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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
All commercial transactions including sales, investments, and transportationthat take place between two or more countries
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
along regional rather than global lines. Forces working against further globalization and international business will slow down both trends.
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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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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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culture Certain cultural attributes may link groups from different nations more closely than certain groups within nations
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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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continue to play a major role in shaping cultural values Many religions influence specific beliefs that may affect business
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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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between superiors and subordinates. Individualism vs. collectivism: degree of dependence on organization
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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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organizations, and interest groups, The relationships among institutions, and the political norms and rules that govern their functions
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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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Democracy
Wide participation by citizens in the
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Totalitarianism
Restricts decision making to a few
individuals Types:
Authoritarianism Fascism Secular totalitarianism Theocratic totalitarianism
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Bases of Rules
Rule of Man Rule of Law
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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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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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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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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
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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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with:
Privatization Deregulation Property right protection Fiscal and monetary reform Antitrust legislation
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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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concern for some countries MNEs and countries need to understand the impact of FDI in home and host countries
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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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depend on the values of the groups or are there universal standards Negotiating between evils Respecting cultural identity
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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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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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ICC and the UN The U.S. Foreign Corrupt Properties Act Industry Initiatives Relativism, the Rule of Law, and Responsibility
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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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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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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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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
it follows a free trade policy What types of products countries will export and import With which partners countries will primarily trade
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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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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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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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competitive superiority:
demand conditions factor conditions related and supporting industries firm strategy, structure, and rivalry
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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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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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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
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Physical and Social Factors Affecting the Flow of Goods and Services
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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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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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must:
Determine which ones are essential. Consider costs and alternatives. Consider political consequences.
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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.
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their citizens apart from those in other nations, countries limit foreign products and services in certain sectors.
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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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companies can:
Move abroad Seek other market niches Make domestic output competitive Try to get protection
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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)
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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
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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
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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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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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produce products. Companies need to determine what their entry strategy will be. Companies need to balance the commonness of the EU with national differences.
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(NAFTA) is designed to eliminate tariff barriers and liberalize investment opportunities and trade in services Key provisions in NAFTA are labor and environmental agreements
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DR) Andean Community (CAN) The Southern Common Market (MERCOSUR) The proposed South American Community of Nations.
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representatives of most of the countries in the world and international trade and development in a number of significant ways
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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
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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
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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
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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
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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
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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.
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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
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commodity markets. An invoice currency in many contracts. An intervention currency employed by monetary authorities in market operations to influence their own exchange rates.
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(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.
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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
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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
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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
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
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Letter-of-Credit Relationships
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transactions involving the imports and exports of goods and services, for foreign investments, and to earn money through arbitrage or speculation
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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
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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
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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.
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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
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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
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Africa
African countries are committed to
establishing a common currency by 2021, but there are many obstacles to accomplishing this objective
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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
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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
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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
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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
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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
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manage the political and economic environment certain technical factors that result from trading
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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.
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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
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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
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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
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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
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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
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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
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Creating Value
Firms create value either through a low-cost
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the value chain provides a strong tool to improve the accuracy of strategic analyses and decisions
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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
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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.
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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
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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
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Types Of Strategy
The firm entering and competing in foreign
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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
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Location
Companies lack resources to take advantage of all
decide:
Where to sell. Where to produce.
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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
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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
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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
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OpportunityRisk Matrix
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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
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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.
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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
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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
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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
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Advantages of Exporting
Lower investment way to enter foreign
markets Lower risk way to enter foreign markets Expands sales Achieves scale economies Diversifies sales
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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
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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
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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.
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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.
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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Management Contracts
Management contracts are used primarily
when the foreign company can manage better than the owners
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Turnkey Operations
Turnkey operations are: Most commonly performed by construction companies Often performed for a governmental agency
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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
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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
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may:
be the result of experience necessitate costly termination fees create organizational tensions
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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
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Performance Assessment
When collaborating with another company,
managers must:
continue to monitor performance assess whether to take over operations
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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
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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
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
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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.
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Horizontal Differentiation
Horizontal differentiation describes how the
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
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Functional structure
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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
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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
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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
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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.
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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.
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Control Mechanisms
Reports Visits to Subsidiaries Management Performance Evaluations Cost and Accounting Comparisons Evaluative Measurements Information Systems
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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.
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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.
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
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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
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Marketing Orientations
International marketing strategies depend
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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
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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.
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markets is through demographics and psychographics Three basic approaches to international segmentation:
By country By global segment By multiple criteria
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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.
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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
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Branding Strategies
A brand is an identifying mark for products or
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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.
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May need to give incentives. May use successful products as bait for new ones. Must convince distributors that product and company are viable.
differences in distribution are infrastructure conditions, the number of levels in the distribution system, retail inefficiencies, size and operatinghour restrictions, and inventory stock-outs.
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opportunities to sell internationally, using the Internet does not negate companies needs to develop sound programs within their marketing mix
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Gap Analysis
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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
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materials, information, and funds from the initial raw material supplier to the ultimate customer.
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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
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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
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Manufacturing Configuration
Three broad categories of manufacturing
configuration are:
centralized facility regional facilities multidomestic facilities
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activities into a unified system. Control can be the measuring of performance so companies can respond appropriately to changing conditions.
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Information Technology
EDI (electronic data interchange) ERP (enterprise resource planning) MRP (material requirements planning) RFID (radio frequency ID) E-commerce Private technology exchange (PTX)
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Quality
Quality is defined as meeting or exceeding
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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
Outsourcing
Major outsourcing configurations: Vertical integration. Outsourcing through industrial clusters. Other outsourcing.
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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
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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
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function:
Domestic purchasing only. Foreign buying based on need. Foreign buying as part of a procurement strategy. Integration of global procurement strategy.
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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.
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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.
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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
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around the world Both the form and the content of financial statements are different in different countries
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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.
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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
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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
differences:
Mutual recognition. Reconciliation to local GAAP. Recasting of financial statements in terms of local GAAP.
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different national Generally Accepted Accounting Principles (GAAP) into line with International Financial Reporting Standards (IFRS) issued by the IASB.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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allocates financial resources among the companys activities and projects. Four key functions are:
Capital structure. Long-term financing. Capital budgeting. Working capital management.
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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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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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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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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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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MNEs determine which projects and countries will receive capital investment funds.
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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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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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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,
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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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arise from:
Lack of familiarity with laws. Loose enforcement.
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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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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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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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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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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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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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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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
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
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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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.
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
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.
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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Country bargaining unit is only a small part of MNE activities. MNE may continue serving customers with foreign production or resources.
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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