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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.


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

Cultural Factors affecting International Business Operations


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


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


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


How Cultures Form and Change

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


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.

Major Language Groups: Population and Output


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


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

Issues in Work Motivation

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

Index Hierarchies of Needs


The Hierarchy of Needs vs. The Need Hierarchy


Factors Affecting Relationship Preferences

Power distance: general relationship

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


Factors Affecting Risk-taking Behavior

Uncertainty avoidance Trust Future orientation Fatalism


Factors Affecting Information and Task Processing

Perception of cues Obtaining Information: Low-Context versus

High-Context Cultures Information Processing


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


Dealing with Cultural Differences

Accommodation Cultural distance Culture shock Company and Management orientations polycentric ethnocentric geocentric

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

The Political and Legal Environments Facing Business

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


Political and Legal Factors Influencing International Business Operations


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


Individualism vs. Collectivism

Individualism: primacy of the rights and

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


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


The Political Spectrum


Wide participation by citizens in the

decision-making process Five types:

Parliamentary Liberal Multiparty Representative Social

Fundamental Features of Democratic Political Systems


Restricts decision making to a few

individuals Types:
Authoritarianism Fascism Secular totalitarianism Theocratic totalitarianism


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


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


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


The Diffusion of Civil Law


Trends in Legal Systems

The preference for stability The influence of national legacies


Bases of Rules
Rule of Man Rule of Law


Operational concerns that face managers worldwide

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


Strategic concerns that face managers worldwide

Product safety and liability Marketplace behavior Product origin Legal jurisdiction Arbitration


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

The Economic Environment

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

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.


Economic Factors Affecting International Business Operations


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.

Adjustments to GNI
Number of people in a country Growth rate Local cost of living Economic sustainability


Other features of an economy

Inflation Unemployment Debt Income distribution Poverty Labor costs Productivity Balance of payments

Components of a Countrys Balance of Payments


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.

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

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


Privatization Deregulation Property right protection Fiscal and monetary reform Antitrust legislation

Reforms and Economic Progress


Globalization and Society

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


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


Home and Host Country Influences on the Allocation of FDI


What MNEs Have To Offer


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


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


Why Companies Care About Ethical Behavior

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


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


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

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


Where Bribes Are (and Are Not) Business as Usual


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


Ethics and the Environment

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


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


Sources of Worker-Related Pressures in the Global Supply Chain


Ethical Dimensions of Labor Conditions

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


Corporate Codes of Ethics

Motivations for Corporate Responsibility Developing a good Code of Conduct


Theories and Institutions: Trade and Investment

International Trade and Factor Mobility Theory

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

International Operations and Economic Connections


Laissez-Faire versus Interventionist Approaches to Exports & Imports

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


Theories of Trade Patterns

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


What the major trade theories Do and Dont discuss


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


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


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


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

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


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

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


Worldwide trade of major manufactured goods


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


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

Life Cycle of the International Product


The Porter Diamond

Four conditions as important for

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


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


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

Governmental Influence On Trade



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


Physical and Social Factors Affecting the Flow of Goods and Services


Why Governments Intervene in Trade


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.

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


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.


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

Maintaining essential industries

In protecting essential industries, countries

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


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

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.

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.


Instruments of Trade Control

Trade controls that directly affect price and

indirectly affect quantity include:

tariffs subsidies customs-valuation methods special fees


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

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


Cross-national Cooperation And Agreements


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)

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


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


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


Impact of Free Trade Agreements


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

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


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.

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


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.

Regional economic integration in Asia & Africa

Association of Southeast Asian Nations

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


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


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

World Financial Environment

Global Foreign Exchange And Capital Markets

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

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


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


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


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.

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

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.

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.

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

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


Foreign-Exchange Markets: Exchange-Based and OTC Options


The Foreign-Exchange Trading Process


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


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


Letter-of-Credit Relationships


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


The Determination of Exchange Rates


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


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

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


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.


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

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


African countries are committed to

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


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

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

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


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


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

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

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.

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

Business Implications of ExchangeRate Changes

Exchange rates can affect business

decisions in three major areas:

Marketing Production Finance


Global, Strategy, Structure, and Implementation

The Strategy Of International Business

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

The Role of Strategy in International Business


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

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

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


The Five Forces Model of Industry Structure


Events that can change industry structure

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


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


Creating Value
Firms create value either through a low-cost

leadership strategy or a differentiation strategy


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


The Value Chain Framework


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


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.

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

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


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


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


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


Country Evaluation And Selection


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


Location Decisions Affecting International Operations


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

Where to sell. Where to produce.

The Location-Decision Process


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


Information that is important in Scanning

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


Factors to Consider in Analyzing Risk

Four broad categories of risk that

companies may consider are:

political monetary competitive natural disaster


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


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


Simplified Market-Penetration Grid


OpportunityRisk Matrix


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

The Usual Pattern of Internationalization


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.


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


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.


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

Export And Import Strategies


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

Environmental Factors Influencing Export and Import Operations


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


Advantages of Exporting
Lower investment way to enter foreign

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


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


Phases of Export Development


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


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

The International Transaction Chain


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.


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.


Strategic Advantages of Imports

Specialization of Labor Global Rivalry Local Unavailability Diversification of Operating Risks


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


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.


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


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

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

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


Trade Information by Type and Source


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


Direct Investment and Collaborative Strategies


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


Factors Affecting Operating Modes in International Business


Foreign Expansion: Alternative Operating Modes


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


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


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.

Methods for Making FDI

The advantages of acquiring an existing operation

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

Collaborative Arrangements and International Objectives


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


International Motives for Collaborative Arrangements

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


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

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


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

Management Contracts
Management contracts are used primarily

when the foreign company can manage better than the owners


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


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

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


Collaborative Strategy and Complexity of Control


How to Dissolve a Joint Venture


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


Managing Foreign Arrangements

The evolution to a different operating mode

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


Country Attractiveness/Company Strength Matrix


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


Performance Assessment
When collaborating with another company,

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


The Organization of International Business


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

Factors Affecting Organizing Operations


Organization in the International Business

The organization of international business is challenging due


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

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.


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


Functional structure


International division structure


Product division structure


Geographic (area) division structure


Matrix division structure


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


Simplified Network Structure


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

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


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.

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.


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


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.


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.


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

Strategy and Organizational Culture in International Business


Managing International Operations

Marketing Globally


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


Marketing as a Means of Pursuing an International Strategy


Marketing Orientations
International marketing strategies depend

on companies orientations that include:

Production Sales Customer Strategic marketing Societal marketing


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


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.

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

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.

Potential obstacles in International pricing

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


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

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


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.


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.

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.

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


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.


Gap Analysis


Global Manufacturing and Supply Chain Management


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


Factors Influencing Supply Chain Management


Supply Chain Management

Supply chain - the coordination of

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


The Global Supply Chain


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


Global Manufacturing Strategies

The success of a global manufacturing

strategy depends on four key factors:

compatibility configuration coordination control


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

Manufacturing Configuration
Three broad categories of manufacturing

configuration are:
centralized facility regional facilities multidomestic facilities


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.


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


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)


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.


Global Sourcing and Production Strategy


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


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


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


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


The Purchasing Function

Global progression in the purchasing

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


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.


Steps In Global Sourcing Process


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.


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.


International Accounting Issues


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


Factors Influencing International Accounting


What the Controller Controls


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


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.

Who Uses Accounting Information?


Environmental Influences on Accounting Practices


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

A Disclosure/Assessment Matrix for National Accounting Systems


Development of Accounting Systems in the West


Classifying Accounting Systems According to Equity Market Strength


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


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

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.


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.


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.

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.

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.

Selecting a Translation Method


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.

Management Accounting Issues

Performance evaluation and control The impact of transfer pricing on

performance evaluation The use of the balanced scorecard


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.

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.


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.


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.

The Multinational Finance Function


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


Factors Influencing Finance in International Business


The Role of the Treasurer in the Financial Function


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.


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.


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.


Global Capital Markets

Two major sources of funds external to the

MNEs normal operations are debt markets and equity markets.


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

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


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


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


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.

Capital Budgeting in a Global Context

Capital budgeting is the process whereby

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


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

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.


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


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.

How the MNE Handles Its Funds (II): Multilateral Cash Flows


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


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.


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.


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.


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


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.


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.


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.

The Tax-Haven Subsidiary as Holding Company


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


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.


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.

Human Resource Management


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


Factors Influencing HRM in International Business


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.


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.

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

Comparing Approaches to Staffing Foreign Operations


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.
Click for Video 20-377

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.

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.


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.

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


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.

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.

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.