Global Business Strategy Notes

Week 2

Key Issues in Global Business

1. Changing Patterns of Trade & Investment
(a) Trade
Growth of intra-firm trade (35% of total trade)

(b) Portfolio investment:

Unstable patterns (1997/2001/2003/2007/2011/2015?)

(c) Direct investment (investment by company in a foreign company)

(i) Move away from regional investment, towards ‘winners’
BRICS = Brazil, Russia, India, China and South Africa
N11 = Next Eleven are the eleven countries – Bangladesh, Egypt, Indonesia, Iran, Mexico,
Nigeria, Pakistan, the Philippines, Turkey, South Korea and Vietnam
BEM = Big Emerging Markets
MIST = Mexico, Indonesia, South Korea, Turkey

(ii) Increased numbers of transnational corporations from emerging markets

- Especially agriculture / energy / telecoms (Wilmar, CP Group, Petronas, SingTel)

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4Cs of Organisation:
1. Coordination (making sure that all the parts fit together)
2. Cooperation (getting all the people to work together – it implies compliance, but not
necessarily willingness)
3. Communication (making sure that people have sufficient information to work effectively)
4. Control (making sure that everything goes to plan, or taking corrective actions when it
doesn’t)

Control overlaps with everything, and there are areas of overlap between the remainder.

Q) Difference between organizational implications and strategic implications for a company

when it expands the business out of its home-country?

‘Organisational implications’ refers to the 4Cs of coordination, cooperation, communication

and control.
- These are primarily internal considerations, though they can affect our relationships with
other players in the marketplace (suppliers, partners etc.).

‘Strategic implications’ refers to those things that fundamentally affect the way we do
business.
- Usually, it refers to the effects on our business model, our resources, or our market.

Q) What's the difference between implications on organisation and management?

- Organisational implications are primarily concerned with the 4Cs (as defined in our
course)
- Managerial implications are concerned with the kinds of issues you dealt with in
Organisational Behaviour in your first year (e.g. decision-making, motivation, leadership
style etc.).

2. Increasing Popularity of Regionalisation (work together to achieve a common goal for

countries)
What is changing in Asia-Pacific, and why?
(a) Growth of multilateral FTAs [TPP/RCEP/FTAAP]
- Potential access to new markets
- Fear of being an outsider

TPP = Trans-Pacific Partnership

RCEP = Regional Comprehensive Economic Partnership
FTAAP = Free Trade Area of the Asia-Pacific

(b) Growth of bilateral FTAs [e.g. Sin-EU FTA]

- Frustration with regional partners

3. Spread of Globalised Markets

(a) Globalisation of wants/needs
- Greater awareness (harmonisation of demand?)

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(b) Global Search for Customers
- Growth of mass customisation (internet-driven)
- Growth of global branding (esp. through franchising)
- Growth of B2B exchanges (internet-driven, ICT)

4. Developments in ICT
(a) Reduced Communications Costs
- Free non-commercial use
- Competitive commercial rates

(b) Simplified global communications

- P2P desktop communication
- Menu-driven / integrated devices

(c) Reduced transportation costs

- Tracking [GPS- RFID]
- Clearance & storage

(d) Improved control mechanisms

- Remote secure use
- Remote monitoring

New Technology:
- 3D printing / additive manufacturing
- Robotics & automation
- Nanotechnology & miniaturisation
- Biotechnology
KEY: integration of all four with ICT
- Most recent: Big Data

5. The Natural Environment

- Global warming
- Sustainable development
- Environmental degradation
- Resource security: water, food, minerals, energy

6. Effects of Globalisation
(a) Economic consequences for home economy
- Hollowing out (plus moral & ethical dimension) – locals lose jobs
- Linkages /pull through

(b) Economic consequences for host economy

- Displacement & ‘crowding out’
- Loss of economic sovereignty
- Jobs created and lost
- Extra tax revenues?
- Foreign market access
- Learning [technology transfer, managerial transfer, skills upgrade]

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Home
Host
Third

7. Corporate Responses to Change

- Globalisation of corporate communications
- Increasing integration & interdependence
- Geographical dispersal of functions
- Increasingly sophisticated logistics & SCM
- Increasing external collaboration
- MNCs taking initiative as change agents
- Growing importance of CSR (stewardship)

Strategic Decisions/Imperatives
1. Strategic/Philosophical Considerations
(a) Effectiveness & Efficiency
- Resource optimising orientation
- Customer orientation

(b) Centralisation & Dispersion

- Location of resources
- Inter-relatedness of operations

(c) Market Growth & Development

- Products
- Markets

(d) Implementation
- Operational mode
- Resource management
- Organisation

2. Bartlett & Ghoshal’s Strategic Imperatives

Strategic Imperatives:
- Industrial
- Competitive
- Country/market
- Company-specific

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Conceptualisation: putting it all together

Summary:
(a) International VS Domestic (b) International Business (c) Key Considerations
Business Drivers - Strategic imperatives
- Conceptually they’re the - The central role of ICT - Effectiveness & efficiency
same - New ways of thinking by MNCs - Ethics & morality
- Operationally they’re - New manufacturing processes
different

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Week 3
Asia Pacific
Regions
- Middle East & Caucasus
- Central Asia
- South Asia
- Northeast Asia
- China’s New Silk Roads
- Australia & New Zealand, PNG & Timor Leste
- Southeast Asia

Middle East & Caucasus

Central Asia
- Central Asia Regional
Economic Cooperation

- Asian Development Bank

- Shanghai Cooperation
Organisation

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Oil-Gas Pipelines to China:

South Asia
CEPA = Closer Economic Partnership Arrangement
SAARC = South Asian Association for Regional Cooperation
SAFTA = South Asian Free Trade Area

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Northeast Asia

China’s New Silk Roads:

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Island Disputes:

Australia & New Zealand, Papua New Guinea & Timor Leste
ANZ = Australia, New Zealand

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Interregional Integration

Asia-Pacific’s Future: proposed Asia-Pacific multilateral FTAs

RCEP TPP FTAAP
Brunei Australia Australia
Myanmar Brunei Brunei
Cambodia Canada Canada
Indonesia Chile Indonesia
Laos Japan Japan
Malaysia Malaysia South Korea
Philippines Mexico Malaysia
Singapore New Zealand New Zealand
Thailand Peru Philippines
Vietnam Singapore Singapore
Australia United States Thailand
China Vietnam United States
India Taiwan
Japan Hong Kong
South Korea China
New Zealand Mexico
Papua New Guinea
Chile
Peru
Russia
Vietnam

Summary:
- China-India-Russia in new ‘Great Game’
- Growing importance of Russian Far East (RFE)
- Central Asian instability
- Relevance of Middle East to Southeast Asia
- The 3 Scenarios and Southeast Asia
- For the future: TPP/RCEP/FTAAP

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Asia-Pacific Basic Statistics 2013
COUNTRY POPULATION AREA GDP (exchange GDP P.C.
(MIL) (000 SQ. KM) rate) (US$BN) (US$)
China 1,356 9,597 9,330 9,800
Japan 127.1 378 5,007 37,100
Mongolia 2.953 1,564 11.14 5,900
S. Korea 49.1 100 1,198 33,200
Taiwan 23.3 36 484.7 39,600
India 1,236.30 3,287 1,670 4,000
Pakistan 196.2 796 236.5 3,100
Bangladesh 166.3 144 140.2 2,100
Sri Lanka 21.9 66 65.12 6,500
Nepal 31 147 19.34 1,500
Russia 142.5 17,098 2,113 18,100
Australia 22.5 7,741 1,488 43,000
New Zealand 4.4 268 181.1 30,400
PNG 6.6 463 16.1 2,900
Timor-Leste 1.2 15 6.13 21,400

Central Asia/SCO Basic Statistics 2013

COUNTRY POPULATION AREA GDP (exchange rate) GDP P.C. (US$)
(MIL) (000 SQ. KM) (US$BN)
Russia 142.5 17,098 2,113 18,100
China 1,356 9,597 9,330 9,800
Kazakhstan 18 2,725 224.9 14,100
Kyrgyzstan 5.6 200 14.3 2,500
Tajikistan 8.1 143 8.513 2,300
Uzbekistan 28.9 447 55.2 3,800
USA 316.1 9,827 16.72 52,800
Norway 5.08 323.8 515.8 55,400

ASEAN/Southeast Asia
ASEAN Member States:
1. Brunei
2. Cambodia
3. Indonesia
4. Laos
5. Malaysia
6. Myanmar
7. Philippines
8. Singapore
9. Thailand
10. Vietnam

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Observer Status:
Timor-Leste, Papua New Guinea

Laos & Cambodia – friends of China

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1. Inter-regional Cooperation

Key ASEAN Agreements:

Pacific: Trans-Pacific Partnership (TPP) / Free Trade Area of the Asia-Pacific (FTAAP) / SG
Asia: Regional Comprehensive Economic Partnership (RCEP) / SG
Northeast Asia: ASEAN+3 (China, Japan and Korea) / SG
AUS: Australia-New Zealand (ANZ) FTA / SG/Thailand/Malaysia/Vietnam
NA: Enhanced Economic Engagement (E3) / SG
US-ASEAN Expanded Economic Engagement (E3) initiative – a framework for economic
cooperation designed to expand trade and investment ties between the United States and
ASEAN, creating new business opportunities and jobs in all eleven countries.

LA: Mercosur - Argentina, Bolivia, Brazil, Paraguay, Uruguay and Venezuela / SG

EU/ European Free Trade Association (EFTA): FTA / SG
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South Asia: Comprehensive Economic Partnership Agreement (CEPA) - between India and
South Korea / SG/TH

2. Intra-regional COOPERATION
Regional Initiatives:
- ASEAN Economic Community (AEC) by 2016 – like EU
- ASEAN Investment Area (AIA) by 2016

Bilateral Initiatives:
Sin-Thailand: Singapore-Thailand Enhanced Economic Partnership (STEER)
Sin-Vietnam: Industrial development
Sin-Malaysia: Iskandar
Sin-Myanmar: Economic Assistance
Sin-Indo: Riau Islands Province (Kepri) - Batam, Bintan and Karimun belong to the Free Trade
Zone (FTZ)
Thai-Myanmar: Dawei Land Bridge, Special Economic Zone (SEZ)
Thai/Myanmar/Cambodia military?

Growth Polygons:

IMT-GT = Indonesia Malaysia Thailand Growth Triangle

IMS-GT = Indonesia Malaysia Singapore Growth Triangle
EAGA = East ASEAN Growth Area
GMS = Greater Mekong Subregion

The GMS countries are Cambodia, the People's Republic of China (PRC, specifically Yunnan
Province and Guangxi Zhuang Autonomous Region), Lao People's Democratic Republic (Lao
PDR), Myanmar, Thailand, and Vietnam.

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3. Intra-regional COMPETITION

4. Singapore’s initiatives

TPP = Trans-Pacific Partnership

RCEP = Regional Comprehensive Economic Partnership
FTAAP = Free Trade Area of the Asia Pacific

GCC = Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab
Emirates)
EFTA & EU = European Free Trade Association

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1. FTAs
2. Thailand (STEER) + Vietnam
3. 7 Hours Fly Time (to any countries within the circle)
4. Expertise (sell Singapore’s expertise, eg. PSA, Surbana, HDB)

Summary:
(i) The new challenges for ASEAN/Southeast Asia
- Staying relevant as a region
- Improving security
- Managing the image
- Dealing with bilateralism

(ii) Managing enlargement

- Southeast Asia & RCEP/TPP/FTAAP
- The future role of ASEAN

SE Asia Basic Statistics 2013

COUNTRY POPULATION AREA GDP (US$BN) GDP P.C. (US$)
(MIL) (000 SQ. KM)
Brunei 0.41 5.77 16.56 54,800
Indonesia 249.8 1.9 867.5 5,200
Malaysia 29.7 330 312.4 17,500
Philippines 98.3 300 272.2 4,700
Singapore 5.4 0.7 295.7 62,400
Thailand 67 514 400.9 9.9
Cambodia 15 181 15.64 2,600
Lao PDR 6.77 237 10.1 3,100
Myanmar 53.2 676.5 59.43 1,700
Vietnam 89.7 331 170 4,000
USA 316.1 9,827 16.72 52,800
Norway 5.08 323.8 515.8 55,400

Week 4
Location Screening & Analysis
Systematic Location Screening: a conventional approach to screening
- Decide on research objectives
- Decide research process/approach
- Collect data: (where to get and what info you hold) -> internal & external
- Analyse data: matching (internal-external fit)
- Select attractive location(s)
- Monitor, review and learn

Location Screening + Indicators

The Objectives of the Research & The Research Process
What exactly is the information for and how do we manage it?
What might we be looking for?

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What indicators would you choose?
- Growth rates (GDP, GNI, GNP)
- Scalability/ Size of market, Population (how big?)
- How fast market is growing
- Competitors
- Per capita income

- Attractive markets
- Production sites
 Cost of labour/resources/capital/money
 Infrastructure
 Availability of labour/ quality of labour
- Logistics/distribution bases
- Support service centres
- Offshore functional bases
- Regional Head Offices
- Communications centres

Screening Process Decisions: Key Decisions

(a) Who:
- in-house
- outsourced

(b) Parameters:
- geography
- industry/market
- time

(c) Type/Purpose:
- exploratory (new ideas)
- confirmatory (double-check)
- investigative (greater depth)

(d) Deliverables:
- options
- scenarios
- recommendations

Collecting the Data

How should we go about it?

Where does the information come from?

- From within the company
- Free and available on internet:
 multilateral agencies: WB, UN, IMF, ADB
 governments (CIA Factbook, embassies)

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  banks
 NGOs
 non-commercial sites (Wikipedia, blogs)
- commercial sources (mostly paid)
 comprehensive analysis: EIU, PERC, BERI, Coface (risk map)
 business media: Economist, BT, ST

INTERNAL
How capable/competitive are we?
- Structures (organisational set-up)
- Processes (sales)
- Assets (machines / brand names)
- Networks (suppliers / distributors)
- Knowledge (secret ingredients)

but to be really useful, factors should be measurable and comparable

often called ‘internal audit’

EXTERNAL
Choice of indicators & variables
Choose your OWN variables within these indicators

(a) Operational
- Economy
- Market (Demand & Supply)
- Cross-border costs
- Government incentives/policies
- Location
- Infrastructure
- Local resources (Cost/Quality/Quantity)

(b) Environmental
- Political
- Legal & regulatory
- Security
- Social
- Natural

Analysing the Data

Choosing between locations

(a) Instinct/ Experience

(b) Expert Opinion (Delphi)

- panel, focus groups consisting of retired civil servants, press, analysts

(c) Elimination Process (hurdles)

- sequential, start with most important thing, based on criteria

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(d) Comparative Evaluative Frameworks
- grids
- graphics

Normalisation Techniques:
(a) Ranking (e.g. 1 to 4)

(b) Grouping
2: dichotomous (Yes/No or Go/No-Go)
3: Low/Medium/High (use of shading/colours/patterns)
5: (often Likert or Semantic Differential scale)

(c) Anchoring
10: (convert to tenths (relative to total)
100: (as % of the total)
relative to key indicator (e.g. BCG matrix)

(d) Graphics (trade-offs/trends/matches)

- Opportunity Risk Matrix

- Attractiveness Strength Matrix

Country Attractiveness: info comes from Location Screening Results/Indicators

Competitive Strength: info comes from internal analysis/data
Eg. Market strength, ability to build new infrastructure

Sales Forecasting / Forecasting Demand

 Example A
1. In existing markets, the most commonly-used technique to estimate demand is a sales
forecast (Example A) based on previous experience.

 Examples B/C/D
2. However, if you believe that previous patterns were erratic, or that trends and
circumstances have changed, or if this is a new market and you have no previous
information, then you can build your own estimates from scratch (examples B/C/D).
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This is done based upon what you see right now, what you plan to do (or could do) and what
you expect other players to do (pre-emptively, concurrently and reactively).

Players include customers, competitors, suppliers, distributors, partners, supporters,

legislators, influencers and spectators.

 Examples E/F/G/H
3. If you cannot get the information you need then an alternative is to use previous indirect
experience, or ‘proxies’ (examples E to H ).

EXAMPLE A: Using a company’s past sales

EXAMPLE B: Reducing /chain-ratio method (often consumer goods)

- Start with a big figure (national/local population?)
- Reduce through process of logical elimination, e.g.
 family size (for family purchases)
 income
 don’t want our product
 cannot reach them
 already have (durables - but remember these for later)
- Calculate an average volume per buying unit
- Multiply to get total market size
- Project forward to planning horizon +n
- Calculate market share for each year
- Calculate margin of error (See Diagram D)

EXAMPLE C: Build-up method (often B-B, retail/services)

- Identify buyers by geog/industry/assn
- Calculate an average volume per buying unit
- Multiply and aggregate to get total market size
- Project forward to planning horizon +1
- Calculate market share for each year
- Calculate margin of error (See Diagram D)

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EXAMPLE D: what-if / sensitivity analyses: incremental corrections
Scenario analysis: alternative realities (e.g. Shell’s energy scenarios)

Analysis With Incomplete Data:

How would you try to estimate demand for smartphones in Tajikistan, assuming they had
never been sold there?
Use proxy, look for a place just like that country (GNP, literacy rate)

EXAMPLE E: Contemporary analogy using single country/region

Tajikistan & rural China (Xinjiang province)

 culture (consumer behaviour)  population

 geography  political system
 topography  economy
 stage of development  resources
 demographics  foreign exposure
 infrastructure

EXAMPLE F: Contemporary analogy – multiple country

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EXAMPLE G: Historical analogy

EXAMPLE H: Use of lead indicators/proxies/predictors

BASED ON BIG DATA
Some lead indicators (consumer electronics):
 chemical fertiliser production
 cargo handled at ports
 world oil prices
 confidence in mfg

Week 5
Cross-Border Resource Deployment
Operational Configuration refers to the nature & extent of the interrelationships between
different parts of the organisation.
- By nature, we mean whether the parts of the organisation are vertically integrated,
horizontally-integrated, or stand-alone.
- By extent, we mean whether the whole organisation is structured in this way, or only
certain parts of it.

Spatial Configuration refers to the geographical locations of these different parts of the
organisation.
- They may be concentrated in one country (usually, but not always the home country), or
dispersed around the world.
- When you put the two together, the configuration shows if/how the units/functions are
interrelated, and where they are located geographically.

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Operational Configuration
Global Operational Networks: Conceptual Framework

-every country is sharing resources and information across one another

-to get the most optimal use of resources
-Country A can pass resources to Country B by transfer-pricing

Integration ALONG Supply Chains

Short Supply Chains:

-Country D could be the focal point, the central place of trade

-Entrepot trade – big container ships come to Country D, then break down further into small
containers, and shift to Country A,B,C
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-eg. bring people in to Country D, train them at this HR office, then send them to the region
(Country A,B,C)

-Country C can be Hong Kong, it outsources operation to China

Q) The diagram indicated country D as a coordinating logistics centre and thereby ships it
out to the rest of its counterparts for localisation of the products. But if the rest of the
counterparts are producing unrelated products, then how can they share common
resources? Would it be that country D buys the different components that are needed for
each country and thereafter ships it to them?

To some extent, yes. But unrelated products can share some things - including materials.
The whole point of this option is to show that one place can act as a logistics centre for all
the SBUs. The commonality of the products is not the issue. Sometimes, a procurement
centre can buy a whole range of unrelated items at a discount, simply because it buys so
much.

Longer Supply Chains:

Long Supply Chains:

-Country A is the starting point
-source for materials from somewhere, where they will get the materials
-then pass on to Country B, C to do something to them, and finally pass to Country D to sell
to the market
-much more complex and sophisticated system
-if one Country goes wrong, it may be dangerous

Along Supply Chains:

So why longer supply chain (part of a chain)?
-Because Country B has something that Country C may not have
-that’s called Competitive Advantage, the country specialise in something
-therefore, have to research what each country has to OFFER

ALONG THE SUPPLY CHAIN VS ACROSS THE SUPPLY CHAIN

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Integration ACROSS Supply Chains
Products:

Resources:

1. Must have economies of scale

2. Transport Costs or any relevant for any kind costs (have to beat opportunity costs)

Dispersed Operations
Stand-alone (LOCAL supply chains):

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-why would the countries not share anything?
1. because of different local tastes, therefore customization
-eg. Country A = Nigeria VS Country B = Japan, different kind of consumers and demand type

2. Shipping costs across the countries could be expensive

There could be tax or tariffs, import/export tax

3. Strategic imperative is competition

Country A produces this product but Country B also produce already, so point shipping over

4. Diversification
If one goes down, still have 3 other countries to produce the product
-Business Continuity Plan

COMPETING value/supply chains:

-countries have access to one another’s marketplace

-eg. Citibank, allow its team to compete with one another, so as to give good value to its
customers, but it has to reduce its margins (Citibank Malaysia allow its employees to
compete with its Singapore counterpart, may result in smaller margins, but it’s better to get
the deal with lower margin than don’t get at all)

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A Fully-Integrated Framework: Implications of Interrelatedness

-To make it work, need to have standardization

-the more you get to the end (Stage 4), the more difficult it is to share

Steps:
-Identify places that could be a problem (eg. Indonesia)
-this only makes sense if there is standardization

Spatial Configuration
How cross-border relationships develop

1. Stand-alone Operations (limited sharing)

What are the key decisions?
 Standardised or customised operations
 Sequential or simultaneous entry
Simultaneous or sequential entry?
 Competition
 Resources
 Available partners
Standardise or customise?
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  Ease
 Customer preference
 Cost savings

Spatial Operations (Stand-alone Operations):

1) Licensing
2) Franchising
3) JV Partner
To consider between standardising or customizing?

1.standardised or customised operations

-ease of customisation operation
-customer preference: some might need localisation
-cost savings, comparative advantage

2.sequential or simultaneous entry: charles and keith simultaneous to prevent competition

-competition as sequential might allow copy cats
-resources availability to expand fast into those markets with high competition, licensing is
the sophisticated buyer and they need the rights to use it, fastest way as so long they start
to produce you can collect money
-second fastest is franchising but they are not sophisticated buyer so they need to be
trained, frontend fee and loyalty fee
-third fastest is JV partner that have localised knowledge and expertise also eliminate the
entry barrier
-available partners: need good partners and professional people

2. Interrelated Operations (sharing)

More on sequential and simultaneous entry
 Import Substitution (ISP): if cannot produce, then you import from another country
 Global Supply Chain (VIP)
 ‘Born Global’ Organisations: a group of companies coming together, like a
cooperative

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Import Substitution:
- Companies as well as countries can have import-substituting strategies.
- In our case, if a company decides to produce in the host country instead of exporting from
the home country, then it is substituting local (host country) production for imports.
- Initially, the intention is usually to produce for the local market, with no plans for
interconnecting these operations worldwide.
- However, over time these overseas subsidiaries often start to share resources and finished
products with other subsidiaries and these inter-related operations subsequently evolve
into a global network.

- Note that the global network was not necessarily the original objective, but became part of
an emergent strategy over time.
- Essentially, this approach relates to the famous Internationalisation Theory of the Uppsala
School in Sweden, though most companies today do not go through the whole process
described in the theory.
- That is why I didn’t refer to the theory in class. NOTE THE UNDERLINED CAVEATS.

3. New Ideas in Resource Utilisation

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- Dispersed in-house: do ourself
- Outsourced/ bought-in
- Provided: do something for others
- Shared: 1 sales team and 1 production team

- ‘New ideas in resource utilisation’ refers to the increasingly common practise of viewing
each resource as a potential cross-border profit earner in its own right, and not simply as a
component of its in-house production process (i.e. the traditional combination of land,
labour and capital).

- For example, many companies today use their resources separately to provide cross-border
services for other companies (e.g. outsourced customer service, IT support, payroll
management), or they share/swap their resources with other companies (e.g. databases,
licenses, piggyback selling).

4. New Ideas in Functional Deployment

- Finance: New York, London and SG

- Sourcing: across New York to Brazil to Africa
- Technical Support: Houston Texas, Manchester and Malaysia
- ICT
- ‘New ideas in functional deployment’ refers to the practise of physically locating or
relocating some business functions (e.g. Marketing, IT, R&D, customer support) in other
countries, a practise that wasn’t very common even ten years ago.
- The traditional approach was usually to keep all the business functions in the home country
(with the exception of cross-border production), or to replicate the entire business process in
a host country.
- Today, it’s quite common to see one or two business functions located outside the home
country (e.g. HP’s R&D function in Singapore) while most of the production takes place
elsewhere.

EXAMPLES
(i) Shell Malaysia

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(ii) SAP: Conceptual Network

(iii) Toyota Global

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(iv) Ahn Laboratories
 Korean consumer electronics company
 Outsources online support to Digital River (US)
 Digital River outsources to Element 5 (Germany)
 Element 5 uses support centre in Mexico
 Customers are in Southeast Asia

(v) Dell in Asia Pacific

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Based on political, strategic and historical reasons
Manufacturing Design Centres Call centres
 Xiamen  Shanghai  Dalian
 Penang  Bangalore  Quezon City, Pasay,
 Chennai  Japan Eastwood City
 Taipei  Hyderabad, Mohali,
 Singapore Gurgaon
Support Centre Asia Pacific Regional HQ
 Kuala Lumpur  Singapore

(vi) Nutella

Summary: A Multi-Location View

Location-specific Considerations:
 Which location(s)
 Interconnected or stand-alone
 Simultaneous or sequential entry
 Operational mode (e.g. JV/franchise)

Cross-border (sharing) Considerations:

 Logistics
 Support (e.g. sales team)
 Coordination *
 Cooperation *
 Communication *
 Control *

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Week 6
Operational Modes
What are we trying to establish?
 Market presence (incl. distribution)
 Production sites (mfg, assembly)
 Support service centres
o Call centres
o After-sales/technical support
 Offshore functional bases (e.g. R&D)
 Regional, head offices

-Sole distributor
-Joint venture
-Strategic alliance

Offshore Functional Bases:

This refers to the traditional functions of a company (production, R&D, marketing, finance
etc.). If they are offshore, it means they are located in a host or third country. This may be
instead of the home country, or in addition to the home country.

For example, some of HP’s R&D operations are now carried out solely in Singapore, even
though it’s an American company. But other R&D activities are carried out in the USA and
Singapore.

What determines choice of mode?

Considerations
Internal Considerations
 Organisational philosophy (risk?)
o Risk taker or adverse?
o International MNC VS SME
o MNC have a portfolio of risk, can take risk
o SME are smaller, so tend to be more risk adverse
 Long-term objectives
 Costs and available resources
 Managerial/organisational expertise
 Exit considerations (see final slide)
 Existing modes (see below)
 Future plans (see below)

The multiple-location context:

35
External Considerations
(a) Host Country Factors
 Operational constraints (JV partners?)
 Legal constraints (49% ownership?)
 Costs vs. investment incentives
 Market factors (for market entry)
o Product/customer requirements
o Degree & nature of competition

(b) Wider (Global) Considerations

 Existing (and future) operations
 Relative country risk

Entry & Operational Modes

resource utilisation/deployment options

36
  BPO – Business Process Outsourcing – headhunting, HR, admin, customer service
 MPO – Manufacturing Process Outsourcing

 BCC – Business Cooperation Contract (Vietnam)

 SFCE – Sino-Foreign Cooperative Enterprise (China)
 CM – Contract Manufacturing – eg. Supermarket house brands/ own brands where
you get someone to do it for you and label it as your brand (cos no plant)

 PPP – Public-Private Partnership (also P3) – working with foreign government

 BOT – Build Operate Transfer – private

In-house Operations
1. Onshore:
(a) Options/Decisions
- Direct export

(b) Key Considerations

- Location of sales/support teams
- Logistics (home/3C?) – collaborate, control, cooperate, costs, coordinate, communication
- Effectiveness (market knowledge)

2. Offshore:
(a) Options/Decisions
- Representation, operation, co-ordination
- Acquisition or start-up?

Q) What's the difference between the 3 options (representation, operation and co-

37
ordination) for host-based operational modes?

These are the 3 ways a company can operate in a host country.

 Representation is through the use of a representative office
 Operation means actually carrying out the operation yourself (e.g. manufacturing or
assembly)
 Co-ordination means co-ordinating the activities of sub-contractors or outsourcers in
the host country.

(b) Key Considerations

- Exposure (highly visible, PR)
- Effectiveness (market knowledge)

Collaborative Operations
Collaboration: a conceptualisation

ICT can facilitate the sharing of information across all

1. Intermediaries/Delegation (Delegate)
Eg. Sale of Goods Act (SOGA)
Eg. Performance Contract/ Service Contract

(a) Options
- Indirect export (onshore)
- Distribution (offshore)
- Licensing (offshore) – fastest way
- Franchising (offshore)

38
- Agency (offshore)

Consider:
- Contract over TIME
- Bounded by GEOGRAPHY

(b) Key Considerations

- Intellectual property protection
- Quality control
- Future competition
- Lock-out

2. Cooperation/ Joint Operations (Cooperate)

(a) Options
- International equity JV (IEJV) – long term
- Alliances/sharing (incl. x-licensing) (Strategic Alliance) – short term, solve specific issues
- Business cooperation contracts (China/Vietnam) – a term JV, usually 10 years in Vietnam

(b) Key Considerations

- Quality control & contamination
- Co-ordination
- Managing the relationship
- Post-partnership considerations
de-skilling and learning

3. Provision (Provide)
(a) Options
- MPO/CM (manufacturing process outsourcing) - one of the oldest forms of contract
manufacturing is private label manufacturing for supermarkets
- BPO (business process outsourcing)
- Management (service) contracts
- PPP-style projects (turnkey/Build-Operate-Transfer (BOT) & variants)

(b) Key Considerations

- Control (operations, quality)
- Human resource constraints
- Risk & return assessment
- Financial resources (loans, working capital, materials)

Implications of Operational Modes:

- Management (process)
- Resources (what, whose, where)
- Organisation (structure)

39
Project Finance Models:
BOT – Build, Operate, Transfer

 Form of project financing, wherein a private entity receives a concession from the
private or public sector to finance, design, construct, and operate a facility stated in
the concession contract. This enables the project proponent to recover its
investment, operating and maintenance expenses in the project.
 A type of arrangement in which the private sector builds an infrastructure project,
operates it and eventually transfers ownership of the project to the government. In
many instances, the government becomes the firm's only customer and promises to
purchase at least a predetermined amount of the project's output. This ensures that
the firm recoups its initial investment in a reasonable time span.

BOO – Build, Own, Operate

 With a BOO contract, a private company is granted the right to develop, finance,
design, build, own, operate, and maintain a project.
 The private sector partner owns the project outright and retains the operating
revenue risk and all of the surplus operating revenue in perpetuity.
 This approach is quite common in the power generation sector.

- In a BOO, project ownership of the project remains usually with the project company for
example a mobile phone network.
- Therefore, the private company gets the benefits of any residual value of the project.
- This framework is used when the physical life of the project coincides with the concession
period.
- A BOO scheme involves large amounts of finance and long payback period.
- Some examples of BOO projects come from the water treatment plants.
- These facilities run by private companies process raw water, provided by the public sector
entity, into filtered water, which is after returned to the public sector utility to deliver to the
customers

BTO – Build, Transfer, Operate

DBOO – Design, Build, Own, Operate

Eg. Hyflux

BOOT – Build, Own, Operate, Transfer

- A BOOT structure differs from BOT in that the private entity owns the works.

40
- During the concession period the private company owns and operates the facility with the
prime goal to recover the costs of investment and maintenance while trying to achieve
higher margin on project.
- The specific characteristics of BOOT make it suitable for infrastructure projects like
highways, roads mass transit, railway transport and power generation and as such they have
political importance for the social welfare but are not attractive for other types of private
investments

DBFO – Design, Build, Finance, Operate

-Design–build–finance–operate is a project delivery method very similar to BOOT except that
there is no actual ownership transfer.
- Moreover, the contractor assumes the risk of financing till the end of the contract period.
- The owner then assumes the responsibility for maintenance and operation.
- Some disadvantages of DBFO are the difficulty with long term relationships and the threat
of possible future political changes which may not agree with prior commitments.

- This model is extensively used in specific infrastructure projects such as toll roads.
- The private construction company is responsible for the design and construction of a piece
of infrastructure for the government, which is the true owner.
- Moreover, the private entity has the responsibility to raise finance during the construction
and the exploitation period.

- The cash flows serve to repay the investment and reward its shareholders.
- They end up in form of periodical payment to the government for the use of the
infrastructure.
- The government has the advantage that it remains the owner of the facility and at the same
time avoids direct payment from the users.
- Additionally, the government succeeds to avoid getting into debt and to spread out the cost
for the road over the years of exploitation

BLT – Build, Lease, Transfer

- Under BLT a private entity builds a complete project and leases it to the government.
- On this way the control over the project is transferred from the project owner to a lessee.
- In other words, the ownership remains by the shareholders but operation purposes are
leased.
- After the expiry of the leasing the ownership of the asset and the operational responsibility
are transferred to the government at a previously agreed price.
- For foreign investors taking into account the country risk BLT provides good conditions
because the project company maintains the property rights while avoiding operational risk.

Exit Considerations
- Why might you decide to exit?
 Consolidation/reorganisation
 Changed local conditions
41
  Changed global conditions

- Key considerations before exiting

 Current & future
 Location-specific costs & benefits of exit
 Global costs & benefits of exit

Week 7
Cross-Border Resource Management
Money (financial)
Man (HR)
Material (inputs)
Machinery
Mind (Intellectual Property)

Basic Framework

Location-specific: resources protection/exploitation are unique to each location

Delegate:
-Licensing to other countries
-Work together to make $$, protect resources through relationship building (trust)

42
ADEP refers to the Acquisition, Development, Exploitation and Protection of resources.
- In general, the more creative a company is in exploiting its resources to make money, the
more risks it takes.
- So the challenge is to protect (P) while exploiting (E) resources.

Utilisation & Management of Resources

The SME in Tuas:

The ‘connected’ company:

43
Exploit & Protect

1. Technological Resources
What are technological resources?
- Intellectual property (IP)
 Patents/copyrights (software?)
 Trademarks/service marks/brand names

- Secret processes (knowledge)

 Chemical processes (Coke/Pepsi/KFC)

market intelligence & databases

BIG DATA

(a) EXPLOIT
(i) Use in-house [internal constraints]

(ii) Delegate [valuing, competition, monitoring]

- Licensing (usually newer)
- Franchising?

44
(iii) Share/swap [post-alliance competition, mgt]
- Sharing (IP, knowledge) – pool 2 resources together
- Swapping (IP, knowledge)

(iv) Provide [valuing, competition]

- Selling (usually older) – reverse engineering

Technology is often time-sensitive (the ‘obsolescing bargain’)

(b) PROTECT
(i) Protecting against what?
- Counterfeiting, piracy, theft of technology
- Grey/parallel markets
(ii) How?
- Legal protection? legal recourse/detection/enforcement
o IPA: International Property Agreement
o ISA: International Software Alliance
- Technical protection (don’t tell/don’t show)
- Own people in key positions
- Safe haven protection
- Restrictive warranties

2. Human Resources
(a) EXPLOIT
(i) Use in-house
- Production & management

(ii) Delegate – no

(iii) Share
- Sales teams
- R&D/engineers

(iv) Provide
- Consultancy
- Training
- Services, e.g. payroll, recruitment, IT support

(b) PROTECT (managing ‘people risk’)

(i) Protecting against what?
- Espionage/piracy/stealing by partners
- Reputation contamination
- Future competition & poaching
- Personal safety
- Expatriate problems

(ii) How?
45
 - Keep secrets at home and use own people
- Gag orders/competitive restraints (difficult to enforce)
- Active/aggressive corporate communications
- Insurance
- Use third country nationals

3. Physical Assets
What are physical assets?
 Plant & machinery
 Installations/buildings/real estate
 Inventories
 Transportation equipment

(a) EXPLOIT
(i) Use in-house to produce for sale

(ii) Delegate – no

(iii) Share assets

- Lease/sub-let property

(iv) Provide contract manufacturing

(b) PROTECT
(i) Protecting against what?
- Physical damage
- Theft (including unauthorised use)
- Expropriation/confiscation/coercion
o Expropriation: government has the right to seize assets but must pay full
market value compensation
o Confiscation: seize assets & give nothing
o Coercion: make it impossible to operate in any country (eg. Russia)

(ii) How?
- Use of strategic locations – put next door, eg. Johor
- Cross-border integration & alternative sites – Plan B, Global Supply Chain
- Complex structures & OBS operations
- Technical protection (e.g. surveillance)
- Insurance
- Local participation (shareholders & partners – local investors)
- Active/aggressive corporate communications

4. Intangible Resources
- Reputation (brand name & corporate image)
- Goodwill (client/customer base)
- Information (knowledge & databases?)

46
 - Networks/links (internal & external)
- Managerial innovativeness
- Managerial expertise
- Managerial commitment

5. Financial Resources (Week 8)

Summary:
- Key challenges in global resource management:
 Acquire
 Develop
 Exploit
 Protect

- Basic options for global resource management:

 Use in-house
 Delegate
 Provide
 Share/swap

Week 8
International Finance
-Raise funds in Thailand, use it in Singapore
-raise cheap money in one country and use it somewhere else
-borrowing and using funds
-but there is currency risk
-so have to learn how to hedge
-next week on how to deal with financial risk

Sourcing & Management of Funds

(i) Home & Host Country
- Listings
- Loans
- Bonds

(ii) International Agencies

- World Bank Group/IMF/regionals (e.g. ADB)

IDA: International Development Association

47
-an international financial institution which offers concessional loans and grants to the
world's poorest developing countries
-for the least developed country in the world
-gets special loans, privileged treatment
-helps to promote development

IFC: International Finance Cooperation

-an international financial institution that offers investment, advisory, and asset management
services to encourage private sector development in developing countries

ADB: Asian Development Bank

-the main devices for assistance are loans, grants, policy dialogue, technical assistance and
equity investments
-mostly to do with infrastructure

(iii) Offshore funds

- Eurocurrencies
o Eurocurrency is deposits in banks that are located outside the borders of the
country that issue the currency the deposit is denominated in.
o For example, a deposit denominated in Japanese Yen held in a Brazilian bank
is a Eurocurrency deposit.
o Likewise a deposit denominated in US dollars held in a Singapore bank is a
Eurocurrency deposit, or more specifically or more clearly a Eurodollar
deposit.
o Currency deposited by national governments or corporations in banks outside
their home market. This applies to any currency and to banks in any country.
For example, South Korean won deposited at a bank in South Africa, is
considered eurocurrency
-If Citibank banks holds euro dollars in Singapore, then it’s considered as offshore
-Dollars held by Citibank in Singapore
-If Japanese goes to offshore, it’s called euro yen
-Held offshore, outside the country of origin

- Eurobonds
o A bond issued in a currency other than the currency of the country or market
in which it is issued.
o A Eurobond is an international bond that is denominated in a currency not
native to the country where it is issued.
-long term bonds, but raised in euro currency, outside the country of origin
-Japanese yen bonds outside Japan are called samurai bonds

(iv) Internal Sources of Working Capital for MNCs

48
-Parent company gives loan to French subsidiary and charges interest
-Parent company can charge fees and get money from the French subsidiary

-can move money from parent company to subsidiary by investing more equity capital
-Brazilian subsidiary is a standby facility
-nobody changes hands here

-French subsidiary can give loan to Brazilian subsidiary

-extension of accounts payable: 90 days, can charge credit

(v) Multilateral Cash Flows

- Different times
- Different currencies

49
-each of the subsidiaries owe one another money
-different subsidiaries have their own currency system

(vi) Multilateral Netting

-eg. GE Finance is the clearing account

-24hours rolling basis
Tax Considerations
Key Issues for Global Treasury Management:
 Double Taxation
 Tax Havens (tightening regulations)
o residents for more than 183 days have to pay tax
o Singapore is a tax haven
o Eg. Delaware US Tax Haven
o Etc. Money Laundering
 Tax Netting (minimising)
o [group as a whole pay the least tax possible, even if some units may pay more
taxes as compared to other units]

50
 o The Global Treasury Management Team needs to ensure that the company as
a whole pays as little tax as possible.
o This is done by organising the company’s activities in such a way that much of
its expenses arise in high tax countries, and much of its revenues arise in low
tax countries.
o If this is done legally, it is known as tax avoidance.
o If it is done illegally, it is known as tax evasion.
 Tax Evasion: illegal
 Tax Avoidance: legal but may not be ethical

 Tax Holidays: number of years which are tax-free to attract investors

 Tax Incentives/Disincentives
o Investment
 accelerated depreciation: get the right to write off your equipment by
end of first year instead of over 10years
o Operations
 special preferential treatment on income tax of businessman, on
imports
o Repatriation/Guarantees on Currency
 Transfer Pricing

Transfer Pricing
“The prices at which goods and services are transferred between units of the same
organisation”
-Sharing resources & technology

Transfer pricing refers to the amount used when accounting for transfer of goods or services
from one company to another in the same business group.

 It matters to governments
 It matters to companies

(a) Options
Basic Principles of Transfer Pricing
 Below cost (under-invoicing)
o Under-invoicing. The provision of an invoice that states price as less than is
actually being paid.
o This might be done on an import in order to reduce the amount that will be
collected by an ad valorem tariff.
o Or it might be done on an export to reduce apparent profit and thus taxes
 Cost (under-invoicing)
 Arm's length
o price which I will charge to an independent firm, fair price to third party, price
recommended by OECD
o but this is not market price, it is the imputed price
o An imputed cost is an invisible cost that is not incurred directly, as opposed to
an explicit cost, which is incurred directly.
o Imputed cost is also known as "implied cost" or "opportunity cost"

51
  Above arm's length (over-invoicing)
o Charging more than it’s worth
o An invoice with a price listed that is higher than a company actually intends to
charge a client.
o The act or practice of billing more hours than one actually works. For example,
a lawyer may meet with a client for 10 minutes and bill for half an hour.
Overinvoicing is difficult to track, but common in many white collar
professions.

(b) How it works (eg. To evade taxes)

CT=Corporation Tax

A produces something to sell to B, then B value add and sell to C

B under invoice and charge lesser than it’s worth to A
C over charges B,

(c) Rationale
 To evade tariffs and other taxes
o Corporate taxes
o Import (& export) taxes
 I, representing the company, under-invoice and say the items are lesser than
what they are worth when importing to a country with high import tax rate,
so as to incur less taxes
 To counter repatriation restrictions
o Evade currency quotas & capital controls
 For cosmetic purposes
o Reduce reported profits
o Distort costs

1. To evade currency quotas

Sometimes governments have to ration currency because they don't have enough to pay for
their imports. In this case, the foreign investor may have to wait in a queue and will not be
able to repatriate profits from the subsidiary back to the home country. But the host
Government will still allow the investor to pay invoices outside the country. Therefore the
investor can manipulate the invoice values so that the subsidiary is overpaying its overseas
invoices or undercharging for good and services it sells abroad. In both cases, the money
leaves the country and reduces the amount of profit left behind.

2. To evade capital controls

Same as above, but stricter than currency quotas. This time there may be no quota at all
because the host government just doesn't have any currency. This happened in Malaysia in
1997-9

52
3. To reduce risk: Repatriate funds faster
Same principle as above, but this time the purpose is for the company to get money out of
the country without drawing too much attention to itself. Governments may impose
capital/currency controls if they believe there is the possibility of capital flight. Through TP,
the capital flight is less obvious.

Windfall Tax:
- A windfall profits tax is a higher tax rate on profits that ensue from a sudden windfall
gain to a particular company or industry.
- A tax levied by governments against certain industries when economic conditions
allow those industries to experience above-average profits.
- Windfall taxes are primarily levied on the companies in the targeted industry that
have benefited the most from the economic windfall, most often commodity-based
businesses.

(d) Implications
but: it may be difficult to apply in practise
- May attract government attention
- Many countries have strict laws on TP
- May make joint ventures difficult

Countertrade
- Countertrade means exchanging goods or services which are paid for, in whole or part, with
other goods or services, rather than with money.
- A monetary valuation can however be used in counter trade for accounting purposes.

- International trade in which goods are exchanged for other goods, rather than for hard
currency.
- Countertrade can be classified into three broad categories - barter, counterpurchase and
offset.

- Barter forms the oldest countertrade arrangement, and essentially involves the direct
exchange of goods and services having an equivalent value, but with no cash settlement.
- In a counter purchase, the overseas seller agrees to buy goods or services sourced from the
buyer's country up to a defined amount.
- In an offset arrangement, the seller assists in marketing products manufactured by the
buying country or allows part of the assembly of the exported product to be carried out by
manufacturers in the buying country; this practice is often found in the aerospace and
defense industries.

(a) Options
 Compensatory trade (no options)
o Selling between two countries that doesn't involve money but goods

53
 o Compensation trade is a form of barter in which one of the flows is partly in
goods and partly in hard currency.
 Parallel trade (with options)
o In Parallel Trade, the seller is paid partly or wholly for the goods or services he
provides, with goods or services provided by the buyer.
o The difference between Parallel Trade and Compensatory Trade, is that with
Parallel Trade, the seller is able to choose the goods or services he wants in
return for the goods or services he is selling.

Other definitions:
o The free movement of goods across countries from lower-value to higher-
value markets
o practice of buying cheap goods to re-export at a higher price, a trade that
creates shortages in home countries
 Buy-back (repay with output)
o occurs when a firm builds a plant in a country - or supplies technology,
equipment, training, or other services to the country and agrees to take a
certain percentage of the plant's output as partial payment for the contract.
 Clearing deals (govt-to-govt)
o Countertrade at government level – usually the trading of strategic stockpiles.
E.g., Thailand trading its surplus stocks of rice for Malaysian palm oil.
o Clearing deals are government-to-government countertrade arrangements,
usually involving surpluses of commodities. For example, a few years ago the
Malaysian government swapped some of its palm oil stocks with Thailand, in
exchange for Thai rice.
 Modern switch trade (multiple trades)

Other Types:
- Switch trading: Practice in which one company sells to another its obligation to make
a purchase in a given country.
- Counter purchase: Sale of goods and services to one company in other country by a
company that promises to make a future purchase of a specific product from the
same company in that country.
- Offset: Agreement that a company will offset a hard - currency purchase of an
unspecified product from that nation in the future. Agreement by one nation to buy a
product from another, subject to the purchase of some or all of the components and
raw materials from the buyer of the finished product, or the assembly of such
product in the buyer nation.

(b) Modern Countertrade: Switch Trade

54
-UK trader sells beef to Thai trader
-Thai trader pays for the beef in baht, use the baht to buy rice
-Trade the rice to Nigeria and gets paid in Naira
-Nigeria trader buys textile and ship to UK and gets paid in pounds

REASONS:
Why Countertrade?
1. The world debt crisis has made ordinary trade financing very risky.
- large banks and financial institutions are "risk adverse" in many of the hostile regions of
the world opening to trade

2. Many countries cannot obtain the trade credit or financial assistance to pay for desired
imports.
- the IMF and World Bank are increasingly restrictive in the way they allow governments to
operate

3. Countries are increasingly returning to the notion of bilateralism as a way to reduce trade
imbalances.
- some multilateral blocks have developed - but politics is easier on a one2one basis - so
many nations find it easier to cur deals directly with another single country

4. Countertrade is often viewed as an excellent mechanism to gain entry into new markets.
The party receiving the goods may become a new distributor, opening up new international
marketing channels and ultimately expanding the market.
- especially where 4X problems are challenging to solve

5. Providing countertrade services helps sellers differentiate its products from those of
competitors.
- flexibility is key to winning business in a global market that is more and more competitive
to vendors

 Expand or maintain foreign markets

 Increase sales
 Sidestep liquidity problems

55
 Repatriate blocked funds
 Clean up bad debt situations
 Build customer relationships
 Keep from losing markets to competitors
 Gain foreign contracts for future sales
 Find lower-cost purchasing sources

1. Money - some people cannot pay in the currency you want

"to enable trade to take place in markets which are unable to pay for imports. This
can occur as a result of a non-convertible currency, a lack of commercial credit or a
shortage of foreign exchange"

2. The Political Environment - local jobs and industry

"to protect or stimulate the output of domestic industries (including agriculture and
mineral extraction) and to help find new export markets"

3. The Political Environment - rules and regulations to protect the host country
"as a reflection of political and economic policies which seek to plan and balance
overseas trade"
4. "to gain a competitive advantage over competing suppliers."

1. Money: sometime the shortage of cash resources leads nation towards counter
trade. Developing nations, particularly, have very limited cash resources but they
generally are abundant in natural resources. By engaging in counter trade these
nations ensure that the resources available to them are fully utilized and they are
also able to fulfill their requirements without spending cash.

2. Protect local industries: by engaging in counter trade, nations ensure that as they
give business to a foreign nation they also create business and job opportunities for
their own people by promoting the traded commodity.

3. Balance of trade: Maintaining a positive balance of trade is very important for every
nation. Counter trade is a great way for nations to ensure that the import and
exports in the nation are balanced as every commodity that is being bought is
equalled with some commodity being sold.

4. Competitive advantage: when it comes to trading there is also competition between

various nations. By providing the opportunity of counter trade to other country you
gain a competitive edge over the other nations selling or trading the same product.

 Gives additional hard currency

 Marketing expertise that they may otherwise not have
 Technological advances that the country would not otherwise have
 Gives access to markets for companies that may otherwise be closed to them
56
  Helps conserve foreign currency reserves of the importing country
 Allows access to foreign markets without necessarily setting up marketing
companies or programs
 Allows importing country to export products for which markets might not otherwise
exist

RISKS:
 Value proposition may be uncertain, especially in cases where the goods being
exchanged have significant price volatility
 Complex negotiations
 Higher costs and logistical issues

TYPES:

Barter: It is the exchange of goods and services for goods and services without any use of
money. Like the trade relationship between China and Thailand where fruit has been traded
by Thailand for buses made by China.

Switch Trading: In this method one company trades products and services or, in some cases,
builds infrastructure like roads, railway lines, hospitals with another nation and, in turn, are
obligated to make a purchase from that nation. One such example is a deal proposed by the
Philippine Government where they offer to trade Philippine coffee for essential products.

Counter Purchase: In this, a foreign company, or country, trades with a nation with the
promise that in the future they will make purchase of a specific product from the nation. A
recent example of this is the ongoing trade between Congo and China where infrastructure
is being traded for a supply of metals.

Buyback: In this type of counter trade, a company builds a plant, supplies technology,
training, etc. In exchange they take a part of output of the plant. For example, a company
based in the USA sets up a lets say an automobile factory in X country. They take a part of
the total produce as their own but they have setup the industry, provided the technology
and the training to X country.

Offset: This is an agreement by one nation to buy a product from a company in another. The
terms of contract are subject to the purchase of some or all of the components and raw
materials from the buyer of the finished product, or the assembly of such product in the
buyer nation. This is more common in terms of defense equipments or space crafts etc.

1. Barter: Exchange of goods or services directly for other goods or services without the
use of money as means of purchase or payment.

2. Switch trading: Practice in which one company sells to another its obligation to make
a purchase in a given country.

3. Counter purchase: Sale of goods and services to one company in aother country by a

57
 company that promises to make a future purchase of a specific product from the
same company in that country.

4. Buyback: This occurs when a firm builds a plant in a country, or supplies technology,
equipment, training, or other services to the country, and agrees to take a certain
percentage of the plant's output as partial payment for the contract.

5. Offset: Agreement that a company will offset a hard currency purchase of an

unspecified product from that nation in the future. Agreement by one nation to buy
a product from another, subject to the purchase of some or all of the components
and raw materials from the buyer of the finished product, or the assembly of such
product in the buyer nation.

EXAMPLES:
Countertrade is the exchange of goods or services for other goods or services. This system
can be typified as simple bartering, switch trading, counter purchase, buyback, or offset.

Switch trading: Party A and B are countertrading salt for sugar. Party A may switch its
obligation to pay Party B to a third party, known as the switch trader. The switch trader gets
the sugar from Party B at a discount and sells it for money. The money is used as Party A's
payment to Party B.

Counter purchase: Party A sells salt to Party B. Party A promises to make a future purchase
of sugar from Party B.

Buyback: Party A builds a salt processing plant in Country B, providing capital to this
developing nation. In return, Country B pays Party A with salt from the plant.

Offset agreement: Party A and Country B enter a contract where Party A agrees to buy sugar
from Country B to manufacture candy. Country B then buys that candy.

 "Saudi Arabia agreed to buy ten 747 jets from Boeing with payment in crude oil,
discounted at 10% below posted world oil prices.

 General Electric won a contract for a $150-million electric-generator project in

Romania by agreeing to market $150 million of Romanian products in markets to
which Romania did not have access.

 The Venezuelan government negotiated a contract with Caterpillar under which

Venezuela would trade 350 000 tonnes of iron ore for Caterpillar earthmoving
equipment.

 Albania offered such items as spring water, tomato juice, and chrome ore in
exchange for a $60-million fertilizer and methanol complex.

 Philip Morris ships cigarettes to Russia, for which it receives chemicals that can be

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 used to make fertilizer. Philip Morris ships the chemicals to China, and in return,
China ships glassware to North America for retail sale by Philip Morris."

(c) Guidelines
 Get goods valued and discounted
 Check legal constraints
 Dangers of countertrade & dumping

Summary:
 Complexity of the treasurer's role
o Manipulating transfer prices
o Reducing the corporate tax burden
o Obtaining & applying funds efficiently
o Managing risk
 Finance options in developing economies
 Ethical & legal issues in financing

Week 9
Managing Cross-Border Risk
Internal & External Risks

Defining our terms:

- A problem is a current difficulty we have identified
- A risk is a potential difficulty we may have identified
- Uncertainty is not knowing about the future

Competition is not a risk, it is a fact of life

Difference between Uncertainty & Risk:

Uncertainty relates to not knowing how the market will change over time (e.g. demand), so
we try to reduce this uncertainty by modelling it. We do this by forecasting.

Risks are specific events that might take place and, if they did, they would cause us
problems. We try to anticipate such risks, and then handle them accordingly (contingency
planning, insurance, PR etc.).

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Risk & Uncertainty: Conceptual Flow

-Managing Risk: 1% of risk can be too large for a small company (depends on seriousness of
risk on company size)
-Learning: Learn & Improve
Did we anticipate these risks? Risks are always changing

The Risk Cycle

1. Identify: what things might go wrong

2. Assess
3. Prepare
- Proactive: pre-empt, try to stop, to reduce likelihood
- Reactive: respond after it happens, to reduce impact
4. Respond
5. Recover
6. Reflect
7. Improve

Unit
Country (deals with govt)
Corporate (communications, HQ)

-Crisis Management

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Managing Risk
(a) Identifying
Three basic approaches
1. Categorical/Typological Analysis
- Political/Economic/Social/Technological (PEST)
- Competitive/Environmental/Natural etc.

2. Scenario-based Analysis - anticipating changes:

- Spatial (Local/Global) – things that specifically affect that factory
- Temporal (Imminent/5 yrs/10 yrs)

3. Contingency-based Analysis (examples) – depends on the risk, market, company, problem

- Risks that affect everyone (business law)
- Risks by Industry (extractive)
- Risks by Business (small) - cashflow
- Risks by Mode of Operation (Wholly-Owned Subsidiary/JV)
- Risks by Culture/Nationality
Japanese in China / Americans globally (cross-cultural)

Contingency-based means ‘depending on the circumstances’.

- The contingency-based view of risk management is that each situation is unique and should
be treated as such.
- What you are trying to do here is not identify generic risks that would affect every
company, but risks that are specific to your organization.

e.g. what social factors will affect JVs over the next 5 years?

(b) Assessing
What constitutes a ‘real’ risk?

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Black swan event: highly unlikely but high impact
A Black Swan event is an event in human history that was unprecedented and unexpected at
the point in time it occurred.

Operational Mode Risks:

This model may be wrong

We don’t just have different degrees of risk, we have different types of risk

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-Exporting can be as risky as Wholly-owned Subsidiary
coercion, confiscated factory etc.
different types of risks (pirates, global supply chain bullwhip effect)
-High risk does not mean High investment (left x-axis)

(c) Handling (preparing & responding) [Managing]

Remember, risks are events that have not yet happened.
If they have already happened, they are no longer risks.

(i) Options
Passively manage the risk:
 Avoid (don’t proceed)
 Accept (cost/global view/strategic/gamble)
 Transfer/neutralise/ (to other party or insurer)
Actively manage the risk:
 Pre-empt (reduce likelihood)
 Mitigate (reduce impact - contingency plans)

(ii) Contingency Planning: Preparing & Responding

(iii) Examples of Risk

 Commercial risk (demand, competition, IP)
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  Confiscation or expropriation of assets
 Political pressure/coercion (home or host)
 Operational restrictions & requirements
 Risk of physical harm to employees
 Damage to reputation
 Destruction/damage to property
 Strained relations with partners/locals
 Catastrophic risk (Bhopal/Fukushima)
 Black swan events (no chance of happening, but if happens, can be very serious)
 Currency risk
 Trading risk

(iv) General Options for Managing Risk

(v) Financial Options for Managing Risk

Trading Risk:
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  Default risk
o Supplier defaults
 Delivery risk
o Supplier doesn’t comply
 Credit risk
o Buyer defaults
 Transfer risk
o Buyer’s country stops payment

Options for managing trading risk:

 Open account trading (supplier accepts risk)
 Draft/trade bill (supplier accepts risk)
 Use of intermediaries (banks accept risk)
 Trade/investment insurance (transfer the risk)
 Cash in advance (buyer accepts risk)

Summary:
 Micro/Contingent VS Macro/Global approach to risk
 Different Degrees and Different Types of Risk
 Wider Implications (external/internal)
o Local environment
o Wider/global environment
o Management
o Organisation
o Resources

Categories of Risks:
Business Risks - Trading, Commercial
Country Risks - Political, Economic, Legal

External VS Internal Risks:

External Risks are those that occur/originate externally (e.g. banking system might collapse;
meteorite might crash through the ceiling of the factory).

Internal Risks are those that occur/originate internally (e.g. factory might burn down
because of our inadequate safeguards; workers might go on strike because of low pay;
reputation might be damaged by our behaviour).

Q) How does having a low equity joint venture help in reducing the likelihood of risk? And
how does local borrowing reduce the impact?

Likelihood: Low-equity joint ventures can mean that your local partner has a much higher
shareholding than you do, or that a large proportion of the venture is financed through
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locally-funded (i.e. host-country) debt. Both mean that you have less capital tied up in the
venture and therefore there is less incentive for the host government to seize your assets.

Impact: If the government still goes ahead and seizes your assets, then your losses are
minimal, since the greater impact will be on your local partner or local banks.

Week 10

Ansoff’s Product-Market Expansion Grid

Generating Ideas

-Product Life Cycle

-Price Elasticity of Demand
-Competition
-Promotion
-Place (Distribution): online, retail chains

A ‘Product’ focus means that the company’s primary strategy is to serve its existing markets
by introducing new/modified/adapted products.
- This may be because it has a core competence and competitive advantage in using this
approach
- Or because it has no alternative (for example, a large consumer electronics company with
strong R&D resources, may compete by using rapid innovation to continually bring
new/modified products to market).

A ‘Market’ focus means that the company’s primary strategy is to seek out new markets for
its existing products.
- Once again, this may be because it has a core competence and competitive advantage in
using this approach
- Or because it has no alternative (for example, a small company with a new patent but few
resources, may decide to licence the technology in many countries).

As you can see, this is simply an application of Ansoff’s Framework, and both approaches still
have to apply sound marketing principles

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FAS Framework for Assessing Options
Evaluating Ideas

F: Feasibility (if we wanted to go ahead, could we?)

 Existing or acquired capability
 Customer/partner credibility
 Competitive advantage

A: Acceptability (is this something we want to do?)

 Risk/return considerations
 Stakeholder acceptance
 Moral/ethical dimension

S: Suitability (does it make sense in the wider context?)

 Compatibility with current operations
 Consistency with future intentions

Risk:
- Consequences of go/no-go
- Reversibility

Online Collaboration
Points for Discussion
 Task
o Organisation (allocating roles/ tasks)
o Content choices (what/how/who/from where)
o Integration (who/when/how)
o Presentation (what you choose/ how)
o Submission of final document
 What problems?
 What might you do differently next time?

Challenges of Online Collaboration

 Unavailability (job pressures/ out of office)
 Different time zones
 Connection/ technology problems
 Language problems (spoken/ written)
 Cultural differences (seniority/ formality)
 Familiarity/ expertise (people/ technology)
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  Relative importance/ urgency
 Major managerial challenges
o Orchestration (how to get cooperation)
o Facilitation (outliers)
o Moderation (hoggers and sub-groups)

The Cultural Minefield: Understanding your partners

 Having VS Showing Respect (Power Distance)
 Criticism (Personal VS Professionalism)
 Reciprocation (Gift-giving VS Favours)
 Identity & Obligation (Individual VS Family/Team)
 Process VS Results (Theory X/Y)
 Hidden Meanings/ Reasoning (hi-context/language)
 Humour – the ultimate minefield
 Personal Space (Privacy & Proximity)
 Time Orientation (Task completion & punctuality)
 Education (Long-term Orientation)

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