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Background For International Business

Globalization and International Business

Chapter Objectives
To define globalization and international business

and show how they affect each other To understand why companies engage in international business and why international business growth has accelerated To discuss the major criticisms of globalization To become familiar with different ways in which a company can accomplish its global objectives To apply social science disciplines to understanding the differences between international and domestic business

Definition of Globalization
The broadening set of interdependent relationships among people from different parts of a world that happens to be divided into nations

Definition of International Business

All commercial transactions including sales, investments, and transportationthat take place between two or more countries

International Business: Operations and Influences

Factors in Increased Globalization


1. 2. 3. 4. 5. 6. 7.

Increase in and expansion of technology Liberalization of cross-border trade and resource movements Development of services that support international business Growing consumer pressures Increased global competition Changing political situations Expanded cross-national cooperation

The Criticisms of Globalization


Threats to national sovereignty Growth and environmental stress Growing income inequality

Reasons That Firms Engage in International Business


Expanding sales Acquiring resources Minimizing risk

Modes of International Operations

Modes of Operation in International Business


Merchandise exports and imports Service exports and imports Tourism and Transportation Service Performance Asset Use Investments

Types of International Organizations


Collaborative arrangements Strategic Alliance Multinational Enterprise (MNE)

Physical and Social Factors Affecting International Business Operations

Competitive Factors Affecting International Business

Views on future of international business and globalization


Further globalization is inevitable. International business will grow primarily

along regional rather than global lines. Forces working against further globalization and international business will slow down both trends.

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Comparative Environmental Frameworks


The Cultural Environments Facing Business

Chapter Objectives
To understand methods for learning about

cultural environments To analyze the major causes of cultural difference and change To discuss behavioral factors influencing countries business practices To understand cultural guidelines for companies that operate internationally
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Cultural Factors affecting International Business Operations

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The People Factor


Culture refers to learned norms based on the

values, attitudes, and beliefs of a group of people Cultural diversity Cultural collision Sensitivity and Adjustment

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Cultural Awareness
There is no foolproof way to build your

awareness of culture Hard to isolate culture from economic and political conditions Education about a culture helps Studies of cultures have shortcomings

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The Nation as a Point of Reference


National boundaries act as proxy for culture Not everyone in a country shares the same

culture Certain cultural attributes may link groups from different nations more closely than certain groups within nations

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How Cultures Form and Change


Cultural values set early in life Changes occur from: Choice Imposition

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Language as a Cultural Stabilizer


When people from different areas speak the same

language, culture spreads more easily Among nations that share a same language, commerce is easier Isolation from other groups, especially because of language, tends to stabilize cultures. Some countries see language as being so important that they regulate the inclusion of foreign words and/or mandate the use of the countrys official language for business purposes.
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Major Language Groups: Population and Output

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Religion as a Cultural Stabilizer


Centuries of profound religious influence

continue to play a major role in shaping cultural values Many religions influence specific beliefs that may affect business

2-24

Issues in Social Stratification


Ascribed group memberships are determined at

birth Acquired group memberships are based on ones choice of affiliation Performance orientation of the society Open vs. Closed society Attitude towards gender Attitude towards age Importance of family group Prestige of occupation
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Issues in Work Motivation


Materialism and Motivation Expectation of Success and Reward Assertiveness: The MasculinityFemininity

Index Hierarchies of Needs

2-26

The Hierarchy of Needs vs. The Need Hierarchy

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Factors Affecting Relationship Preferences


Power distance: general relationship

between superiors and subordinates. Individualism vs. collectivism: degree of dependence on organization

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Factors Affecting Risk-taking Behavior


Uncertainty avoidance Trust Future orientation Fatalism

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Factors Affecting Information and Task Processing


Perception of cues Obtaining Information: Low-Context versus

High-Context Cultures Information Processing

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Factors Affecting the Communication Process


Spoken and Written language Silent language: color associations conversational distance perception of time and punctuality body language and gestures prestige

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Dealing with Cultural Differences


Accommodation Cultural distance Culture shock Company and Management orientations polycentric ethnocentric geocentric
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Factors Affecting Strategies for Instituting Cultural Change


Value systems Cost/benefits of change Resistance to too much change Participation Reward sharing Opinion leadership Timing Learning abroad
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The Political and Legal Environments Facing Business

Objectives
To discuss the goals and functions of a political system To profile trends in the emergence and diffusion of contemporary

political systems To explain the idea of political risk and describe approaches to managing it To understand how political and legal systems affect the conduct of business To describe trends in the evolution and diffusion of contemporary legal systems To discuss the issue of the rule of law versus the rule of man To explain legal issues facing international companies To explain the idea of intellectual property and to discuss areas of concern and controversy

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Political and Legal Factors Influencing International Business Operations

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Definition of a Political System


The complete set of institutions, political

organizations, and interest groups, The relationships among institutions, and the political norms and rules that govern their functions

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Individualism vs. Collectivism


Individualism: primacy of the rights and

role of the individual Collectivism: primacy of the rights and role of the community

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Political Ideology
The system of ideas that expresses the

goals, theories, and aims of a sociopolitical program Most modern societies are pluralistic different groups champion competing political ideologies

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The Political Spectrum

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Democracy
Wide participation by citizens in the

decision-making process Five types:


Parliamentary Liberal Multiparty Representative Social
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Fundamental Features of Democratic Political Systems

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Totalitarianism
Restricts decision making to a few

individuals Types:
Authoritarianism Fascism Secular totalitarianism Theocratic totalitarianism

3-43

Trends in Political Systems


Engines of democracy: Failure of totalitarian systems to deliver economic progress Improved communication technology Belief that democracy leads to improved standards of living

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Definition of Political Risk


The risk that political decisions or events in

a country negatively affect the profitability or sustainability of an investment Types:


Procedural Distributive Catastrophic

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Definition of a Legal System


The mechanism for creating, interpreting, and

enforcing the laws in a specified jurisdiction Types:


Common law Civil law Theocratic law Customary law Mixed systems

3-46

The Diffusion of Civil Law

3-47

Trends in Legal Systems


The preference for stability The influence of national legacies

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Bases of Rules
Rule of Man Rule of Law

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Operational concerns that face managers worldwide


Starting a business Entering and enforcing contracts Hiring and firing local workers Closing down the business

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Strategic concerns that face managers worldwide


Product safety and liability Marketplace behavior Product origin Legal jurisdiction Arbitration

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Intellectual property
Intangible property rights that are a result of

intellectual effort Intellectual property rights refer to the right to control and derive the benefits from writing, inventions, processes and identifiers Local attitudes play a large role in piracy
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The Economic Environment

Objectives
To understand the importance of economic analysis

of foreign markets To identify the major dimensions of international economic analysis To compare and contrast macroeconomic indicators To profile the characteristics of the types of economic systems To discuss the idea of economic freedom To profile the idea, drivers, and constraints of economic transition
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Importance of Economic Environments


Company managers study economic environments

to estimate how trends affect their performance A countrys economic policies are a leading indicator of governments goals and its planned use of economic tools and market reforms. Economic development directly impacts citizens, managers, policymakers, and institutions.

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Economic Factors Affecting International Business Operations

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Elements of the Economic Environment


Gross national income (GNI): the income

generated both by total domestic production as well as the international production activities of national companies Gross domestic product (GDP): the total value of all goods and services produced within a nations borders over one year, no matter whether domestic or foreign-owned companies make the product.
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Adjustments to GNI
Number of people in a country Growth rate Local cost of living Economic sustainability

4-58

Other features of an economy


Inflation Unemployment Debt Income distribution Poverty Labor costs Productivity Balance of payments
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Components of a Countrys Balance of Payments

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Definition of Economic System


A mechanism that deals with the

production, distribution, and consumption of goods and services Types:


Market economy Command economy Mixed economy
Click for Video 4-61

The Economic Freedom Index


Approximates the extent to which a

government intervenes in the areas of free choice, free enterprise, and market-driven prices for reasons that go beyond the basic need to protect property, liberty, citizen safety, and market efficiency Countries with the freest economies have had the highest annual growth and a greater degree of wealth creation.
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Dimensions of The Economic Freedom Index


Business freedom Trade freedom Monetary freedom Freedom from government Fiscal freedom Property rights Investment freedom Financial freedom Freedom from corruption Labor freedom
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Transition to a Market Economy


Liberalizing economic activity Reforming business activity Establishing legal and institutional frameworks Success is linked to how well the government deals

with:

Privatization Deregulation Property right protection Fiscal and monetary reform Antitrust legislation
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Reforms and Economic Progress

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Globalization and Society

Objectives
To identify problems in evaluating the activities of

multinational enterprises (MNEs) To evaluate the major economic effects of MNEs on home and host countries To understand the foundations of responsible corporate behavior in the international sphere To discuss some key issues in the social activities and consequences of globalized business To examine corporate responses to globalization

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Evaluating the Impact of FDI


FDI is Foreign Direct Investment The large size of some MNEs causes

concern for some countries MNEs and countries need to understand the impact of FDI in home and host countries

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Home and Host Country Influences on the Allocation of FDI

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What MNEs Have To Offer

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Considering the Logic of FDI


Need to consider relationship between those

who make foreign investments (MNEs) and possible effects on receiving countries Areas to consider:
Stakeholder trade-offs Cause-and-effect relationships Individual and aggregate effects

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The Economic Impact of the MNE


Balance-of-Payments effects: Net import effect Net capital flow Growth and Employment effects: Home-country losses Host-country gains Host-country losses

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Why Companies Care About Ethical Behavior


Instrumental in achieving two objectives: To develop competitive advantage To avoid being perceived as irresponsible

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The Cultural Foundations of Ethical Behavior


Relativism vs. Normativism: do truths

depend on the values of the groups or are there universal standards Negotiating between evils Respecting cultural identity

5-74

The Legal Foundations of Ethical Behavior


Legal justification for ethical behavior may

not be sufficient because not everything that is unethical is illegal The law is a good basis because it embodies local cultural values Laws will become similar in different countries
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Ethics and Bribery


Bribes are payments or promises to pay cash or

anything of value Bribes used to get government contracts or to get officials to do what they should be doing anyway Problems with bribery:
Affects performance of company & country Erodes government authority Damage reputations when disclosed Increases cost of doing business

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Where Bribes Are (and Are Not) Business as Usual

5-77

Whats Being Done About Corruption?


Cross-National Accords: The OECD, the

ICC and the UN The U.S. Foreign Corrupt Properties Act Industry Initiatives Relativism, the Rule of Law, and Responsibility

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Ethics and the Environment


Sustainability Global Warming and The Kyoto Protocol
National and Regional Initiatives Company-Specific Initiatives

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Ethical Dilemmas and the Pharmaceutical Industry


Tiered pricing and other price-related issues WTO Agreement on Trade-Related Aspects

of Intellectual Property Rights (TRIPS) R&D and the Bottom Line

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Sources of Worker-Related Pressures in the Global Supply Chain

5-81

Ethical Dimensions of Labor Conditions


Ethical Trading Initiative The Problem of Child Labor What MNEs Can and Cant Do

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Corporate Codes of Ethics


Motivations for Corporate Responsibility Developing a good Code of Conduct

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Theories and Institutions: Trade and Investment


International Trade and Factor Mobility Theory
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Objectives
To understand theories of international trade To explain how global efficiency can be improved

through free trade To identify factors affecting national trade patterns To explain why a countrys export capabilities are dynamic To understand why production factors To explain the relationship between foreign trade and international factor mobility
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International Operations and Economic Connections

6-86

Laissez-Faire versus Interventionist Approaches to Exports & Imports


Interventionist: Mercantilism Neomercantilism Free-trade theories: Absolute advantage Comparative advantage

6-87

Theories of Trade Patterns


Explaining trade patterns: Country size Factor proportions Country similarity Trade competitiveness: Product life cycle theory Porter diamond

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What the major trade theories Do and Dont discuss

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Mercantilist Theory
Mercantilist theory proposed that a country

should try to achieve a favorable balance of trade (export more than it imports) Neomercantilist policy also seeks a favorable balance of trade, but its purpose is to achieve some social or political objective

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Theory of Absolute Advantage


Suggests specialization through free trade

because consumers will be better off if they can buy foreign-made products that are priced more cheaply than domestic ones A country may produce goods more efficiently because of a natural advantage or because of an acquired advantage

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Theory of Comparative Advantage


Also proposes specialization through free

trade because it says that total global output can increase even if one country has an absolute advantage in the production of all products

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Theories of Specialization
Both absolute and comparative advantage theories

are based on specialization Assumptions policymakers question:


full employment economic efficiency division of gains transport costs statics and dynamics services production networks mobility
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Trade Pattern Theories


How much a country will depend on trade if

it follows a free trade policy What types of products countries will export and import With which partners countries will primarily trade

6-94

Theory Of Country Size


Countries with large land areas are apt to

have varied climates and natural resources They are generally more self-sufficient than smaller countries are Large countries production and market centers are more likely to be located at a greater distance from other countries, raising the transport costs of foreign trade
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Factor-Proportions Theory
A countrys relative endowments of land,

labor, and capital will determine the relative costs of these factors Factor costs will determine which goods the country can produce most efficiently

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Worldwide trade of major manufactured goods

6-97

Country-similarity Theory
Most trade today occurs among high-income

countries because they share similar market segments and because they produce and consume so much more than emerging economies Much of the pattern of two-way trading partners may be explained by cultural similarity between the countries, political and economic agreements, and by the distance between them

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Product Life Cycle (PLC) Theory


Companies will manufacture products first

in the countries in which they were researched and developed, almost always developed countries Over the products life cycle, production will shift to foreign locations, especially to developing economies as the product reaches the stages of maturity and decline
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Life Cycle of the International Product

6-100

The Porter Diamond


Four conditions as important for

competitive superiority:
demand conditions factor conditions related and supporting industries firm strategy, structure, and rivalry

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Limitations of the Porter Diamond Theory


Production factors and finished goods are

only partially mobile internationally The cost and feasibility of transferring production factors rather than exporting finished goods internationally will determine which alternative is better

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The Relationship between Trade and Factor Mobility


Capital and labor move internationally to

gain more income and flee adverse political situations Although international mobility of production factors may be a substitute for trade, the mobility may stimulate trade through sales of components, equipment, and complementary products
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Governmental Influence On Trade

7-104

Objectives

To explain the rationales for governmental policies that enhance and restrict trade To show the effects of pressure groups on trade policies To describe the potential and actual effects of governmental intervention on the free flow of trade To illustrate the major means by which trade is restricted and regulated To demonstrate the business uncertainties and business opportunities created by governmental trade policies

7-105

Physical and Social Factors Affecting the Flow of Goods and Services

7-106

Why Governments Intervene in Trade

7-107

Possible impacts of import restrictions designed to create domestic employment


May lead to retaliation by other countries. Are less likely retaliated against effectively by

small economies. Are less likely to be met with retaliation if implemented by small economies. May decrease export jobs because of price increases for components. May decrease export jobs because of lower incomes abroad.
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Protecting Infant-Industries
The infant-industry argument for protection

holds that governmental prevention of import competition is necessary to help certain industries move from high-cost to low-cost production

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Developing an Industrial Base


Countries seek protection to promote

industrialization because that type of production:


Brings faster growth than agriculture. Brings in investment funds. Diversifies the economy. Brings more income than primary products do. Reduces imports and promotes exports. Helps the nation-building process.

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Economic Relationships with Other Countries


Trade controls are used to improve economic

relations with other countries Their objectives include improving the balance of:
payments raising prices to foreign consumers gaining fair access to foreign markets preventing foreign monopoly prices assuring that domestic consumers get low prices lowering profit margins for foreign producers
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Maintaining essential industries


In protecting essential industries, countries

must:
Determine which ones are essential. Consider costs and alternatives. Consider political consequences.

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Preventing Shipments to Unfriendly Countries


Considerable governmental interference in

international trade is motivated by:


political rather than economic concerns maintaining domestic supplies of essential goods preventing potential enemies from gaining goods that would help them achieve their objectives
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Maintaining or extending spheres of influence


Governments give aid and credits to, and

encourage imports from, countries that join a political alliance or vote a preferred way within international bodies. A countrys trade restrictions may coerce governments to follow certain political actions or punish companies whose governments do not.
7-114

Preserving national identity


To sustain this collective identity that sets

their citizens apart from those in other nations, countries limit foreign products and services in certain sectors.

7-115

Instruments of Trade Control


Trade controls that directly affect price and

indirectly affect quantity include:


tariffs subsidies customs-valuation methods special fees

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Nontariff Barriers: Quantity Controls


Trade controls that directly affect quantity and

indirectly affect price include:


quotas voluntary export restraint (VERs) buy local legislation standards and labels licensing arrangements specific permission requirements administrative delays reciprocal requirements restrictions on services
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Dealing With Governmental Trade Influences


When facing import competition,

companies can:
Move abroad Seek other market niches Make domestic output competitive Try to get protection

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Cross-national Cooperation And Agreements

8-119

Objectives
To identify the major characteristics and challenges of the World Trade

Organization To discuss the pros and cons of global, bilateral, and regional integration To describe the static and dynamic impact of trade agreements on trade and investment flows To define different forms of regional economic integration To compare and contrast different regional trading groups, including but not exclusively the European Union (EU), the North American Free Trade Agreement (NAFTA), the Southern Common Market (MERCOSUR), and the Association of South East Asian Nations (ASEAN) To describe other forms of global cooperation, such as the United Nations and the Organization of Petroleum Exporting Countries (OPEC)
8-120

GATT
The General Agreement on Tariffs and

Trade (GATT), begun in 1947, created a continuing means for countries to negotiate the reduction and elimination of trade barriers and to agree on simplified mechanisms for the conduct of international trade

8-121

WTO
The World Trade Organization (WTO)

replaced GATT in 1995 as a continuing means of trade negotiations that aspires to foster the principle of trade without discrimination and to provide a better means of mediating trade disputes and of enforcing agreements

8-122

Regional Economic Integration


Efforts at regional economic integration

began to emerge after World War II as countries saw benefits of cooperation and larger market sizes The major types of economic integration are:
the free trade area the customs union the common market

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Impact of Free Trade Agreements

8-124

The Effects of Integration


Once protection is eliminated among

member countries, trade creation allows MNEs to specialize and trade based on comparative advantage Trade diversion occurs when the supply of products shifts from countries that are not members of an economic bloc to those that are
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European Union
Regional, as opposed to global, economic integration occurs

because of the greater ease of promoting cooperation on a smaller scale The European Union (EU) is an effective common market that has abolished most restrictions on factor mobility and is harmonizing national political, economic, and social policies The EU is comprised of 27 countries, including 12 countries from mostly Central and Eastern Europe that joined since 2004 The EU has abolished trade barriers on:
intrazonal trade instituted a common external tariff created a common currency, the euro

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Implications of the EU for corporate strategy


Companies need to determine where to

produce products. Companies need to determine what their entry strategy will be. Companies need to balance the commonness of the EU with national differences.
8-127

The North American Free Trade Agreement (NAFTA)


The North American Free Trade Agreement

(NAFTA) is designed to eliminate tariff barriers and liberalize investment opportunities and trade in services Key provisions in NAFTA are labor and environmental agreements

8-128

Regional economic integration in the Americas


Caribbean Community (CARICOM) Central American Common Market (CACM) Central American Free Trade Agreement (CAFTA-

DR) Andean Community (CAN) The Southern Common Market (MERCOSUR) The proposed South American Community of Nations.
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Regional economic integration in Asia & Africa


Association of Southeast Asian Nations

(ASEAN) Asia Pacific Economic Cooperation (APEC) The African Union

8-130

Forms of International Cooperation


The United Nations is comprised of

representatives of most of the countries in the world and international trade and development in a number of significant ways

8-131

Commodity Agreements
Many developing countries rely on

commodity exports to supply the hard currency they need for economic development Instability in commodity prices has resulted in fluctuations in export earnings OPEC is an effective commodity agreement in terms of attempting to stabilize supply and price
8-132

World Financial Environment


Global Foreign Exchange And Capital Markets
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Objectives
To learn the fundamentals of foreign exchange To identify the major characteristics of the foreign

exchange market and how governments control the flow of currencies across national borders To describe how the foreign exchange market works To examine the different institutions that deal in foreign exchange To understand why companies deal in foreign exchange
9-134

Foreign Exchange
Foreign exchange is money denominated in

the currency of another nation or group of nations The market in which these transactions take place is the foreign-exchange market. The exchange rate is the price of a currency

9-135

The Foreign Exchange


The Bank for International Settlements divides the

foreign exchange market into reporting dealers (also known as dealer banks or money center banks), other financial institutions, and nonfinancial institutions. Dealers can trade currency by telephone or electronically, especially through Reuters, EBS, or Bloomberg The foreign exchange market is divided into the overthe-counter market (OTC) and the exchange-traded market

9-136

Some Traditional Foreign Exchange Instruments


Spot transactions involve the exchange of

currency on the second day after the date on which the two dealers agree to the transaction Outright forward transactions involve the exchange of currency three or more days after the date on which the dealers agree to the transaction An FX swap is a simultaneous spot and forward transaction

9-137

Foreign Exchange Derivatives


Currency swaps deal more with interest-bearing

financial instruments (such as a bond), and they involve the exchange of principal and interest payments. Options are the right but not the obligation to trade foreign currency in the future. A futures contract is an agreement between two parties to buy or sell a particular currency at a particular price on a particular future date.
9-138

Some Aspects Of The Foreign Exchange Market


Approximately $3.2 trillion in foreign

exchange is traded every day. The US dollar is the most widely traded currency in the world (on one side of 86% of all transactions) London is the main foreign exchange market in the world
9-139

Why the US dollar is the most widely traded currency


An investment currency in many capital markets. A reserve currency held by many central banks. A transaction currency in many international

commodity markets. An invoice currency in many contracts. An intervention currency employed by monetary authorities in market operations to influence their own exchange rates.
9-140

The Spot Market


Foreign exchange dealers quote bid (buy) and offer

(sell) rates on foreign exchange If the quote is in American terms, the dealer quotes the foreign currency as the number of dollars and cents per unit of the foreign currency If the quote is in European terms, the dealer quotes the number of units of the foreign currency per dollar The numerator is called the terms currency and the denominator the base currency.
9-141

The Forward Market


If the foreign currency in a forward contract is

expected to strengthen in the future (the dollar equivalent of the foreign currency is higher in the forward market than in the spot market), the currency is selling at a premium. If the opposite is true, it is selling at a discount An option is the right, but not the obligation, to trade foreign currency in the future Options can be traded OTC or on an exchange
9-142

Futures
A foreign currency future is an exchange-

traded instrument that guarantees a future price for the trading of foreign exchange, but the contracts are for a specific amount and specific maturity date

9-143

Foreign-Exchange Markets: Exchange-Based and OTC Options

9-144

The Foreign-Exchange Trading Process

9-145

The Foreign Exchange Trading Process


Companies work with foreign exchange

dealers to trade currency Dealers also work with each other and can trade currency through:
voice brokers electronic brokerage services directly with other bank dealers

Internet trades of foreign exchange are

becoming more significant


9-146

How Companies Use Foreign Exchange


The major institutions that trade foreign exchange

are the large commercial and investment banks and securities exchanges Commercial and investment banks deal in a variety of different currencies all over the world The CME Group and the Philadelphia Stock Exchange trade currency futures and options

9-147

Letter-of-Credit Relationships

9-148

How Companies Use Foreign Exchange


Companies use foreign exchange to settle

transactions involving the imports and exports of goods and services, for foreign investments, and to earn money through arbitrage or speculation

9-149

The Determination of Exchange Rates

10-150

Objectives
To describe the International Monetary Fund and its role in the

determination of exchange rates To discuss the major exchange-rate arrangements that countries use To explain how the European Monetary System works and how the euro came into being as the currency of the euro zone To identify the major determinants of exchange rates To show how managers try to forecast exchange-rate movements To explain how exchange-rate movements influence business decisions

10-151

The International Monetary Fund


Originally organized in 1945 Objectives: To promote international monetary cooperation, exchange stability, and orderly exchange arrangements To foster economic growth and high levels of employment To provide temporary financial assistance to countries to help ease balance-of-payments adjustment
10-152

IMF History
The Bretton Woods Agreement set a fixed

exchange rate against gold & the US dollar The Jamaica Agreement (1976) eliminated par values against gold and the US dollar and permitted greater flexibility. Voting is through the Quota system

10-153

Special Drawing Right


The Special Drawing Right (SDR) is a

special asset the IMF created to increase international reserves The value of the SDR is based upon the weighted average of a basket of four currencies: the U.S. dollar, the euro, the Japanese yen, and the British pound.

10-154

Exchange Rates
The world can be divided into: Countries that basically let their currencies float according to market forces with minimal or no Central Bank intervention Countries that do not but rely on heavy Central Bank intervention and control Anyone involved in international business needs

to understand how the exchange rates of countries with which they do business are determined
10-155

The Euro
European Monetary System (EMS): established by the EU

(then the EC) in 1979 as a means of creating exchange rate stability within the bloc European Central Bank: established by the EU on July 1, 1998, to set monetary policy and to administer the euro Euro: the common European currency established on Jan. 1, 1999 as part of the EUs move toward monetary union as called for by the Treaty of Maastricht of 1992 European Monetary Union (EMU): a formal arrangement linking many but not all of the currencies of the EU

10-156

Africa
African countries are committed to

establishing a common currency by 2021, but there are many obstacles to accomplishing this objective

10-157

The Determination Of Exchange Rates


Currencies that float freely respond to supply and

demand conditions free from government intervention The demand for a countrys currency is a function of the demand for its goods and services and the demand for financial assets denominated in its currency Fixed exchange rates do not automatically change in value due to supply and demand conditions but are regulated by their Central Banks
10-158

Central Banks
Central banks are the key institutions in countries that

intervene in foreign-exchange markets to influence currency values The Bank for International Settlements (BIS) in Switzerland acts as a central bankers bank. It facilitates communication and transactions among the worlds central banks A central bank intervenes in money markets by increasing a supply of its countrys currency when it wants to push the value of the currency down and by stimulating demand for the currency when it wants the currencys value to rise
10-159

Black Markets The Result of Fixed Exchange Rates


Many countries that strictly control and

regulate the convertibility of their currency have a black market that maintains an exchange rate that is more indicative of supply and demand than is the official rate

10-160

Foreign-Exchange Convertibility
Fully convertible currencies, often called hard

currencies, are those that the government allows both residents and nonresidents to purchase in unlimited amounts Currencies that are not fully convertible are often called soft currencies, or weak currencies They tend to be the currencies of developing countries

10-161

Exchange Controls
To conserve scarce foreign exchange, some

governments impose exchange restrictions on companies or individuals who want to exchange money, such as
import licensing multiple exchange rates import deposit requirements quantity controls
10-162

Factors that determine exchange rates


purchasing-power parity differences in real interest rates confidence in the governments ability to

manage the political and economic environment certain technical factors that result from trading
10-163

Forecasting Exchange-Rate Movements


Fundamental forecasting uses trends in

economic variables to predict future rates. The data can be plugged into an econometric model or evaluated on a more subjective basis. Technical forecasting uses past trends in exchange rates themselves to spot future trends in rates.
10-164

Factors to Monitor
Major factors that managers should monitor

when trying to predict the timing, magnitude, and direction of an exchangerate change include
the institutional setting fundamental analysis confidence factors events technical analysis
10-165

Business Implications of ExchangeRate Changes


Exchange rates can affect business

decisions in three major areas:


Marketing Production Finance

10-166

Global, Strategy, Structure, and Implementation


The Strategy Of International Business
11-167

Objectives
To examine the idea of industry structure, firm

strategy, and value creation To profile the features and functions of the value chain framework To appreciate how managers configure and coordinate a value chain To identify the dimensions that shape how managers develop strategy To profile the types of strategies firms use in international business
11-168

The Role of Strategy in International Business

11-169

Industry, Strategy, And Firm Performance


Managers, as agents of their firms, devise

strategies to engage international markets in ways that sustain the companys boost its profitability and growth Strategy is defined as the efforts of managers to build and strengthen the companys competitive position within its industry in order to create superior value
11-170

Industry, Strategy, And Firm Performance


Firm performance is influenced by both the

structure of the companys industry and the insight of managers strategic decision making Estimates vary on the degree of influence for both factors Managers need to be familiar with industryand firm-level conditions in making strategy
11-171

The Five Forces Model


Managers typically anchor analysis of industry

structure by modeling the strength and importance of the so-called five fundamental forces.:
the moves of rivals battling for market share the entry of new rivals seeking market share the efforts of other companies outside the industry to convince buyers to switch to their own substitute products the push by input suppliers to charge more for their inputs the push by output buyers to pay less for products

11-172

The Five Forces Model of Industry Structure

11-173

Events that can change industry structure


Competitors moves. Government policies. Changes in economics. Shifting buyer preferences. Technological developments. Rate of market growth.

11-174

Strategy and Value


Strategy is defined as the efforts of

managers to build and strengthen the companys competitive position within its industry in order to create superior value Value is the measure of a firms ability to sell what it makes for more than the cost it incurred to make it

11-175

Creating Value
Firms create value either through a low-cost

leadership strategy or a differentiation strategy

11-176

The Firm As Value Chain


Interpreting the firm within the context of

the value chain provides a strong tool to improve the accuracy of strategic analyses and decisions

11-177

The Value Chain Framework

11-178

What Is a Value Chain?


The value chain lets managers deconstruct

the general idea of create value into a series of discrete activities The function of the value chain is shaped by how managers opt to configure and then coordinate discrete value activities

11-179

Dimensions of The Value Chain


Primary activities that create and deliver the

product. Support activities that aid the individuals and groups engaged in primary activities. Profit margin reports the difference between the total revenue generated by sales and the total cost of the activities that led to those sales. Orientationnamely, whether the particular activity takes place upstream or downstream.
11-180

Using the Value Chain


Configuration is the way that managers arrange the

activities of the value chain. Coordination is the way that managers connect the activities of the value chain. Firms pay close attention to location economics when configuring their value chain Devising a way to coordinate value chain activities must be in ways that leverage a firms core competencies
11-181

Pressures for Global Integration


Companies that operate internationally face

the asymmetric pressures of global integration versus local responsiveness Change, whether in managers, competencies, industries, or environments, often spurs companies to rethink and reset their value activities

11-182

Integration-Responsiveness (IR) Grid (I): Industry Types

11-183

Types Of Strategy
The firm entering and competing in foreign

markets can adopt either an:


international multidomestic global transnational strategy

Often, firms use a mix of these four types

due to company, industry, and environmental situations


11-184

Integration-Responsiveness (IR) Grid (II): Strategy Types

11-185

Country Evaluation And Selection

12-186

Objectives
To grasp company strategies for sequencing the penetration of

countries To see how scanning techniques can help managers both limit geographic alternatives and consider otherwise overlooked areas To discern the major opportunity and risk variables a company should consider when deciding whether and where to expand abroad To know the methods and problems when collecting and comparing information internationally To understand some simplifying tools for helping to decide where to operate To consider how companies allocate emphasis among the countries where they operate To comprehend why location decisions do not necessarily compare different countries possibilities

12-187

Location Decisions Affecting International Operations

12-188

Location
Companies lack resources to take advantage of all

international opportunities. Companies need to:


Determine the order of country entry. Set the rates of resource allocation among countries.

In choosing geographic sites, a company must

decide:
Where to sell. Where to produce.
12-189

The Location-Decision Process

12-190

Scanning
Scanning techniques aid managers in

considering alternatives that might otherwise be overlooked They also help limit the final detailed feasibility studies to a manageable number of those that appear most promising

12-191

Information that is important in Scanning


Opportunities: Sales expansion - Economic and Demographic Variables Resource acquisition - Cost Considerations

12-192

Factors to Consider in Analyzing Risk


Four broad categories of risk that

companies may consider are:


political monetary competitive natural disaster

12-193

Some Problems with Research Results and Data


The amount, accuracy, and timeliness of

published data vary substantially among countries Managers should be particularly aware of different definitions of terms, different collection methods, and different base years for reports, as well as misleading responses

12-194

Country Comparison Tools


Companies frequently use several tools to compare

opportunities and risk in various countries, such as grids that rate country projects according to a number of separate dimensions and matrices, such as one on which companies plot opportunity on one axis and risk on another When allocating resources among countries, companies need to consider how to treat reinvestments and divestments, the interdependence of operations in different countries, and whether they should follow diversification versus concentration strategies

12-195

Simplified Market-Penetration Grid

12-196

OpportunityRisk Matrix

12-197

Allocating Among Locations


Companies may reduce the risk of liability

of foreignness by moving first to countries more similar to their home countries Companies may contract with experienced companies to handle operations for them, limit the resources they commit to foreign operations, and delay entry to many countries until they are operating successfully in one or a few
12-198

The Usual Pattern of Internationalization

12-199

Geographic Diversification versus Concentration


Strategies for ultimately reaching a high

level of commitment in many countries are:


Diversificationgo to many fast and then build up slowly in each. Concentrationgo to one or a few and build up fast before going to others. A hybrid of the two.

12-200

To Diversify or to Concentrate: The Role of Product and Market Factors

12-201

Reinvestment Versus Harvesting


A company may have to make new

commitments to maintain competitiveness abroad. Companies must decide how to get out of operations if:
They no longer fit the overall strategy. There are better alternative opportunities.

12-202

Noncomparative Decision Making


Companies often evaluate entry to a country

without comparing that country with other countries This is because they may need to react quickly to proposals, to respond to competitive threats, and because multiple feasibility studies seldom are finished simultaneously
12-203

Export And Import Strategies

13-204

Objectives
To introduce the ideas of export and import To identify the elements of export and exporting

strategies To compare direct and indirect selling of exporting To identify the elements of import and importing strategies To discuss the types and roles of third-party intermediaries in exporting To discuss the role of countertrade in international business
13-205

Environmental Factors Influencing Export and Import Operations

13-206

Exports & Imports


Exporting refers to the sale of goods or

services produced by a company based in one country to customers that reside in a different country Importing is the purchase of goods or services by a company based in one country from sellers that reside in another

13-207

Advantages of Exporting
Lower investment way to enter foreign

markets Lower risk way to enter foreign markets Expands sales Achieves scale economies Diversifies sales

13-208

Characteristics of Exporters
The probability of a companys becoming

an exporter increases with company size, but the extent of exporting does not directly correlate with size Companies export to increase sales revenues, use excess capacity, and diversify markets

13-209

Phases of Export Development

13-210

Pitfalls of Exporting
Companies new to exporting (and also some

experienced exporters) often make many mistakes One way to avoid mistakes is to develop a comprehensive export strategy that includes an analysis of the companys resources as well as its export potential Companies can also improve the odds of export success by working with an experienced export intermediary

13-211

Designing an Export Strategy


As a company establishes its export

business plan, it must:


assess export potential obtain expert counseling select a country or countries where it will focus its exports formulate its strategy determine how to get its goods to market
13-212

The International Transaction Chain

13-213

Types of importers
Those looking for any product around the

world to import and sell. Those looking for foreign sourcing to get their products at the cheapest price. Those using foreign sourcing as part of their global supply chain.

13-214

Types of imports
Industrial and consumer goods to

independent individuals and companies. Intermediate goods and services that are part of the firms global supply chain.

13-215

Strategic Advantages of Imports


Specialization of Labor Global Rivalry Local Unavailability Diversification of Operating Risks

13-216

Customs Agencies
Customs agencies assess and collect duties, as well

as ensure that import regulations are adhered to A custom broker helps by valuing products to qualify for:

more favorable duty treatment qualifying products for duty refunds through drawback provisions deferring duties by using bonded warehouses and foreign trade zones limiting liability by properly marking an imports country of origin

13-217

Principal types of exporting


Direct: goods and services are sold to an

independent party outside of the exporters home country. Indirect exports: goods and services are sold to an intermediary in the domestic market, which then sells the goods in the export market.

13-218

Indirect Selling
Exporters may deal directly with: agents or distributors in a foreign country indirectly through third-party intermediaries, such as export management companies other types of trading companies

13-219

Direct Selling
Through distributors who usually deal with

retailers instead of end users To retailers and end users Internet marketing is a new form of direct exporting that is allowing many small- and medium-sized companies to access export markets as never before
13-220

Export Documentation
Key export documents are: pro forma invoice commercial invoice bill of lading consular invoice certificate of origin shippers export declaration export packing list
13-221

Export Assistance
Trading companies can perform many of the functions for

which manufacturers lack the expertise Exporters can use the services of other specialists, such as freight forwarders, to facilitate exporting These specialists can help an exporter with the complex documentation that accompanies exports Government agencies in some countries, such as the Ex-Im Bank in the United States, provide assistance in:
terms of direct loans to importers bank guarantees to fund an exporters working capital needs insurance against commercial and political risk

13-222

Trade Information by Type and Source

13-223

Countertrade
Countertrade is when goods and services

are traded for each other. It is used when a firm exports to a country whose currency creates barriers to efficient trade Common types are: barter, buyback, offset, switch trading, and counter purchase

13-224

Direct Investment and Collaborative Strategies

14-225

Chapter Objectives
To clarify why companies may need to use modes other than

exporting to operate effectively in international business To comprehend why and how companies make foreign direct investments To understand the major motives that guide managers when choosing a collaborative arrangement for international business To define the major types of collaborative arrangements To describe what companies should consider when entering into arrangements with other companies To grasp what makes collaborative arrangements succeed or fail To see how companies can manage diverse collaborative arrangements

14-226

Factors Affecting Operating Modes in International Business

14-227

Foreign Expansion: Alternative Operating Modes

14-228

Why Exporting May Not Be Feasible


1. 2. 3. 4. 5. 6.

When production abroad is cheaper than at home When transportation costs to move goods or services internationally are too expensive When companies lack domestic capacity When products and services need to be altered substantially to gain sufficient consumer demand abroad When governments inhibit the import of foreign products When buyers prefer products originating from a particular country

14-229

Foreign Direct Investment


Control accompanies investment Three primary reasons that spur companies

to want a controlling interest:


internalization theory appropriability theory freedom to pursue global objectives

14-230

Foreign Direct Investment (FDI) approaches


Internalization theory holds that it is sometimes

cheaper to handle operations oneself than to contract with another company The idea of denying rivals access to resources (capital, patents, trademarks, and management know-how) is called the appropriability theory When a company has a wholly owned foreign operation, it may more easily have that operation participate in a global strategy.
14-231

Methods for Making FDI


The advantages of acquiring an existing operation

include:
adding no further capacity to the market avoiding start-up problems easier financing

Companies may choose to build if: no desired company is available for acquisition acquisition will lead to carry-over problems acquisition is harder to finance
14-232

Collaborative Arrangements and International Objectives

14-233

General Motives for Collaborative Arrangements


To Spread and Reduce Costs To Specialize in Competencies To Avoid or Counter Competition To Secure Vertical and Horizontal Links To Gain Knowledge

14-234

International Motives for Collaborative Arrangements


Gain location-specific assets Overcome legal constraints Diversify geographically Minimize exposure in risky environments

14-235

Types of Collaborative Arrangements


Companies have a wider choice of operating

form when there is less likelihood of competition Internal handling of foreign operations usually means more control and no sharing of profits MNEs want returns from their intangible assets
14-236

Licensing
Licensing agreements may be: exclusive or nonexclusive used for patents, copyrights, trademarks, and other intangible property Licensing often has an economic motive,

such as the desire for faster start-up, lower costs, or access to additional resources

14-237

Franchising
Franchising includes providing an intangible asset

(usually a trademark) and continually infusing necessary assets Many types of products and many countries participate in franchising Franchisors face a dilemma:
the more standardization, the less acceptance in the foreign country the more adjustment to the foreign country, the less the franchisor is needed
14-238

Management Contracts
Management contracts are used primarily

when the foreign company can manage better than the owners

14-239

Turnkey Operations
Turnkey operations are: Most commonly performed by construction companies Often performed for a governmental agency

14-240

Joint Ventures
Joint ventures may have various

combinations of ownership The type of legal organization may be a partnership, a corporation, or some other form permitted in the country of operation When more than two organizations participate, the joint venture is sometimes called a consortium
14-241

Equity Alliances
An equity alliance is a collaborative

arrangement in which at least one of the collaborating companies takes an ownership position (almost always minority) in the other(s). Equity alliances help solidify collaboration

14-242

Collaborative Strategy and Complexity of Control

14-243

How to Dissolve a Joint Venture

14-244

Problems of Collaborative Arrangements


The major strains on collaborative

arrangements are due to five factors:


Relative importance to partners Divergent objectives Control problems Comparative contributions and appropriations Differences in culture

14-245

Managing Foreign Arrangements


The evolution to a different operating mode

may:
be the result of experience necessitate costly termination fees create organizational tensions

14-246

Country Attractiveness/Company Strength Matrix

14-247

Negotiating Process
In technology agreements: seller does not want to give information without assurance of payment buyer does not want to pay without evaluating information

14-248

Performance Assessment
When collaborating with another company,

managers must:
continue to monitor performance assess whether to take over operations

14-249

The Organization of International Business

15-250

Objectives
Profile the evolving understanding of the

organization of international business Describe traditional and contemporary structures Study the systems used to coordinate and control operations Profile the role of organization culture Examine special situations in the organization of international business
15-251

Factors Affecting Organizing Operations

15-252

Organization in the International Business


The organization of international business is challenging due

to:

the geographic and cultural distances that separate countries the need to operate differently among countries the large number of uncontrollable factors the high uncertainty resulting from rapid change in the international environment problems in gathering reliable data in many places

Organization in the MNE is an integrated function of its

formal structure, coordination and control systems, and the shared values that make up its culture Prevailing environmental and workplace trends pressure managers to question their customary approaches to organizing their companies
15-253

Vertical Differentiation
Vertical differentiation is the matter of how the company

balances centralization versus decentralization of decision making Centralization is the degree to which high-level managers, usually above the country level, make strategic decisions and pass them to lower levels for implementation. Decentralization is the degree to which lower-level managers, usually at or below the country level, make and implement strategic decisions. Decision making should occur at the level of the people who are most directly affected and have the most intimate knowledge about the problem.

15-254

Horizontal Differentiation
Horizontal differentiation describes how the

company designs its formal structure to perform three functions:

Specify the total set of organizational tasks Divide those tasks into jobs, departments, subsidiaries, and divisions so the work gets done Assign authority and authority relationships to make sure work gets done in ways that support the companys strategy

15-255

Functional structure

15-256

International division structure

15-257

Product division structure

15-258

Geographic (area) division structure

15-259

Matrix division structure

15-260

Contemporary structures
Contemporary structures, like the network

or virtual formats, arrange work roles, responsibilities, and relationships in ways that eliminate the horizontal, vertical, or external boundaries that block the development of knowledge-generating and decision-making relationships

15-261

Simplified Network Structure

15-262

Coordination and Control Systems


No matter what sort of structure the MNE

uses, it needs to develop coordination and control mechanisms to prevent duplication of efforts, to ensure that headquarters managers do not withhold the best resources from the international operations, and to include insights from anywhere in the organization
15-263

Coordination Systems
Coordination can take place via standardization,

plans, and mutual adjustment Standardization relies on specifying standard operating procedures:
planning relies on general goals and detailed objectives mutual adjustment relies on frequent interaction among related parties

15-264

Approaches to Coordination
Coordination by standardization: Sets universal rules and procedures that apply to units worldwide. Enforces consistency in performance of activities in geographically dispersed units. Coordination by plan requires interdependent units

to meet common deadlines and objectives. Coordination by mutual adjustment requires managers to interact personally with counterparts.
15-265

Control Methods
Companies exercise control through: Market control uses external market mechanisms to establish objective standards. Bureaucratic control emphasizes organizational authority and relies on rules and regulations. Clan control uses shared values and ideals to moderate employee behavior.

15-266

Control Mechanisms
Reports Visits to Subsidiaries Management Performance Evaluations Cost and Accounting Comparisons Evaluative Measurements Information Systems

15-267

Organization Culture
The set of fundamental assumptions about

the organization and its goals and practices that members of the company share A system of shared values about what is important and beliefs about how the world works.

15-268

Importance of Culture
Key features of a companys organization

culture include:

Values and principles of management. Work climate and atmosphere. Patterns of how we do things around here. Traditions. Ethical standards.

An organizations culture often shapes the

strategic moves it considers.


15-269

Challenges and Pitfalls


Managers from different countries often have

values that differ from those endorsed by the company People in an MNE often have slight exposure to the values held by senior managers Evidence suggests that mixing national cultures on teams does not necessarily improve performance
15-270

Strategy and Organizational Culture in International Business

15-271

Managing International Operations


Marketing Globally

16-272

Objectives
To understand a range of product policies and the circumstances in

which they are appropriate internationally To grasp the reasons for product alterations when deciding between standardized versus differentiated marketing programs among countries To appreciate the pricing complexities when selling in foreign markets To interpret country differences that may necessitate alterations in promotional practices To comprehend the different branding strategies companies may employ internationally To discern complications of international distribution and practices of effective distribution To perceive why and how emphasis in the marketing mix may vary among countries

16-273

Marketing as a Means of Pursuing an International Strategy

16-274

Marketing Orientations
International marketing strategies depend

on companies orientations that include:


Production Sales Customer Strategic marketing Societal marketing

16-275

Production Orientation
Companies focus primarily on production -

either efficiency or high quality - with little emphasis on marketing. Used internationally for certain cases:
Commodity sales Passive exports Foreign-market segments or niches

16-276

Other Orientations
Sales orientation: a company tries to sell abroad

what it can sell domestically and in the same manner on the assumption that consumers are sufficiently similar globally. Customer orientation: the product and method of marketing it are varied Strategic Marketing orientation: combines production, sales, and customer orientations Social Marketing orientation: Companies consider effects on all stakeholders when selling or making their products.
16-277

Segmenting and Targeting Markets


The most common way of segmenting

markets is through demographics and psychographics Three basic approaches to international segmentation:
By country By global segment By multiple criteria
16-278

Why Firms Alter Products


Legal factors are usually related to safety or health

protection. Examination of cultural differences may pinpoint possible problem areas. Personal incomes and infrastructures affect product demand. Although some standardization of products would eliminate wasteful alterations, there is resistance because:
A changeover would be costly. People are familiar with the old.
16-279

Potential obstacles in International pricing


Government intervention Market diversity Export price escalation Fluctuations in currency value Fixed versus variable pricing Relations with suppliers

16-280

The Push-Pull Mix


Promotion may be categorized as push, which

uses direct selling techniques, or pull, which relies on mass media. For each product in each country, a company must determine its promotional budget as well as the mix between push and pull Factors in Push-Pull Decisions:
Type of distribution system Cost and availability of media to reach target markets Consumer attitudes toward sources of information Price of the product compared to incomes
Click for Video 16-281

Standardization of Advertising Programs


Advantages of standardized advertising include: Some cost savings. Better quality at local level. Rapid entry into different countries. Major problems for standardizing advertising

among countries are:


Translation Legality Message needs
16-282

Branding Strategies
A brand is an identifying mark for products or

services. Global branding is hampered by:


language differences expansion by acquisition nationality images laws concerning generic names

Global brands do help develop a global image

16-283

Distribution Strategies
Distribution is the course - physical path or

legal title - that goods take between production and consumption. Distribution reflects different country environments:
It may vary substantially among countries. It is difficult to change.

16-284

Choosing Distributors and Channels


Distribution may be handled internally:
When volume is high. When companies have sufficient resources. When there is a need to deal directly with the customer because of the nature of the product. When the customer is global. To gain a competitive advantage.

Some evaluation criteria for distributors include their:


Financial capability. Connections with customers. Fit with a companys product. Other resources. Trustworthiness. Compatibility with product image.
16-285

The Challenge Of Getting Distribution


Distributors choose which companies and

products to handle. Companies:

May need to give incentives. May use successful products as bait for new ones. Must convince distributors that product and company are viable.

Five factors that often contribute to cost

differences in distribution are infrastructure conditions, the number of levels in the distribution system, retail inefficiencies, size and operatinghour restrictions, and inventory stock-outs.
16-286

The Internet and Electronic Commerce


Although the Internet offers new

opportunities to sell internationally, using the Internet does not negate companies needs to develop sound programs within their marketing mix

16-287

Managing the Marketing Mix


The difference between total market potential and

companies sales is due to gaps:


Usage - less product sold by all competitors than potential. Product line - company lacks some product variations. Distribution - company misses geographic or intensity coverage. Competitive - competitors sales not explained by product line and distribution gaps.

16-288

Gap Analysis

16-289

Global Manufacturing and Supply Chain Management

17-290

Objectives
To describe different dimensions of global manufacturing

strategy To examine the elements of global supply chain management To show how quality affects the global supply chain To illustrate how supplier networks function To explain how inventory management is a key dimension of the global supply chain To present different alternatives for transporting products along the supply chain from suppliers to customers

17-291

Factors Influencing Supply Chain Management

17-292

Supply Chain Management


Supply chain - the coordination of

materials, information, and funds from the initial raw material supplier to the ultimate customer.

17-293

The Global Supply Chain

17-294

Logistics
Logistics, or materials management, is that

part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customers requirements

17-295

Global Manufacturing Strategies


The success of a global manufacturing

strategy depends on four key factors:


compatibility configuration coordination control

17-296

Compatibility
The degree of consistency between FDI decisions

and a companys competitive strategy. Some company strategies that managers must consider:
Efficiency/cost Dependability Quality Innovation Flexibility
17-297

Manufacturing Configuration
Three broad categories of manufacturing

configuration are:
centralized facility regional facilities multidomestic facilities

17-298

Coordination and Control


Coordinating is the linking or integrating of

activities into a unified system. Control can be the measuring of performance so companies can respond appropriately to changing conditions.

17-299

Information Technology
EDI (electronic data interchange) ERP (enterprise resource planning) MRP (material requirements planning) RFID (radio frequency ID) E-commerce Private technology exchange (PTX)

17-300

Quality
Quality is defined as meeting or exceeding

the expectations of customers. Quality standards can be:


general (ISO 9000) industry-specific company-specific (AQL, zero defects, TQM, and Six Sigma)

17-301

Total Quality Management


Total quality management (TQM) is a

process that stresses:


customer satisfaction employee involvement continuous improvements

The goal of TQM is to eliminate all defects.

17-302

Global Sourcing and Production Strategy

17-303

Supplier Networks
Sourcing: the process of a firm having inputs

supplied to it from outside suppliers (both domestic and foreign) for the production process. Domestic sourcing allows the company to avoid problems related to:
language culture currency tariffs, and so forth

Foreign sourcing allows the company to reduce

costs and improve quality, among other things


17-304

Outsourcing
Major outsourcing configurations: Vertical integration. Outsourcing through industrial clusters. Other outsourcing.

17-305

Make or Buy Decision


Under the make or buy decision, companies

have to decide if they will make their own parts or buy them from an independent company Companies go through different purchasing phases as they become more committed to global sourcing

17-306

Supplier Relations
When a company sources parts from

suppliers around the world, distance, time, and the uncertainty of the international political and economic environment can make it difficult for managers to manage inventory flows accurately

17-307

The Purchasing Function


Global progression in the purchasing

function:
Domestic purchasing only. Foreign buying based on need. Foreign buying as part of a procurement strategy. Integration of global procurement strategy.

17-308

Major Sourcing Strategies


Assign domestic buyers for foreign purchasing. Use foreign subsidiaries or business agents. Establish international purchasing offices. Assign the responsibility for global sourcing to a

specific business unit or units. Integrate and coordinate worldwide sourcing.

17-309

Steps In Global Sourcing Process

17-310

Lean Manufacturing and Just-in-Time Systems


Lean manufacturing - a productive system

whose focus is on optimizing processes through the philosophy of continual improvement. JIT - sourcing raw materials and parts just as they are needed in the manufacturing process.

17-311

Transportation Networks
The transportation system links together

suppliers, companies and customers Foreign trade zones (FTZs) - special locations for storing domestic and imported inventory in order to avoid paying duties until the inventory is used in production or sold.

17-312

International Accounting Issues

18-313

Objectives
To examine the major factors influencing the development of

accounting practices in different countries To examine the global convergence of accounting standards To explain how companies account for foreign-currency transactions and translate foreign-currency financial statements To discuss different forms of performance evaluation of foreign operations and how foreign exchange can complicate the budget process To explain how arbitrary transfer pricing can complicate performance evaluation and control To introduce the balanced scorecard as an approach to evaluating performance

18-314

Factors Influencing International Accounting

18-315

What the Controller Controls

18-316

Accounting for International Differences


Accounting standards and practices vary

around the world Both the form and the content of financial statements are different in different countries

18-317

Accounting Objectives
The accounting process identifies, records,

and interprets economic events. The Financial Accounting Standards Board (FASB) sets accounting standards in the United States. The International Accounting Standards Board (IASB) is an international privatesector organization that sets accounting standards.
18-318

Who Uses Accounting Information?

18-319

Environmental Influences on Accounting Practices

18-320

Cultural Differences in Accounting


Culture can have a strong influence on the

accounting dimensions of measurement and disclosure The cultural values of secrecy and transparency refer to the degree of disclosure of information The cultural values of optimism and conservatism refer to the valuation of assets and the recognition of income
18-321

A Disclosure/Assessment Matrix for National Accounting Systems

18-322

Development of Accounting Systems in the West

18-323

Classifying Accounting Systems According to Equity Market Strength

18-324

Financial Statements
Financial statements differ in terms of:
language currency type of statements (income statement, balance sheet, etc.) financial statement format extent of footnote disclosures the underlying GAAP on which the financial statements are based

Major approaches to dealing with accounting and reporting

differences:

Mutual recognition. Reconciliation to local GAAP. Recasting of financial statements in terms of local GAAP.
18-325

International Accounting Standards and Global Convergence


Convergence is the process of bringing

different national Generally Accepted Accounting Principles (GAAP) into line with International Financial Reporting Standards (IFRS) issued by the IASB.

18-326

Major forces leading to convergence


Investor orientation. Global integration of capital markets. MNEs need for foreign capital. Regional political and economic harmonization. MNEs desire to reduce accounting and

reporting costs. Convergence efforts of standards-setting bodies.

18-327

International Financial Reporting Standards (IFRS)


The IASB is attempting to harmonize accounting

standards through issuing International Financial Reporting Standards (IFRS). The EU and other countries have agreed to require IFRS for publicly listed companies. FASB and IASB are trying to converge their standards through a variety of different activities. Enforcement of IFRS is a major concern. The SEC may soon allow U.S.-listed firms to report financial results using IFRS.
18-328

Recording Foreign Currency Transactions


Foreign-currency receivables and payables give

rise to gains and losses whenever the exchange rate changes. Transaction gains and losses must be included in the income statement in the accounting period in which they arise. The FASB requires that U.S. companies report foreign currency transactions at the original spot exchange rate and that subsequent gains and losses on foreign-currency receivables or payables be put on the income statement. The same procedure must be followed according to IFRS.
18-329

Translating Foreign-Currency Financial Statements


Translation: the process of restating

foreign-currency financial statements. Consolidation: the process of combining the translated financial statements of a parent and its subsidiaries into one set of financial statements.
Click for Video 18-330

Translation Methods
The functional currency is the currency of

the primary economic environment in which the entity operates. The current-rate method applies when the local currency is the functional currency. The temporal method applies when the parents reporting currency is the functional currency.
18-331

Selecting a Translation Method

18-332

Disclosing Foreign-Exchange Gains and Losses


With the current-rate method, the

translation gain or loss is recognized in comprehensive income rather than net income, and therefore it goes to owners equity. With the temporal method, the translation gain or loss is recognized in the income statement.
18-333

Management Accounting Issues


Performance evaluation and control The impact of transfer pricing on

performance evaluation The use of the balanced scorecard

18-334

Performance Evaluation And Control


Different measures are used to evaluate

performance of foreign operations, including ROI, sales, cost reduction, quality targets, market share, profitability, and budget to actual. When using a budget, management must select a currency to set the budget and a currency to evaluate performance. The most widely used approaches to translate budgets and compare with performance use forecasts of the exchange rate.
18-335

Transfer Pricing And Performance Evaluation


Transfer pricing refers to prices on

intracompany transfers of goods, services, and capital. There are conflicting reasons for setting transfer prices that make it difficult for top management to select the correct price.

18-336

The Balanced Scorecard


The balanced scorecard is an approach to

performance measurement that closely links the strategic and financial perspectives of a business. Using the balanced scorecard helps management avoid using only one measure of performance.

18-337

Corporate Governance
The external and internal factors designed to

safeguard the assets of a company and protect the rights of shareholders. Corporate governance practices worldwide are partly a function of the legal environment in the countries where companies operate. The Sarbanes-Oxley Act of 2002 was passed in the United States to improve financial reporting and strengthen internal controls.
18-338

The Multinational Finance Function

19-339

Objectives
To describe the multinational finance function and how it fits in

the MNEs organizational structure To show how companies can acquire outside funds for normal operations and expansion, including offshore debt and equity funds To explore how offshore financial centers are used to raise funds and manage cash flows To explain how companies include international factors in the capital budgeting process To discuss the major internal sources of funds available to the MNE and to show how these funds are managed globally To describe how companies protect against the major financial risks of inflation and exchange-rate movements

19-340

Factors Influencing Finance in International Business

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The Role of the Treasurer in the Financial Function

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The Finance Function


The corporate finance function acquires and

allocates financial resources among the companys activities and projects. Four key functions are:
Capital structure. Long-term financing. Capital budgeting. Working capital management.

The CFO acquires financial resources and

allocates them among the companys activities and projects.


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Capital Structure
Capital structure of the company is the mix

between long-term debt and equity Leverage is the degree to which a firm funds the growth of business by debt. The amount of leverage used varies from country to country.

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Factors that Influence the Choice of Capital Structure


Choice of capital structure depends on: tax rates degree of development of local equity markets creditor rights Companies can use local and international

debt markets to raise funds.

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Global Capital Markets


Two major sources of funds external to the

MNEs normal operations are debt markets and equity markets.

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Eurocurrencies
A Eurocurrency is any currency banked outside its

country of origin, but it is primarily dollars banked outside the United States Four major sources of Eurocurrencies:

Foreign governments or individuals who want to hold dollars outside the United States Multinational enterprises that have cash in excess of current needs European banks with foreign currency in excess of current needs Countries such as Germany, Japan, and Taiwan that have large balance-of-trade surpluses held as reserves
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International Bonds
A foreign bond is one sold outside the

country of the borrower but denominated in the currency of the country of issue A Eurobond, also called a global bond, is a bond issue sold in a currency other than that of the country of issue

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Equity Securities and the Euroequity Market


The three largest stock markets in the world

are in New York, Tokyo, and London, with the U.S. markets controlling nearly half of the worlds stock market capitalization. Euroequities are shares listed on stock exchanges in countries other than the home country of the issuing company

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American Depositary Receipts (ADRs)


Most foreign companies that list on the U.S.

stock exchanges do so through American Depositary Receipts, which are financial documents that represent a share or part of a share of stock in the foreign company ADRs are easier to trade on the U.S. exchanges than are foreign shares

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Offshore Financial Centers


Offshore financing is the provision of financial

services by banks and other agents to nonresidents. Offshore financial centers are cities or countries that provide large amounts of funds in currencies other than their own. OFCs offer low or zero taxation, moderate or light financial regulation, and banking secrecy and anonymity. The OECD is trying to eliminate the harmful tax practices in tax-haven countries.
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Capital Budgeting in a Global Context


Capital budgeting is the process whereby

MNEs determine which projects and countries will receive capital investment funds.

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Methods Of Capital Budgeting


Capital budgeting techniques: Payback period. Net present value of a project. Internal rate of return. MNEs need to determine free cash flows based on

cash flow estimates and tax rates in different countries and an appropriate required rate of return adjusted for risk. Two ways to deal with the variations in future cash flows: determine several different scenarios or adjust the hurdle rate
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Internal Sources of Funds


Funds are working capital, or current assets

minus current liabilities. Sources of internal funds are:


Loans. Investments through equity capital. Intercompany receivables and payables. Dividends.

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How the MNE Handles Its Funds (I): Internal Funds

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Global Cash Management


Cash budgets and forecasts are essential in

assessing a companys cash needs. Dividends are a good source of intercompany transfers, but governments often restrict their free movement. Multilateral netting is the process of coordinating cash inflows and outflows among subsidiaries so that only net cash is transferred, reducing transaction costs. Netting requires sophisticated software and good banking relationships in different countries.
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How the MNE Handles Its Funds (II): Multilateral Cash Flows

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How the MNE Handles Its Funds (IV): Multilateral Netting

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Foreign-Exchange Risk Management


Translation exposure arises because the dollar value of the

exposed asset or liability changes as the exchange rate changes. Transaction exposure arises because the receivable or payable changes in value as the exchange rate changes. Economic, or operating, exposure arises from effects of exchange-rate changes on:
Future cash flows. The sourcing of parts and components. The location of investments. The competitive position of the company in different markets.

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Exposure-Management Strategy
To protect assets from exchange-rate risk,

management needs to:


Define and measure exposure. Establish a reporting system. Adopt an overall policy on exposure management. Formulate hedging strategies.

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Formulating Hedging Strategies


Hedging strategies can be operational or financial. Operational strategies include: Using local debt to balance local assets. Taking advantage of leads and lags for intercompany payments. Forward contracts can establish a fixed exchange

rate for future transactions. Currency options can ensure access to foreign currency at a fixed exchange rate for a specific period of time.

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Taxation of Foreign Source Income


Tax planning influences profitability and cash flow. Taxation has a strong impact on several choices:
Location of operations Choice of operating form, such as export or import, licensing agreement, overseas investment Legal form of the new enterprise, such as branch or subsidiary Possible facilities in tax-haven countries to raise capital and manage cash Method of financing, such as internal or external sourcing and debt or equity Capital budgeting decisions Method of setting transfer prices

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International Tax Practices


Problems with different countries tax practices

arise from:
Lack of familiarity with laws. Loose enforcement.

With a value-added tax, each company pays a

percentage of the value added to a product at each stage of the business process. Corporate tax rates vary from country to country.

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Approaches to Corporate Taxation


In the separate entity approach,

governments tax each taxable entity when it earns income. An integrated system tries to avoid double taxation of corporate income through split tax rates or tax credits.

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Taxing Branches And Subsidiaries


Foreign branch income (or loss) is directly

included in the parents taxable income. Tax deferral means that income from a subsidiary is not taxed until it is remitted to the parent company as a dividend. In a CFC, U.S. shareholders hold more than 50 percent of the voting stock. Active income is derived from the direct conduct of a trade or business. Passive income (also called Subpart F income) usually is derived from operations in a tax-haven country.
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The Tax-Haven Subsidiary as Holding Company

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The Tax Status of U.S.-Owned Foreign Subsidiaries

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Transfer Prices
A transfer price is a price on goods and

services one member of a corporate family sells to another. The OECD has set transfer pricing guidelines to eliminate the manipulation of prices and, therefore, taxes for MNEs.

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Double Taxation and Tax Credit


The IRS allows a tax credit for corporate

income tax U.S. companies pay to another country. A tax credit is a dollar-for-dollar reduction of tax liability and must coincide with the recognition of income. The purpose of tax treaties is to prevent double taxation or to provide remedies when it occurs.
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Human Resource Management

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Objectives
To discuss the importance of human resource

management in international business To profile principal types of staffing policies used by international companies To explain the qualifications of international managers To examine how MNEs select, prepare, compensate, and retain managers To profile MNEs relations with organized labor

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Factors Influencing HRM in International Business

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Human Resource Management (HRM)


Human resource management refers to

activities necessary to staff the organization. HRM is more difficult for the international company than its domestic counterpart due to:
Environmental differences. Organizational challenges.

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The Strategic Function of International HRM


Research and anecdotes show that the MNE whose

HRM policies support its chosen strategy creates superior value Many MNEs struggle to develop effective HRM policies An expatriate is an employee who leaves her or his native country to live and work in another. A third-country national is an employee who is a citizen of neither the home nor the host country.
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Staffing Policies
Three perspectives describe how companies set about

staffing their international operations, namely the:

ethnocentric - fills management positions with home-country nationals polycentric - uses host-country nationals to manage local subsidiaries geocentric approaches - seeks the best people for key jobs throughout the organization, regardless of their nationality

Companies may use elements of each staffing policy but one

type normally predominates While executive transferred from headquarters to local operations are more likely to best understand the companys core competencies, an ethnocentric staffing can result in a narrow perspective in foreign markets
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Comparing Approaches to Staffing Foreign Operations

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Selecting Expatriates
Technical competence often is the strongest

determinant of who is selected for an international assignment. Adaptiveness refers to a persons potential for
Self-maintenance and personal resourcefulness. Developing satisfactory relationships. Interpreting the immediate environment.

Top managers in subsidiaries usually assume a

greater range of leadership roles and broader duties than do managers of similar-size homecountry operations.
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Expatriate Failure
Expatriate failure is operationally costly and

professionally detrimental. The improving sophistication of MNE selection procedures has reduced the rate of expatriate failure. A leading cause of expatriate failure is the inability of a spouse to adapt to the host country.
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Training Expatriates
Training and predeparture preparations can lower the

probability of expatriate failure. Increasingly, preparation activities include the spouse. Training and predeparture preparations often includes:
general country orientation cultural sensitivity practical skills

MNEs usually anchor training programs to transfer

specific information about the host country as well as improve the executive's cultural sensitivity.

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Compensating Expatriates
Compensation must neither overly reward nor

unduly punish a person for accepting a foreign assignment. The most common approach to expatriate pay is the balance sheet approach. MNEs often provide additional compensation or more fringe benefits to employees who work in remote or dangerous areas. Companies struggle to determine the proper degree to which they should equalize pay for the same job done in different countries.
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Repatriating Expatriates
Repatriation, the act of returning home from a

foreign assignment, has many difficulties Repatriation tends to cause dissonance in many areas, most notably
Financial. Work. Social.

The principal cause of repatriation frustrations is

finding the right job for someone to return to


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International Labor Relations


A labor union is association of workers who

have united to represent their collective views for wages, hours, and working conditions. Collective bargaining refers to negotiations between labor union representatives and employers to reach agreement on a work contract.
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How Labor Looks At The MNE


Labor claims it is disadvantaged in dealing

with MNEs because:


It is hard to get full data on MNEs global operations. MNEs can manipulate investment incentives. They can easily move value activities to other countries. Ultimate decision making occurs in another country.
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How Labor Responds To The MNE


Labor tries to strengthen its bargaining power through

cross-national cooperation. Labor may be at a disadvantage in MNE negotiations because the

Country bargaining unit is only a small part of MNE activities. MNE may continue serving customers with foreign production or resources.

Falling union membership in many countries foreshadows

lower bargaining power for labor, whereas the effort of MNEs to develop integrated labor relations across countries increases their bargaining power.

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