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The Firm in a Global Context

by: Justine Harber

The Firm in a Global Context BUAD 361

Justine Harber
GPA 3.73

John Anderson

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This 91 page Study Guide was uploaded by Justine Harber on Monday October 26, 2015. The Study Guide belongs to BUAD 361 at University of Tennessee - Knoxville taught by John Anderson in Fall. Since its upload, it has received 33 views. For similar materials see /class/229867/buad-361-university-of-tennessee-knoxville in Business Administration at University of Tennessee - Knoxville.

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Date Created: 10/26/15
BA 361 FINAL EXAM STUDY GUIDE CHAPTER 9 INTERNATIONAL STRATEGIC MANAGEMENT International Strategic Management is the comprehensive and ongoing management planning process aimed at formulating and implementing strategies that enable a firm to compete effectively internationally International Strategic Management results in the development of various international strategies which are comprehensive frameworks for achieving a firm s fundamental goals Conceptually there are many similarities between developing a strategy for competing in a single country and developing one for competing in multiple countries The process of developing a particular international strategy is often referred to as strategic planning Strategic planning is usually the responsibility of o toplevel executives at corporate headquarters o and senior managers in domestic and foreign operating subsidiaries Most larger firms also have a permanent planning staff to provide technical assistance for top managers as they develop strategies Disney is the opening case for this chapter Disney s planning staff for example gathered demographic and economic data that the firm s decision makers used to select the French site for Euro Disney and the Hong Kong site for its latest Asian Park There are many similarities between developing a strategy for competing in a single country and developing one for competing in multiple countries In both cases the firm s strategic planners must answer the same fundamental questions 0 What products andor services does the firm intend to sell 0 Where amp how will it make those products or services 0 Where and how will it sell them 0 Where and how will it acquire the necessary resources 0 How does it expect to outperform its competitors International businesses have the ability to exploit three sources of 39 39 39 unavailable to domestic firms 0 Global efficiencies International firms can improve their efficiency with I Location efficiencies I Economies of scale I Economies of scope o Multinational flexibility There are wide variations in the political economic legal and cultural environments of countries and these environments are constantly changing I new laws are passed I new governments elected I economic policies are changed I new competitors may enter or leave the national market and so on I International businesses thus face the challenge of responding to these multiple diverse amp changing environements 0 Worldwide Learning The diverse operating environments of MNC s may also contribute to organizational learning Differences in these operating environments may cause the firm to operate differently in one country than another An astute firm may learn these differences and transfer this learning to its operations in other countries 0 Types of Global Efficiencies 0 Location efficiencies International firms may achieve location efficiencies by locating their facilities anywhere in the world that yields them the lowest production or distribution costs or that best improves the quality of service they offer their customers I Ex MerecedesBenz has achieved economies of scale by focusing production of its Mclass as it assembly plant in Vance Alabama Economies of scale Similarly by building factories to serve more than one country international firms may also lower their production costs by capturing economies of m Economies of scope By broadening their product lines in each of the countries they enter international firms may enjoy economies of scope lowering their production and marketing costs and enhancing bottom lines 0 Strategic Alternatives there are four strategic alternatives that MNCs may adopt in their attempt to balance the three goals of global efficiencies multinational flexibility and worldwide learning 0 Home Replication Strategy A firm utilizes the core competency or firmspecific advantage it developed at home as its main competitive weapon in the foreign markets that it enters It takes what it does exceptionally well in its home market and attempts to duplicate it in foreign markets Multidomestic Strategy This type of corporation views itself as a collection of relatively indepdent operating subsidiaries each of which focuses on a specific domestic market Each of these subsidiaries is free to customize its products its marketing campaigns and its operations techniques to best meet the needs of its local customers It is effective when there are clear differences among national markets when economies of scale for production distribution and marketing are low and when the cost of coordination between the parent corporation and its various foreign subsidiaries is high Global Strategy Views the world as a single marketplace and has its primary goal the creation of standardized goods amp services that will address the needs of customers worldwide The global strategy is almost the exact opposite of the multidomestic strategy Transitional Strategy Attempts to combine the benefits of global scale effeciencies such as those pursued by a global corporation with the benefits and advantages of local responsiveness which is the goal of a multidomestic corporation Transnational SHW Firm combines benefits of global scale efficiencies with benefits W responsiveness Multidomestic aw Firm operates as a collection of relatively competency or frrm ci c advantage Independent subsrdrarres Low High Pressures for Local ResponsivenessFlexibility Global Strategy Firm views the world as High single marketplace Goal 39s to create standardized Home Replication LOW Firm uses core r Pressures for Global Effi iencies Tkic four 0 The need for local responsiveness o The need to achieve global integration Firms must pay particular attention to local conditions when consumers tastes preferences vary widely across countries when large differences exist in local laws economic conditions and infrastructure orwhen hostcountry governments play a major role in the particular industry Pressures for global integration arise when the firm is selling a standardized commoditywith little ability to differentiate its products through features or quality such as agricultural goods bqu chemicals ores and lowend L lftrade barrier anu costs are low such firms must strive to produce their goods atthe lowest possible costs Conversely if the product features is desired by consumers vary by country or if firms are able to differentiate their products through brand names aftersales support services and quality differences the pressures for global integration lessend Components of International Strategy After determiningthe overall international strategic philosophy oftheir firm managers who engage in international strategic planningthen need to address the four39 39 stratem 39 139 o Distinctive Competence 0 Scope of Operations 0 Resource Deployment o Synergy Distinctive Competence Answers the question What do we do exceptionally well especially as compared to our competitors 0 Represents important resource to the rm 0 A firm39s distinctive competence may be cutting edge technology efficient distribution networks superior organizational practices orweIIrespected brand names Without a distinctive competence a foreign firm will have difficulty competing with local firms that are presumed to know the local market better The Disney name image and portfolio of character for example is a distinctive competence that allows the firm to succeed in foreign markets Whatever its form this distinctive competence represents an important resource to the firm A firm often wishes to exploit this advantage by expanding its operations into as many markets as its resources allow To a large degree the internationalization strategy adopted by a company reflects the interplay between its distinctive competence and the business opportunities available in different countries 0 Scope of Operations Answers the question 0 Where are we going to conduct business 0 Aspects of Scope I Geographical region countries regions within a country andor clusters of countries I Market or product niches within regions such as the premiumquality market niche the lowcost market niche or other specialized market niches I Specialized market niches 0 Because all firms have finite resources and because markets differ in their relative attractiveness for various products managers must decide which markets are most attractive to their firm Scope is tied to the firm39s distinctive competence if the firm possesses a distinctive competence only in certain regions or in specific product lines then its scope of operations will focus on those areas where the firm enjoys the distinctive competence 0 Resource Deployment Answers the question 0 Given that we are going to compete in these markets how will we allocate our resources to them 0 Resource specifics Resource deployment might be specified along product lines geographical lines or both This part of strategic planning determines relative priorities for firm s limited resources I Product lines I Geographical lines o Synergy Answers the question 0 How can different elements ofour business benefit each other 0 Goal is to create a situation where the whole is greater than the sum ofthe parts 0 Disney has excelled at generating synergy in the United States People know the Disney characters from television so they plan vacations to Disney theme parks At the parks they are bombarded with information about the newest Disney movies and they buy merchandise featuring Disney characters which encourage them to watch Disney characters on TV starting the cycle all over again Developing International Strategies Firms generally carry out international strategic management in two broad stages 0 Strategy Formulation deciding what to do the firm establishes its goals and the strategic plan that will lead to the achievement of those goals In international strategy formulation managers develop refine and agree on which markets to enter or exit and how best to compete in each 0 Strategy Implementation actually doing it the firm develops the tactics for achieving the formulated international strategies Strategy implementation is usually achieved via the organization39s design the work of its employees and its control systems and processes Steps in International Strategy Formulation 0 Develop a mission statement 0 Perform a SWOT analysis 0 Set strategic goals 0 Develop tactical goals amp plans 0 Develop a control framework Mission StatementsFirst step in International Strategy Formulation o Clarifies the organization s I Purpose I Values I Direction 0 Communicates firm s strategic direction 0 Specifies firm s target customers and markets principal products geographical domain core technologies concerns for survival plans for growth amp profitability basic philosophy and desired public image 0 Most organizations begin the international strategic planning process by creating a mission statement which clarifies the organization39s purpose values and directions The mission statement is often used as a way of communicating with internal and external constituents and stakeholders about the firm39s strategic direction MNCs may have multiple mission statementsone for the overall firm and one for each of its various foreign subsidiaries SWOT Analysis strengths weaknesses opportunities threats 2quotd step in intl strat formula 0 A firm typically initiates its SWOT analysis by performing an environmental scan In conducting a SWOT analysis a firm39s strategic managers must also assess the firm39s Internal environment that is its strengths and weaknesses the S and W in SWOT 0 Organizational strengths are skills resources and other advantages the firm possesses relative to its competitors 0 Potential strengths which form the basis of a firm39s distinctive competence might include an abundance of managerial talent cuttingedge technology wellknown brand names surplus cash a good public image and strong market shares in key countries o A firm also needs to acknowledge its organizational weaknesses These weaknesses reflect deficiencies or shortcomings in skills resources or other factors that hinder the firm39s competitiveness They may include poor distribution networks outside the home market poor labor relations a lack of skilled international managers or product development efforts that lag behind competitors39 0 When members of a planning staff scan the external environment they try to identify both opportunities the O in SWOT and threats the T in SWOT confronting the firm They obtain data about economic financial political legal social and competitive changes in the various markets the firm serves or might want to serve External environmental scanning also yields data about environmental threats to the firm such as shrinking markets increasing competition the potential for new government regulation political instability in key markets and the development of new technologies that could make the firm39s manufacturing facilities or product lines obsolete Environmental Scan is a systematic collection of data about all elements of the firm s external amp internal environments including 0 Markets 0 Regulatory issues 0 Competitor s actions 0 Production costs 0 Labor productivity One technique for assessing a firm39s strengths and weaknesses is the value chain The value chain is a breakdown of the firm into its important activities production marketing human resource management and so forth to enable its strategists to identify its competitive advantages and disadvantages Each primary and support activity can be the source of an organizational strength distinctive competence or weakness For example the quality of Caterpillar39s products Research and Development in the figure and the strength of its worldwide dealership network Marketing Sales and Service in the figure are among its organizational strengths but a history of contentious labor relations Human Resources in the figure represent one of its organizational weaknesses Support activities Exp Primary activities g Manufacturing Marketing amp Sales Service Company Infrastructure Information Systems Human Resources Research Ii Development Sourcing amp Logistics Strategic Goals also called ob39ectives are what the firm wants to accomplish by pursuing a particular course of action With the mission statement and SWOT analysis as context international strategic planning is largely framed by the setting of strategic goals By definition they should be 0 Measurable o Feasible o timelimited answering the questions quothow much how and by when Tactical Goals amp Plans After a SWOT analysis has been performed and strategic goals set the next step in strategic planning is to develop speci c tactical goals and plans or tactics Tactics usually involve 0 middle managers 0 and focus on the details of implementing the firm39s strategic goals 0 Examples Hiring Compensation Career paths Distribution and logistics Control Framework The final aspect of strategy formulation is the development of a control framework A control framework is the set of managerial and organizational processes that keep the firm moving toward its strategic goals Each set of responses stems from the control framework established to keep the firm on course The control framework can prompt revisions in any ofthe preceding steps in the strategy formulation process Levels of International Strategy Given the complexities of international strategic management many international businesses especially MNCs find it useful to develop strategies forthree distinct levels with an organization k Corporate S39 39 Unrelated 5 g Related Business Strategy Differentiation Cost Leadership amp Focus Functional Strategies Finance Marketing Operations Human Resource Management 000 0 Corporate Strategy Corporate strategy attempts to define the domain of businesses the firm intends to operate 0 Singlebusiness strategycalls for a firm to rely on a single business product or service for all its revenue The most significant advantage of this strategy is that the firm can concentrate all its resources and expertise on that one product or service However this strategy also increases the firm39s vulnerability to its competition and to changes in the external environment Related diversificationthe most common corporate strategy calls for the firm to operate in several different but fundamentally related businesses industries or markets at the same time This strategy allows the firm to leverage a distinctive competence in one market in order to strengthen its competitiveness in others The goal of related diversification and the basic relationship linking various operations are often defined in the firm39s mission statement Unrelated diversificationwhereby a firm operates in several unrelated industries and markets 0 Advantages of Related Diversification O O O 0 Less dependence on single product Greater economies of scale Entry into additional markets more efficient amp effective First the firm depends less on a single product or service so it is less vulnerable to competitive or economic threats or example if Disney faces increased competition in the theme park business its movie television and licensing divisions can offset potential declines in theme park revenues Second related diversification may produce economies of scale for a firm For example The Limited lnc takes advantage of its vast size to buy new clothing lines at favorable prices from Far Eastern manufacturers and then divides the purchases among its Limited Express Lerner and other divisions Third related diversification may allow a firm to use technology or expertise developed in one market to enter a second market more cheaply and easily For example Pirelli SpA used its expertise in producing rubber products and insulated cables refined over 100 years ago to become the world39s fifth largest producer of automobile tires Pirelli has also transferred its knowledge of rubber cables to become a major producer of fiber optic cables 0 Business Strategy 0 O O O Differentiation Overall cost leadership Focus Whereas corporate strategy deals with the overall organization business strategy focuses on specific businesses subsidiaries or operating units within the firm Business strategy seeks to answer the question quotHow should we compete in each market we have chosen to enterquot Firms that pursue corporate strategies of related diversification or unrelated diversification tend to bundle sets of businesses together into strategic business units SBUs In firms that follow the related diversification strategy the products and services of each SBU are somewhat similar to each other A differentiation strategy attempts to establish and maintain the image either real or perceived that the SBU39s products or services are fundamentally unique from other products or services in the same market segment The overall cost leadership strategy calls for a firm to focus on achieving highly efficient operating procedures so that its costs are lower than its competitors39 This allows it to sell its goods or services for lower prices A successful overall cost leadership strategy may result in lower levels of unit profitability due to lower prices but higher total profitability due to increased sales volume A focus strategy calls for a firm to target specific types of products for certain customer groups or regions Doing this allows the firm to match the features of specific products to the needs of specific consumer groups These groups might be characterized by geographical region ethnicity purchasing power tastes in fashion or any other factor that influences their purchasing patterns 0 Functional Strategies O 0000 RampD Human Resources Financial Marketing Operations Functional strategies attempt to answer the question quotHow will we manage the functions of finance marketing operations human resources and research and development RampD in ways consistent with our international corporate and business strategiesquot Internationalfinancial strategy deals with such issues as the firm39s desired capital structure investment policies foreignexchange holdings riskreduction techniques debt policies and workingcapital management Typically an international business develops a financial strategy for the overall firm as well as for each SBU International marketing strategy concerns the distribution and selling of the firm39s products or services It addresses questions of product mix advertising promotion pricing and distribution International operations strategy deals with the creation of the firm39s products or services It guides decisions on such issues as sourcing plant location plant layout and design technology and inventory management International human resource strategy focuses on the people who work for an organization It guides decisions regarding how the firm will recruit train and evaluate employees and what it will pay them as well as how it will deal with labor relations International RampD strategy is concerned with the magnitude and direction of the firm39s investment in creating new products and developing new technologies Foreign Market Analysis To successfully increase market share revenue and profits firms must normally follow three steps in foreign market analysis 0 Assess alternative markets 0 Evaluate the respective direct and opportunity costs benefits and risks of entering each 0 Select those that hold the most potential for entry or expansion Factors in Assessing New Market Opportunities In assessing In assessing alternative foreign markets a firm must consider a variety of factors including the current and potential sizes of these markets the levels of competition the firm will face their legal and political environments and sociocultural factors that may affect the firm39s operations and performance 0 ProductMarket Major productmarket differences Structural characterstics of national market Competitor analysis Potential target markets Relevant trends Explanation of change OOOOOO Success factors 0 Strategic options The first step in foreign market selection is assessing market potential The decisions a firm draws from this information often depend upon the positioning of its products relative to those of its competitors A firm producing highquality products at premium prices will find richer markets attractive but may have more difficulty penetrating a poorer market Conversely a firm specializing in lowpriced lowerquality goods may find the poorer market even more lucrative than the richer market Consider the market differences between the two Chinas the Peoples39 Republic of China and the Republic of China Taiwan highlighted in Map 121 Although China39s population dwarfs that of Taiwan Taiwan s per capita income and standard of living is higher than China s A firm attempting to sell its products in both of these markets would clearly have a very different set of considerations to address for each Dole Food Company s international operations are subject to a variety of costs benefits and risks Different Modes of Entry 0 Exporting International Licensing 0 International Franchising o Specialized Modes 0 Foreign Direct Investment 0 Choosing a Mode of Entry There are several decision factors that affect choice of mode of entry 0 0 Ownership advantages are tangible or intangible resources owned by a firm which grant it a competitive advantage over its industry rivals Liability of foreignness reflects the informational political and cultural disadvantages that foreign firms face when trying to compete against local firms in the host country market Location advantagesreflects the informational political and cultural disadvantages that foreign firms face when trying to compete against local firms in the host country market lnternalization advantages are those that make it desirable for a firm to produce a good or service itself rather than contracting with another firm to produce it Other factors I Need for control I Resource availability I Global Strategy 0 Exporting Perhaps the simplest mode of lnternatlonallzing a domestic business is exporting the most common form of international business activity 0 O 0 Advantages I Relatively low financial exposure I Permit gradual market entry I Acquire knowledge about local market I Avoid restrictions on foreign investments I Exporting offers a firm several advantages The firm can control its financial exposure to the host country market as it deems appropriate Little or no capital investment may be needed if the firm chooses to hire a host country firm to distribute its products Exporting permits a firm to enter a foreign market gradually thereby allowing it to assess local conditions and finetune its products to meet the idiosyncratic needs of host country consumers Disadvantages I Vulnerability to tariffs amp NTBs I Logisticalcomplexltles I Potential conflicts with distributors Motivations for exporting Firms may have two different motivations for exporting I Proactive motivations are those that pull a firm into foreign markets as a result of opportunities available there I Reactive motivations are those that push a firm into foreign markets often because opportunities are decreasing in the domestic market Forms of exporting Indirect exporting occurs when a firm sells its product to a domestic customer which in turn exports the product in either its original form or a modified form Afirm also may sell to a foreign firm39s local subsidiary which then transports the first firm39s products to the foreign country 0 Direct exporting occurs through sales to customers either distributors or endrusers located outside the firm39s home country Research suggests that in one third of cases a firm39s initial direct exporting to a foreign market is the result of an unsolicited order its subsequent direct exporting typically results from deliberate efforts to expand its business 39 39 Through 439 39 ct39 39t39 the firm gains yaluable expertise about operating internationally and specific knowledge concerning the individual countries in which it operates o lntracorporate Transfer is the sale of goods by a firm in one country to an affiliated firm in another They account for about 40 percent of all us merchandise exports and imports Many MNCs constantly engage in such transfers importing and exporting semifinished products and component parts in order to lower their production costs Gummy 1 INDWEDT Expomwc Dummy 2 a domestic customer V COMPANY B Sellstu fulelgrl custamel new i DlRchFmeTan nlmh 7 ry y Sells dimlle in falelgn custamel counlry i IwaolimMrl TRANSFERS lialmtrv 2 9 em 1 in when tummy 0 Additional Considerations for Exporting O 0000 O Government policies Marketing concerns Logistical considerations Distribution issues Export promotion policies export financing programs and other forms of home country subsidization encourage exporting as an entry mode Conversely host countries may impose tariffs and NTBs on imported goods thereby discouraging the firm from relying on exports as an entry mode Marketing concerns such as image distribution and responsiveness to the customer may also affect the decision to export Often foreign goods have a certain product image or cachet that domestically produced goods cannot duplicate The choice of exporting is also influenced by a firm39s need to obtain quick and constant feedback from its customers Such feedback is less important for standardized products whose designs change slowly if at all such as toothbrushes and coffeemakers Logistical considerations also enter into the decision to export The firm must consider the physical distribution costs of warehousing packaging transporting and distributing its goods as well as its inventory carrying costs and those of its foreign customers A final issue that may influence a firm39s decision to export is distribution A firm experienced in exporting may choose to establish its own distribution networks in its key markets 0 Types of Export Intermediaries 0 OOO Export management company WebbPomerene association International trading company Other intermediaries An exporter may also market and distribute its goods in international markets by using one or more intermediaries third parties that specialize in facilitating imports and exports These specialists may offer limited services such as handling only transportation and documentation Or they may perform more extensive roles including taking ownership of foreignbound goods andor assuming total responsibility for marketing and financing exports Export Management Company is a firm that acts as its client39s export department Most are small operations that rely on the services of a handful of professionals An EMC39s staff typically is knowledgeable about the legal financial and logistical details of exporting and so frees the exporter from having to develop this expertise lnhouse The EMC may also provide advice about consumer needs and available distribution channels in the foreign markets the exporter wants to penetrate O EMCs usually operate in one of two ways Some act as commission agents for exporters They handle the details of shipping clearing customs and document preparation in return for an agreedupon fee In this case the exporter normally invoices the client and provides any necessary financing it may need 0 Others take title to the goods They make money by buying the goods from the exporter and reselling them at a higher price to foreign customers 0 WebbPomeren Association is a group of US firms that operate within the same industry and that are allowed by law to coordinate their export activities without fear of violating US antitrust laws 0 First authorized by the Export Trade Act of 1918 a WebbPomerene association engages in market research overseas promotional activities freight consolidation contract negotiations and other services for its members It may also directly engage in exporting by buying goods domestically from members and selling the goods in foreign markets on the association39s behalf Although such associations were originally designed to allow smaller related firms to cooperate in promoting exports most are now dominated by larger firms In general WebbPomerene associations have not played a major role in international business Fewer than 25 such associations exist today and they tend to be concentrated in raw materials such as wood pulp sulfur and phosphate rock 0 Five largest Japanese Soga Soshas o MitsubishiCorporation o Mitsui amp Company 0 Marubeni o Sumitomo Group 0 ltochu Corporation 0 The most important international trading companies in the global marketplace are Japan39s saga sosha which are an integral part ofJapan s keiretsu system The sogo sosha have prospered for several reasons Because of their farflung operations they continuously obtain information about economic conditions and business opportunities in virtually every corner of the world As part of a keiretsu a sogo sosha enjoys ready access to financing from the keiretsu39s lead bank and a builtin source of customers its fellow keiretsu members This customer base reduces the sogo sosha39s costs of soliciting clients and builds up its business volume thereby allowing it to reap economies of scale in its transportation and informationgathering roles Nonmembers of the keiretsu are then attracted to doing business with the sogo sosha because of its low cost structure and international expertise Moreover many of the sogo sosha have made investments in the natural resource sector Japan39s international trading companies have been so successful that measured by sales volume they are among the world39s largest service companies 0 Other lntermedaries In addition to the intermediaries that provide a broad range of services to international exporters and importers numerous other types offer more specialized services 0 Manufacturers agents solicit domestic orders for foreign manufacturers usually on a commission basis 0 Manufacturers export agents act as a foreign sales department for domestic manufacturers selling those firms39 goods in foreign markets 0 Export amp Import Brokersbring together international buyers and sellers of such standardized commodities as coffee cocoa and grains 0 Freight Forwarders specialize in the physical transportation of goods arranging customs documentation and obtaining transportation services for their clients 0 Licensing is when a firm the licensor leases the right to use its intellectual property technology work methods patents copyrights brand names or trademarks to another firm called the licensee in return for a fee called a royalty o The use of licensing as an entry mode may be affected by host country policies Firms are not advised to use licensing in countries that offer weak protection for intellectual property since they may have difficulty enforcing licensing agreements in the host country39s courts On the other hand the use of licensing may be encouraged by high tariffs and NTBs which discourage imports or by host country restrictions on FDI or repatriation of profits 0 Licensing is a popular mode for entering foreign markets because it involves little outof pocket cost A firm has already incurred the costs of developing the intellectual property to be licensed thus revenues received through a licensing agreement often go straight to the firm39s bottom line Licensing also allows a firm to take advantage of any locational advantages of foreign production without incurring any ownership managerial or investment obligations 0 Basic Issues in International Licensing o quot quot39 athe39 39 39 ofthe o Determiningcompensation 0 Establishing rights privileges and constraints 0 Specifying the duration of the contract 0 The licensor and licensee must determine which rights and privileges are and are not being conveyed in the agreement Compensation is another basic issue that is specified in a licensing agreement The licensor wants to receive as much compensation as possible while the licensee wants to pay as little as possible Yet each also wants the agreement to be profitable for the other so that both parties will willingly perform their contractual obligations Compensation under a licensing agreement is called a royalty The royalty is usually paid to the licensor in the form of a flat fee a fixed amount per unit sold or most commonly a percentage of the sales of the licensed product or service Royalties of 35 percent of sales are typical Other basic issues to be addressed in licensing agreements are the rights and privileges given to the licensee and the constraints imposed on it by the licensor The licensor may view the licensing agreement as a shortterm strategy designed to obtain knowledge about the foreign market at low cost and with little risk If sales of its products and services are strong it may want to enter the market itself after the agreement has ended Thus the licensor may seek a shortterm agreement If the contract39s duration is too short the licensee may be unwilling to invest in necessary consumer research distribution networks andor production facilities believing that it will be unable to amortize its investment over the life of the licensing contract Normally the licensor wants the licensee to undertake these market development efforts Accordingly the greater the investment costs incurred by the licensee the longer is the likely duration of the licensing agreement 0 Advantages of Licensing 0 Low financial risk 0 Lowcost way to assess market potential 0 Avoid tariffs NTBs restrictions on foreign investment 0 License provides knowledge of local markets 0 Disadvantages of Licensing 0 Limited market opportunitiesprofits 0 Dependence on licensee o Potenital conflicts with licensee o Possibilty of creating future competitor 0 Licensing carries relatively low financial risk provided the licensor fully investigates its market opportunities and the abilities of its licensees It also allows the licensor to learn more about the sales potential of its products and services in a new market without significant commitment of financial and managerial resources Licensees benefit through the opportunity to make and sell with relatively little RampD cost products and services that have been successful in other international markets 0 Licensing limits the market opportunities for both parties The licensor and licensee depend on each other to maintain product quality and to promote the product39s brand image Improper actions by one party can damage the other party Further if the licensee or licensor does not adhere to the agreement costly and tedious litigation may hurt both parties A final concern is the longterm strategic implications of licensing a firm39s technology Many firms are concerned that sharing their technology will inadvertently create a future competitor The licensee by producing under the licensing agreement may be able to learn the manufacturing secrets of the licensor or to develop new production tricks of its own The licensee can also build an independent reputation for manufacturing quality and service excellence while operating under the contract Although the licensing agreement may restrict the geographical area in which the licensee can manufacture and sell the product once it expires the former licensee may choose to expand its operations into the licensor39s existing territory 0 Franchising is an agreement that allows an independent entrepreneur or organization called the franchisee to operate a business under the name of another called the franchisor in return for a fee Franchise fees are complex and involve up front as well as ongoing fees amp royalties o Franchising actually a special form of licensing allows the franchisor more control over the franchisee and provides for more support from the franchisor to the franchisee than is the case in the licensorlicensee relationship The franchisor provides its franchisees with trademarks operating systems and wellknown product reputations as well as continuous support services such as advertising training reservation services for hotel operations and quality assurance programs 0 Basic Issues in International Franchising 0 00000 0 Does a differential advantage exist in domestic market Are these success factors transferable to foreign locations Has franchising been a successful domestic strategy Financial strength of franchisee Geographic amp market area issues International franchising is likely to succeed when certain market conditions exist First it may work when the franchisor has been successful domestically because of unique products and advantageous operating procedures and systems Franchising may also be effective when the factors that contributed to domestic success are transferable to foreign locations Third this may be a viable option if the franchisor has already achieved considerable success in franchising in its domestic market Finally foreign investors must be interested in entering into franchise agreements Like licensing agreements franchising agreements are spelled out in formal contracts with a typical set of terms The franchisor generally receives a fixed payment plus a royalty based on the franchisee39s sales for the rights to use the franchisor39s name trademarks formulas and operating procedures The franchisee usually agrees to adhere to the franchisor39s requirements for appearance financial reporting and operating procedures However franchisors are likely to allow some degree of flexibility in order to meet local customs and tastes As with other licensing arrangements one of the services the franchisee offers the franchisor is knowledge about the local market39s culture and customs o The company quotYumquot offers many franchise opportunities including KFC amp Pizza hut 0 Advantages of Franchising O O O O 0 Low financial risks Lowcost way to assess market potential Avoid tariffs NTBs restrictions on foreign investment Maintain more control than with licensing Franchisee provides knowledge of local market 0 Disadvantages of Franchising 0 000 Limited market opportunitiesprofits Dependence on franchisee Potential conflicts with franchisee Possibility of creating future competitor On the plus side franchisees can enter a business that has an established and proven product and operating system and franchisors can expand internationally with relatively low risk and cost A franchisor also can obtain critical information about local market customs and cultures from host country entrepreneurs that it otherwise might have difficulty obtaining It further can learn valuable lessons from franchisees that apply to more than the host country o On the negative side as with licensing both parties to a franchising agreement must share the revenues earned at the franchised location International franchising may also be more complicated than domestic franchising Specialized Entry Modes a firm may also use any of several specialized strategies to participate in international business without making longterm investments 0 Contract Manufacturing 0 Management contract 0 Turnkey Project Contract Manufacturing is used by firms both large and small that outsource most or all of their manufacturing needs to other companies This strategy reduces the financial and human resources firms need to devote to the physical production of their products Advantages of Contract Manufacturing 0 Low financial risks 0 Minimize resources devoted to manufacturing 0 Focus firms resources on other elements of the value chain Disadvantages of Contract Manufacturing 0 Reduced control may effect quality delievery schedules etc 0 Reduce learning potential 0 Potential public relations problem Management Contracts is an agreement whereby one firm provides managerial assistance technical expertise or specialized services to a second firm for some agreedupon time in return for monetary compensation For its services the first firm may receive either a flat fee or a percentage of sales The management contract may also specify performance bonuses based on profitability sales growth or quality measures Management contracts allow firms to earn additional revenues without incurring any investment risks or obligations Advantages of Management Contracts 0 Focus firm s resources on its area of contracts 0 Minimal financial exposure Disadvantages of Management Contracts 0 Potential returns limited by contract expertise 0 May unintentionally transfer proprietary knowledge and techniques to contractee Turkney Project A turnkey project is a contract under which a firm agrees to fully design construct and equip a facility and then turn the project over to the purchaser when it is ready for operation The turnkey contract may be for a fixed price in which case the firm makes its profit by keeping its costs below the fixed price Or the contract may provide for payment on a costplus basis which shifts the risk of cost overruns from the contractor to the purchaser International turnkey contracts often involve large complex multiyear projects such as construction of a nuclear power plant an airport or an oil refinery Managing such complex construction projects requires special expertise As a result most are administered by large construction firms Advantages of Turkney Project 0 Focus firm s resources on its area of expertise 0 Avoid all longterm operational risks Disadvantages of Turkney Project 0 Financial Risks 0 Cost overruns 0 Construction Risks o Delays 0 Problems with suppliers An increasingly popular variant of the turnkey project is the socalled BOT project in which the firm builds a facility operates it and later transfers ownership of the project to some other party Through this approach the contractor profits from operation and ownership of the project for some period of time but bears any financial risks associated with it during this period BOT PROJECT Builds facility Operates it Transfers ownership Foreign Direct Investment Many firms prefer to enter international markets through ownership and control of assets in host countries Such FDI affords the firm increased control over its international business operations as well as increased profit potential Control is particularly important to the firm if it needs to closely coordinate the activities of its foreign subsidiaries to achieve strategic synergies or if it determines that the control is necessary in order to fully exploit the economic potential of proprietary technology manufacturing expertise or some other intellectual property right FDI is also beneficial if host country customers prefer dealing with local factories Many firms and governments participate in programs that favor locally made products in order to promote their local economies Equally important many purchasing managers perceive that local production implies more reliable supply faster service and better communication with suppliers FDI exposes the firm to greater economic and political risks and operating complexity as well as the potential erosion of the value of its foreign investments if exchange rates change adversely A firm39s decision to engage in FDI may also be influenced by government policies Firms using FDI must also meet the standard challenges of managing operating and financing their foreign subsidiaries while facing the additional hurdle of doing so in political legal and cultural milieus different from their own Advantages of FDI 0 High profit potential 0 Maintain control over operations 0 Acquire knowledge of local market 0 Avoid tariffs amp NTBs o Disadvantages of FDI 0 High financial amp managerial investments 0 Higher exposure to political risk 0 Vulnerability to restrictions on foreign investment 0 Greater managerial complexity 0 Foreign Direct Investment Three different methods 0 Building new facilities the Greenfield strateg 0 Buying existing assets in a foreign country Brownfield or Acguisition strategy 0 Participating in Joint Venture o The greenfield strategy involves starting a new operation from scratch the word greenfield arises from the image of starting with a virgin green site and then building on it The firm buys or leases land constructs new facilities hires andor transfers in managers and employees and then launches the new operation The advantages of this strategy are presented on the next slide 0 A second FDI strategy is acquisition of an existing firm conducting business in the host country By acquiring a going concern the purchaser quickly obtains control over the acquired firm39s factories employees technology brand names and distribution networks The acquired firm can continue to generate revenues as the purchaser integrates it into its overall international strategy Unlike the greenfield strategy the acquisition strategy adds no new capacity to the industry 0 Joint ventures are created when two or more firms agree to work together and create a jointly owned separate firm to promote their mutual interests 0 Greenfield Strategy 0 Best site 0 Modern facilities 0 Economic development incentives 0 Clean state 0 Firms using a greenfield strategy can select the site that best meets its needs and construct modern uptodate facilities Local communities often offer economic development incentives to attract such facilities because they will create new jobs these incentives lower the firm39s costs The firm also starts with a clean slate Managers do not have to deal with existing debts nurse outmoded equipment or struggle to modify ancient work rules protected by intransigent labor unions The firm can acclimate itself to the new national business culture at its own pace rather than having the instant responsibility of managing a newly acquired ongoing business Research indicates that the greater the cultural differences between the home and host countries the more likely a firm is to choose to build a new factory rather than purchase an existing firm 0 However successful implementation takes time and patience Land in the desired location may be unavailable or very expensive In building the new factory the firm must also comply with various local and national regulations and oversee the factory s construction It must also recruit a local workforce and train it to meet the firm s performance standards By constructing a new facility the firm may be more strongly erceived as a foreign enterprise Countertrade A sales amp marketing strate ountertrade is an alternative means of structuring an international sale when conventi onal means of payments are difficult costly or nonexisitent because overnments may restrict the convertibility of their currency importers cannot get hard currency from their ba traded services lltey issue is how to v establish cost price retail wholesale etc 7mm inns m raw sugar sealer is Sui alue the goods or services involved eg how do U Wm M E Sugar reiineries KAZAHKSTAN CUDDEV refineries ks Customers may not have cash but do have other goods that can be swapped or Seller desires goods instead of cash for paymen Countertrade is when a firm accepts something otherthan money as payment for its goods or define or Marc Rich swaps r emied sugar SiEERiA lnrgasnllrie mi relineries Marc riicn svaps anllne luv anDei cunnenlra le uNEuLlA Marc Rich sni s copper cupper snncenlrale rnines tn reiineries v a ant apen rneriisi yieieing nare currency lav Marc riicn Types of Countertrade Agreements 0 Barter transaction the otherfor a period Goods may be unwa in duestionab CounterPurchase cred it situat o isthe direct exchange of goods or services between two parties without cash if the goods are not exchanged simultaneously one party may end up financing nted unusa ble or have a low resale va The most restrictive amp inflexible technioue mostly used for one time deals and s eciprocal buying agreement where a company is paid in cash and then agrees to spend some ofthe cash in other local market purchases Normally the company or industry is specified I A country has to allow payment in cash but knows it will receive some of the cash back via the counterpurchase o Offset I As in a counterpurchase deal the selling party agrees to purchase goods amp services with specified percentage of the proceeds from the original sale I But the seller can fulfill the obligation with any firm in the country to which the sale is being made I This gives the exporter greater flexibility to choose goods to be purchased 0 Switch Trading I Occurs when a thirdparty trading house or switch trader buys a firm s counterpurchase credits amp sells them to another firm that can better use them I Poland amp Greece 0 Compensation or buybacks I Occurs when a firms builds a plant in a country or supplies technology equipment training or other services I It then agrees to take certain percentage of the plant s output as partial or full payment for the contract 0 Advantages of Countertrade 0 Means to finance an export deal when other means are not available 0 Countertrade can become a strategic marketing weapon 0 Can finance or pay for other needs the company has such as advertising gross rating points etc 0 Think of 39 as a sales amp strategv o Disadvantages of Countertrade 0 Companies would rather be paid in hard currency rather than countertrade 0 Exchange of unusable or poorquality goods that cannot be disposed profitability 0 Establishment of costprice for goods involved 0 Expenses relating to maintaining inhouse trading department to arrange and manage countertrade deals 0 Generally higher risk 0 Unwilling firms may lose an export opportunity and be at a competitive disadvantage o Firm Suitability to Countertrade o Countertrade most attractive to multinationals that can use their worldwide network of contacts to most profitability dispose goods 0 Countertrade is attractive to firms that have products that have shelf life or obsolescence issues 0 It is suitable to firms that have the financial means and trading sophistication to make these deals favorable CHAPTER 11 INTERNATIONAL STRATEGIC ALLIANCES 0 Strategic Alliance is a business arrangement whereby two or more firms choose to cooperate for their mutual benefit 0 Globalization can be a very expensive process particularly when a firm must perfectly coordinate RampD production distribution marketing and financial decisions throughout the world in order to succeed A firm may lack all the necessary internal resources to effectively compete against its rivals internationally The high costs of researching and developing new products alone may stretch its corporate budget Thus a firm may seek partners to share these costs Or a firm may develop a new technology but lack a distribution network or production facilities in all the national markets it wants to serve Accordingly the firm may seek out other firms with skills or advantages that complement its own and negotiate agreements to work together Cooperation between international firms can take many forms such as crosslicensing of proprietary technology sharing of production facilities cofunding of research projects and marketing of each other39s products using existing distribution networks Such forms of cooperation are known collectively as strategic alliances 0 Joint VentureJV is a special type of strategic alliance in which two or more firms join together to create a new business entity that is legally separate and distinct from its parents 0 Joint ventures are normally established as corporations and are owned by the founding parents in whatever proportions they negotiate Although unequal ownership is common many are owned equally by the founding firms 0 Benefits of Strategic Alliances amp Joint Ventures 0 000 O 0 Ease of Market Entry Shared Risk Shared Knowledge amp Expertise Synergy amp Competitive Advantage A firm wishing to enter a new market often faces major obstacles such as entrenched competition or hostile government regulations Partnering with a local firm can often help it navigate around such barriers A strategic alliance may allow the firm to achieve the benefits of rapid entry while keeping costs down Strategic alliances can be used to either reduce or control individual firms39 risks A firm may want to learn more about how to produce something how to acquire certain resources how to deal with local governments39 regulations or how to manage in a different environment information that a partner often can offer Firms may also enter into strategic alliances in order to attain synergy and competitive advantage These related advantages reflect combinations of the other advantages discussed in this section the idea is that through some combination of market entry risk sharing and learning potential each collaborating firm will be able to achieve more and to compete more effectively than if it had attempted to enter a new market or industry alone o Pitfalls of Strategic Alliances O O O O O O O O O 0 Changing circumstances Incompatibility of partners Loss of autonomy Distribution of earnings Access to information Incompatibility among the partners of a strategic alliance is a primary cause of the failure of such arrangements At times incompatibility can lead to outright conflict although typically it merely leads to poor performance of the alliance Compatibility problems can be anticipated if the partners carefully discuss and analyze the reasons why each is entering into the alliance in the first place Limited access to information is another drawback of many strategic alliances For a collaboration to work effectively one partner or both may have to provide the other with information it would prefer to keep secret An obvious limitation of strategic alliances relates to the distribution of earnings The partners must also agree on the proportion of the joint earnings that will be distributed to themselves as opposed to being reinvested in the business the accounting procedures that will be used to calculate earnings or profits and the way transfer pricing will be handled Just as firms share risks and profits they also share control thereby limiting what each can do Most attempts to introduce new products or services change the way the alliance does business or introduce any other significant organizational change first must be discussed and negotiated The economic conditions that motivated the cooperative arrangement may no longer exist or technological advances may have rendered the agreement obsolete 0 Scope of Strategic Alliances O O O O 0 Significant variation 0 Comprehensive alliance o Narrowly defined alliance Degree of collaboration depends upon basic goals of each partner The scope of cooperation among firms may vary significantly This is illustrated in Figure 132 shown on the next slide The scope may consist of a comprehensive alliance in which the partners participate in all facets of conducting business ranging from product design to manufacturing to marketing It may consist of a more narrowly defined alliance that focuses on only one element of the business such as RampD The degree of collaboration will depend on the basic goals of each partner Comprehensive alliances arise when the participating flrms agree to perform together multiple stages of the process by which goods or services are brought to the market RampD design production marketing and distribution Because of the broad scope of such alliances the firms must establish procedures for meshing such functional areas as finance production and marketing for the alliance to succeed Yet integrating the different operating procedures of the parents over a broad range of functional activities is difficult in the absence of a formal organizational structure As a result most comprehensive alliances are organized as joint ventures Strategic alliances may also be narrow in scope involving only a single functional area of the business In such cases integrating the needs of the parent firms is less complex Thus functionally based alliances often do not take the form of a joint venture although joint ventures are still the more common form of organization Types of functional alliances include production alliances marketing alliances financial alliances and RampD alliances PARTNER PARTNER 1 2 PROD PROD MKTG FIN RampD PRODUCTION Strategic Alliance FIN MKTG gt Strategic Alliance FINANCE Strategic Alliance Strategic Alliance 6 COMPREHENSIVE 0 Strategic Alliance Types of Functional Alliances Production Alliances a functional alliance in which two or more firms each manufacture products or provide services in a shared or common facility A production alliance may utilize a facility one partner already owns Marketing Alliances is a functional alliance in which two or more firms share marketing services or expertise In most cases one partner introduces its products or services into a market in which the other partner already has a presence The established firm helps the newcomer by promoting advertising andor distributing its products or services The established firm may negotiate a fixed price for its assistance or may share in a percentage of the newcomer39s sales or profits Alternatively the firms may agree to market each others products on a reciprocal basis 0 Financial Alliances is a functional alliance of firms that want to reduce the financial risks associated with a project Partners may share equally in contributing financial resources to the project or one partner may contribute the bulk of the financing while the other partner or partners provides special expertise or makes other kinds of contributions to partially offset its lack of financial investment 0 RampD Alliances the partners agree to undertake joint research to develop new products or services An RampD consortium is a confederation of organizations that band together to research and develop new products and processes for world markets It represents a special case of strategic alliance in that governmental support plays a major role in its formation and continued operation 0 Issues in the Implementation of Strategic Alliances 0 Partner Selection 0 Form of ownership 0 Joint Management 0 The success of any cooperative undertaking depends on choosing the appropriate partners Strategic alliances are more likely to be successful if the skills and resources of the partners are complementary each must bring to the alliance some organizational strength the other lacks A firm contemplating a strategic alliance should consider at least four factors in selecting a partner or partners 1 compatibility 2 the nature of the potential partner39s products or services 3 the relative safeness of the alliance and 4 the learning potential of the alliance These are discussed further on the next slide 0 Ajoint venture almost always takes the form of a corporation usually incorporated in the country in which it will be doing business The corporate form enables the partners to arrange a beneficial tax structure implement novel ownership arrangements and better protect their other assets It allows the joint venture to create its own identity apart from those of the partners 0 Further issues and questions are associated with how a strategic alliance will be managed Three standard approaches are often used to jointly manage a strategic alliance shared management agreements assigned arrangements and delegated arrangements 0 Factors Affecting Partner Selction o Compatibility 0 Nature of Partner Services 0 Relative Safeness 0 Learning Potential 0 The firm should select a compatible partner which it can trust and work effectively with Without mutual trust a strategic alliance is unlikely to succeed But incompatibilities in corporate operating philosophies may also doom an alliance 0 Another factor to consider is the nature of a potential partner39s products or services It is often hard to cooperate with a firm in one market while doing battle with that same firm in a second market Under such circumstances each partner may be unwilling to reveal all its expertise to the other partner for fear that the partner will use that knowledge against the firm in another market o o o 0 Most experts believe a firm should ally itself with a partnerwhose products or services are complementawto but not directly competitive with its own Given the complexities and potential costs of failed agreements managers should gather as much information as possible about a potential partner before entering into a strategic alliance Before establishing a strategic alliance partners should also assess the potential to learn from each other Areas of learning can range from the vew specific for example how to manage inventow more efficiently or how to train employees more effectively to the vew general for example how to modify corporate culture or how to manage more strategically At the same time however each partner should carefully assess the value of its own information and not provide the other partnerwith any that will result in competitive disadvantage for itself should the alliance dissolve Approaches to Joint Management Shared Management Agreements each partnerfully and actively participates in managingthe alliance The partners run the alliance and their managers regularly pass on instructions and details to the alliance s managers The alliance managers have limited authority oftheir own and must defer most decisions to managers from the parent firms This type of agreement requires a high level of coordination and nearperfect agreement between the participating partners Thus it is the most difficult to maintain and the one most prone to conflict amongthe partners Assigned Arrangements Under an assigned arrangement one partner assumes primaw responsibility forthe operations of the strategic alliance Delegated Arrangements which is reserved forjoint ventures the partners agree not to get involved in 39 39 Iso delegate LU the executives ofthe joint venture itself These executives may be specifically hired to run the new operation or may be transferred from the participatingfirms They are responsible forthe daytoday decision making and management ofthe venture and for implementing its strategy Thus they have real power and the autonomy to Iare much 39 make 39 quot39 quot in the partnerfirms LU managers Both parties are active participants SHARED MANAGEMENT AGREEMENT One pannerlakes primary spun r sm my ASSIGNEDARRANGEMENT DE LEGATED ARRANGME NT CHAPTER 12 INTERNATIONAL MARKETING Marketing is the quotprocess of planning and executingthe conception pricing promotion and distribution of ideas goods and services to create exchanges that satisfy individual amp organizational objectives Interna onal Marketing is the extension of these activities across national boundaries Firms expanding into new markets in foreign countries must deal with different political cultural and legal systems as well as unfamiliar economic conditions advertising media and distribution channels An international firm accustomed to promoting its products on television will have to alter its approach when enteringa less developed market in which relatively few people have televisions Advertising regulations also vary by country International marketing managers confront two tasks their domestic counterparts do not face capturing synergies amongvarious national markets and coordina ng marketing activities amongthose markets Synergies are important because they provide opportunities for additional revenues and for growth and crossfertilization Coordination is important because it can help lower marketing costs and create a unified marketingeffort Interna onal Marketing as an Integrated Functional Area 0 Operations Management 0 Finance O O 0 Accounting Human Resource Management An international firm s marketing activities often are organized as a separate and self contained function within the firm Yet that function both affects and is affected by virtually every other organizational activity These interrelationships make international marketing management a critical component of international business success International marketing management encompasses a firm s efforts to ensure that its international marketing activities mesh with the firm s corporate strategy business strategy and other functional strategies 0 Market Strategy Must Support Business Strategy 0 OOO Differentation Cost Leadership Focus A key challenge for a firm s marketing managers is to adopt an international marketing strategy that supports the firm s overall business strategy Business strategy can take one of three forms differentiation cost leadership or focus A differentiation strategy requires marketing managers to develop products as well as pricing promotional and distribution tactics that differentiate the firm s products or services from those of its competitors in the eyes of customers Differentiation can be based on perceived quality fashion reliability or other salient characteristics as the marketing managers of such products as Rolex watches BMW automobiles and Montblanc pens successfully have shown Assuming the differentiation can be communicated effectively to customers the firm will be able to charge higher prices for its product or insulate itself from price competition from lesser brands A firm may adopt an international business strategy that stresses its overall cost leadership pursued and achieved through systematic reductions in production and manufacturing costs reductions in sales costs the acceptance of lower profit margins the use of less expensive materials and component parts or other means Marketing managers will concentrate their promotional efforts on advertising the low price of the product and will utilize channels of distribution that allow the firm to keep the retail price low for example by selling through discounters rather than through fashionable boutiques A firm also may adopt a focus strategy In this case marketing managers will concentrate their efforts on particular segments of the consumer market or on particular areas or regions within a market 0 Marketing Mix Decisions 0 000 How to develop the firm s products How to price those products How to sell those products How to distribute those products to the firm s customers O These elements are collectively known as the marketing mix and referred to as the four P5 ofmarketing product pri ng promotion and place or distribution The role of the four Ps in international marketing is illustrated in Figure 162 as shown on the following slide BUSINESS STRATEGIES n Diflarantvatinn I CastLeadershup 0 Focus MARKElilNG MIX KEY DECISIDNrMAKING FACTORS I Standardization vs Customization I Target Customers mdustrial or n Le alfnrces cunsumer I Economic factorsincumelevels I Cultural influences mpemiun Changing exchange rates Co Key DecisionMaking Factors 0 0000000 Standardized vs customization Legal forces Economic factors Changing Exchange Rates Target customers Cultural influences Completition The array of factors affecting marketing deci broader and more complex than those affecting domestic markets ons for international markets is far Standardized vs Customization A firm s marketers usually choose from three basic approaches in deciding whether to standardize or customize their firm s marketing mix 0 O Ethnocentric Approach is relatively easy to adopt The firm simply markets its goods in international markets using the same marketing mix it uses domestically thereby avoiding the expense of developing new marketing techniques to serve foreign customers When some firms first internationalize they adopt this approach believing that a marketing mix that worked at home should be as successful abroad Polycentric Approach is far more costly because international marketers attempt to customize the firm s marketing mix in each market the firm enters in order to meet the idiosyncratic needs of customers in that market Customization may increase the firm s revenues if its marketers are successful in this task Firms that adopt this approach believe customers will be more willing to buy and more willing to pay a higher price for a product that exactly meets their needs than a product that does not Often international firms that view themselves as multidomestic adopt this approach 0 Geocentric Approach calls for standardization of the marketing mix allowing the firm to provide essentially the same product or service in different markets and to use essentially the same marketing approach to sell that product or service globally Coca Cola was one of the first international businesses to adopt this approach Reduces marketing costs Facilitates centralized control of marketing Promotes efficiency in RampD Results in economies of scale in production OOOOO Reflects the trend toward a single global marketplace of Ignores different conditions of product use Ignores local legal differences OOO Ignores differences in buyer behavior patterns Inhibits local marketing initiatives 0 Ignores other differences in individual markets The tradeoffs between standardization and customization are clear Standardization allows a firm to achieve manufacturing distribution and promotional efficiencies and to maintain simpler and more streamlined operations However the firm may suffer lost sales if its products fail to meet the unique needs of customers in a given market Customization allows a firm to tailor its products to meet the needs of customers in each market although the firm may sacrifice cost efficiencies by so doing In essence standardization focuses on the cost side of the profit equation by driving down costs the firm s profits are enhanced Customization focuses on the revenue side of the profit equation by attending to the unique customer needs in each market the firm is able to charge higher prices and sell more goods in each market In practice most firms avoid the extremes of either approach Many successful firms have adopted a strategy of llthink globally act locally to gain the economies of scale of a global marketing mix while retaining the ability to meet the needs of customers in different national markets Advantages of Customized International Marketing 0 Reflects different conditions of use 0 Acknowledges local legal differencesdifferences in buyer behavior 0 Account for other differences in individual markets Disadvantages of Customized International Marketing 0 Increase costsinefficiencies o Inhibits centralized control of marketing 0 Reduces economies of scale in production 0 Ignores the trend toward a single global marketplace The degree of standardization or customization a firm adopts depends on many factors including product type the cultural differences between the home country and the host countries and the host countries legal systems The firm may adopt one approach for one element of the marketing mix and another for a second element Often firms standardize product designs to capture manufacturing economies of scale but customize advertisements and the channels of distribution to meet specific local market needs A firm tilting toward standardization assumes consumers around the world are basically similar but then adjusts for differences among them A firm tilting toward customization assumes consumers are different but then adjusts for similarities among them An international firm also must consider its own organizational structure Standardization implies that power and control should be centralized often at the firm s headquarters whereas customization suggests that headquarters must delegate considerable decisionmaking power to local managers Often international firms address these organizational issues by adopting a twostep process 1 The decision to standardize some elements of the marketing mix such as product design brand name packaging and product positioning is made centrally 2 Then local managers are called on to critique the global marketing program and to develop plans to implement customized elements of the marketing mix such as promotion and distribution Product comprises both the set of tangible factors that the consumer can see or touch physical product amp its packaging and numerous intangible factors such as image installation warranties and credit terms Critical to a firm s ability to compete internationally is its success in developing products with tangible and intangible features that meet the wants and needs of customers in diverse national markets For instance Toyota s success in selling its automobiles in Europe Asia and the Americas reflects its productrelated achievements in designing and producing mechanically reliable vehicles offering competitive warranties building a solid brand name for its products providing spare parts and repair manuals and furnishing financing to its dealers and retail customers Factors Affecting the Standardization of Products 0 Legal forces Cultural Influences Economic Factors Brand Names 0000 A key product policy decision facing international marketers is the extent to which their firms products should be standardized across markets or customized within individual markets One is the nature of the product s target customers are they industrial users or are they individual consumers Although some industrial products are customized and some consumer products are standardized generally speaking industrial products are more likely to be standardized than consumer products The laws and regulations of host countries also may affect the product policies adopted by international firms Some countries for instance have imposed detailed labeling requirements and health standards on consumer products that firms both foreign and domestic must follow strictly International firms must adjust the packaging and even the products themselves to meet these consumer protection regulations International firms often must adapt their products to meet the cultural needs of local markets One typical adaptation is to change the labeling on the product s package into the primary language of the host country A country s level of economic development may affect the desired attributes of a product Consumers in richer countries often favor products loaded with extra performance features more pricesensitive consumers in poorer countries typically opt for strippeddown versions of the same products Sometimes a firm may have to adjust package size or design to meet local conditions One element international firms often like to standardize is the brand name of a product A firm that does this can reduce its packaging design and advertising production costs 0 Factors Affecting Pricing Policies 0 Business strategy 0 Competitive Environment 0 Costs of doing business 0 Exchange rate fluctuations 0 Pricing policies directly affect the size of the revenues earned by a firm The policies also serve as an important strategic weapon by allowing the firm to shape the competitive environment in which it does business Both domestic and international firms must strive to develop pricing strategies that will produce profitable operations but the task facing an international firm is more complex than that facing a purely domestic firm To begin with a firm s costs of doing business vary widely by country Differences in transportation charges and tariffs cause the landed price of goods to vary by country Differences in distribution practices also affect the final price the end customer pays Exchange rate fluctuations also can create pricing problems If an exporter s home currency rises in value the exporter must choose between maintaining its prices in the home currency which makes its goods more expensive in the importing country and maintaining its prices in the host currency which cuts its profit margins by lowering the amount of home country currency it receives for each unit sold 0 Pricing Policies 0 Standard Price Policy 0 TwoTiered Pricing 0 Market Pricing 0 An international firm following a geocentric approach to international marketing will adopt a standard price policy whereby the firm charges the same price for its products and services regardless of where they are sold or the nationality of the customer Firms that sell goods which are easily tradable and transportable often adopt this pricing approach out of necessity An international firm that follows an ethnocentric marketing approach will use a twotiered pricing policy whereby the firm sets one price for all its domestic sales and a second price for all its international sales A firm that adopts a two tiered pricing policy commonly allocates to domestic sales all accounting charges associated with research and development administrative overhead capital depreciation and so on The firm then can establish a uniform foreign sales price without having to worry about covering these costs Twotiered pricing often is used by domestic firms just beginning to internationalize An international firm that follows a polycentric approach to international marketing will use a market pricing policy Market pricing is the most complex of the three pricing policies and the one most commonly adopted A firm utilizing market pricing customizes its prices on a marketbymarket basis to maximize its profits in each market 0 Conditions for Marketing Priciing Two conditions must be met if a firm is to successfully practice market pricing 0 O O 0 Firms must face different demand andor cost conditions in the countries in which it sells its products Firms must be able to prevent arbitrage Two conditions must be met if a firm is to successfully practice market pricing 1 The firm must face different demand andor cost conditions in the countries in which it sells its products This condition usually is met because taxes tariffs standards of living levels of competition infrastructure costs and availability and numerous other factors vary by country 2 The firm must be able to prevent arbitrage The firm s market pricing policy will unravel if customers are able to buy the firm s products in a lowprice country and resell them profitably in a highprice country Because of tariffs transportation costs and other transaction costs arbitrage is usually not a problem if countrytocountry price variations are small lf prices vary widely by country however arbitrage can upset the firm s market pricing strategy Assuming these conditions are met the advantages of this polycentric approach are obvious The firm can set higher prices where markets will tolerate them and lower prices where necessary to remain competitive It also can directly allocate relevant local costs against local sales within each foreign market thereby allowing corporate strategists and planners to better allocate the firm s resources across markets 0 Risks to Market Pricing Policy 0 OOO Charges of Dumping Damage to Brand Name Development of a gray market Consumer resentment A market pricing policy however can expose a firm to complaints about dumping as well as to three other risks 1 damage to its brand name 2 development of a gray market for its products and 3 consumer resentment against discriminatory prices The firm needs to ensure that the prices it charges in one market do not damage the brand image it has carefully nurtured in other markets A firm that follows a market pricing policy also risks the development of gray markets for its products as a result of arbitrage A gray market is a market that results when products are imported into a country legally but outside the normal channels of distribution authorized by the manufacturer This phenomenon also is known as parallel importing A gray market may develop when the price in one market is sufficiently lower than the price the firm charges in another market that entrepreneurs can buy the good in the lowerprice market and resell it profitably in the higherprice market Thus the firm that has large price differences among markets is vulnerable to having these differentials undercut by gray markets Gray markets frequently arise when firms fail to adjust local prices after major fluctuations in exchange rates A third danger lies in consumer resentment Consumers in the highpriced country may feel they are being gouged by such pricing policies Estee Lauder for example charges 40 for Clinique facial soap in Tokyo the same soap sells for only 10 in the United States Promotion Mix the third P of international marketing mix encompasses all efforts by an international firm to enhance the desirability of its products among potential buyers Because promotion relies on communication with audiences in the host country it is the most culture bound of the four Ps 0 Advertising 0 Personal Selling 0 Sales Promotion 0 Public Relations Factors Affecting Advertising Strategy 0 The message it wants to convey o The media available for conveying the message 0 The extent to which the firm wants to globalize its advertising effort 0 For most international firms especially those selling consumer products and services advertising is the most important element in the promotion mix As a firm develops its advertising strategy it must consider three factors 1 The message it wants to convey 2 The media available for conveying the message 3 The extent to which the firm wants to globalize its advertising effort At the same time the firm must take into account relevant cultural linguistic and legal constraints found in various national markets The message of an advertisement is the facts or impressions the advertiser wants to convey to potential customers The choice of message is an important reflection of the way the firm sees its products and services and the way it wants them to be seen by customers A product s country of origin often serves as an important part of the advertising message The medium is the communication channel used by the advertiser to convey a message A firm s international marketing manager must alter the media used to convey its message from market to market based on availability legal restrictions standards of living literacy rates the cultural homogeneity of the national market and other factors A country s level of economic development also may affect the media firms use In many less developed countries television ownership may be limited and literacy rates low This eliminates television newspapers and magazines as useful advertising media but raises the importance of radio Legal restrictions also may prompt the use of certain media A firm also must decide whether advertising for its product or service can be the same everywhere or must be tailored to each local market the firm serves Advantages of Personal Selling for International Firms 0 000 0 Local sales representatives understand local culture norms and customs Personal selling promotes close personal contact with customers Personal selling makes it easier for firm to adopt valuable market information The second element of the promotion mix is personal selling making sales on the basis of personal contacts The use of sales representatives who call on potential customers and attempt to sell them a firm s products or services is the most common approach to personal selling Because of the close contact between the salesperson and the potential customer sellers are likely to rely on host country nationals to serve as their representatives Firms that hire local sales representatives can be reasonably confident that those individuals understand the local culture norms and customs Personal selling promotes close personal contact with customers Customers see real people and come to associate that personal contact with the firm Personal selling makes it easier for the firm to obtain valuable market information Knowledgeable local sales representatives are an excellent source of information that can be used to develop new products andor improve existing products for the local market On the other hand personal selling is a relatively highcost strategy Each sales representative must be adequately compensated even though each may reach relatively few customers An industrial products sales representative for example may need a full day or more to see just one potential customer After a sale is closed the sales representative may still find it necessary to spend large blocks of time with the customer explaining how things work and trying to generate new business Most larger international firms also find it necessary to establish regional sales offices staffed by sales managers and other support personnel which add more salesrelated costs Sales Promotion comprises specialized marketing efforts designed to offer an incentive for behavior such as coupons instore promotions sampling direct mail campaigns cooperative advertising and trade fair attendance Sales promotion activities focused on wholesalers and retailers are designed to increase the number and commitment of these intermediaries working with the firm Sales promotion activities may be narrowly targeted to consumers andor offered for only a short time before being dropped or replaced with more permanent efforts This flexible nature of sales promotions makes them ideal for a marketing campaign tailored to fit local customs and circumstances Public Relations consists of efforts aimed at enhancing a firm s reputation and image with the general public as opposed to touting the specific advantages of an individual product or service The impact of good public relations is hard to quantify but over time an international firm s positive image and reputation are likely to benefit the firm in a host country Consumers are more likely to resist llbuy local pitches when the foreign firm also is perceived to be a good guy Good public relations also can help the firm when it has to negotiate with a host country government for a zoning permit or an operating license or when it encounters a crisis or unfavorable publicity Distribution Issues Distribution is the process of getting products and services from the firm into the hands of customers An international firm faces two important sets of distribution issues 0 Physical transportation mode Physically transporting its goods and services from where they are created to the various markets in which they are to be sold 0 Merchandising Mode Selecting the means by which to merchandise its goods in the markets it wants to serve AdvantagesDisadvantages of Transportation modes 0 Mode 0 Advantages o Disadvantages 0 Sample Products 0 Train 0 Safe reliable 0 Limited to rail 0 Automobiles inexpensive routes slow grains 0 Airplane 0 Safe reliable o Expensive 0 Jewelry fast limited access medicine 0 Truck 0 Versatile 0 Small size 0 Consumer inexpensive goods 0 Ship 0 Inexpensive 0 Slow indirect 0 Automobiles good for larger furniture products 0 Electronic 0 Fast 0 Unusable for 0 Information Media many products The most obvious issue an international firm s distribution managers must address is the selection of a mode or modes of transportation for shipping the firm s goods from their point of origin to their destination This choice entails a clear tradeoff between time and money as Table 162 indicates Faster modes of transportation such as air freight and motor carrier are more expensive than slower modes The transportation mode selected affects the firm s inventory costs and customer service levels as well as the product s useful shelf life exposure to damage and packaging requirements International air freight scores high on each of these dimensions whereas ocean shipping ranks very low If the firm relies on slower modes of transportation it can maintain a given level of inventory at the point of sale only by maintaining higher levels of inventory in transit If the firm selects unreliable modes that make it difficult to predict when shipments will actually arrive the firm will have to increase buffer stocks in its inventory to avoid stockouts that will lead to disappointed customers Slower modes of transportation also increase the firm s international order cycle time the time between the placement of an order and its receipt by the customer for any given level of inventories The BA361 Exam 3 Study Guide Chapter 1 International Business business transactions between parties from more than one country EX buying from one country and shipping them to another for processing and assembly Domestic Business transactions in boundaries of single country International Business VS Domestic International different currencies legal systems may differ culture availability of resources Basic skills and Knowledge are similar marketing managers to choose audience Complexity of international business skills and knowledge culture legal political social must coordinate with subsidiaries while dealing with taxes and regulatory authorizes of home and other counties Study international Business keep pace with future competitors small businesses entering latest techniques and tools no single country has monopoly on good ideas obtain cultural literacy EX Japanese firms pioneered inventory management technique like Justintime JIT systems suppliers deliver inputs just as needed EX European Volvo and Japanese Honda labor practices like empowerment quality circles autonomous groups and cross functional teams Exporting selling products made in ones country for use or resale in other countries critical to firms health Importing buying products made in other countries for use or resale in own country Importing and Exporting Divided into TWO groups 1 Trade in Goods tangible products clothes computers and raw materials US calls this merchandise exports and imports British call it Visible Trade 2 Trade in servicesintagible products banking travel and accounting US calls this service exports and imports United Kingdom called Invisible trade International Investment Capital supplied by residents of one country to residents in another country Divided into TWO categories 1 Foreign Direct Investment FDI investments made for actively controlling property assets or companies located in host county Country where headquarters is called home country company operates is called host country 2 Foreign Portfolio Investment FPI purchases of foreign financial assets stocks bonds and certificates of deposit for purpose other than control Licensing contractual arrangement where a firm in one country licenses the use of its intellectual propertiespatents trademarks brand names copyrights or secret trade to a firm in a second country in return for royalty payment Franchising specialized form of licensing when a firm in one country franchisor authorizes a firm in second country franchisee to utilize its operating systems as well as its brand names trademarks and logos in return for a royalty payment Management contract arrangement firm in one country agrees to operate facilities or provide management services to firm in another country for agreed upon fee Formal internal business organization that engages in cross border commercial transactions with individuals private firms publics sectors Multinational corporation MNC firms with extensive involvement in international business quotfirm that engages in foreign direct investment and owns or controls value adding activities in more than one country Largest MNC Exxon Mobil Multinational enterprises MNE are not true corporations like accounting partnerships and Lloyds of ondon Multinational organizations MNO not for profit red cross Characteristics of MNC 1 Engage in foreign direct investment 2 Own and control foreign assets 3 Buy resources in multiple countries 4 Sell goods and services in multiple countries Globalization inexorable integration of markets nation states and technologies in a way the is enabling individuals corporations and nation states to reach around the world further faster deeper and cheaper than ever before International trade and international investment two primary vehicles for conducting international business Globalization Led to intense international trade Rapid growth internet and technology Why has growth occurred Strategic imperatives which motivates globalization Motives for globalization 1 Leverage core competencies increase revenue 2 To acquire resources and supplies material labor scarce products or unavailable 3 Seek new markets expansion achieve economies of scaeower av cost as production increase and led dependent on one country 4 Better compete with rivals coke vs pepsi Environmental changes which facilitate it 1 Political environment eliminated barriers WTO 2 Technological Changes govt policies improvement in technology communication transportatlon improvements Core competency distinctive strength or advantage central to firms operation Chapter 2 TriadJapan European Union and United States Much of the worlds current activity is concentrated in a group of countries called Triad or Quad Quad Triad and Canada 909 million of quad residents produce 73 of worlds GDP Marketplace of North America United States Canada Mexico Greenland and countries of Central America and Carribean 507 million people produce about 33 of worlds output United States 3rd largest population and 4 h largest land mass yet LARGEST economy accounting for almost 30 of worlds 40 trillion GDP in 2004 Highest income of North American Countries size and politically stability account for 18 h of world trade in goods and services Prime market for lower income countries trying to raise standard of living through exports Prime market for firms from higher income countries trying to attract business in large well educated middle class US dollar Invoicing currency currency in which sale of goods and services is denominated Bc political stability and military strengths us attracts Flight cagital money sent out of a politically or economical unstable country to safe haven Long term investments in US Canada World s 2nd largest land mass Population only 32 million GDP 980 billion 80 of population concentrated within 100 miles 37 exporting vital Trade between US and Canada single largest bilateral trading relationship in world Rich natural resources Advantages of Canada Proximity to US Stability of legal and political systems Excellent infrastructure and education Mexico Largest Spanish speaking nation President every six years Federal Govt system Govt program of economical nationalism discouraged foreign investments and erected high tariffs to protect domestic goods Canada Mexico and United States initiated NAFTA North American Free Trade Agreement reducing barriers to trade among the three countries over a 15 year period Central America and Caribbean Divided geographically by these 2 grou pstwo dozen countries Population 77 million GDP 199 billion Political instability weak middle class chronic us intervention inadequate education economic policies create poverty import limitations sugar and clothing Marketplace for Western Europe Most prosperous eager businesses want to market products Divided into two regions European Union and other countries in region EU 25 countries peace and prosperity reducing barriers to trade and investment GDP 127 trillion and population 455 million One of world s richest markets Germany most important EU member 27 trillion gdp worlds largest exporter of goods France strong Leadership Free market oriented parliamentary democracies Govt and ownership play important role 12 members eliminated national currency replacing with Euro Describe Western Europe as a maior marketplace and business center in the world economy The Marketplace of Eastern Europe and Central Europe Most economical change Communism to capitalism and totalitarianism to democracy Mikhail Gorbachev initiative to glasnostopenness and Perestroikaeconomic reconstructing triggered regions religious social and economical revolutions Central Europe Challenges with collapse of communism govt Trading system by soviet Union broke down and former states had to adjust loss of guaranteed exports Reconstruct economies from centrally planned communism to decentralized market systems Czech hungary Poland and Slovakia upper middle class OECDNATO and EU Discuss the problems facing communist countries of Eastern and Central Europe Market Place for Asia Half of worlds population Produces less than a quarter of worlds GDP High quality and low low skilled and high The Four Tigers reference to Chinese heritage South Korea Taiwan Singapore and Hong Kong Rapid industrializing Newly industrializing countriesNlC or NlEeconomies Only countries once categorized by the world bank that have subsequently achieved high income status Marketplace for Africa and Middle East Africa 815 million people 54 countries Middle East cradle of civilization Chapter 3 The Legal Environment Domestic firm must follow the laws and customs of its home country An international business faces a more complex It must obey the laws not only of its home country but also the laws of all the host countries in which it operates These laws determine the markets firms may serve the prices they can charge for their goods and the cost of necessary inputs such as labor raw materials and technology These laws may also affect the location of economic activity Differences in Legal Systems Nationa legal systems vary dramatically for historical cultural political and religious reasons The rule of law the role of lawyers the burden of proof the right to judicial review and of course the laws themselves differ from country to country Legal Systems Common Law Civil Law Religious Law and Bureaucratic Law Common Law the foundation of the legal systems in the United Kingdom and its former colonies including the United States Canada Australia India New Zealand Hong Kong Barbados Saint Kitts and Nevis and Malasyia It is based on the cumulative wisdom of judges decisions on individual cases through history cases create legal precedents which otherjudges use to decide similar cases Legislation and regulations are part of common law Judges juries defenses and prosecution criminal and civil courts Common Law has evolved differently in each common law country In addition to differences in case law statutory laws which are laws enacted by legislative action vary among common law countries Countries Using Common Law 0 United States 0 Canada 0 Australia 0 India 0 New Zealand 0 Barbados 0 Saint Kitts o Nevis 0 Malaysia Civil Law Also called Code Law based on a codification or detailed listing of what is and is not permissible The civil law system originated in biblical times with the Romans who spread it throughout the western world Its dominance was reinforced by the imposition of the civillawbased Napolenoic Code on terrorites conquered by French emporer Napoleon Bonaparte during the early nineteenth century Judge determines scope of evidence collected and presented Judge is very active in proceedings An important difference between common law and civil law systems is apparent in the roles of judges and lawyers In a common law system the judge serves as a neutral referee ruling on various motions by the opposing parties lawyers These lawyers are responsible for developing their clients cases and choosing which evidence to submit on their clients behalf In a civil law system the judge takes on many of the tasks of the lawyers The judge determines scope of evidence collected and presented Judge is very active in the proceedings Religious Laws based on the officially established rules governing the faith and practice of a particular region A country that applies religious law to civil and criminal conduct is called theocracy Islamic law is based on the Code of Sharia Talmudic law on the Talmud Iran is an example of a theocracy A group of mullahs or holy men determine legality through their interpretation of the Koran Countries relying upon religious law often have other features such as an absence of due process and appeals procedures Bureaucratic Law Legal system in communist countries and in dictatorships This is whatever the country s burecrats say it is regardless of the formal law of the land Contracts can be broken or made at the whim of those in power In countries relying on bureaucratic law the ability of an international business to manage its operations is compromised by bureaucrats International managers are often confronted with arbitrary rules This is frequently a complaint for businesses operating in China Its hard because the lack of consistency predicitability and appeal procedures Laws Affecting International Bussiness Transactions laws may be explicitly designed to regulate international business activities 1 Sanctions are restraints against commerce They may take many forms including restricting access to hightechnology goods withdrawing preferential tariff treatment boycotting country s goods and denying new loans One form of sanction is to export controls on hightechnology goods Many technologically advanced countries control the export of socalled dualuse products that may be used for both civilian and military purposes 2 Embargos amp Extraterritoriality An embargo is a comprehensive sanction against all commerce with a given country It may be imposed by countries acting in unison or alone Countries may also attempt to regulate business activities that are conducted outside their borders This is known as extraterritoriality Antiboycott provisions in US trade law have extraterritorial reach The HelmsBurton Act is the most controversial application of extraterritoriality affecting international business today This act is directed against international firms that quottrafficquot in the assets of US companies that were confiscated by the Cuban government when Castro assumed control in 1959 The act authorizes the US government and the former US owners of the confiscated assets to take action against new foreign owners Laws Directed Against Foreign Firms 1 4 Nationalization Countries may pass laws that are explicitly directed against foreignowned firms When governments choose to transfer ownership of resources from the private to the public sector lndustries that lack mobility are most suspectible to this such as crude oil production and mining Exportation When the host government compensates the private owners for the loss the transfer is called exportation Privatization The conversion of stateowned property to privatelyowned propeperty It is the opposite of nationalization and it creates opportunities for businesses Many governments limit foreign ownership of domestic firms to avoid having economies or key industries controlled by foreigners Countries can also constrain foreign MNCs by imposing restrictions on their ability to repatriate return to their home countries the profits earned in the host country Privatization stems from two primary forces political ideology and economic pressure Economic amp political impacts of MNCs on Host Countries Advantages Greater selection Higher standards Job creation Tax benefits Technology transfer Disadvantages Competition Job loss Dependency on economic health on MNC Political power MNCs affect every local economy in which they compete and operate MNCs may make direct investments in new plants and factories thereby creating local jobs Such investments provide work for local contractors builders and suppliers MNCs also pay taxes which benefit the local economy and help to improve educational transportation and other municipal services Technology transfer can also have positive local effects 0 MNCs may also have negative effects on the local economy To the extent that MNCs compete directly with local firms the MNCs may cause these firms to lose both jobs and profits As a local economy becomes more dependent on the economic health of an MNC the financial fortunes of the firm take on increasing significance When retrenchment by an MNC is accompanied by layoffs cutbacks or a total shutdown of local operations the effects can be devastating to a local economy 0 MNCs also may have a significant political impact either intentionally or unintentionally Their sheer size often gives them tremendous power in each country in which they operate Furthermore there is always the possibility that this power may be misused Even when it is not MNCs are often able to counter efforts by host governments to restrict their activities The MNCs simply threaten to shift production and jobs to other locations Cultural Impacts on MNCs on Host Countries Advantages 0 Improved standard of living 0 Introduction of new products 0 Better health care 0 More sanitary food products Disadvantages 0 Abuse of less developed policies in the areas of safety and environmental concerns 0 Negligent product offerings 0 As they raise local standards of living and introduce new products and services previously unavailable people in the host cultures develop new norms standards and behaviors Some of these changes are positive such as the introduction of safer equipment and machinery better health care and pharmaceuticals and purer and more sanitary food products Other changes are not positive Nestl for example has received much criticism for its promotion of infant formula in the world s developing countries Dispute quot 39 39 in 39 39 39 Business Disputes in international commerce can be very complicated Typically four questions must be answered for an international dispute to be resolved 1 Which country s law applies 2 In which country should the issue be resolved 3 Which technique should be used to resolve the conflict litigation arbitration mediation or negotiation 4 How will the settlement be enforced 0 Many international business contracts specify answers to these questions to reduce uncertainty and expense in resolving disputes The courts of most major trading countries will honor and enforce the provisions of these contract as long as they are not contrary to other aspects of the coutnry s public policy o If a contract does not contain answer to the first two questions each party to the transaction may seek to have the case heard int eh court system most favorable to its own interests a process known as forum shopping this allegedly places US manufacturesrs at a disadvantage in international markets Whether a foreign court order is enforced is determined by the principle of comity The principle of comity provides that a country will honor and enforce within its own territory the judgments and decisions of foreign courts with certain limitations For the principle to apply countries commonly require three conditions to be met 1 Reciprocity is extended between the countries that is country A and country B mutually agree to honor each other s court decisions 2 The defendant is given proper notice 3 The foreign court judgment does not violate domestic statutes or treaty obligations 0 Because of the costs and uncertainties of litigation many international businesses seek less expensive means of settling disputes over international transactions Often business conflicts will be resolved through 39 dispute such as Because of the speed privacy and informality of such proceedings disputes can often be resolved more cheaply than through the court system Arbitration the process by which both parties to conflict agree to submit their cases to a private individual or body whose decision they will honor Foreign Sovereign Immunities Act of 1976 provides that the actions of foreign governments against US firms are generally beyond the jurisdiction of the US courts Technological Environment An important determinant of a country39s technological environment and the willingness of foreign firms to transfer technology to the country is the degree of protection that its laws offer intellectual property rights Intellectual property patents copyrights trademarks brand names and so forth is an important asset of most MNCs It often forms the basis of a firm s g I in the global marketplace The value of intellectual property can quickly be damaged unless countries enforce ownership rights of firms Countries that provide weak protection for intellectual property are less likely to attract technologyintensive foreign investments Weak intellectual property protection also discourages local firms from developing intellectual property of their own Intellectual Property Intellectual property often forms the basis of a firm s competitive advantage 0 Patents 0 Copyrights o Trademarks 0 Brand Names International Treaties Protecting Intellectual Property Rights Most countries have passed laws protecting intellectual property rights Protection of such rights has also been promoted by numerous international treaties Among these are the International Convention for the Protection of Industrial Property Rights more commonly known as the Paris Convention the Berne Convention for the Protection of Literary and Artistic Works the Universal Copyright Convention and the TradeRelated Intellectual Property Rights a reement part of the Uruguay Round On paper these laws and treaties would appear to provide adequate protection to owners of intellectual property However not all countries have signed the treaties Further their enforcement by many signatories is Iax The Political Enviroment An important part of any business decision is assessing the political environment in which a firm operates Laws and regulations passed by any level of goveremnt can affect the viability of a firm s operations in the host country Minimum wage laws affect the price a firm must pay for labor zoning regulations affect the way it can use its property and evniromental protection laws affect the production technology it can use as well as the costs of disposing waste materials Political Risk Assessement systematic analysis of the political risks they face in foreign countries Political risk are any changes in the political environment that may adversely affect the value for a firm s business activities Most political risks can be divided into three categories 1 Ownership Risk in which the property of a firm is threatened through confiscation or expropriation 2 Operating Risk in which the ongoing operations of a firm andor the safety of its employees are threatened through changes in laws environmental standards tax codes terrorism armed insurrection and so forth 3 Transfer Risk In which the government interferes with a firm s ability to shift funds into and out of the country Levels of Political Risk 1 Macropolitical risk Affects all firms in a country 2 Micropolitical risk Affects only a specific firm or firms within a specific industry Political risks may affect all firms equally or focus on only a handful A macropolitical risk affects all firms in a country examples are the civil wars that tore apart Sierra Leone Zaire Bosnia and Rwanda in the 1990s or the recent conflicts in Afghanistan Iraq and Liberia A micropolitical risk affects only a specific firm or firms within a specific industry Saudi Arabia s nationalization of its oil industry in the 1970s is an example of a governmentaIIy imposed micropolitical risk as is the Venezuelan governments recently announced requirements that foreign oil companies renegotiate their contracts with the government Examples of Political Risks Type of Political Risk Impact on Firms Expropriation Loss of future profits Consification Loss of assets Loss of future profits Campaign against foreign good Loss of sales Increased costs of public relations efforts to improve public image Mandatory labor benefits39 g 39 Increased operating costs Kidnappings terrorist threats and other forms of violence Disrupted production increased security costs increased managerial costs lower productivity Civil wars Destruction of property lost sales disruption of production increased security costs lower productivity Inflation Higher operating costs Repatriation Inability to transfer funds freely Currency devaluations Reduced value of repatriated earnings Increased taxation Lower aftertax profits Insurance Against Political Risks To reduce the risk of foreign operations most developed countries have created governmentowned or governmentsponsored organizations to insure firms against political risks The Overseas Private Investment Corporation OPIC insures US overseas investments against nationalization insurrections or revolutions and foreignexchange inconvertibility In a typical transaction in 2005 OPIC sold ACD Research a small Staten Island health care consulting firm 467 million of political risk insurance allowing it to provide advanced equipment and training to a major oncology center in Russia However OPIC insurance is limited to firms operating in countries with which the United States has signed bilateral investment treaties The Multilateral Investment Guarantee Agency MIGA a subsidiary of the World Bank provides similar insurance against political risks Private insurance firms such as Lloyd s of London also underwrite political risk insurance Basic Country Knowledge Is the country a democracy or dictatorship Does country rely on free market or government controls Does government view foreign firms as positive influence Are firm s customers private or public Does government act arbitrarily ls existing government stable Any firm contemplating entering a new market should acquire basic knowledge of that country learning for example about its political and economic structures in order to control the firm s political risks The firm needs answers to such questions as those presented in the slide What and how much information a firm needs to assess political risk will depend on the type of business it is and how long it is likely to be in the host country The greater and longerlived a firm s investment the broader its risk assessment should be Some degree of political risk exists in every country although the nature and importance of these risks vary CHAPTER 4 THE ROLE OF CULTURE Firms and businesspeople venturing beyond their familiar domestic markets soon recognize that foreign business customs values and definitions of ethical behavior differ vastly from their own Firms that rely on their familiar home culture to compete in a new market can jeopardize their international success lndeed virtually all facets of an international firm s business including contract negotiations production operations marketing decisions and human resource management policies may be affected by cultural variations Culture is the collection of values beliefs behaviors customs and attitudes that distinguish one society from another A society s culture determine the rules that govern how firms operate in the society Characteristics of Culture 1 Culture reflects learned behavior that is transmitted from one member of a society to another Some elements of culture are transmitted intergenerationally as when parents teach their children table manners Other elements are transmitted intragenerationally as when seniors educate incoming freshmen about a school s traditions 2 The elements of culture are interrelated For example Japan s grouporiented hierarchical society stresses harmony and loyalty which has historically translated into lifetime employment and minimal job switching 3 Because culture is learned behavior it is adaptive that is the culture changes in response to external forces that affect the society 4 Culture is shared by members of the society and defines the membership of the society Individuals who share a culture are members of a society those who do not are outside the boundaries of the society Elements of Culture Social Structure Language Communication Religion ValuesAttitudes Social Structure ndividuals Families and Groups All human societies involve individuals living in family units and working with each other in groups Societies differ however in the way they define family and in the relative importance they place on the individual s role within groups The US view of family ties and responsibilities focuses on the nuclear family father mother and offspring In other cultures the extended family is far more important These differing social attitudes are reflected in the importance of the family to business In the United States firms discourage nepotism and the competence of a man who married the boss s daughter is routinely questioned by coworkers ln Arabowned firms however family ties are crucial and hiring relatives is a common accepted practice Cultures also differ in the importance of the individual relative to the group Social Stratification Societies differ in their degree of social stratification All societies categorize people to some extent on the basis of their birth occupation educational achievements or other attributes However the importance of these categories in defining how individuals interact with each other within and between these groups varies by society ocial mobility is the ability of individuals to move from one stratum of society to another Social mobility tends to be higher in less stratified societies Social mobility or the lack thereof often affects individuals attitudes and behaviors toward such factors as labor relations human capital formation risk taking and entrepreneurship Language organizes the way members of a society think about the world It filters observations and perceptions and thus affects unpredictably the messages that are sent when two individuals try to communicate Language provides important clues about the cultural values of the society and aids acculturation The presence of more than one language group is an important signal about the diversity of a country s population and suggests that there may also be differences in income work ethic and educational achievement For instance India recognizes 16 official languages and approximately 3000 dialects are spoken within its 39 39 a reflection ofthe39 39 of its societv Generallv countries by one language group tend to have a homogeneous society in which nationhood defines the society Countries with multiple language groups tend to be heterogeneous with language providing an imnnrtant means of39 39 quot 39 cultural differences within the countrv 3000 different languages worldwide 10000 different dialects accent Primary delineator of cultural groups Can be used as a weapon against other language groups Engish has emerged as the predominant common language or lingua franca of international business Translation Disasters KFC Finger Lickin Good Eat your fingers off China Pillsbury s Jolly Green Giant lntimidating Green Orge Saudi Arabia Some linguistic differences may be overcome through translation The process however requires more than merely substituting words of one language for those of another Translators must be sensitive to subtleties in the connotations of words and focus on translating ideas not the words themselves A classic mistake is KFC s initial translation of llFinger LickinI Good into Chinese which came out as the far less appetizing llEat Your Fingers Off I Similarly the original translation of Pillsbury s Jolly Green Giant for the Saudi Arabian market was llintimidating green ogre a very different image from what the firm intended although it still might encourage children to eat their peas Firms can reduce the chances that they are sending the wrong message to their customers by using a technique known as backtranslation With backtranslation one person translates a document then a second person translates the translated version back into the original language This technique provides a check that the intended message is actually being sent thus avoiding communication mistakes Caterpillar Fundamental English When communications to nonnative speakers must be made in the home country s language speakers and writers should use common words use the most common meanings of those words and try to avoid idiomatic phrases Caterpillar is faced with the problem of communicating with the diverse international users of its products It developed its own language instruction program called Caterpillar Fundamental English CFE which it uses in its overseas repair and service manuals CFE is a simplified condensed version of English that can be taught to nonEnglish speaking people in 30 lessons It consists of 800 words that are necessary to repair Cat s equipment 450 nouns 7O verbs 100 prepositions and 180 other words A similar approach was developed by the European Association of Aerospace Industries llSimplified English that was required to be used in aircraft maintenance manuals written for its members Latin America Manana some other day NOT MEANING TOMMORROW IN LATIN AMERICA Japan Yes yes I understand what is being said nois very impolite in japan Communication Communicating across cultural boundaries whether verbally or nonverbally is particularly important skill for international managers Nonverbal Communication may account for 8090 percent of all information transmitted among members of a culture by means other than language Members of a society communicate with each other using more than words This nonverbal communication includes facial expressions hand gestures intonation eye contact body positioning and body posture Although most members of a society quickly understand nonverbal forms of communication common to their society outsiders may find the nonverbal communication difficult to comprehend Table 41 shown on the following two slides lists some of the many common forms of nonverbal communication Forms of Nonverbal Communication Hand gestures Facial expression Posture and stance Clothinghair style Walking behavior Interpersonal distance Handshakes Touching Eye contact Architectectureinterior design Artifacts and non verbal symbols Graphic symbols Kissing Body Language Arts amp rhetorical forms Smell Speech rate pitch inflection volume Color symbolism Synchornization of speech and movement Taste symbolism of food oral gratification Cosmetics Sound signals Time symbolism Timing and pauses Silence Gift Giving amp Hospitality Gift giving is an important means of communication but what is appropriate varies giving and hospitality are important means of communication in many business cultures Japanese business etiquette requires solicitous hospitality Elaborate meals and afterhours entertainment serve to build personal bonds and group harmony among the participants These personal bonds are strengthened by the exchange of gifts that vary according to the occasion and the status of the giver and the recipient However business gifts are opened in private so as not to cause the giver to lose face should the gift be too expensive or too cheap relative to the gift offered in return The business culture of Arab countries also includes giftgiving and elaborate and gracious hospitality as a means of assessing these qualities Unlike in Japan however business gifts are opened in public so that all may be aware of the giver s generosity Norms of hospitality even affect the way bad news is delivered in various cultures In the United States bad news is typically delivered as soon as it is known In Korea it is delivered at day s end so it will not ruin the recipient s whole day Further in order not to disrupt personal relationships the bad news is often only hinted at In Japan maintaining harmony among participants in a project is emphasized so bad news often is communicated informally from a junior member of one negotiating team to a junior member of the other team Even better a third party may be used to deliver the message to preserve harmony within the group Religion an important aspect of most societies It affects the ways in which members of a society relate to each other and to outsiders Religions impose constraints on the roles of individuals in society For example the caste system of Hinduism traditionally has restricted the jobs individuals may perform thereby affecting the labor market and foreclosing business opportunities Countries dominated by strict adherents to Islam such as Saudi Arabia and Iran limit job opportunities for women in the belief that their contact with adult males should be restricted to relatives Religion also affects the types of products consumers may purchase as well as seasonal patterns of consumption In most Christian countries for example the Christmas season represents an important time for giftgiving yet very little business is done on Christmas Day itself While consumption booms during the Christmas holidays production plummets as employees take time off to visit friends and family The impact of religion on international businesses varies from country to country depending on the country s legal system its homogeneity of religious beliefs and its toleration of other religious viewpoints Consider Saudi Arabia home of the holy city of Mecca to which all Muslims are supposed to make a pilgrimage sometime in their lives The teachings of the Koran form the basis of the country s theocratic legal system and 99 percent of the Saudi population is Muslim Strong political pressure exists within the country to preserve its religious traditions For example work stops five times a day when the faithful are called to pray to Allah Religion 74 Christianity Islam Hinduism Buddhism Religion is an important aspect of most societies It affects the ways in which members of a society relate to each other and to outsiders Approximately 85 percent of the world s 63 billion people claim some religious affiliation As reflected in Map 43 74 percent of the world s population adheres to one of four religions Christianity comprising Roman Catholic 174 percent Protestant 123 percent and Eastern Orthodox 36 percent lslam 206 percent Hinduism 143 percent and Buddhism 60 percent Map 43 is provided on the following slide The Protestant ethic makes a virtue of high savings rates constant striving for efficiency and reinvestment of profits to improve future productivity all of which are necessary for the smooth functioning of a capitalist economy In contrast Hinduism emphasizes spiritual accomplishment rather than economic success The goal of a Hindu is to achieve union with Brahma the universal spirit by leading progressively more ascetic and pure lives as one s reincarnated soul goes through cycles of death and rebirth The quest for material possessions may delay one s spiritual journey Thus Hinduism provides little support for capitalistic activities such as investment wealth accumulation and the constant quest for higher productivity and efficiency lslam while supportive of capitalism places more emphasis on the individual s obligation to society According to Islam profits earned in fair business dealings are justified but a firm s profits may not result from exploitation or deceit for example and all Muslims are expected to act charitably justly and humbly in their dealings with others Two million Muslims annually descend on the Grand Mosque in Mecca Saudi Arabia as part of the Haij Culture also affects and reflects the secular values and attitudes of the members of a society Cultural values often stem from deepseated beliefs about the individual s position in relation to his or her deity the family and the social hierarchy that we discussed earlier Cultural attitudes toward such factors as time age education and status reflect these values and in turn shape the behavior of and opportunities available to international businesses operating in a given culture Values are the principles and standards accepted by a culture s members Attitudes encompass the actions feelings and thoughts that result from those values Values amp Attitudes Time Age Education and Status Attitudes about time differ dramatically across cultures In AngloSaxon cultures the prevailing attitude is quottime is money In Latin American cultures however few participants would think it unusual if a meeting began 45 minutes afterthe appointed time In Arab cultures meetings not only often start later than the stated time butthey also may be interrupted by family and friends who wander in to exchange pleasantries Important cultural differences exist in attitudes toward age Youthfulness is considered a virtue in the United States In Asian and Arab cultures however age is respected and a manager39s stature is correlated with age A countw39s formal system of public and private education is an important transmitter and reflection of the cultural values of its societ The means bywhich status is achieved also vaw across cultures In some societies status is inherited as a result of the wealth or rank of one39s ancestors In others it is earned by the individual through personal accomplishments or professional achievements Cultural attitudes toward such factors as time age education and status reflect these values and in turn shape the behavior of and 39 39 quot quot 39 39 39 r quot o39 agiven culture Theories of Culture Hall s Low Contextthe words used by the speaker explicity conveythe speaker39s message to the listener High Context Approach the context in which a conversation occurs is just as important as the words that are actually spokenm and cultural clues are important in understandingwhat is being communicated Cultural Cluster Approach Hofstede s Five Dimension Low High Context 5 Context 5 9 m 390 5 m 3 u C a D C E 5 C E 3 C CD 5 a quota o C C 9 x U c m g E a E w m C a o C m cu m m E U a m 5 o i CD B o i m o h m o C D I U D m r I D lt gt gt x O Business behaviors in highcontext cultures often differ from those in lowcontext cultures For example German advertising is typically fact oriented while Japanese advertising is more emotion oriented High context cultures place higher value on interpersonal relations in deciding whether to enter into a business arrangement In such cultures preliminary meetings are often held to determine whether the parties can trust each other and work together comfortably Lowcontext cultures place more importance on the specific terms of a transaction In lowcontext cultures such as Canada the United Kingdom and the United States lawyers are often present at negotiations to ensure that their clients interests are protected Conversely in highcontext cultures such as Saudi Arabia Japan and Egypt the presence of a lawyer particularly at the initial meeting of the participants would be viewed as a sign of distrust Because these cultures value longterm relationships an assumption by a potential partner that one cannot be trusted may be sufficient grounds to end the negotiations One useful way of characterizing differences in cultures is the lowcontext highcontext approach developed by Edward and Mildred Hall In a lowcontext culture the words used by the speaker explicitly convey the speaker s message to the listener AngloSaxon countries such as Canada the United Kingdom and the United States and Germanic countries are good examples of lowcontext cultures see Figure 42 shown on the following slide In a highcontext culture the context in which a conversation occurs is just as important as the words that are actually spoken and cultural clues are important in understanding what is being communicated Examples are Arab countries and Japan An approach to understanding communication based on the relative emphasis on verbal and nonverbal cues to transmit meaning Cultural Cluster Approach Comprises countries that share many cultural similiarities although differences do remain Many clusters are based on language similarities although differences do remain An approach to understanding communication based on meaningful clusters of countries that share cultural values Hofstede s Five Dimensions of National Culture Social Orientation ndividuaism the interests of the individual take precedence vs Collectivism The interests of the group take precedence Power Orientation Power Respect Authority is inherent in one s position within a hierarchy vs Power Tolerance Individuals assess authority in view of its perceived rightness or their own personal interests Uncertainity OrientationUncertaintity Acceptance Positive response to change and new opportunities vs Uncertainty avoidance prefer structure and a consistent routine Goal Orientation Aggressive Goal Behavior Value material possessions money and assertiveness vs Passive Goal Behavior Value social relevancequality of life and the welfare of others Time Orientation Long term outlook value dedication hard work and thrift vs Shortterm outlook Value traditions and social obligations CHAPTER 5 ETHICS AND SOCIAL RESPONSIBILITY IN INTERNATIONAL BUSINESS Ethics consists of an individual s personal beliefs about whether a decision behavior or action is right or wrong What constitutes ethical behavior varies from one person to another Although ethics is defined in the context of an individual s belief the concept of ethical behavior usually refers to behavior that conforms to generallyaccepted social norms Unethical behavior then is behavior that does not conform to generallyaccepted social norms Ethical Generalizations Individuals have their own personal belief systems People from the same cultural context will tend to hold similar beliefs Behaviors can be rationalized Circumstances affect adherence to belief systems National culture is intertwined with ethics Individual have their own personal belief system about what constitutes ethical and unethical behavior For example most people will be able to readily describe simple behaviors such as stealing or returning found property as ethical or unethical People from the same cultural contexts are likely to hold similar beliefs as to what constitutes ethical and unethical behavior For example a group of middleclass residents of Brazil will generally agree with one another as to whether a behavior such as stealing from an employer is ethical or unethical Individuals may be able to rationalize behaviors based on circumstances For instance the person who finds twenty dollars and knows who lost it may quickly return it to the owner But if the money is found in an empty room the finder might justify keeping it on the grounds that the owner is not likely to claim it anyway Individuals may deviate from their own belief systems based on circumstances For instance in most situations people would agree that it is unethical to steal and therefore they do not steal But if a person has no money and no food that individual may steal food as a means of survival Ethical values are strongly affected by national cultures and customs For instance in Japan status is often reflected by group membership Members of one culture may view a behavior as unethical while members of another may view that same behavior as perfectly reasonable An American businessman might report to the police an American customs officer who requested 100 in a envelope to clear a shipment of imported goods whereas his Kenyan or Indonesian counterparts would likely make the payment without even being asked Behavior of Behavior of Organization Employees 39 Toward Employees Toward Organization 4 9 Cultural Context l Behavior of Employees 39 and Organization inward Other Economic Agents One 39 of 39t 39 quot39 quot 39 L39 is the treatment of employees by the organization At one extreme an organization can strive to hire the best people to provide ample opportunity for skills and career development to provide appropriate compensation and benefits and to generally respect the personal rights and dignity of each employee At the other extreme a firm can hire using prejudicial or preferential criteria can intentionally limit development opportunities can provide the minimum compensation allowable and can treat employees callously and with little regard to personal dignity The central ethical issues related to how employees treat the organization include conflicts of interest secrecy and confidentiality and honesty A conflict of interest occurs when a decision potentially benefits the individual to the possible detriment ofthe organization Divulging company secrets is viewed as unethical in some countries but not in others Athird area of concern is honesty including such things as using a business telephone to make personal long distance calls stealing supplies and padding expense accounts The third major perspective forviewing ethics involves the relationship between the firm and its employees with other economic agents including customers competitors stockholders suppliers dealers and labor unions The behaviors that may be subject to ethical ambiguity include advertising and promotions financial disclosures ordering and purchasing shipping and solicitations bargaining and negotiation and other business relationships Acceptability of Bribery Acceptable Russia China Taiwan South Korea United States Unacceptable Australia Sweden Switzerland Austria Managing Ethical Behavior Across Borders Guidelines and Code of Ethics Ethics training Organizational Practices Corporate Culture Many large multinationals including Toyota Siemens General Mills and Johnson amp Johnson have written guidelines that detail how employees are to treat suppliers I and other 39 Others have developed formal codes of ethics written statements ofthe values and ethical standards that guide the firms39 actions Some multinational corporations address ethical issues proactively by offering employees training in how to cope with ethical dilemmas At Boeing for example line managers lead training sessions for other employees and the company also has an ethics committee that reports directly to the board of directors The training sessions involve discussions of different ethical dilemmas that employees might face and how they might best handle those dilemmas Organizational practices and the corporate culture also contribute to the management of ethical behavior lfthe top leaders in a firm behave in an ethical manner and violations of ethical standards are promptly and appropriated addressed then everyone in the organization will understand that the firm expects them to behave in an ethical manner to make ethical decisions and to do the right things But if top leaders appear to exempt themselves from ethical standards or choose to ignore or trivialize unethical behaviors then the opposite message is being sent Corporate Social Responsibility The set of obligations an organization undertakes to protect and enhance the society in which it functions Organizations themselves do not have ethics but do relate to their environment in ways that often involve ethical dilemmas and decisions by individuals within the organization These situations are generally referred to within the context of the organization39s social responsibility Managers must balance the ideal of a global stance on social responsibility against the local conditions that may compel differential approaches in the various countries where the firm does business Exampes of f nmnanine with a f 39 to QRff nrnnrafn Social quot LL Bean Toyota Lands39 End 3M Dell Computer DiamlerChrysler BP Honda Approaches to Social Responsib it Firms generally adopt one of four different basic approaches to social responsibility The basic approach they adopt shapes how they manage issues of compliance the informal dimensions of social responsibility and the evaluation of their social responsibility efforts The coming slides will explain each approach Obstructionist Do as little as possible to address social or environmental problems Deny or avoid responsibility Examples Astra Nestle Danone Organizations that take what might be called an obstructionist stance to social responsibility usually do as little as possible to address social or environmental problems When they cross the ethical or legal line that separates acceptable from unacceptable practices their typical response is to deny or avoid accepting responsibility for their actions For example a few years ago top managers in several foreign affiliates of Astra a Swedish firm were accused of a host of improprieties ranging from sexual harassment to the diversion of company resources for personal use When these problems first began to surface top officials in Sweden denied any wrongdoing before they even bothered to conduct an investigation Similarly both Nestle and Danone have been accused of violating international agreements signed in 1981 to control the marketing of infant formulas that serve as substitutes for breast milk Nestle and Danone however allegedly provided mothers in West Africa with free samples of milk power and violated labeling standards on infant formula in the countries of Togo and Burklna Faso The firms however deny any such violations and argue that their actions were all technically within the parameters of the agreements Defensive Do what is required legally but nothing more Corporate responsibility is to generate profits Ex Phillip Morris One step removed from the obstructionist stance is the defensive stance whereby the organization will do everything that is required of it legally but nothing more Managers in organizations that take a defensive stance insist that thelrjob is to generate profits Tobacco companies such as Philip Morris take this position in their marketing efforts In the United States they are legally required to include warnings to smokers on their products and to limit their advertising to prescribed media Domestically they follow these rules to the letter of the law but use stronger marketing methods in countries that have no such rules In many African countries for example cigarettes are heavily promoted contain higher levels of tar and nicotine than those sold in the United States and carry few or no health warning labels 39 quotquot L39 39 quot legal 39 Imore Agree to participate in social programs Match contributions by employees Respond to requests from nonprofits No proactive behaviorto seek such quot39 Afirm 39 39 39 meets its legal and ethical requirements but will also go beyond these requirements in selected cases Such firms voluntarily agree to participate in social programs but solicitors have to convince the organization that the programs are worthy oftheir support Some firms will match contributions made bytheir employees to selected charitable causes VodaPhone an African telecommunications company for example sponsors a youth cricket league in Pretoria South Africa Proactive Strong support of social responsibility Viewed as citizens of society Seeks opportunities to contribute Ex McDonald39s The body shop Ben amp jerw s The highest degree of social responsibility that a firm can exhibit is the proactive stance Firms that adopt this approach take to heart the arguments in favor of social responsibility They viewthemselves as citizens in a society and proactively seek opportunities to contribute An excellent example of a proactive stance is the Ronald McDonald House program undertaken by McDonald s Corp These houses located close to major medical centers can be used by families for minimal cost while their sick children are receiving medical treatment nearby Least Most Responsible Responsible Proactive Managing Compliance Formally They should view social responsibility as a major challenge that requires careful planning decision making consideration and evaluation They may manage social responsibility through both formal and informal dimensions Formal organizational dimensions used to implementafirm39s social re pun iuiIiLy39 39 a 39 quot L39 39 rquot R 39 giving Legal Compliance is the extent to which the organization conforms to regional national and international laws The task of managing legal compliance is generally assigned to the appropriate functional managers Ethical Compliance is the extent to which the members ofthe organization follow basic ethical and legal standards of behavior Philanthropic Givingis the awarding of funds or gifts to charities or other social programs Managing Compliance Informally Leadership organization culture and how the organization responds to whistle blowers each helps shape and define people s perceptions ofthe organization s stance on social responsibility Leadership practices and organization culture can go a longwaytoward defining the social responsibility stance an organization and its members will adopt Whistle blowing is the disclosure by an employee of illegal or unethical conduct on the part of others within the organization How an organization responds to this practice often indicates its stance toward social responsibility Corporate Social Audit A formal and thorough analysis of the effectiveness of the firm s social performance Many organizations choose to conduct formal evaluations of the effectiveness of their social responsibility efforts Some organizations routinely conduct corporate social audits The audit is usually undertaken by a task force of highlevel managers from within the firm It requires that the organization clearly define all its social goals analyze the resources it devotes to each goal determine how well it is achieving the various goals and make recommendations about which areas need additional attention Steps in Corporate Social Audit Define Social Goals Analyze resources devoted to each goal Determine degree of achievement for each goal PWN Make recommendations Actors in policy formulation process The state The market Civil society Another challenge facing corporations in establishing their policy towards corporate social responsibility is that the role of the corporation in society varies across countries Multinational corporations which by definition operate in multiple political and legal jurisdictions are continually attempting to find the proper balance between the roles and behaviors expected by their home government and those expected by all of the host governments in the countries in which they operate A model developed by two Dutch CSR experts Rob van Tuder and Alex van der Zwart showcases this problemi Their approach suggests there are three main actors in the policy formulation process 1 The state which passes and enforces laws 2 The market which through the process of competition and the pricing mechanism utilizes inputs and allocates outputs to members of the society and 3 Civil society which includes churches charitable organizations labor unions etc Civil society in many ways manifests the cultural values of the citizens of the country The interplay between these three actors establishes public policy and the norms of social interaction including of course accepted business behaviors As is the case with culture however these social norms vary from country to country Their model develops stereotypical behaviors in three regions of the world These three stereotypes are explained on the following slide Regional Stereotypes AngloSaxon Approach AngloSaxon countries view the state the market and civil society as separate competitive and antagonistic When the government must contract with the private sector to purchase goods or services such contracting should be done through an open and competitive bidding process The Asian Approach Many Asian countries rely on close cooperation between the private sector and the government For example the economic clout ofJapan s keiretsu and Korea s chaebo rests on their willingness to do the government s bidding and viceversa Many Asian leaders view this cooperation as the inchpin of their successful development From the perspective of the AngloSaxon approach this symbiotic relationship between business and government is viewed as corruption The Continental European Approach In the European Union the three actors have a much more cooperative ways of working with one another In Germany for example large employer associations bargain with umbrella labor organizations under the watchful supervision of the government In general public policy process is based upon creating consensus among the three actors Cooperation not competition is the hallmark of this approach quot 39 39 39 39Ethics amp Social quot quot Foreign Corrupt Practices Act FCPAl was passed by the United States Congress in 1977 The FCPA prohibits US firms their employees and agents acting on their behalf from paying or offering to pay bribes to any foreign government official in order to influence the official actions or policies of that official to gain or retain business This prohibition applies even if the transaction occurs entirely outside US borders Alien Tort Claims Act was passed in the United States in 1789 but has recently emerged as a potentially significant law affecting US multinational corporations Under some recent interpretations of this law US multinationals may conceivably be responsible for hu manrights abuses by foreign governments if the companies benefited from those abuses AntiBriberv C 39 of the f 39 39 for Economic f 39 amp quot 39 w developed in and first ratified by Canada in 2000 it has since been ratified by 33 other countries The Convention is an attempt to eliminate bribery in international business transactions lts centerpiece mandates jail time for those convicted of paying bribes International Labor Organization llLOl mnltors working conditions in factories in developing countries The lLO has begun to systematically inspect working conditions in countries such as Bangladesh Cambodia and the Philippines Corporations find that such an independent inspection mechanism helps allay concerns from consumer activist groups Dealing with Corruption Typical situations encountered The legal framework Foreign Corrupt Practices Act Foreign Corrupt Practices Act Enacted in 1977 after a four year inquiry by the SEC Lockheed bribes Watergate slush funds voluntary disclosure 400 companies with 300 million in payments FCPA passed unanimosoly GENERALLY SPEAKING THE FCPA PROHIBITS US INDIVIDUALSI COMPANIES OR THEIR AGENTS FROM MAKING GIFTS OR PAYMENTS TO FOREIGN OFFICIALS OR POLITICIANS TO USE THEIR POWER OR INFLUENCE TO OBTAIN OR RETAIN BUSINESS FCPA Pros amp Cons Supporters see the FCPA as framework for a UN sponsored global agreement against bribery and the only ethical way to conduct business Detractors believe it is naive puts American companies at a competitive disadvantage and attempts to force American moral standards on other people Severe Penalties Fines of 2 million for individuals and entities Fines of 100000 and 5 years for llwillful violators Suspension of government business export licenses or benefits of OPIC EXIM Bank or SBA lneligibility to receive Other Applicable Statues Securities Exchange Act of 1934 expanded to include llactions reflecting on the integrity of a company or its management I Mail and Wire Fraud Act where national or international means are used to facilitate bribery Currency and Foreign Transactions Reporting Act where bribery involves amounts greater than 10000 without being reported False Statements Act Two Main Provisions AntiBribery Discosure amp reporting requirements Applicability To every US business and individual Foreign companies that act as agents for a US company or individual This makes the US company or individual also liable NonAmerican employees working for American companies Law extends beyond perpetrator to directors managers shareholders and other employees You are responsible for your subordinates Prosecuting Elements Must be a US citizen corporation domestic or foreign agent of one Distinction between agent and distributor Mails or interstate commerce are involved Corrupt intent exists to induce an official to obtain business lncludes contractors and consultants of foreign governments Must be an offer payment gift or promise for money or tangible or intangible items These are outright bribes often called speed money mordida etc llKnowledge standard Payments are unlawful even if the payer believes the payment will be transferred Safe Harbors Gifts or payments to secure routine government action allowed Payments made to foreign officials for bona fide expenditures in connection with the promotion or demonstration of a product or service or the execution of a contract with a foreign government or agency are allowed These payments often called grease or facilitating payments are legal and tax deductible under US law THERE ARE NO CHOICES YOU MUST COMPLY NORMALLY NEED TO SEEK LEGAL COUNCIL FRAUD Be careful in selecting suppliers distributors agents acquisition candidates and management Background checks are crucial Kroll Associates The Ackerman Group Kidnapping Kidnap lnsurance kidnapping and ransom or K amp R Seldom political Highly organized by guerrilla groups and organized crime 80 take place in Latin America Brazil Colombia Mexico Guatemala AIG Chubb Group Lloyds of London Don t believe it can t happen to you Areas of Social Responsibility Organizationalstakeholders Natural environment General social welfare Organizational stakeholders are those people and organizations that are directly affected by the practices of an organization and that have a stake in its performance Most companies that strive to be responsible to their stakeholders concentrate first and foremost on three main groups customers employees and investors Many laws regulate the disposal of waste materials In many instances companies themselves have become more socially responsible in their release of pollutants and general treatment of the environment Still companies need to develop economically feasible ways to avoid contributing to acid rain and global warming to avoid depleting the ozone layer and to develop alternative methods of handling sewage hazardous wastes and ordinary garbage Some people believe that in addition to treating their stakeholders and the environment responsibly business organizations also should promote the general welfare of society Examples include making contributions to charities philanthropic organizations and not forproflt foundations and associations supporting museums symphonies and public radio and television and taking a role in improving public health and education Some people also believe that organizations should act even more broadly to correct the political andor social inequities that exist in the world CHAPTER 6 Foreign Exchange Foreign Exchange 0 A commodity that consists of currencies issued by countries other than one s own 0 Foreign Exchange is the marketplace where currencies are exchanged 0 Foreign Exchange is the act of exchanging currencies One factor that obviously distinguishes international business from domestic business is the use of more than one currency in commercial transactions The foreignexchange market exists to facilitate this conversion of currencies thereby allowing firms to conduct trade more efficiently across national boundaries The foreignexchange market also facilitates international investment and capital flows Firms can shop for lowcost financing in capital markets around the world and then use the foreignexchange market to convert the foreign funds they obtain into whatever currency they require Other Terms FOREX the foreign exchange market an OTC market Currency Pair two currencies involved in a foreign exchange Base Currency The first currency in a currency pair Pip the smallest unit of price a currency can be traded in Spread difference between Ask amp Bid pricealso the bank fee Tick the minmum up or down change in the price of a currency Foreign Exchange Rates Direct Exchange Rate 0 Direct Quote Price of the foreign currency in terms of the home currency Indirect Exchange Rate 0 Indirect Quote Price of the home country in terms of the foreign currency Foreign Exchange Market Participants Banks mostly bank to bank but also broker to bank Central banks and some finance ministries Brokers Speculators Customers businesses and individuals Convertible Currencies Currencies that are freely tradable Hard currencies lnconvertible Currencies Currencies that are not freely tradable because of domestic laws or the unwillingness of foreigners to hold them Soft currencies Spot amp Forward Markets Spot Market for foreignexchange transactions that are to be consummated immediately or in the very near future Forward Market For foreignexchange transactions that occur at some time in the future Swap Transaction A transaction in which the same currency is bought and sold simultaneously but delievery is made at two different points in time Exchange Market Transactions Approx 89 percent of the transactions involve the US dollar a dominance stemming from the dollar s role in the Bretton Woods system Because the dollar is facilitated most currency exchange it is known as the primary transaction currency for the foreignexchange market The Roles of Banks Buy or sell major traded currencies they are market makers Banks sometimes speculate for very short periods of timeminutes Markets Wholesale market amp retail market The foreignexchange departments of large international banks such as JPMorgan Chase Barclays and Deutsche Bank in major financial centers like New York London and Frankfurt play a dominant role in the foreignexchange market These banks stand ready to buy or sell the major traded currencies They profit from the foreignexchange market in several ways Much of their profits come from the spread between the bid and ask prices for foreign exchange International banks are key players in the wholesale market for foreign exchange dealing for their own accounts or on behalf of large commercial customers lnterbank transactions typically involving at least 1 million or the foreign currency equivalent account for a majority of foreignexchange transactions Corporate treasurers pension funds hedge funds and insurance companies are also major players in the foreign exchange market International banks also play a key role in the retail market for foreign exchange dealing with individual customers who want to buy or sell foreign currencies in large or small amounts Typically the price paid by retail customers for foreign exchange is the prevailing wholesale exchange rate plus a premium The size of the premium is in turn a function of the size of the transaction and the importance of the customer to the bank Bank Foreign Exchange Clients The clients of the foreignexchange departments of banks fall into several categories 0 Commercial customers MNCs Business travelers tourists engage in foreignexchange transactions as part of their normal commercial activities such as exporting or importing goods and services paying or receiving dividends and interest from foreign sources and purchasing or selling foreign assets and 39 Some 39 39 may also use the market to hedge or reduce their risks due to potential unfavorable changes in foreignexchange rates for moneys to be paid or received in the future 0 Speculators deliberately assume exchange rate risks by acquiring positions in a currency hoping that they can correctly predict changes in the currency s market value Foreignexchange speculation can be very lucrative if one guesses correctly but it is also extremely risky 0 Arbitrageurs attempt to exploit small differences in the price of a currency between markets They seek to obtain riskless profits by simultaneously buying the currency in the lowerpriced market and selling it in the higherpriced market Arbitrage is the riskless purchase of a product in one market for immediate resale in a second market in order to profit from a price discrepancy There are two types of arbitrage activities that affect the foreignexchange market arbitrage of goods and arbitrage of money Arbitrage of Goods Purchasing Power Parity Underlying the arbitrage of goods is a very simple notion If the price of a good differs between two markets people will tend to buy the good in the market offering the lower price the quotcheapquot market and resell it in the market offering the higher price the quotexpensivequot market Under the law ofone price such arbitrage activities will continue until the price of the good is identical in both markets excluding transactions costs transportation costs taxes and so on The arbitrage of goods across national boundaries is represented by the theory of purchasing power parity PPP This theory states that the prices of tradable goods when expressed in a common currency will tend to equalize across countries as a result of exchange rate changes PPP occurs because the process of buying goods in the cheap market and reselling them in the expensive market affects the demand for and thus the price of the foreign currency as well as the market price of the good itself in the two product markets in question Arbitrage of Money Professional traders employed by money market banks and other financial organizations seek to profit from small differences in the price of foreign exchange in different markets Whenever the foreignexchange market is not in equilibrium professional traders can profit through arbitraging money Numerous forms of foreignexchange arbitrage are possible but three forms are common twopoint threepoint and covered interest Twopoint arbitrage involves profiting from price differences in two geographically distinct markets Suppose E1 is trading for 200 in New York City and 180 in London A foreignexchange trader at JPMorgan Chase could take 180 and use it to buy E1 in London s foreignexchange market The trader could then take the pound she just bought and resell it for 200 in New York s foreignexchange market Professional currency traders can make profits through threepoint arbitrage whenever the cost of buying a currency directly such as using pounds to buy yen differs from the cross rate of exchange The cross rate is an exchange rate between two currencies calculated through the use of a third currency such as using pounds to buy dollars and then using the dollars to buy yen The US dollar is the primary third currency used in calculating cross rates The difference between these two rates offers arbitrage profits to foreignexchange market professionals The market for the three currencies will be in equilibrium only when arbitrage profits do not exist which occurs when the direct quote and the cross rate for each possible pair of the three currencies are equal Coveredinterest arbitrage is arbitrage that occurs when the difference between two countries interest rates is not equal to the forward discountpremium on their currencies In practice it is the most important form of arbitrage in the foreignexchange market It occurs because international bankers insurance companies and corporate treasurers are continually scanning money markets worldwide to obtain the best returns on their shortterm excess cash balances and the lowest rates on shortterm loans Economic Exposure amp Risk V If the value of a currencv sav the Brazilian real is expected to change in the future it will impact the plans for vour Brazilian 39 in 39 market entrv expansion etc V If a countrv or market is impacted bv civil strife war strikes or other political change it likelv will affect the value ofthe currencv thus creating economic exposure V Economic exposure can be reduced by locating operations in another market hedging earnings and currency in the forward and futures market having backup geographic operations being sure to plan in local curreng etc V Example Dell Brazil entry plan Reducing Economic Exposure The key to reducing economic exposure is to distribute the firm s productive assets to various locations so the firm s longterm financial wellbeing is not severelv affected bv adverse changes in exchange rates This is also known as a real hedge Hedging These are 39 39 contracts 39 39 39 39 etc used bv39 and other organizations to facilitate planning and ensure against losses on exchange Currency Future A contract that resembles a forward contract However unlike the forward contract the currency future is for a standard amount on a standard delivery date Currency Option Allows but doesn t require a firm to buy or sell a specified amount of foreign currency at any time up to a specified date A call option grants the right to buy the foreign currency in question a put option grants the right to sell the foreign currency Three Types of Risk in International Business Economic Transaction Translation Translation Effects While cash actually increases or decreases from translation on consolidation other assets and liabilities are affected differently Fixed assets equipment and inventory are revalued using several methods dictated under US FASB Statement 52 to a market or replacement value These assets don t gain or lose value just because the local currency rate changed Receivables and liabilities are affected by currency changes as well unless there is balance sheet quotbalancequot of hard and soft currencies or there is hedging High or hyperlnflationary accounting is similar On translation and consolidation balance sheet elements are restated at the rate on the last day of the period Income statement items are translated or restated at the actual exchange rate on the date of the transaction or by using a weighted averaged over the accounting period Ways to Reduce Translation amp Transaction Exposure Tactics are primarily but not exclusively designed to protect short to mediumterm cash flows from adverse changes in exchange rates Companies should use forward exchange rate contracts and swaps Firms can also use a lead strategy 7 An attempt to collect foreign currency receivables when a foreign currency is expected to depreciate 7 Paying foreign currency payables before they are due when a currency is expected to appreciate Firms can also use a lag strategy 7 An attempt to delay the collection of foreign currency receivables if that currency is expected to appreciate 7 Delay paying foreign currency payables if the currency is expected to depreciate Firms can purchase an offsetting asset eg financial instruments like certificates of deposit gold etc in the liability currency Firms can utilize a real hedge by locating assets and production in other country markets Financial statements of foreign affilitates must be restated into the functional currency of the parent at the end of an accounting period The functional currency may be different from the reporting management currency Current Rate Method Functional same as book currency Balance sheet items are translated at the exchange rate on the balance sheet date lncome statement items are translated at the actual rate when the transaction occurred or on a weighted basis Temporal Rate Method Foreign functional currency in US Monetary assets and liabilities those fixed in currency units are restated at current exchange rates Nonmonetary assets and liabilities those that change with exchange rates are restated at historical rates More Management Tactics for Foreign Exchange Central control of exposure is needed to protect resources efficiently and ensure that each sub unit adopts the correct mix of tactics and strategies This can be done in a netting or pooling operation Firms must distinguish between transactiontranslation exposure and economic exposure and must track their exposure continually Forecasts of future exchange rate movements cannot be overstated Firms need to establish good reporting systems so the central finance function can regularly monitor the firm s exposure positions The firm should produce monthly foreign exchange exposure reports FASB 52 When a liability is in a foreign currency the liability is booked in the home currency general ledger because companies only report in one currency Remember however the true liability is in the foreign currency If the exposure extends over two or more months or over a fiscal year end PAS 52 requires that an estimate be made of the expected currency liability and then stated in the home currency CHAPTER 7 Formulation of National Trade Policies Two Basic Issues on Trade Intervention N Should a national government intervene to protect the country s domestic firms by taxing foreign goods entering the domestic market or constructing other barriers against imports Should a national government directly help the country s domestic firms increase their foreign sales through export subsidies governmenttogovernment negotiations and guaranteed loan programs In today s global economy many firms benefit from international trade finding foreign markets a rich source of additional customers Exports generate domestic jobs so many national governments promote the success of their countries domestic firms in international markets But at times firms believe that their foreign competitors have gained an unfair advantage as a result of policies adopted by their governments As a result as is the case in the commercial aircraft market a firm may ask its national government for protection against the foreigners Two principal issues have shaped the debate on appropriate trade policies as indicated by the questions posed in the slide In North America the trade policy debate has recently focused on the issue of whether the government should promote quotfree I trade or fair trade Free trade implies that the national government exerts minimal influence on the exporting and importing decisions of private firms and individuals Fair trade sometimes called managed trade suggests that the national government should actively intervene to ensure that domestic firms exports receive an equitable share of foreign markets and that imports are controlled to minimize losses of domestic jobs and market share in specific industries Some fair traders also argue that the government should ensure a lllevel playing field on which foreign and domestic firms can compete on equal terms Although sounding reasonable the lllevel playing field argument is often used to justify policies that restrict foreign competition IndustryLevel Arguments National Defense Infant Industry Maintenance of Existing Jobs Voluntary exchange makes both parties to the transaction better off and allocates resources to their highest valued use In Adam Smith s view the welfare of a country and its citizens is best promoted by allowing selfinterested individuals regardless of where they reside to exchange goods services and assets as they see fit However many businesspeople politicians and policy makers believe that under certain circumstances deviations from free trade are appropriate The next slides review the four industrylevel arguments related to free trade policy National Defense Argument Country must be selfsufficient in critical raw materials machinery and technology or else be vunerable to foreign threats Appeals to general public Protects steel electronics and machine tools industries and merchant marines National defense has often been used as a reason to support governmental protection of specific industries Because world events can suddenly turn hostile to a country s interests the national defense argument holds that a country must be self sufficient in critical raw materials machinery and technology or else be vulnerable to foreign threats For instance the vulnerability ofJapan s supply lines was demonstrated by the extensive damage done to its merchant marine fleet by Allied submarines during World War II After the war Japan banned the importation of rice as a means of promoting domestic selfsufficiency in the country s dietary staple The national defense argument appeals to the general public which is concerned that its country will be pushed around by other countries that control critical resources Many special interest groups have used this politically appealing argument to protect their industries from foreign competition US industries receiving favorable treatment for national defense reasons include steel electronics machine tools and the merchant marine Infant Industry Argument Imposition of tariffs to give US firms temporary protection from foreign competition until firms are fully established Powerful economic development strategy Which industries should be protected For how long Alexander Hamilton the first US secretary of the treasury articulated the infant industry argument in 1791 Hamilton believed that the newly independent country s infant manufacturing sector possessed a comparative advantage that would ultimately allow it to thrive in international markets He feared however that the young nation s manufacturers would not survive their infancy and adolescence because of fierce competition from more mature European firms Hamilton thus fought for the imposition of tariffs on numerous imported manufactured goods to give US firms temporary protection from foreign competition until they could fully establish themselves Governmental nurturing of domestic industries that will ultimately have a comparative advantage can be a powerful economic development strategy However determination of which industries deserve infant industry protection is often done on a political rather than an economic basis Firms workers and shareholders are not shy about using the infant industry argument to bolster support for import protection or export subsidies for their industries Moreover once an industry is granted protection it may be reluctant to give it up Many infant industries end up being protected well into their old age Maintenance of Existing Jobs Jobs in highwage countries threatened by imports from lowwage countries Forms of assistance Tariffs amp Quotas Wellestablished firms and their workers particularly in high wage countries are often threatened by imports from lowwage countries as in the case of the US steel industry To maintain existing employment levels firms and workers often petition their governments for relief from foreign competition Government officials eager to avoid the human and economic misery inflicted on workers and communities when factories are shut down tend to lend a sympathetic ear to such pleas Assistance may come in the form of tariffs quotas or other barriers The assistance may be temporary as was the case when HarleyDavidson received tariff protection from Japanese imports for five years in the mid1980s to allow the firm to revamp its operations and restore its image in the marketplace Conversely the assistance may be long lived as in the case of governmental protection of the US commercial shipbuilding industry which has extended that industry s life by over 30 years National Trade Policies Economic Development Programs Industrial Policy Public Choice Analysis Economic Development Programs An important policy goal of many governments particularly those of developing countries is economic development Countries that depend on a single export often choose to diversify their economies to reduce the impact of say a bad harvest or falling prices for the dominant export some countries such as Japan Korea and Taiwan based their postWorld War II economic development on heavy reliance on exports According to this export promotion strategy a country encourages firms to compete in foreign markets by harnessing some advantage the country possesses such as low labor costs Other countries such as Australia Argentina India and Brazil adopted an import substitution strategy after World War II such a strategy encourages the growth of domestic manufacturing industries by erecting high barriers to imported goods Many multinational corporations MNCs responded by locating production facilities within these countries to avoid the costs resulting from the high barriers In general the export promotion strategy has been more successful than the import substitution strategy Industrial Polig is pursued the national government identifies key domestic industries critical to the country s future economic growth and then formulates programs that promote their competitiveness Ideally industrial policy assists a country s firms in capturing large shares of important growing global markets as MITI has done for Japanese multinational corporations MNCs Many experts however do not view industrial policy as a panacea for improving the global competitiveness of a country s firms They argue that government bureaucrats cannot perfectly identify the right industries to favor under such a policy Opponents of industrial policy also fear that the choice of industries to receive governmental largesse will depend on the domestic political clout of those industries ratherthan on their potential international competitiveness Instead of selectingfuture winners in the international marketplace opponents say industrial policywill become a more sophisticatedsoundingversion of pork barrel politics At the heart of the industrial policy debate is the question of what is the proper role of government in a market economy Underthe 1920 Jones Act the United States restricts foreign ships from providingtransportation services between US ports This restriction is supported by owners of US oceangoingvessels who gain increased profits estimated at 630 million peryear However the Jones Act is also estimated to increase the transportation costs that consumers pay by 105 billion annually or 40 per person Further like other restrictions on free trade the Jones Act has had unintended consequences as Map 91 suggests Public choice analysis suggests that few consumers will be motivated to learn how the Jones Act impacts them orto write or call their elected officials to save a trivial sum like 40 The special interests however such as shipowners and members of US maritime unions are motivated to know all the ins and outs ofthe Jones Act and to protect it from repeal because what they gain makes it worth their while to do so As a result members of Congress constantly hearfrom special interest groups about the importance of preservingthe Jones Act while the average consumer is silent on the issue Knowingthat they will be harmed by the special interest groups and will not be rewarded by the general public ifthey repeal the Jones Act members of Congress will rationally vote with the special interests on this issue Reasons for Tariffs Tariffs raise revenues for national governments Tariffs act as a barrierto trade Tariffs protect domestic companies and industries ort tariffs Ad valorem Im port tariffs 7 quot Spec39f39c l Compound Atariff is a tax placed on a good that is traded internationally Some tariffs are levied on goods as they leave the countw an exporttariff or as they pass through one countw bound for another a transit tariff Most however are collected on imported goods an import tariff Three forms of import tariffs exist 1 An ad valorem tariff is assessed as a percentage of the market value ofthe imported good 2 A specific tariff is assessed as a specific dollar amount per unit of weight or other standard measure 3 A compound tariff has both an ad valorem component and a specific component Nontariff Barriers Quotas Numerical export controls Product amp testing standards Restrcited access to distribution networks Bureaucratic obstacles Public sector procurement policies Regulatory controls Currency controls Investment controls Localpurchase requirements Nontariff barriers are the second category of governmental controls on international trade Any government regulation policy or procedure other than a tariff that has the effect of impeding international trade may be labeled a nontariff barrier NTB Though there are several forms of nontariff barriers as indicated in the slide quotas and numerical export controls deserve special attention A quota is a numerical limit on the quantity of a good that may be imported into a country during some time period such as a year Quotas have traditionally been used to protect politically powerful industries such as agriculture automobiles and textiles from the threat of competition Atariff rate quota TRQ imposes a low tariff rate on a limited amount of imports of a specific good above that threshold a TRQ imposes a prohibitively high tariff rate on the good A country also may impose quantitative barriers to trade in the form of numerical limits on the amount of a good it will export A voluntary export restraint VER is a promise by a country to limit its exports of a good to another country to a prespecified amount or percentage of the affected market Often this is done to resolve or avoid trade conflicts with an otherwise friendly trade partner International negotiations in the postWorld War II era have reduced the use of tariffs and quotas For this reason nonquantitative NTBs have now become major impediments to the growth of international trade These NTBs are more difficult to eliminate than tariffs and quotas because they often are embedded in bureaucratic procedures and are not quickly changeable Promotion of International Trade Subsidies Foreign trade Zones Export financing programs National state and local governments often provide economic development incentives another type of subsidy to entice firms to locate or expand facilities in their communities to provide jobs and increase local tax bases These incentives may be in the form of property tax abatements free land training of workforces reduced utility rates new highway construction and so on A foreign trade zone FTZ is a geographic area where imported or exported goods receive preferential tariff treatment FTZs are used by governments worldwide to spur regional economic development Through utilization of an FTZ a firm typically can reduce delay or sometimes totally eliminate customs duties Generally a firm can import a component into an FTZ process it further and then export the processed good abroad and avoid paying customs duties on the value of the imported component The maquiadora system is an example of the use of FTZs For many bigticket items such as aircraft supercomputers and large construction projects success or failure in exporting depends on a firm s producing a highquality product providing reliable repair service after the sale and offering an attractive financing package Because of the importance of the financing package most major trading countries have created government owned agencies to assist their domestic firms in arranging financing of export sales Objectives of Unfair Trade Practice Laws Promote global efficiency by encouraging production in those countries that can produce a good most efficiently Ensure that trade occurs on the basis of comparative advantage not the size of government subsidies Protect consumers from predatory behavior Many economists argue for abolishing unfair trade practice laws Advocates of abolishing unfair trade practice laws generally agree with the objectives of these laws which are stated in the slide However abolition advocates assert that in practice these laws do more harm than good Foreign firms alleged to have dumped goods in the United States must provide comprehensive documentation of their pricing and costaccounting procedures in English using US Generally Accepted Accounting Principles GAAP Firms failing to comply with the short deadlines for supplying these documents find themselves at a disadvantage in defending themselves before the International Trade Commission Moreover critics of unfair trade practice laws argue that the lTC s costing methodology is flawed and biased toward finding dumping when none exists Most major trading countries believe that US enforcement of its unfair trade practice laws is based on politics not the law and thus the laws serve as a protectionist trade barrier Some economists believe the laws make no sense either in theory or in practice because of the harm they cause consumers These economists are skeptical of the predatory pricing argument contending that decades of economic research have failed to find many realworld examples of such behavior With regard to international price discrimination or government subsidization the economists argue that if foreigners are kind enough or dumb enough to sell their goods to our country below cost why should we complain CHAPTER 8INTERNATIONAL COOPERATION AMONG NATIONS Goals ofthe World Trade Organization WTO Promote trade flows by encouraging nations to adopt nondiscriminatory predictable trade policies Reduce remaining trade barriers through multilateral negotiations Establish impartial procedures for resolving trade disputes among members The eighth and final round of GATT negotiations began in Uruguay in 1986 The participants agreed to create the WTO The World Trade Organization came into being on January 11995 Headquartered in Geneva Switzerland as of May 2006 the WTO includes 149 member and 32 observer countries Members are required to open their markets to international trade and to follow the WTO s rules The three primary goals of the WTO are listed in the slide WTO Challenges Cairns Group Multifibre Agreement General Agreement on Trade in Services GATS Agreement on trade related aspects of intellectual property rights TRIPS Trade Related investment Measures agreement TRIMS Enforcement of WTO Decisions 1 2 3 Country failing to live up to the agreement may have a complaint filed against it WTO panel evaluates complaint If found in violation the country may be asked to eliminate the trade barrier Forms of Economic Integration 1 U1wa Free Trade Area Customs Union Common Market Economic Union Political Union European Union EU 2008 1 Most important trading bloc BA 361 Exam 2 Review Lecture SixThe Role of the Government 39239 What is rolepurpose of the government from an economic perspective 0 Tax 8 Spend I Collect taxes amp then provide goodsservices that are otherwise difficult to provide in the private market I Roads schoolseducation police fire national defense etc o Regulate the behavior of firms 8 individuals I Antitrust Regulation I Economic and SocialHealth Regulation 39239 Welfare economics 0 Perfect Competition is the only market structure considered efficient I Perfect competition is always the starting point I All market structures and market outcomes are compared against perfect competition Price Marginal Cost implies no market power All evil comes from the case where PgtMC where firms have some market power some control over price 0 Welfare economics the branch of economics that studies how the allocation of resources market structure in our case affects the well being of society 0 Maximizing total possible surplus is where the equilibrium price P and quantity Q This is what economists mean by efficiency maximizing the possible total surplus to society Any price other than P results in less Total Surplus to society 39239 Monopoly 0 When a perfect monopolist has the market to itself I It reduces output to Quantity of the market I It can then drive up the price to Price of the market I This maximizes profit to the monopolist but is inefficient to society I Deadweight Loss Lost welfare to society having one monopoly produce a good rather than many small businesses 39239 Oligopoly 0 Has the same problem I The efficiency loss is not as great but still there I When oligopoly firms behave anticompetitive it is seen as an attempt to move from Price and Qto monopoly outcome 39239 The Need for Antitrust and Regulation 0 We don t live in a world served by perfectly competitive industries 0 Governments have two basic tools I Antitrust attempts to curtail monopoly power Limit power of firms limit number of options to firms I Regulation Curtail choicesactions Economics of Antitrust 39239 Antitrust policies that attempt to promote competition to prevent firms from possessing monopoly power and ban certain monopolistic behaviors amp prices 0 Ways to do this I Break up monopolies I Block mergers that would create too much ofa control over price I Regulate business practices such as price fixing 39239 Antitrust Legislation Three acts make up the bulk of the legislative body of antitrust o Sherman Act 1890 I Made any act that quotrestricted trade illegal I Made it illegal to attempt monopolization 0 Clayton Act 1914 I Outlawed specific acts I Prohibited mergers that reduced competition 0 Federal Trade Commission Act 1914 I Created FTC I Outlawed unfair methods of competition 0 Robinson Patman Act 1936 I Prohibited selling products as quotunreasonably low pricesquot I Try to make predatory pricing illegal 39239 Antitrust Enforcement 0 Federal antitrust enforcement is shared between 2 agencies I DO mostly handles horizontal price fixing also monopolization amp mergers I FTC mostly handles price fixing and mergers 39239 Antitrust Penalties o Sherman Act I Set fines by the government 0 Clayton Act I Set damages that may be recovered by those injured I Individuals harmed due to unfair business practices may sue for 3 times damages incurred 39239 Antitrust Issues 0 How to prove price fixing Treble damages awarded under Clayton Act 0 0 Case of predaton pricing set prices too low in order to drive competitors out of the market Once they are out then they can own market 39239 Types of Mergers 0 Horizontal Mergers merger between two competitors or rivals in the same market Folgers amp Maxwell House I Concern Market power ofthe merged firm Vertical Mergers Merger between two firms with potential or actual buyer seller relationships ex Panini pastry market and Starbucks breakfast market I Concern Foreclosure of part of the market 0 Conglomerate Mergers Merger that is neither horizontal or vertical Maxwell House coffee market amp Panini pastry market 0 I Concern Possible bundling of complementary goods 39239 Safe amp Unsafe Mergers Markets with HH over 1800 considered highly concentrated Markets with HH between 1000 and 1800 considered moderately concentrated Markets with HH less than 1000 considered unconcentrated Rule of thumb DOJ uses to measure safe amp unsafe mergers M O O O Unsafe Unsafe Postmerger 1800 HH39 1000 Safe Unsafe Safe Safe 5 100 Increase in HHI O 39239 Benefits amp Costs of a Horizontal Merger o Firm begin at competitive solution PMCACACO I Merger leads to efficiency gains where average cost falls to AC1 I Merger also leads to market power price increases to P1 and quantity falls to Q1 39239 Elasticity and benefitscost of merger o The more elastic demand I The smaller the benefit Bgain to producers I The larger the cost Closs to consumers I Harder to justify the proposed merger o The more inelastic demand I The larger benefit Bgain to producers I The smaller the cost Closs to consumers I Easier to justify proposed merger Regulation 39239 Regulation A state imposed limitation on the discretion that may be exercised individuals or organizations supported by threat of sanction 0 Two groups of regulation I Economic regulation regulate what firms can do set rules I Social regulation clean water clean air etc 0 Economic Regulation I Regulating Industry pricequantity of firms 0 Federal Trade Commission 0 Federal Aviation Authority 0 Federal Communications Commission 0 SEC 0 SocialHealthEnvironmental Regulations I Correcting for some side effect of economic activity 0 Equal employment opportunity commission 0 Environmental protection agency 0 Occupational safety and health administration 0 Consumer product safety commission 39239 Basic quot 39 39 Natural 39 39 39 0 Natural Monogoly When economies of scale exist to the extent that average cost decline over the entire range of the market demand curve I Graphically this means the AC curve is still declining at the point where it meets market demand 0 Unregulated Monopoly I Unregulated the monopoly sets output where MRMC at levels Qm I Unregulated the monopoly charges price Pm I Unregulated the monopoly earns positive economic profits 0 The monopoly is producing less than the socially desired level of output I There are consumers who value the good more than the cost ofthe providing good I It would be socially beneficial for the monopoly to produce more than amount Qm I Socially optimal allocation is to set Qwhere MC intersects demand and P equal to MC 0 Solutions I Do Nothing I Allow monopoly but regulate its activities I Government ownership and operation ofthe facility 0 Regulated Monopoly I Set PMC I Problem with this type of price regulation is firm is incurring losses Government would have to subsidize operation leads taxing equity issues in taxation I Therefore set PAC at least firm is not making a loss to Natural 39 39 39 I Marginal Cost Pricing 0 Pricing 0 Set PMC o Forces monopoly to produce at the socially optimal level Q I Average Cost Pricing 0 Set PAC o More practical than marginal cost pricing 0 Efficiency gains I Monopoly produces more than it would unregulated I No economic profits LECTURE 7 Trade Overview 0 v Export Any good commodity or service produced in the domestic country and then transported and sold abroad to consumers in a foreign country v Import Any good commodity or service produced in a foreign country and then transported and sold to customers in the domestic country o 00 o 00 o o 00 Net Exports Total Exports Total Imports Trade Surplus when Total Exports gt Total imports Trade Deficit when Total Exports lt Total imports Gross Domestic Product The market value of all final goods and services within a country during a given time period GDP CIGX M ExportsImportsGDP Net Export Total World Exporters I US I Germany I China I Japan Top Exports Year to Date I Civilian aircrafts I Auto engines parts I Pharmeciticual preparations Total World Importers I US I Germany I China I UK I Japan Top Imports Year to Date I Crude oil I Auto engines parts I Pharmeciticual preparations I Computer accessories US Top Trading Partners I Canada I China I Mexico o 00 o 00 o 00 o 00 o 00 0 Gravity model SIZE MA39I39I39ERS Predicts the volume of trade between any two countries ceteris paribus is proportional to the product of their size as measured by GDP and diminishes with their distance Trade can be explained as a function of I Size I Distance Globalization I A loosely defined term that in its largest sense implies a quotknitting together of economies and governments with social cultural political and economic effects I In an economic context it implies the growing integration of national economies through international trade foreign direct investment capital flows migration labor and the spread oftechnology Globalizationhistory I WWI First quotGolden Age of Trade I WWI Great Depression Smoot Hawley WWII INCREASE IN TARIFFS 0 Sharp decrease of worldwide trade I GATT General Agreement on Trade 8 Tariffs o Gradual amp Steady increase in worldwide trade amp lowering of barriers I WTO World Trade Organization 0 Formed in 1995 as a successor of GATT Globilization Pros 8 Cons I Pros 0 Mixed blessing that has the potential to o Allocate capital investment to its highest valued used 0 Allow labor specialization that enlarges the economic world 0 Gives consumer more choices 0 Raise the standard of living for all I Cons 0 Will destroy jobs and lower wages in rich countries 0 Lower environmental standards for all 0 Exploits workers in poor conditions 0 Limits government sovereignty International Organizations I World Trade Organization 0 Focusing on negotiating trade terms between countries I World Bank 0 An umbrella of five closely associated development institutions focus is on alleviation of global property I International Monetary Fund 0 186 member countries focus is on global monetary stability I United Nations 0 192 member countries focus is on peacekeeping 39239 Functions of the WTO MAIN TASK facilitate trade I Administering trade agreements I Acting as a forum for trade negotiations I Settling trade disputes I Reviewing national trade policies I Assisting developing countries in trade policy issues I Cooperating with other international organizations 39239 WTO Principles I Trade without discrimination 0 Most favored nation MFN foremost principle of WTO 0 Any deal with one country applies to all countries 0 National treatment I Freer Trade 0 Lowering barriers through negotiations Predictability o Agreements are stable binding and transparent I Promote Fair Competition 0 Encourage fair competitiondiscourage unfair practices I Encourage development 8 economic reform 0 Special rules to include developing countries 39239 WTO Trade Issues I Agricultural Goods 0 Most countries have market distorting policies in agriculture which has lead to trade distortions I Intellectual Property 0 Attempts at greater protection of intellectual property but also the enforcement of that protection I Enviromental Concerns o Attempts to balance between using trade as a springboard for economic growth while simultaneously protecting the environment I Regional Trade Agreements RTA s 0 Small trading blocks usually regional in nature I Regionalism actions by governments to liberalize or facilitate trade on a regional basis sometimes through free trade areas or customs unions 0 Becoming increasing prevelant o NAFTA North American Free Trade Agreement 0 EC European Communities LECTURE 8 GAINS FROM TRADE 39239 Common fallacy quotTrade is a zerosum gamequot 0 For every transaction there is a winner amp loser where gains and losses balance each other out 0 Common sense refutes this If that were the case then nobody would ever voluntarily trade 39239 Why trade 0 Arbitrary distribution of natural resources around the globe 0 Trade allows consumers to enjoy a variety of goodsservices o Specialization allows for more total production 0 Trade allows both parties to consumer more total than before 39239 Three Possible Scenarios 0 Because of the distribution of resources one individualcountry can t produce a type of good while another individualcountry can produce another type of good 0 Suppose both individualscountries could make both goods but one individualcountry was quotbetterquot at producing one good while the other individualcountry was quotbetterquot at the other good 0 Suppose both individualscountries could make both goods but one individual was quotbetterquot at making both goods 39239 PPF Production Possibilities Frontier 0 Shows the maximum combination of goodsservices that can be produced given the current state of available resources and technology 39239 Absolute Advantage when one personcountry is more productive than another person a comparison of productivity between pplcountries how can you get done per 39239 Costs are opportunitv costs 0 During the time Japan spends producing a TV they could have been producing an aircraft 0 How many aircrafts do they give up when producing a TV o 0 Comparative Advantage when one person or country can produce a good or service at a lower cost than another person or country A comparison of the opportunity cost between individuals or countries What is the point of trade 0 Trade depends on competitive advantage and Mabsolute advantage 0 00 0 There is not a quotzero sum game but has the potential to make both parties better off 0 Trade rate depends on the opportunity costs rate must lie somewhere between the costs in order to make both parties better off 0 Gains from trade stem from differences in opportunity costs allowing each to specialize in the goods it has a comparative advantage in results in the highest total production the quoteconomic piequot is as large as possible 39239 Comparative Advantage Sources 0 Differences in Climate 0 Countries in tropical climates can grow things like coffee sugar etc 0 Countries in temperate climates can grow corn 0 Differences in Factor Endowments o Facotr intensity measure of which factor is used in relatively greater quantities than other factors 0 Ex Clothing teneds to be labor intensive in that it doesn t require much physical capital per worker 0 Differences in Technology 0 Arise from tradition Swiss watchmakers 0 Random innovations in manufacturing 0 Ex US advantage in paharametticals maybe bc of RampD LECTURE NINE TRADE amp WELFARE ECONOMICS o v Consumer Surplus The gain to consumers from participating in the market 0 0 Production Surplus The gain to producers from participating in the market 0 0 Total Surplus CSPS the total surplus from voluntary trade 0 o o v Will a country export or import a good 0 Countries should export goods if it has a comparative advantage 0 Countries should import goods that they don t have a comparative advantage in Who gains and who loses from free trade 0 Use welfare economics to determine winners and losers and to quantify the size of gainslosses Pw The world price of a good 0 The price that prevails in world markets Pd Domestic price without trade 0 The price that prevails in home country wo trade If PdltPw 0 Country has comparative advantage in the good 0 Under free trade country should export the good If PdgtPw 0 Country does not have comparative advantage in the good 0 Under free trade country should import the good PwgtPd 0 When country opens the market to world trade price rises to Pw 0 Domestic buyers reduce their comsumption amount to Qd 0 Domestic producers increase their supply amount to Qs 0 Domestic producers export amount Qs Qd PdgtPw 0 When country opens themarket to world trade price falls to Pw 0 Domestic consumers increase their consumption amount to Qd 0 Domestic producers reduce their supply to amount Qs 0 Country imports amount Qd Qs EQlt 22 gt Pm Direction of trade Exports Imports Consumer surplus FaHs Rises Producer surplus Rises FaHs Total surplus Rises Rises No matter whether the country becomes an importer or an exporter of the good trade creates winners and losers HOWEVERl THE GAINS OUTWEIGH THE LOSSES 39239 Trade Barriers 0 Most common forms of trade barriers I Quota a limit or restriction on the quantity of imports allowed per time period I Tariff generally taxed placed on imports As either straight value or of the price I Voluntary Export Restriction VER39s Exporting country voluntarily limits itself I Nontariff boundaries Any rule that restricts or limits trade duties fees licenses 39239 Tariff Price 8 Import Effects 0 Tariff tax on imports This causes price to rise form Pw to Pt Domestic consumers buy amount Qd Domestic producers supply amount Qs 000 Country imports amount Qd Qs 39239 Common quot for P 0 Protect national security I Some industries are vital to the national interest or to national security I These industries should be shielded from global competition 0 Protect infant industries I Some industries may be new or emerging I These industries should be given a temporary shield until they are ready to compete in the global marketplace 0 Protect the environment I Rich countries with higher environmental standards will lower these standards in order to lower costs and complete 0 Protect domestic worker I Protect the domestic worker from fewer domestic jobs I Protect the domestic worker from forced lower wages 0 Protection against unfair labor practices I Protection against quotdumpingquot from foreign industries I Protect childrenwomen against poor working conditions 0 Protection against income inequality I Trade will worsen the gap between rich and poor countries as rich countries take advantage of poorer ones 39239 What is the driving force behind wages PRODUCTIVITY o In general workers have higher wages because they are more productive 39239 When you open up a company that imports it loses jobs 39239 Arguments Against Protectionism 0 It s Expensive 0 Hard to sell if it even works I Steel textiles autos I US has been desperately protecting these industries for decades employment still falling in all three LECTURE TEN EXCHANGE RATES 0 O 0 O 0 00 0 0 0 0 O 0 Current Exchange Rates Exchange Rate the price of one currency in terms of another currency as determined in the foreign exchange market 0 Appreciate when one currency can buy more of another currency 0 Depreciate when one currency can buy less of another currency 0 WHEN ONE CURRENCY APPRECIATES RELATIVE TO ANOTHER CURRENCYI THE OTHER CURRENCY BY DEFINTION MUST DEPRECIATE What determines the exchange rate between the dollar 5 and the Japanese yen o The market for S s and JPY What factors cause currency to depreciate or appreciate 0 Changes in supply or demand for a particular currency What causes changes in supply and demand for currencies 0 International trade in goods and services 0 International trade in physical assetscapital 0 International trade in financial instruments stocksbondsetc STRONGEST FORCE BY FAR Demand for US S39s comes from foreign buyers Supply of US S39s comes from Americans who wish to buy foreign goods What causes a currency to appreciate 0 Any increase in demand for S s I Anything that will make people in foreign countries wish to buy more US goodsservices or capital assets or stocksbonds Examples An expanding foreign economy rising foreign wealth will buy more US exports An increase in foreign prices relative to US prices US goods become cheaper An increase in interest rate of US securities relative to foreign securities foreign investment in US securities 0 39 Orany decrease in supply 0 Anything that will make US citizens buy ess foreign goodsservices capital assets or stockslbonds 0 Examples


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