinational Corporation Since multinational corporations are involved in payables and receivables denominated in different currencies, product shipments across national borders, and subsidiaries operating in different sovereignties, they face a different set of problems than corporations with a purely domestic operations. The corporate treasurer and other financial decision makers of the multinational corporations operate in a cosmopolitan setting that offers profit and loss opportunities never considered by the executives of purely domestic corporations. Therefore, the attributes of financial management in the multinational corporation are very unique. The basic issues such as control, cash management, intra-corporation transfers, and capital budgeting are face by all corporations. The problems particular to the internationally oriented corporation are more complex than those of the domestic corporations such as financial controls, cash management, intra-corporation transfers, and capital budgeting. Financial Control Any business corporation must evaluate its operations and functions periodically to better allocate resources and increase income and in general to acquire its goals and objectives. The financial management of a multinational corporation involves exercising control over foreign operations. The responsible individuals at the parent office or headquarters review financial reports from foreign subsidiaries with a view toward modifying operations and assessing the performance of foreign managers.

Typical control systems are based on setting standards with regard the to sales, profits, inventory, or other specific variables and then examining many financial statements and reports to evaluate the achievement of such goals. There is no "correct" system of control. Methods vary across industries and even across corporations in a single industry. All methods have the common goal of providing management with a means of monitoring the performance of the corporation's operations, new strategies, and goals as conditions change. However, establishing a useful control system is more difficult for a multinational corporation than for a purely domestic corporation. For instance, should foreign subsidiary profits be measured and evaluated in foreign currency or the domestic currency of the parent corporation? The answer to this question depends on whether foreign managers are to be held responsible for currency translation gains or losses. If top management wants foreign managers to be involved in currency management and international financing issues, then the domestic currency of the parent would be a reasonable choice. On the other hand, if top management wants foreign managers to concern themselves with production operations and functions, and behave as other managers (managers not themselves a part of a foreign multinational) in the foreign country would, then the foreign currency would be the appropriate currency for evaluation. Some multinational corporations prefer a decentralized management structure in which each subsidiary has a great deal of autonomy and makes most financing and production decisions subject only to general parent company guidelines. In this management setting, the foreign manager may be expected to operate and think as the stockholders of the parent corporation would want obtain goals and objectives, so the foreign manager makes decisions aimed at increasing the parent's domestic currency value of the subsidiary. The control mechanism in such corporations is to evaluate foreign managers based on a their ability to increase that value. Other corporations prefer more centralized management in which financial managers at the parent make most of the decisions. They choose to move funds among divisions based on a system wide view rather than what is best for a single subsidiary. A highly centralized system would have foreign managers evaluated on their ability to meet goals established by the parent for key variables like sales or labor costs. The parent-corporation managers assume responsibility for maximizing the value of the corporation, with foreign managers basically responding to directives from the top. Therefore, the appropriate control system is largely determined by the management style of the parent. Considering the discussion to this point, it is clear that managers at foreign subsidiaries should be evaluated only on the basis of things they control. Foreign managers often may be asked by the parent corporation to follow policies and relations with other subsidiaries of the corporation that the managers would never follow if they sought solely to maximize their subsidiary's profit. Actions of the parent that lower a subsidiary's profit should not result in a negative view of the foreign manager. In addition, other actions beyond the foreign manager's control such as changing tax laws, foreign exchange controls, or inflation rates that could result in reducing foreign profits through no fault of the foreign manager. The message to parent company managers is to place blame fairly where the blame lies. In a dynamic world, corporate fortunes may rise and fall because of events entirely beyond any manager's control.

Cash Management Cash management involves utilizing the corporation's cash as efficiently as possible. Given the daily uncertainties of economics and business, corporations must maintain some liquid resources. Liquid assets are those that are readily spent. Cash is the most liquid asset. But since cash (and traditional checking accounts) earns no interest, the corporation has a strong incentive to minimize its holdings of cash. There are highly liquid short-term securities that serve as good substitutes for actual cash balances and yet pay interest. The corporate treasurer is concerned with maintaining the correct level of liquidity at the minimum possible cost. The multinational faces the challenge of managing liquid assets denominated in different currencies. The challenge is compounded by the fact that subsidiaries operate in foreign countries where financial market regulations, banking, accounting, monetary policies, and institutions differ. When a subsidiary receives a payment and the funds are not needed immediately by this subsidiary, the managers at the parent headquarters must decide what to do with the funds. For instance, suppose a U.S. multinational's Costa Rican subsidiary receives 500 million colones. Should the colones be converted to dollars and invested in the United States, or placed in Costa Rican colones investments, or converted into any other currency in the world? The answer depends on the current needs of the corporation as well as the current regulations in Costa Rica. If Costa Rica has strict foreign exchange controls in place, the 500 million colones may have to be kept in Costa Rica and invested there until a future time when the Costa Rican subsidiary will need them to make a payment. Even without legal restrictions on foreign exchange movements, we might invest the colones in Costa Rica for 30 days if the subsidiary faces a large payment in 30 days and we have no need for the funds in another area of the corporation, and if the return on the Costa Rican investment is comparable to what we could earn in another country on a similar investment (which interest rate parity would suggest). By leaving the funds in colones we do not incur any transaction costs for converting colones to another currency now and then going back to colones in 30 days. In any case, we would never let the funds sit idly in the bank for 30 days. There are times when the political, legal, or economic situation in a country is so unstable that we keep only the minimum possible level of assets in that country. Even when we will need colones in 30 days for the Costa Rican subsidiary's payables, if there exists a significant threat that the government or Central Bank could confiscate or freeze bank deposits or other financial assets, we would incur the transaction costs of currency conversion to avoid the political risk associated with leaving the money in Costa Rica. Multinational cash management involves centralized management. Subsidiaries and liquid assets may be spread around the world, but they are managed from the home office of the parent corporation. Through such centralized coordination, the overall cash needs of the corporation are lower. This occurs because subsidiaries do not all have the same pattern of cash flows. For instance, one subsidiary may receive a dollar payment and finds itself with surplus cash, while another subsidiary faces a dollar payment and must obtain dollars. If each subsidiary operated independently, there would be more cash held in the family of multinational foreign units than if the parent headquarters directed the surplus funds of one subsidiary to the subsidiary facing the payable.

Centralization of cash management allows the parent to offset subsidiary payments and receivables in a process called netting. Netting involves the consolidation of payables and receivables for one currency so that only the difference between them must be bought or sold. For example, suppose Ohio Instruments in the United States sells $2 million worth of car phones to its European sales subsidiary and buys $3 million worth of computer frames from its European manufacturing subsidiary. If the payment and receivable both are due on the same day, then the $2 million receivable can be used to fund the $3 million payable, and only $l million must be bought in the foreign exchange market. Rather than buy $3 million to settle the payable and sell the $2 million to convert the receivable into dollars, incurring transaction costs twice on the full $5 million, the corporation has one foreign exchange transaction for $l million. Had the two European operations not been subsidiaries, the financial managers would still practice netting but on a corporate wide basis, buying or selling only the net amount of any currency required after aggregating the receivables and payables of all subsidiaries over all currencies. Effective netting requires accurate and timely reporting of transactions by all divisions of the corporation. The parent financial managers determine the net payer or receiver position of each subsidiary for the weekly netting. Only these net amounts are transferred within the corporation. Netting could still occur by leading or lagging currency flows. Leads and lags increase the flexibility of parent financial managers, but require excellent information flows between all divisions and headquarters . Intra-corporation Transfers Since the multinational corporation is made up of subsidiaries located in different political and economic jurisdictions, transferring funds among divisions of the corporation often depends on what governments will allow. Beyond the transfer of cash, the corporation will have goods and services and resources moving between subsidiaries. The price that one subsidiary charges another subsidiary for internal goods transfers is called a transfer price. The setting of transfer prices can be a sensitive internal corporate issue because it helps to determine how total corporation profits are allocated across divisions. Governments are also interested in transfer pricing since the prices at which goods are transferred will determine tariff and tax revenues in those economies. The parent corporation always has an incentive to minimize taxes by pricing transfers in order to keep profits low in high-tax countries and by shifting profits to subsidiaries in low-tax countries. This is done by having intra-corporation purchases by the high-tax subsidiary made at artificially high prices, while intra-corporation sales by the high-tax subsidiary are made at artificially low prices. Governments often restrict the ability of multinationals to use transfer pricing to minimize taxes. The U.S. Internal Revenue Code, for example, requires arm 's-length pricing between subsidiaries charging prices that an unrelated buyer and seller would willingly pay. When tariffs are collected on the value of trade, the multinational has the incentive to assign artificially low prices to goods moving between subsidiaries. Customs officials may determine that a shipment is being "underinvoiced" and may assign a value that more truly reflects the market value of the goods. Transfer pricing may also be used for "window-dressing", that is, to improve the apparent profitability of a subsidiary. This may be done to allow the subsidiary to borrow at more favorable terms, since its credit rating will be upgraded as a result of the increased profitability. The higher profits can be created by paying the subsidiary artificially high

prices for its products in intra-corporation transactions. The corporation that uses transfer pricing to shift profits from one subsidiary to another introduces an additional problem for financial control. It is important that the corporation be able to evaluate each subsidiary on the basis of its contribution to corporate income. Any artificial distortion of profits should be accounted for so that corporate resources are efficiently allocated. Multinational corporations are frequently called upon by tax authorities to justify the prices they use for internal transfers. Capital Budgeting Capital budgeting refers to the evaluation of prospective investment alternatives and the commitment of funds to preferred projects. Long- term commitments of funds expected to provide cash flows extending beyond one year are called capital expenditures. Capital expenditures are made to acquire capital assets, like machines or factories or whole companies. Since such long-term commitments often involve large sums of money, careful planning is required to determine which capital assets to acquire. Plans for capital expenditures are usually summarized in a capital budget. Multinational corporations considering foreign investment opportunities face a more complex problem than do corporations considering only domestic investments. Foreign projects involve foreign exchange risk, political risk, control, and foreign tax regulations. Comparing projects in different countries requires a consideration of how all factors will change over countries. There are several alternative approaches to capital budgeting. A useful approach for multinational corporations is the adjusted present value approach. We work with present value because the value Qf a dollar to be received today is worth more than a dollar to be received in the future, say one year from now. As a result, we must discount future cash flows to reflect the fact that the value today will fall depending on how long it takes before the cash flows are realized. For multinational corporations, the adjusted present value approach is presented here as an appropriate tool for capital budgeting decisions. The adjusted present value (APV) measures total present value as the sum of the present values of the basic cash flows estimated to result from the in vestment (operations flows) plus all financial effects related to the investment. Capital budgeting is an imprecise science, and forecasting future cash flows is sometimes viewed as more art than science. The typical corporation experiments with several alternative scenarios to test the sensitivity of the budgeting decision to different assumptions. One of the key assumptions in projects considered for unstable countries is the level of political risk that must be accounted for. Cash flows should be adjusted for the threat of loss resulting from government expropriation or regulation. Impact of Management Control The magnitude of agency costs can vary with the management style of the MNC. A centralized management style can reduce agency costs because it allows managers of the parent to control foreign subsidiaries and therefore reduces the power of subsidiary managers. However, the parent's managers may make poor decisions for the subsidiary if they are not as informed as subsidiary managers about financial characteristics of the subsidiary. The alternative style of organizing an MNC's management is a decentralized management style. This style is more likely to result in higher agency costs because subsidiary

managers may make decisions that do not focus on maximizing the value of the entire MNC. Yet, this style gives more control to those managers who are closer to the subsidiary's operations and environment. To the extent that subsidiary managers recognize the goal of maximizing the value of the overall MNC and are compensated in accordance with that goal, the decentralized management style may be more effective. Given the obvious tradeoff between centralized and decentralized management styles, some MNCs attempt to achieve the advantages of both styles. That is, they allow subsidiary managers to make the key decisions about their respective operations, but the decisions are monitored by the parent's management to ensure that they are in the best interests of the entire MNC. Impact of Corporate Control The MNC is subject to various forms of corporate control that can be used to reduce agency problems. First, the MNC may partially compensate its board members and its executives with its stock, which can encourage them to make decisions that maximize the MNC's stock price. However, this may only effectively control decisions by managers and board members who receive stock as compensation. In addition, some managers may still make decisions that conflict with the MNC's goal if they do not expect their decisions to have much of an impact on the stock price. A second form of corporate control is the threat of a hostile takeover if the MNC is inefficiently managed. In theory, this threat is supposed to encourage managers to make decisions that enhance the MNC's value, since other types of decisions would cause the MNC's stock price to decline. Other firms would be more likely to acquire the MNC at such a low price and might terminate the existing managers. In the past, this threat was not very imposing for managers of subsidiaries in foreign countries because foreign governments commonly protected the employees; therefore, the potential benefits from a takeover were effectively eliminated. However, governments have recently recognized that such protectionism may promote inefficiencies and they are now more willing to accept takeovers and the subsequent layoffs that occur in following takeovers. A third form of corporate control is monitoring by large shareholders. United States based MNCs are commonly monitored by mutual funds and pension funds because a large proportion of their outstanding shares are held by these institutions. Their monitoring tends to focus on broad issues to ensure that the MNC uses a compensation system that motivates managers or board members to make decisions to maximize the MNC's value, to use excess cash for repurchasing shares of stock rather than investing in questionable projects, and to ensure that the MNC does not insulate itself from the threat of a takeover (by implementing anti-takeover amendments, for example). Those MNCs that tend to make decisions that appear inconsistent with maximizing shareholder wealth are subjected to shareholder activism in which pension funds and other large institutional shareholders lobby for management changes or other changes. For example, MNCs such as Eastman Kodak, Ford, IBM, and Sears Roebuck were subjected to various forms of shareholder activism. Like U.S. mutual funds and pension funds, foreign-owned banks also maintain large stock portfolios (unlike United States commercial banks, which do not use deposited funds to purchase stocks).

The foreign banks are large and hold a sufficient proportion of shares of numerous firms (including some United States based MNCs) to have some influence on key corporate policies. Their additional role as a tender to many of these firms enhances their ability to monitor corporate policies. However, these banks have not played a major role in corporate control. In general, they do not attempt to intervene unless a particular firm is experiencing major financial problems. Corporate control on MNCs based in the United States has increased and is sometimes cited as the reason for the unusually strong stock price performance of U.S. firms during the 1990's, since corporate policies are now undertaken with more awareness about their impact on the stock price. Other countries are adopting U.S. corporate control practices as a means of forcing local firms to make decisions that satisfy their respective shareholders. Constraints Interfering with the MNC's Goals When financial managers of MNCs attempt to maximize their firm's value, they are confronted with various constraints that can be classified as environmental, regulatory, or ethical in nature. Environmental Constraints: Each country enforces its own environmental constraints. Some countries may enforce more of these restrictions on a subsidiary whose parent is based in a different country. Building codes, disposal of production waste materials, and pollution controls are examples of the restrictions that force subsidiaries to incur additional costs. Many European countries have recently imposed tougher anti-pollution laws as a result of severe pollution problems. Regulatory Constraints: Each country also enforces its own regulatory constraints pertaining to taxes, currency convertibility rules, earnings remittance restrictions, and other regulations that can affect cash flows of a subsidiary established there. Because these regulations can influence cash flows, they must be recognized by financial managers when assessing policies. Also, any change in these regulations may require revision of existing financial policies, so financial managers should not only recognize the regulatory restrictions that exist in a given country but also monitor them for any potential changes over time. Ethical Constraints: There is no consensus standard of business conduct that applies to all countries. A business practice that is perceived to be unethical in one country may be totally ethical in another. For example, the United States-based MNCs are well aware of common business practices in some less developed countries that would be declared illegal in the United States. Bribes to governments in order to receive special tax breaks or other favors are common. A recent report presented to Congress by the Justice Department, estimated that U.S. firms lost out on billions of dollars of international business transactions because of bribes provided by foreign competitors. The United States Foreign Corruption Practices Act forbids U.S. corporations to engage in this type of behavior. See: Country Reports on Economic Policy and Trade Practices (United States Department of State) www.state.gov/www/issues/economic/trade_reports/index.html. The MNCs face a dilemma. If they do not participate in such practices, they may be at a competitive disadvantage. Yet, if they do participate, they receive poor reputations in countries that do not approve of such practices. Some United States-based MNCs have made the costly choice to refrain from business practices that are legal in certain foreign countries but not legal in the United States.(e.g.,

dumping chemicals such as fertilizers, otudated medicines, and food not approved by the FDA in the United States). That is, they follow a worldwide code of ethics. This may enhance their worldwide credibility, which can increase global demand for the products they produce. Four main criteria to identifying a MNE: 1. Structure of Corporation 2. Behavior 3. Performance 4. Coordination 1. Structure refers to the number of countries in which the MNE operates. Also refers to the nature of corporate ownership. Examples: Suzuki owned by GM, Gillette is U.S. owned, an Mitsubishi is owned by Japan, even though GM owns a large percentage. For the majority of MNEs, the ownership of the corporation is maintained in the parent country, even though they might list shares of stock and have ownership in different countries. For example: Kereitsus in Japan, Chaebols in South Korea such as Samsung, Lucky Star and Daewoo, and mergers in the U.S. 2. Performance is the percentage of total revenues, profits, assets and employees coming from abroad. The greater the reliance of the corporation on foreign materials, production, personnel and product plants, the more global the corporation is. If they derive 40% or more from outside the home country, the MNE is considered Stateless Corporation. At Nestle, 98% of business is done abroad-Switzerland is home country. Hoffman La Roche, 96%-Switzerland, Michelin, 78%-France, Sony, 66%Japan, Gillette, 65%-U.S. 3. Behavior is the attitude of top management toward the role of international operations within the total corporate strategy. In most of the European corporations, the majority of CEOs are from foreign countries. The U.S. is an exception. 4. Coordination is how the firm looks at its worldwide operations, multi-domestic or global. Multi-domestic is where each country is considered a different market (Japan uses the term multi-cultural corporation). The corporation is really a collection of subsidiaries. Global is where the firm views the entire world as one market and standardizes its products. Globalization Effect Forces Organizational Characteristics of a Multinational: Formalization, specialization, and centralization. Factors: strategies of multinational, employees attitudes, and local market conditions. 1. Formalization: is define as the use of structures and systems in decision making, communicating and controlling, for example, Korean firms with better working environments when workers expect their jobs to be set forth more strictly and formally. Korea and Japan respond more to formalization than U.S. workers and Taiwan sees more objective as opposed to subjective formalization. Objective Formalization: refers to the number of documents, organizational charts, information booklets, operational instructions, written job schedules and descriptions, procedure manuals, written policies, schedules, and programs. Subjective Formalization: tends to be vague and with less specific goals and procedures, informal controls, and more cultural induced values. 2. Specification: are the organizational characteristics that assign individuals to specific

well define tasks. International specialization can be: Horizontal Specialization: which is the assignment of jobs so that individuals are given a particular function to perform and tend to stay within the confines of the area, for example, jobs in costumer service, sales, training, recruiting, purchasing, and market research. Vertical Specialization: is the assignment of work to groups or departments where individuals are collectively responsible to perform. For example, Level of hierarchy (principle/ agent), risk takers and risk avoidance, Keiretsus, in Japan, Chaebols in South Korea, and mergers in Taiwan. 3. Centralization: Is a management system under which important decisions are made at the top of the pyramid. ( principle-agent). Decentralization is moving down to the lower level personnel. All important decisions are taken by individuals or private institutions and the function of the government is simply to provide a framework and stability within which the market operates. For example, United States of America and Germany. Philosophical Positions Influencing the Training Process of a MNE: 1. Ethnocentric MNE: put home office people in charge of key international management positions. The multinational headquarters group and the affiliated world company managers all have the same basic experiences, attitudes, and beliefs about how to manage operations, run corporations, and market, (e. g., Japanese Keiretsu such as Mazda and Mitsubishi, traditional suppliers, and chaebols in Korean firms). It will do all training at headquarters. 2. Polycentric MNE: is an MNE that places local nationals in key positions and allows these managers to appoint and develop their own people as long as the operations are sufficiently profitable. For example, East Asia, Australia and in general, markets where the expatriates tend to be not expensive for the corporations. It will do the training of employees relying on local management to assure responsibility of seeing that the training function is carried out. 3. Regiocentric MNE: relies on local managers from particular geographic areas to handle operations in and around the area, (e.g., in common markets or trade zones). It often relies on regional group operation and cooperation of local managers, (e.g., Gillette corporation). 4. Geocentric MNE: seeks to integrate diverse regions of the world through a global approach to decision making. For example, IBM and John Deere. C. Advantages for the corporation to operate in the international arena from a micro economic point of view: 1. Cost reduction, minimization of costs 2. Sales expansion 3. Income and sales smoothing 4. Greater variety Cost reduction: Corporations go to different markets to take advantage of the production components and their costs. Corporations that have the advantage of cost differentials have leadership advantages over other markets. These corporations maintain R&D and technology at home. China, Indonesia and Honduras are examples of a labor cost country. Rationalization of production is where a firm will produce different components of a product in different markets to take advantage of lower costs.

Sales expansion: The larger the sales, the more profitable the company is in the long run. Japan, for example has sales growth. Japan sacrificed profit in the short term for many years to build a large market share in the long run (e.g., 200 years). The United States is more concerned with short term profits. Companies produce for the larger market to reduce costs by increasing efficiency and using machines to full capacity. Income and sales smoothing: Advantages accrue to corporations that can minimize the year-to-year swing in sales and income and short run fluctuations such as unemployment and inflation. They enhance the smoothing process by their involvement in other countries, because different countries are in different economies and business cycles. (One country may be coming out of a recession, for example, while another may be at the peak of its growth cycle.) Employee training helps smooth the situation, another is to go to different countries and train them. This helps to minimize risk. Greater variety: Offer as many varieties as possible. Different products and processes are introduced to different markets. An example: Coca Cola. Latin America likes fruit juices. Coca Cola sales were good, but in order to capture a greater market share, it offered a variety of carbonated juices to Latin America, called Fanta. It was successful. Then they were introduced to the United Staes and other lines such as frozen juice and Fruitopia. Political Risk: any change in the political environment that may adversely affect the value of the firms business activities. Political risk is not only the threat of political upheaval but also the likelihood of arbitrary and discriminatory governmental policies and actions that will result on financial loss or competitive disadvantage;, for example, increase prices, tariffs, quotas, price controls, content requirements, and measures directly to the MNE such as partial divestment of ownership, local content, remittance restrictions, expatriate employment, and limitations on export requirements. Examples of political risk: 1. Expropriation; impact on loss of future profits 2. Confiscation; impact on loss of future profits and assets 3. Campaigns against foreign goods; impact on loss of sales and increase in cost of public relations 4. Mandatory labor benefits legislation ? increase in operating costs 5. Kidnap - Terrorism - Civil Wars and disruption of production, increased security costs, increased management costs, lower productivity, destructions of supplies, lost sales 6. Inflation; higher operating cost 7. Currency Devaluations and currency risks; reduced value of repatriated earnings 8. Tax; decreased profits; subsidization, abatements and dumping. Macro political; Civil Wars, i.e., Somalia, Bosnia, Middle East, decreased in Rwanda in 90's, Congo, Zaire Micro political; Euro-currency, 1970's oil embargo, Financial crash of 89. Euro-Disney by French farmers, Chinese operations Decrease Political Risk: Match risks with rewards (profits) Overseas Private Investment Corp. (OPIC); U.S. government sponsored which insures U.S. investments from nationalization, insurrections, revolutions and foreign export changes, and currency inconvertibility. Multilateral Investment Guarantee Agency

(MIGA), subsidiary of World Bank (1988). Lloyds of London underwrites political risk, although it is really expensive. Ways of Overcoming Political Risk 1. Sell shares of subsidiary to host citizens such as 10%,10% and 80%. 2. Short-term lease in new equipment 3. Good corporate citizen to build domestic support 4. Purchase inputs from local suppliers 5. Employ and train host country citizens in key management and administrative decisions 6. Support local charities -- Spain; Plant closing (shut down) laws on severance pay India; limited ownership of domestic business in order to avoid control by foreigners - i.e., pharmaceuticals -- China; in order to sell product, product must have high percentage of materials bought in China -- South Korea; Banking policies, foreigners (banks) have difficulty obtaining Korean currency thus making it harder to compete with Korean banks. -- Government can funnel credit at preferential interest -- Mexico; energy industry - oil should be accrued only by citizen -- Greece; restricts ownership on TV (25%) -- Portugal; 15% - Flemish (Dutch-speaking) in Belgium must own 51% of commercial broadcast Intellectual Property Rights: (Patents, Copyrights) International Convention for the Protection (Paris Convention) of Industrial Property Rights. Literary and artistic works (Beune Convention), Universal Copyright Convention. -- East European, Poland, repatriation of profits -- Japan with its administrative delays -- Latin America with its administrative delays and briberies MNC have been criticized by host countries for many reasons: 1. Rise of interest rates because capital needed locally. 2. Majority of ownership (by shareholders) of subsidiary are owned by parent company, therefore, residents dont have control over operations of company within borders. 3. Key managerial and technical positions are held by expatriates, as a result, they do not contribute in the learning by doing process of host country. 4. Little training to host employer/employees. 5. They do not adapt technology to host countrys needs. 6. Concentration of research and development in home country. 7. Lack of contribution to host exports and balance of payments. 8. Worsen Y ( income) distribution. 9. Earn excessive profits and fees due to their goals, particularly monopoly power. 10. Dominate major industrial sector. 11. Tend to be more accountable to home country. 12. Contribute to inflation by stimulating D (demand) for scarce resources. 13. Create alliances with corrupt host country elites. 14. They recruit best personnel and managers from host at the expense of local entrepreneurs.

15. Host country educates and trains employer/employees. 16. Disregard to employer/employee safety and environment. 17. Disregard culture and social impact Globalization Effect Forces: 1. Advances in computer and communication technology. Increased flow of ideas and information across borders - cable, www, e-mail. 2. Transportation. 3. Reduction on barriers of international trade by government host, increase in new markets by international firms which are exporting to them or building production facilities for local manufacturer. 4. Unification and socialization of global community, such as preferential trade arrangements, NAFTA, EU, ASEAN, which group several markets into a single market 5. Explosive growth in DI in the trillions of dollars. U.S. DI 25.3% to 43%, Japan from 3% to 13%, Europe 40% to 43%. There are 37,000 MNE with $316 trillion. Source: U.S. Commerce Department, 2001. 6. Lessening of U.S. dominance. 7. Mini nationals ? small and medium size firms with exporting, research facilities and sale facilities. 8. Privatization. 9. Globalization of market economic system. Globalization forces which changed U.S.A. multinationals in the 1980's and 90's: 1. Massive deregulation. 2. Collapse of Communism and end of Cold War. 3. Sale of hundreds of billions of dollars of state owned firms around the world in massive privatization efforts designed to shrink the public sector. 4. The revolution of information technology. 5. The rise in the market for corporate control with its waves of takeovers, mergers, acquisitions and leveraged bought outs. 6. The jettisoning of statist policies and their replacement by the free market policies in the Third World countries. 7. The unprecedented number of nations submitting themselves to the exacting regions and standards of the global market place. 8. Degree of internationalization/globalization of the U.S. economy. 9. The integration of worldwide operations of flexibility, adaptability, and speed, (e.g,. The Limited with 3,200 stores but headquartered in Columbus, Ohio). 10. Increase of foreign direct investment in the U.S. by foreign of other countries. THE ECLECTIC PARADIGM OF INTERNATIONAL PRODUCTION 1. Ownership-Specific Advantages (of enterprise of one nationality or affiliates of same) over those of another. Hierarchical-Related Advantages a. Property right and/or intangible asset advantages . Product innovations, production management, organizational and marketing systems, innovator capacity, non-codifiable knowledge, 'bank' of human capital experience, marketing, finance, know-how, and so forth. b. Advantages of common governance, i.e., of organizing with complementary assets. (i) Those that branch plants of established enterprises may enjoy over de novo firms.

Those due mainly to size, product diversity and learning experiences of enterprise, (e.g., economies of scope and specialization). Exclusive or favored access to inputs, (e.g., labor, natural resources, finance, information). Ability to obtain inputs on favored terms due to size or monopsonistic influence. Ability of parent company to conclude productive and cooperative inter-firm relationships, as between Japanese auto assemblers and their suppliers. Exclusive or favored access to product markets. Access to resources of parent company at marginal cost. Synergistic economies (not only in production, but in purchasing, marketing, finance arrangements, etc.). (ii) Those that specifically arise because of multi-nationality. Multi-nationality enhances operational flexibility by offering wider opportunities for arbitraging, production shifting and global sourcing of inputs. More favored access to and/or better knowledge about international markets, for information, finance, labor etc. Ability to take advantage of geographic differences in factor endowments, government intervention, markets, etc. Ability to diversify or reduce risks, (e.g., in different currency areas, and creation of options and/or political and cultural scenarios). Ability to learn from societal differences in organizational and managerial processes and systems. Balancing economies of integration with ability to respond to differences in countryspecific needs and advantages. Alliance or Network-Related Advantages a. Vertical Alliances (i) Backward access to R&D, design engineering and training facilities of suppliers. Regular input by them on problem solving and product innovation on the consequences of projected new production processes for component design and manufacturing. New insights into, and monitoring of, developments in materials, and how they might impact on existing products and production processes. (ii) Forward access to industrial customers, new markets, marketing techniques and distribution channels, particularly in unfamiliar locations or where products need to be adapted to meet local supply capabilities and markets. Advice by customers on product design and performance. Help in strategic market positioning. b. Horizontal Alliances Access to complementary technologies and innovative capacity. Access to additional capabilities to capture benefits of technology fusion, and to identify new uses for related technologies. Encapsulation of learning and development times. Such inter-firm interaction often generates its own knowledge feedback mechanisms and path dependencies. c. Networks (i) Similar firms Reduced transaction and coordination costs arising from better dissemination and interpretation of knowledge and information, and from mutual support and cooperation between members of network. Improved knowledge about process and product development and markets. Multiple, yet complementary, inputs into innovative developments and exploitation of new markets. Access to embedded knowledge of members of networks. Opportunities to develop 'niche' R&D strategies; shared learning and training experiences, as in the case of cooperative research associations. Networks may also help promote uniform product

standards and other collective advantages. (ii) Business districts As per (i) plus spatial agglomerative economies, (e.g., labor market pooling). Access to clusters of specialized intermediate inputs, and linkages with knowledge-based institutions, (e.g., universities, technological spill-overs). 2. Internalization Incentive Advantages (i.e., to circumvent or exploit market failure) Hierarchical-Related Advantages Alliance or Network-Related Advantages Avoidance of search and negotiating costs. To avoid costs of moral hazard, information asymmetries and adverse selection, and to protect reputation of internalizing firm. To avoid cost of broken contracts and ensuing litigation. Buyer uncertainty (about nature and value of inputs (e.g., technology) being sold). When market does not permit price discrimination. Need of seller to protect quality of intermediate or final products. To capture economies of interdependent activities (see b. above). To compensate for absence of future markets. To avoid or exploit government intervention (e.g., quotas, tariffs, price controls, tax differences, etc.). To control supplies and conditions of sale of inputs (including technology). To control market outlets (including those which might be used by competitors). To be able to engage in practices, (e.g., cross-subsidization, predatory pricing, leads and lags, transfer pricing, etc.) as a competitive (or anti-competitive) strategy. While, in some cases, time- limited inter-firm cooperative relationships may be a substitute for FDI, in others, they may add to the incentive advantages of the participating hierarchies, R&D alliances and networking which may help strengthen the overall competitiveness of the participating firms. Moreover, the growing structural integration of the world economy is requiring firms to go outside their immediate boundaries to capture the complex realities of know-how trading and knowledge exchange in innovation, particularly where intangible assets are tacit and need to speedily adapt competitive enhancing strategies to structural change. Alliances or network related advantages are those which prompt a voice rather than an 'exit' response to market failure; they also allow many of the advantages of internalization without the inflexibility, bureaucratic or risk-related costs associated with it. Such quasiinternalization is likely to be most successful in cultures in which trust, forbearance, reciprocity, and consensus politics are at a premium. It suggests that firms are more appropriately likened to archipelagos linked by causeways rather than self-contained 'islands' of conscious power. At the same time, flagship or lead MNCS, by orchestrating the use of mobile 0 advantages and immobile advantages, enhance their role as arbitragers of complementary cross-border value-added activities. 3. Location-Specific Variables (these may favor home or host countries) Hierarchical-Related Advantages Spatial distribution of natural and created resource endowments and markets. Input prices, quality and productivity, (e.g. labor, energy, materials, components, semifinished goods).

International transport and communication costs. Investment incentives and disincentives (including performance requirements, etc.). Artificial barriers (e.g., import controls) to trade in goods. Societal and infrastructure provisions (commercial, legal, educational, transport, and communication). Cross-country ideological, language, cultural, business, political, etc. differences. Economies of centralization of R&D production and marketing. Economic system and policies of government: the institutional framework for resource allocation. Source: Dunning, John, Reappraising Eclectic International Business Studies, (2001), p. 475-76. The L-specific advantages of alliances arise essentially from the presence of a portfolio of immobile local complementary assets, which, when organized within a framework of alliances and networks, produce a stimulating and productive industrial atmosphere. The extent and type of business districts, industrial or science parks and the external economies they offer participating firms are examples of these advantages which, over time, may allow foreign affiliates and cross-border alliances and network relationships to better tap into, and exploit, the comparative technological and organizational advantages of host countries. Networks may also help reduce the information asymmetries and likelihood of opportunism in imperfect markets. They may also create local institutional thickness, intelligent regions and social embededness. Source: Paragism in an Age of Alliance Capitalism, Journal of International Business Studies, 1999. Illustration of types of activity that favor MNEs Natural resource seeking Capital, technology, access to markets; complementary assets; size and negotiating strengths Possession of natural resources and related transport and communications infrastructure; tax and other incentives To ensure stability of supplies at right price; control markets To gain privileged access to resources vis--vis competitors (a) Oil, copper, bauxite, bananas, pineapples, cocoa, hotels (b) Export processing, labor-intensive products or processes Market seeking Capital, technology, information, management and organizational skills; surplus R&D and other capacity; economies of scale; ability to generate brand loyalty Material and labor costs; market size and characteristics; government policy (e.g. with respect to regulations and to import controls, investment incentives, etc.) Wish to reduce transaction or information costs, buyer ignorance or uncertainty, etc., to protect property rights To protect existing markets, counteract behavior or competitors; to preclude rivals or potential rivals from gaining new markets Computers, pharmaceuticals, motor vehicles, cigarettes, processed foods, airline services Efficiency seeking (a) of product (b) of processes As above, but also access to markets; economies of scope, geographical diversification and international sourcing of inputs (a) Economies of product specialization and concentration (b) Low labor costs: incentives to local production by host governments (a) As for second category plus gains from economies of common governance (b) The economies of vertical integration and horizontal diversification As part of regional or global product rationalization and/or to gain advantags of process

specialization (a) Motor vehicles electrical appliances, business services, some R&D (b) Consumer electronics, textiles and clothing, cameras, pharmaceuticals Strategic asset seeking Any of first three that offer opportunities for synergy with existing assets Any of first three that offer technology, markets and other assets in which firm is deficient Economies of common governance; improved competitive or strategic advantage; to reduce or spread risks To strengthen global innovatory or production competitiveness; to gain new product lines or markets Industries that record a high ratio of fixed to overhead costs and which offer substantial economies of scale or synergy Trade and distribution (import and export merchanting) Market access; products to distribute Source of inputs and local markets; need to be near customers; after-sales servicing, etc. Need to protect quality of inputs; need to ensure sales outlets and to avoid underperformance or misrepresentation by foreign agents Either as entry to new markets or as part of regional or global marketing strategy A variety of goods, particularly those requiring contact with subcontractors and final consumers Support services Experience of clients in home countries Availability of markets, particularly those of lead clients Various (see above categories) As part of regional or global product or geographical diversification (a) Accounting advertising, banking, producer goods (b) Where spatial linkages are essential (e.g. airlines and shipping) C. Why should a company go international? There are three important questions that the corporation must answer and there are several reasons to the above question. 1. Does the company have an idea or use which will give a niche or advantage internationally? 2. What causes the firm to go internationally and succeed in a foreign environment against competitors from both domestic firms and other MNEs? 3. What happen to the character, structure, and image of company during the course of internationalization? Nine reasons: 1. Larger market, market power, production possibilities, geographic, product or both. Check population and income as determinants of market size. The corporation will attain greater profits from foreign markets than those received locally. 2. Growth and expansion to secure future market or deal with future competitors. Factors of growth are: rapid increasing expansion of technology, liberalization of government policies, privatization, development of institutions encouraging growth, and increase in global competition. 3. Optimization of resources. More people. United States's GDP is less than the Worlds GDP. Keep the same share of market, but increase market space. Utilize idle materials, spread the risk, minimized competitive risk, protect investment sand cost smoothing. The corporation can accomplish this because its leadership in innovation 9technology intensive industries). 4. Corporations need to compete, keep up with the competition. The corporation watches competitors actions. If a company sets operations in new markets, or markets a new product abroad, companies take immediate actions in order not to loose market shares. Therefore, when companies go international, others follow in order to minimized the risks. International when foreigners come to the United States; so for domestic

companies to compete, they must go international. (Leadership advantage vs. following the leader.) Competitive environment varies from country to country because the number and strength of competitors, suppliers and customers and because of regulations on how a company can compete. Competition has become global via new products becoming global quickly, companies can now produce in different markets, domestic companies as new competitors, and suppliers and customers have become international. 5. Corporations need to maximize profits. Corporations will obtain greater profits from abroad than from being merely domestic companies. Dynamic vs. static equilibrium, fixed vs. variable resources. Therefore, there are economic reasons to go international such as direct investment, control, access to foreign markets, higher sales internationally, and partial or total ownership. The next four are very important (items 6-9): 6. Vertical integration. This is extremely important in centralization or decentralization of operating activities in the global market and global production. It allows a company to control the upswing (upstream) or downswing (downstream) of the market without actual ownership in the decision to buy or make component parts that go in their final product. To maximize profits, control market and control customers, the firm must discern against competition. Companies become vertically integrated to assure sources of supply, dominate distribution channels, avoid dependence on others (suppliers) and to deny such suppliers to the competition. Example: GM attempts to control ore mines in Venezuela to guarantee the ore for GM only. Control where production is sold: price, geography, and distribution downstream, (wholesales to retailer, customer, geographic distribution). Component parts in house ( vertical), for example, the auto industry has more than ten thousand components and the company needs to make decisions as to make or use these components. Reebok and Nike also have to make these type of decisions and all their production has been out source primarily in low wage markets. Problems with vertical integration are that the economies and their exchange rates are volatile; there is change in relative factors of production. Vertical integration gives the corporation control and assurance of supply and distribution without owning them. When making these decisions always look at the trade-offs. Advantages of vertical integration are: protection of technology, when firms are not efficient internally than external suppliers at the performing activity, lower costs, facilitation of specialized investment but creates interdependence, proprietary products enable firm to produce a product containing superior features and comparative advantage, and, improve scheduling, planning, coordination and inventory systems. Reasons for vertical => protect secrecy or minimize effects of government restrictions, cost of involvement, costs of negotiations, need for financial, human, and technical resources to undertake projects, control of key resources and operations, which otherwise may fall in the hands of competitors. Horizontal expansion occurs when a company goes abroad at the same level in the value chain as its domestic operation. Horizontal integration occurs when the company integrates its own operations and avoid buying and selling to other companies in the same area or industry or licensing technology to them i.e., Xerox manufactured and sold copiers in Mexico.

The Vertical approach involves movement along the value chain, (i.e., Alcoas participation in ownership of bauxite production facilities in Australia). Downstream or Backward Vertical, (i.e., Alcoas control over supplies that it needs for its aluminum production in United States). Alcoa acquires a Central American plant to make aluminum cans from its United States-made aluminum. Forward or upstream integration. Horizontal integration may be difficult culturally when the rules of the game are different or you have trouble acquiring or operating. For example, Eastern Europe (Hungary) exporting or licensing is unavailable. There are advantages, however, in transportation costs, market imperfections, following the costumers, product life cycles, and location. 7. Oligopoly, monopoly competitor - ownership and control: Colluding, cooperating, corroborating and coordinating. This gives corporations superior size and larger scope of operations. Companies jostle with each other for larger shares of the world market. Monopoly or oligopoly position gives the company size and ability to operate and produce in foreign markets. Regulated or natural monopolies are where the governments allow a company to manufacture the product and control the price. There is manipulation of price only when the demand is inelastic, no substitutes, consumers can not postpone purchase, and small percentage of consumers budget compared to the benefits obtained, and the market can only afford one producer. Examples of oligopolies: GM, Ford, Daimler-Chrysler. Examples of foreign oligopolies are cartels. Cartels offer unique products not found outside of the cartel. Example: Oil, diamonds, magnesium, coffee, etc. They collude, cooperate and coordinate. They control the supply and/or price. All member countries in the cartel must work together for the cartel to be successful and control a particular commodity or resource. Oligopolies (cartels) - various companies producing similar product or service work together to control markets for the type of products they produce involve more than a partner. Formal agreements to set prices, establish levels of production, sales, allocate market territories (OPEC). Japan - Recession cartel such as The Ministry of International trade and Industry (MITI). 8. Economies of Scale and Economies of Scope. Economies of Scale - Cost advantages associated with large scale of production. As the firm produces more units, amounts changed in quantity produced, the cost per unit falls because fixed costs (plant, equipment and supervisory personnel) are spread out over more units of production. Eventually, the cost per unit might increase or firm incurs more fixed costs to produce additional units. (Whirlpool produces 50% of all washers in United States.) This is the main reason for going international. It is the reduction of the units costs as a producer that makes larger quantities of the product by changing more than one factor of production. Such a production results from reduction of the marginal cost due to increased specialization, the use of capital equipment, benefits of quantity purchase or economies of mass production. It deals with how corporations use the factors of production efficiently to minimize cost. Four stages of factors of production: a. Very Short Run. The Corporation cannot change any of the factors of production,

because they are all fixed; there are not outputs produced in the very short run. Short run supply of labor is fixed. Fixed costs are the costs of setting up production facilities in foreign markets, develop a new product lines, sunk costs, and develop markets. The only way to recuperate high costs is to sell the product worldwide or to manufacture it worldwide. b. Short Run. All factors of production are fixed except one. In the U.S., capital or labor is a factor more able to change. In the Short Run - The Law of Diminishing Marginal Returns. Increase variable input to fixed inputs. Costs decrease. If continue to add inputs, the costs then increase. If factors of production are added, even if free, the cost increases. c. Long Run. Change all resources, except technology. One reason why companies go international. The costs are variable in the long run supply of labor (wages and salaries). d. Very Long Run. Change all factors of production, including technology. Long Run - Economies of Scale - same as the Law of Diminishing Returns, except it is in the long run. If all inputs are changed for only one output or one industry, then we are working under Economies of Scale. Economies of scale is when production occurs in only one industry while economies of scope is producing in more than one industry. If inputs increase 40% and outputs increase more than 40%, then increasing returns to scale or scope. If inputs increase 40% and outputs increase 40% (they are equal), there is constant returns to scale or scope. If inputs increase 40% and outputs increase less than 40%, there is decreasing returns or diseconomies of scale or scope. Experience Curve: is the systematic reduction in production costs that have been observed to occur over the life of the product. Each time accumulated output doubles, the products production costs decrease. Economies of Scale: is the reduction of unit costs achieved by producing large volume of product as plant output increases unit costs decrease. Greater levels of production result in the lower cost per unit, therefore, greater profitability. Economies of scale source is the ability to spread fixed costs over large volume. The ability of the MNE to employ increasing specialized equipment and personnel. For example, Adam Smiths division of labor is for the MNE to expand if able to utilize and make full use of specialized equipment and produce large amounts of output required to justify the hiring of specialized personnel. For example metal stamping machinery in the auto industry. Thus, because MNE can produce large quantities of output and fully utilize equipment and personnel. An MNE can have lower cost for the production. Firms that use economies of scale have competitive advantage to spreading fixed costs of building productive capacity over large output and markets. There is an increasing production by single plants as rapidly as possible and since international marketing is larger than domestic, a firm that serves different markets from different locations is capable of accumulating larger volumes. For example, in the semiconductor companies, a decrease in cost by setting up manufacturing in different locations at once and accommodate demands for local responsiveness manufacturing in different locations makes the company less dependent on locations. Being too dependent

on one location makes the firm too risky. For example, floating exchange rates, flexibility in manufacturing technology, mass customization and, short term economic cycles. 9. Product Life Cycle (introduction, growth, maturity, and decline). PLC includes birth, growth, maturity, and decline over time. With the international market, the life of the product is prolonged without too much more expense. The PLC in the international market is shorter. The PLC was given to us by Raymond Vernon in 1966. The same firm that pioneers the production in the domestic market undertakes production for consumption in foreign markets. For example, Xerox in the United States, Fuji in Japan and Rank X in Great Britain, peanut butter and jelly slices, Heinz with purple and green squeezable ketchup bottles, and Smuckers with squeezable jelly bottles. Investment on those markets where local production grows larger to support local production or marketing, subsequently shifts production to developing countries when product standardization and market saturation give rise to price competition and cost pressures. For example, investment in third world countries or developing countries where labor costs are low. D. The Corporation needs to review and analyse the operations, functions, product and customers. A product must be sellable" on the international market; it must have international appeal and use. Does my product have an international appeal and use? The economy of the country must be studied. Is there a demand for my product or idea? How can the demand be increased or changed? Will the company be able to supply the demand--produce enough to serve the market? Legal systems are weak in the international market. Start with a small market and expand. Know the capabilities and competitors. Are there substitutes to the product? What poses a threat to the product in the international market? Do your competitors or customers sell overseas? E. What a company wants to do, and whether to enter or not. One can make things happen by making an active decision. Some considerations include moral codes and customer operational variables. F. Set up objectives. Stretch the goals of the corporation. The objectives must be practical and attainable, yet somewhat difficult to achieve, (i.e, for your corporation, a piece of cake, but for the competitors, it must be a challenge). PHASE II. TRANSITIONAL STAGE FOR THE CORPORATION DECISIONAL AND OPERATIONAL VARIABLES A. There are five steps in the decision making process. 1. Production. How a corporation converts inputs into outputs efficiently, expanding inputs for more outputs. Economies of Scale/Scope. Economic efficiency and technology efficiency, decrease costs, and increase profits. 2. Marketing allocation. Look at how to handle intercorporate research and analysis. Choose products and markets for international market, methods of entry, and entry strategies. 3. Managerial organization. How to organize internationally, department or branch. A division or branch has more influence over production schedules and allocation than an export department. Personnel management, finance, logistics (warehousing and transportation), and methods of entry and entry strategies. Expatriates vs. local, geocentric, homocentric and heterocentric.

4. World economy. Must decide which world economy to participate in, and which is more successful. One can minimize risk with countries that have the same economic system as ours. Three key economic indicators of countries same as ours to check into are: a. GDP (per capita income). Economic growth and economic development. b. Quality of life - measured by life expectancy. c. Percentage of GDP generated from agriculture, minerals (extractive) vs. percentage of GDP generated from services and manufacturing. World Bank classification of countries First World: High income countries, heavily industrialized, high quality of life, high purchasing power, high educational level. Japan has more purchasing power than the United States, but no credit, no place to invest the income by individuals. Non-socialist, northern hemisphere of the world. Includes the European community, United States, Switzerland, Canada, Scandinavian countries, Japan in the southern hemisphere, as well as New Zealand and Australia which are part of the British Commonwealth system. The country must have a GDP per capita of $3,600.00 or more. Source: http://www.wb.org The U.S.A. average per capita income family of four is $38,000.00. The U.S. is considered de-industrialized and service oriented. Average for individuals is $30,000.00. In 2002 the average doctor salary was $156,000.00, lawyer was $110,000.00, CEO was $2.3 million; college professor was $84,000.00, and average McDonalds worker was $12,000.00. Source: World Bank web site, 2002. For current statistics check on http://www.wb.org Second World or Economies in Transition: (Eastern European nations) Advanced industrialized with former socialist system. Centrally planned, or formally centrally planned economies. European non-market economies. Same as European former Socialist countries. Even though they are not socialists, they are still not a market economy - somewhat in-between. Politically unstable. Undergoing rapid changes. GDP less $3,600.00 but greater than $490.00. Third World or Developing Economies: These countries are middle and/or low income and newly industrialized. The low income countries are the developing countries, such as African and Latin American countries, but also some European countries such as Moldavia with a GDP per capita of $120.00. There is low per-capita income, low quality of life, short life expectancy (of 40 years or less), low purchasing power, and GDP is less than $410.00. Income distribution is unfair and uneven. The middle income countries have one or two of the economic indicators. GDP is less than $3,600.00 and greater than $490.00 The newly industrialized countries are no longer mainly agricultural but also extractive. They own resources that are exported to industrialized countries, example: Oil. They have a high per capita income, better quality of life, and are moving from agricultural to industrialization. Examples: South Korea, Argentina, Israel, Brazil, Chile, Costa Rica, Saudi Arabia, and South Africa, with about $6.300.00 per capita. In the U.S., no taxes are paid when income is $12,600.00, and one is considered indigent when income is $8,600.00. 5. Products to sell and produce with regards to the level of income and distribution of income. Inferior, superior or normal goods and services. Decisions and operational

variables. The level of income determines how wealth is distributed among the countries of the world. Brunei is the wealthiest with a GDP per capita of $2,000,000.00. Distribution of income - how wealth is distributed within the country. In the U.S., 42% of the wealth is owned by 68% of the people. In Latin America, 2% owned 90% of the wealth in past decades, now 12% own about 74% of wealth, and now, with the new economic systems, the distribution is about 18% of the population owing 43% of wealth. What type of commodities? With inferior products (YE is -), the consumption decreases as income increases (Giffin goods). With superior (YE is +) products, as the income increase, the demand increases. With normal (YE = 1) products, consumption remains unchanged as income increases and decreases. Examples of these products: Bread, furniture, hay and sometimes gas. From country to country, these categories change. An example: What is inferior in the U.S. may be normal in Japan and superior in Rwanda or Moldavia. International Firm's Operations and Political Conditions. Operations and functions are directly related to politics and other environmental variables. Every market has two sectors: Private and public. The power of the public sector over the market depends on the country. Scandinavian and German governments own private businesses. In Japan, the government has absolute control over the businesses through the MITI ( Minister of Trade and Industry). And in the U.S., government operated businesses are inefficient. If one assumes the government doesn't exist, then the market controls the country's inputs. See, http://www.ashland.edu/~jgarcia/comparative 1. Economic communications. The allocation of economic resources - opportunity costs, utility, absolute advantage. 2. Preference articulation. How buyer and seller interact, articulate and communicate economic decisions. The outputs in a market economy are: (1) What to produce, (2) how to produce, (3) for whom to produce, and (4) how can flexibility be maintained through the changes over time. Inputs and outputs are based on government interactions. Inputs to the government: 1. Preference articulation. Citizens input into government (Example: Lobbyist, interest groups). 2. Preference aggregation. Political idealist - Democrats, Republicans - parties. 3. Political communications. Mass media, television, radio, newspapers. Outputs Outputs of the Government: 1. Legislative - laws governing how the market will be run 2. Judicial - interpret, adjudicate 3. Executive - enforces Corporations must look at the operational variables, such as marketing, accounting, communications, comparative risk minimization, sales expansion, acquisition, diversification, forward capital, hedging, colleting and paying late, leads and lags of intercorporate payments, and factors of production. They must also look at functional variables, such as finance, technology, exporting and importing, global manufacturing and supply, chain management, accounting, human resources, degree of competition, and

degree of integration to efficiently coordinate the economic activities. Other variables include exchange rates, currency availability, and politics. Key economic characteristics and issues that corporations must consider. Corporations must consider the political structure, the economic system, and whether the industry is in the public or private sector of that international market. A privately owned company should be concerned about the tendency for public ownership. A public company has the concern of crowd-in, crowd-out risks and possibilities. There is also the issue of whether a private company can survive in a country where most of the industries are publicly owned. Does government view foreign capital as being in competition, or in partnership with its public or local enterprises? How much should it be submissive to the private sector? Key economic characteristics: 1. General framework - capitalistic, social or command markets, planned, centralized, ownership of resources 2. Elections 3. Degree of equality - growth, inflation 4. Factor endowment - raw materials: Quality and quantity. Factors of production seekers, such as labor and raw materials 5. Market size and structure - larger markets are harder to enter 6. Extent of social overhead capital - electrical, gas power, transportation, communication 7. International interactions and trade patterns - balance of payments Leading Indicators: Indicators that tell us what is likely to happen within twelve to fifteen months. 4. Average workweek for production workers on manufacturing 2. Average weekly claims for unemployed insurance 3. Net orders for consumer goods and materials 4. Vendor performance, measured as a percentage of companies reporting slower deliveries from suppliers 5. Index of Consumer expectations 6. New orders from non defense capital goods 7. Number of new building permits issued for private housing units 8. Stock prices of 50 common stocks 9. Interest rate spread in ten year bond less federal fund rates 10. Money supply as M2 = currency and demand deposits plus time deposits of less than $1,000,000.00 Five key economic factors that influence economic growth and development: 1. Economic growth, Efficiency and Economic Development and Circular Flow. Developing countries have strong economic growth. Politically and financially, they are risky because they grow too quickly. East and South Asia and Chile have especially strong growth, and the growth is not risky. In Chile the growth is phenomenal. Causes of Growth: 1. Institutions compatible with incentives to grow 2. Technological developments 3. Availability of resources 4. Capital accumulation - Investment in productive capacity

5. Entrepreneurship 6. Health, education, and living standards 7. Infrastructure such as transportation 2. Privatization. Private ownership. The trend is towards privatization of enterprises. How it is done, which to privatize, and who can participate is determined by the country. Eastern Europe, Mexico, Argentina, Germany, U.K., parts of Russia and France to a lesser degree, are all going towards more privatization. France has neither privatization nor nationalization. Russian privatization is decentralization, and it favors keeping insiders in control of the business. In volatile countries, foreigners are less willing to invest. (element of risk). 3. Inflation such as demand pull, cost push, and structural inflation, hyperinflation, and stagflation which affect interest rates, cost of living and consumer confidence. If it is rapid, prolonged, and sustained, it increases the average aggregate prices of all commodities and goods and services in the market. 4. Balance of payments - what we owe to the rest of the world with respect to what the rest of the world owes us. Categories in balance of payments: current accounts, balance of trade, capital (short term and long term) accounts, gold, errors and omissions. 5. External debt - Latin American nations (Mexico, and Brazil), and Africa nations are debtor nations. Large portions of export earnings go toward servicing debt. The U.S. was a creditor nation, but became a debtor nation in the 1970's, however it still has the highest productivity in the world. International firms must check changes in investment patterns due to: 1. Economic conditions. This influences us the most. Full production is 100% full utilization of all factors of production. Full employment is not necessarily at 100% utilization of all factors of production but their practical utilization not necessarily at a 100% capacity. 2. Technological conditions. Technology changes from market to market and week to week. Factors that influence technology: ? PRODUCTION X TECHNOLOGY = PROFIT a. Need capital b. Other products partially displace products through substitution c. Market might not be ready d. No gain in demand of product due to changes Two types of technology: 1. software - human skills, information, know-how, services, and management 2. hardware - machines and equipment Technology may be dynamic or static Dynamic - observable changes Static - changes over time, economic or technologic efficiency 3. Wars and insurrections. Can cause transportation as well as communication difficulties. During WWII, world trade volume went back to what it was in 1938. There is a decrease in resources and control of natural resources. The emphasis is changed from one type of goods to another. Creates shortages. 4. Political and Economic organizations. Stimulate international business. There are different patterns of investment. GATT, W.T.O. and U.N. create organizations which influence the way countries do business, which is different in developing and developed

countries. Marketing management is the planning and coordinating of all activities and tasks in order to have a successful marketing program. Marketing research gives us marketing entry conditions. With indirect investment there is less control. Direct investment allows for more control. Intracorporate and intercorporate factors all impact market entry. Intracorporate factors: 1. Product characteristics 2. Corporate policies and structure 3. Corporate strengths and competitive position Intercorporate factors: 1. Domestic governmental policies 2. Comparative host country's cost 3. Geo-cultural environment 4. Political and legal environment 5. Market opportunities 6. Economic development and performance Marketing is the collection of factors undertaken by the corporation related to its goals and objections for profit. A firm's success is determined by how it relates to the market place. There are seven tasks firms have to perform in order to be successful in selecting the market or country: 1. Study its prospective buyers. Where and who are they? 2. Develop products and services that satisfy the customers' needs and wants. 3. Set prices and terms on the product - to get a reasonable profit and be reasonable to the buyers. 4. Distribution of product in the market 5. Inform the market about the product and persuade the buyers to get interested. 6. To win with the product, give implied warranties and after-sales services. 7. Monitor the market activity of competitors (domestic and international) and develop long term strategies Firms need information systems to identify factors in the international market. They need to consider: 1. International economic factors 2. Legal and political factors 3. Degree of competition In making decisions, corporations need to study the international studies and cultural research. They need to rank the markets in making the decisions. How to enter the country/market: There are four stages: 1. Selection process 2. Channels of distribution 3. Coordination of global logistics 4. Forms of financing Selection of the market/country depends on these factors: 1. Must meet the company's goals and objectives 2. Size of the company with respect to sales and assets

3. Company's product line 4. The competitors (with respect to product life cycle) Criteria of selecting methods of entry 1. Number of markets/countries. Companies differ as to the number of countries they would like to enter. This gives the market coverage they desire. 2. Penetration of that particular market. The number of markets covered and the quality of coverage. Example: Should it be the whole market or just the capital. 3. Market feedback. The more direct the investment, the more feedback that one can get. Choose the method of entry that gives the desired feedback. 4. Learning experience. The more directly involved, the more experience one gets in the market. 5. Control. One of the most important criteria. Management/share holders control from all to nothing. Is it a wholly-owned subsidiary, or an export company? 6. Incremental Marketing costs. With a more direct entry, incur higher costs. Less costs with indirect entry. 7. Profit possibilities. Costs, profit margins are more important than profit possibilities. 8. Investment requirements. Direct entry has high investment requirements. Capital is needed to finance inventories and expand credit. Indirect entry has low investment requirements. 9. Administrative requirements. Vary by entry modes. Accounting, advertising, currency, red tape, licensing, indirect exporting. 10. How much exposure to foreign problems. With direct, there are more problems, such as labor, regulations and other country peculiarities. 11. Personnel requirements. With direct entry, need more skilled internal personnel. 12. Flexibility. If the company expects to stay in the foreign market in the long run, it must be flexible. Market changes, company situations, objectives and goals change. Company needs to have an ability to change with the changing market. 13. Element of Risk. Foreign markets are riskier than the domestic markets. Risk is a function of the methods and amount of involvement in the market. Risk analysis needs to be done. The more direct entry and the more visible the company, the more political vulnerability there is. Indirect Methods of Entry The corporation supplies the product from the production in the domestic market and sells in the foreign market. It is a small percentage in the balance of payments. Exporting is a generic name for indirect investment. With exporting, companies maintain control over the product. It is the most inexpensive investment strategy in the long run, but riskier. Exporting and shipping may or may not be the responsibility of the manufacturer. In the United States the most important indirect investment is in the form of agriculture: soybeans, wheat, corn, rice. In these, the United States supplies 47-58% of the whole world production. Another big export is in the automobile industry. Three stages in the mechanics of Exporting: 1. Selection of the product 2. Selection of the approach of selling. Two approaches: Direct and indirect 3. Ascertaining the market

Indirect approach to exporting - sales occur in the domestic market. Intermediaries are used in distribution. The key is to not let the buyer and seller meet. Title and possession of the product pass in the domestic market. (As does liability, warranties, guarantees, after sales service, distribution). Direct approach - selling in the foreign market Indirect approach - selling to an intermediary which takes product abroad. Advantages of exporting: 1. Most convenient way of doing international business 2. Little capital outlay 3. Excellent way to sell excess capacity, excess product 4. Not subject to political risk 5. No worries of laws, taxes Disadvantages of exporting: 1. Transportation costs 2. Product may lack features desired in the foreign market 3. Competition may grow. Indirect exporting is the simplest form of getting involved in the foreign country. Disadvantages of indirect exporting: 1. Many competitors 2. Manufacturing may change 3. Middlemen may change manufacturers Distribution may be by: 1. Selling to the individual firms 2. Commission houses 3. Export Manufacturing Companies (EMCs), which find the customers. 4. Export trading companies, which have good connections in the international business and know the people to buy from and sell to. Direct Exporting Manager of the corporation assigns the job of exporting to someone within the company. The company handles the business expense of the export. It is a separate department or subsidiary. Deals directly with the sales channels. Corporation never parts with the titles or possession of the product until the product reaches the customers. It takes longer to establish and more management time is needed to maintain. Direct Investment 1. Foreign or overseas distributors. Distributor has exclusiveness for a foreign market. 2. Direct sellers or users 3. Establish own sales office in the foreign market Overcome disadvantages by: 1. Modifying product 2. Revise the product description so it is subject to lower tariffs