International Business An Asian Perspective By Charles W.L. Hill Chow-Hou Wee Krishna Udayasankar
Chapter 1
Globalization McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
What Is Globalization? The world is moving away from selfcontained national economies toward an interdependent, integrated global economic system Globalization refers to the shift toward a more integrated and interdependent world economy
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What Is The Globalization of Markets? Historically distinct and separate national markets are merging It no longer makes sense to talk about the “German market” or the “American market” Instead, there is the “global market” falling trade barriers make it easier to sell globally consumers’ tastes and preferences are converging on some global norm firms promote the trend by offering the same basic products worldwide 1-4
What Is The Globalization of Production? Firms source goods and services from locations around the globe to capitalize on national differences in the cost and quality of factors of production like land, labor, and capital Companies can lower their overall cost structure improve the quality or functionality of their product offering 1-5
Why Do We Need Global Institutions? Institutions help manage, regulate, and police the global marketplace promote the establishment of multinational treaties to govern the global business system
Examples include the General Agreement on Tariffs and Trade (GATT) the World Trade Organization (WTO) the International Monetary Fund (IMF) the World Bank the United Nations (UN) 1-6
What Do Global Institutions Do? The World Trade Organization (like its predecessor GATT) polices the world trading system makes sure that nation-states adhere to the rules laid down in trade treaties promotes lower barriers to trade and investment
The International Monetary Fund (1944) maintains order in the international monetary system The World Bank (1944) promotes economic development The United Nations (1945) maintains international peace and security develops friendly relations among nations cooperates in solving international problems and in promoting respect for human rights is a center for harmonizing the actions of nations
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What Is Driving Globalization? The decline in barriers to the free flow of goods, services, and capital that has occurred since the end of World War II since 1950, average tariffs have fallen significantly and are now at 4 percent countries have opened their markets to FDI
Technological change microprocessors and telecommunications the Internet and World Wide Web transportation technology 1-8
Declining Trade And Investment Barriers Average Tariff Rates on Manufactured Products as Percent of Value
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What Does Globalization Mean For Firms? Lower barriers to trade and investment mean firms can view the world, rather than a single country, as their market base production in the optimal location for that activity
Technological change means lower transportation costs - firms can disperse production to economical, geographically separate locations lower information processing and communication costs - firms can create and manage globally dispersed production systems low cost global communications networks - help create an electronic global marketplace low-cost transportation - help create global markets global communication networks and global media - create a worldwide culture, and a global market for consumer products
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The Changing Demographics Of The Global Economy There has been a drastic change in the demographics of the world economy in the last 30 years Four trends are important: 1. the Changing World Output and World Trade Picture 2. the Changing Foreign Direct Investment Picture 3. the Changing Nature of the Multinational Enterprise 4. the Changing World Order 1-11
How Has World Output And World Trade Changed? In 1960, the United States accounted for over 40% of world economic activity By 2008, the United States accounted for just over 20% of world economic activity A similar trend occurred in other developed countries The share of world output accounted for by developing nations is rising and is expected to account for more than 60% of world economic activity by 2020 1-12
How Has World Output And World Trade Changed? The Changing Demographics of World GDP and Trade
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How Has Foreign Direct Investment Changed Over Time? In the 1960s, U.S. firms accounted for about twothirds of worldwide FDI flows Today, the United States accounts for less than one-fifth of worldwide FDI flows Other developed countries have followed a similar pattern In contrast, the share of FDI accounted for by developing countries has risen Developing countries, especially China, have also become popular destinations for FDI 1-14
How Has Foreign Direct Investment Changed Over Time? Percentage Share of Total FDI Stock 1980-2007
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How Has Foreign Direct Investment Changed Over Time? FDI Inflows 1988-2008
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What Is A Multinational Enterprise? A multinational enterprise (MNE) is any business that has productive activities in two or more countries Since the 1960s, there has been a rise in non-U.S. multinationals, and a growth of mini-multinationals
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The Changing World Order Many former Communist nations in Europe and Asia are now committed to democratic politics and free market economies so, there are new opportunities for international businesses but, there are signs of growing unrest and totalitarian tendencies in some countries like Russia
China and Latin America are also moving toward greater free market reforms between 1983 and 2008, FDI in China increased from less than $2 billion to $90 billion annually but, China also has many new strong companies that could threaten Western firms 1-18
How Will The Global Economy Of The 21st Century Look? The world is moving toward a more global economic system… But globalization is not inevitable there are signs of a retreat from liberal economic ideology in Russia
Globalization brings risks the financial crisis that swept through South East Asia in the late 1990s the recent financial crisis that started in the U.S. in 2008, and moved around the world 1-19
Is An Interdependent Global Economy A Good Thing? Supporters believe that increased trade and crossborder investment mean lower prices for goods and services greater economic growth higher consumer income, and more jobs
Critics worry that globalization will cause job losses environmental degradation the cultural imperialism of global media and MNEs
Anti-globalization protesters now regularly show up at most major meetings of global institutions 1-20
How Does Globalization Affect Jobs And Income? Critics argue that falling barriers to trade are destroying manufacturing jobs in advanced countries Supporters contend that the benefits of this trend outweigh the costs countries will specialize in what they do most efficiently and trade for other goods—and all countries will benefit
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How Does Globalization Affect Labor Policies And The Environment? Critics argue that firms avoid costly efforts to adhere to labor and environmental regulations by moving production to countries where such regulations do not exist, or are not enforced Supporters claim that tougher environmental and labor standards are associated with economic progress as countries get richer from free trade, they implement tougher environmental and labor regulations
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How Does Globalization Affect National Sovereignty? Is today’s interdependent global economy shifting economic power away from national governments toward supranational organizations like the WTO, the EU, and the UN? Critics argue that unelected bureaucrats have the power to impose policies on the democratically elected governments of nation-states Supporters claim that the power of these organizations is limited to what nation-states agree to grant the power of the organizations lies in their ability to get countries to agree to follow certain actions 1-23
How Is Globalization Affecting The World’s Poor? Is the gap between rich nations and poor nations is getting wider? Critics believe that if globalization was beneficial there should not be a divergence between rich and poor nations Supporters claim that the best way for the poor nations to improve their situation is to reduce barriers to trade and investment implement economic policies based on free market economies receive debt forgiveness for debts incurred under totalitarian regimes 1-24
How Does The Global Marketplace Affect Managers? Managing an international business differs from managing a domestic business because countries are different the range of problems confronted in an international business is wider and the problems more complex than those in a domestic business firms have to find ways to work within the limits imposed by government intervention in the international trade and investment system international transactions involve converting money into different currencies 1-25
Review Question The shift toward a more integrated and interdependent world economy is referred to as a) economic integration b) economic interdependency c) globalization d) internationalization 1-26
Review Question The merging of historically distinct and separate national markets into one huge global marketplace is known as a) global market facilitation b) cross-border trade c) supranational market integration d) the globalization of markets 1-27
Review Question Firms that are involved in international business tend to be a) large b) small c) medium-sized d) large, small, and medium-sized 1-28
Review Question Which is not a factor of production? a) trade b) land c) capital d) energy
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Review Question The sourcing of good and services from around the world to take advantage of national differences in the cost and quality of factors of production is called a) economies of scale b) the globalization of production c) global integration d) global sourcing 1-30
Review Question Which organization is responsible for policing the world trading system? a) the International Monetary Fund b) the United Nations c) the World Trade Organization d) the World Bank 1-31
Review Question What is the single most important innovation to the globalization of markets and production? a) advances in transportation technology b) the development of the microprocessor c) advances in communication d) the Internet 1-32
Review Question Which of the following trends is true? a) the United States is accounting for a greater percentage of world trade than ever before b) the United States is accounting for a greater percentage of foreign direct investment than ever before c) the share of world trade accounted for by developing countries is rising d) the share of foreign direct investment by developing countries is declining 1-33
Review Question Which of these is not a concern of anti-globalization protesters? a) globalization raises consumer income b) globalization contributes to environmental degradation c) globalization is causing a loss of manufacturing jobs in developing countries d) globalization implies a loss of national sovereignty 1-34
International Business An Asian Perspective By Charles W.L. Hill Chow-Hou Wee Krishna Udayasankar
Chapter 2
National Differences in Political Economy McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
What Is A Political Economy? The political economy of a nation refers to how the political, economic, and legal systems of a country are interdependent they interact and influence each other they affect the level of economic well-being in the nation
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What Is A Political System? Political system refers to the system of government in a nation Assessed according to the degree to which the country emphasizes collectivism as opposed to individualism the degree to which the country is democratic or totalitarian
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What Is Collectivism? Collectivism stresses the primacy of collective goals over individual goals can be traced to the Greek philosopher, Plato (427-347 BC)
Today, collectivism is equated with socialists (Karl Marx 1818-1883) advocate state ownership of the basic means of production, distribution, and exchange manage to benefit society as a whole, rather than individual capitalists 2-39
How Does Modern-Day Socialism Look? In the early 20th century, socialism split into 1. Communism – socialism can only be achieved through violent revolution and totalitarian dictatorship in retreat worldwide by mid-1990s
2. Social democrats – socialism is achieved through democratic means retreating as many countries move toward free market economies state-owned enterprises have been privatized
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What Is Individualism? Individualism refers to philosophy that an individual should have freedom in his own economic and political pursuits can be traced to Greek philosopher, Aristotle (384-322 BC), who argued that individual diversity and private ownership are desirable individual economic and political freedoms are the ground rules on which a society should be based implies democratic political systems and free market economies
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What Is Democracy? Democracy refers to a political system in which government is by the people, exercised either directly or through elected representatives usually associated with individualism pure democracy is based on the belief that citizens should be directly involved in decision making most modern democratic states practice representative democracy where citizens periodically elect individuals to represent them
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What Is Totalitarianism? Totalitarianism is a form of government in which one person or political party exercises absolute control over all spheres of human life and prohibits opposing political parties 1. Communist totalitarianism – found in states where the communist party monopolizes power 2. Theocratic totalitarianism - found in states where political power is monopolized by a party, group, or individual that governs according to religious principles 3. Tribal totalitarianism - found in states where a political party that represents the interests of a particular tribe monopolizes power 4. Right-wing totalitarianism - permits some individual economic freedom, but restricts individual political freedom 2-43
What Is An Economic System? 1.
2.
3.
There are three types of economic systems Market economies - all productive activities are privately owned and production is determined by the interaction of supply and demand government encourages free and fair competition between private producers Command economies - government plans the goods and services that a country produces, the quantity that is produced, and the prices as which they are sold all businesses are state-owned, and governments allocate resources for “the good of society” because there is little incentive to control costs and be efficient, command economies tend to stagnate Mixed economies - certain sectors of the economy are left to private ownership and free market mechanisms while other sectors have significant state ownership and government planning governments tend to own firms that are considered important to national security
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What Is A Legal System? The legal system of a country refers to the rules that regulate behavior along with the processes by which the laws are enforced and through which redress for grievances is obtained There are three types of legal systems 1. Common law - based on tradition, precedent, and custom 2. Civic law - based on detailed set of laws organized into codes 3. Theocratic law - law is based on religious teachings 2-45
How Are Contracts Enforced In Different Legal Systems? A contract is a document that specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved Contract law is the body of law that governs contract enforcement Under a common law system, contracts tend to be very detailed with all contingencies spelled out Under a civil law system, contracts tend to be much shorter and less specific because many issues are already covered in the civil code Many countries have ratified the United Nations Convention on Contracts for the International Sale of Goods (CIGS) which establishes a uniform set of rules governing certain aspects of the making and performance of everyday commercial contracts between buyers and sellers who have their places of business in different nations
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How Are Property Rights And Corruption Related?
Property rights refer to the legal rights over the use to which a resource is put and over the use made of any income that may be derived from that resource Can be violated through 1. 2.
Private action – theft, piracy, blackmail Public action - legally - ex. excessive taxation or illegally - ex. bribes or blackmailing
high levels of corruption reduce foreign direct investment, the level of international trade, and the economic growth rate in a country
The Foreign Corrupt Practices Act makes it illegal for U.S. companies to bribe foreign government officials to obtain or maintain business over which that foreign official has authority 2-47
Which Countries Are Most Corrupt? Rankings of Corruption by Country 2008
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How Can Intellectual Property Be Protected? Intellectual property - property that is the product of intellectual activity Can be protected using 1. Patents – exclusive rights for a defined period to the manufacture, use, or sale of that invention 2. Copyrights – the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit 3. Trademarks – design and names by which merchants or manufacturers designate and differentiate their products
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How Can Intellectual Property Be Protected? Protection of intellectual property rights differs from country to country World Intellectual Property Organization Paris Convention for the Protection of Industrial Property
To avoid piracy, firms can stay away from countries where intellectual property laws are lax file lawsuits lobby governments for international property rights agreements and enforcement 2-50
What Is Product Safety And Liability? Product safety laws set certain standards to which a product must adhere Product liability involves holding a firm and its officers responsible when a product causes injury, death, or damage When product safety laws are stricter in a firm’s home country than in a foreign country, or when liability laws are more lax, the firm has to decide whether to adhere to home country or host country standards 2-51
What Determines A Country’s Level Of Economic Development? Two ways to measure levels of economic development are 1. Gross national income (GNI) per person 2. Purchasing power parity (PPP) involves adjusting GNI by purchasing power Nobel-prize winner Amartya Sen argues economic development should be seen as a process of expanding the real freedoms that people experience the removal of major impediments to freedom like poverty, tyranny, and neglect of public facilities the presence of basic health care and basic education 2-52
What Determines A Country’s Level Of Economic Development? The United Nations used Sen’s ideas to develop the Human Development Index (HDI) which is based on life expectancy at birth educational attainment whether average incomes are sufficient to meet the basic needs of life in a country
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How Do Countries Compare on Economic Development? Economic Data for Select Countries
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How Does Political Economy Influence Economic Progress? Innovation and entrepreneurship are the engines of long-run economic growth Innovation and entrepreneurship require a market economy and strong property rights Democratic regimes are probably more conducive to long-term economic growth than dictatorships, even the benevolent kind Subsequent economic growth leads to the establishment of democratic regimes 2-55
How Do Geography And Education Influence Economic Development? Countries with favorable geography are more likely to engage in trade, and so, be more open to market-based economic systems, and the economic growth they promote Countries that invest in education have higher growth rates because the workforce is more productive 2-56
How Is The Political Economy Changing? 1.
Since the late 1980s, two trends have emerged Democratic revolution (late 1980s and early 1990s)
2.
many totalitarian regimes failed to deliver economic progress to the vast bulk of their populations new information and communication technologies have broken down the ability of the state to control access to uncensored information economic advances of the last 25 years have led to increasingly prosperous middle and working classes who have pushed for democratic reforms
A move away from centrally planned and mixed economies
more countries have shifted toward the market-based model
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How Free Are Countries Politically? Political Freedom in 2008
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How Free Are Countries Economically? Distribution of Economic Freedom in 2008
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What Is The Nature Of Economic Transformation? The shift toward a market-based system involves deregulation – removing legal restrictions to the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate privatization - transfers the ownership of state property into the hands of private investors the creation of a legal system to safeguard property rights 2-60
What Does The Changing Economy Mean For Managers? Markets that were formerly off-limits to Western business are now open By identifying and investing early in a potential future economic stars, firms may be able to gain first mover advantages (advantages that accrue to early entrants into a market) and establish loyalty and experience in a country ex. China -1.2 billion people and India – 1.1 billion people
However, the potential risks are large It can be more costly to do business in countries with dramatically different product, workplace, and pollution standards, or where there is poor legal protection for property rights 2-61
What Does The Changing Economy Mean For Managers? Managers must consider 1. Political risk - the likelihood that political forces will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise 2. Economic risk - the likelihood that economic mismanagement will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise 3. Legal risk - the likelihood that a trading partner will opportunistically break a contract or expropriate property rights 2-62
How Can Managers Determine A Market’s Overall Attractiveness? The overall attractiveness of a country as a potential market and/or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country Other things being equal, the benefit-cost-risk trade-off is likely to be most favorable in politically stable developed and developing nations that have free market systems and no dramatic upsurge in either inflation rates or private sector debt 2-63
Review Question A political system that stresses the primacy of collective goals over individual goals is called a) individualism b) collectivism c) a democracy d) a market economy 2-64
Review Question _____ believe(s) that socialism can only be achieved through violent revolution and totalitarian dictatorship. a) communists b) social democrats c) social republicans d) Plato 2-65
Review Question A form of government in which one person or political party exercises complete control over all spheres of human life and prohibits opposing political parties is a) a democracy b) a representative democracy c) totalitarianism d) socialism 2-66
Review Question ______ is found in states where political power is monopolized by a party according to religious principles. a) tribal totalitarianism b) right-wing totalitarianism c) theocratic totalitarianism d) communist totalitarianism 2-67
Review Question In which type of economic system are all productive activities privately owned? a) a mixed economy b) a command economy c) a representative economy d) a market economy 2-68
Review Question Which type of law is based on tradition, precedent, and custom? a) civil law b) common law c) theocratic law d) contract law 2-69
Review Question Which country is not among the most corrupt countries in the world? a) Haiti b) Indonesia c) Malaysia d) Nigeria 2-70
Review Question Design and names by which merchants or manufacturers designate and differentiate their products are called a) trademarks b) copyrights c) patents d) name brands 2-71
Review Question Which is not a primary determinant of a nation’s rate of economic development? a) its political system b) its economic system c) its geography d) its currency
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International Business An Asian Perspective By Charles W.L. Hill Chow-Hou Wee Krishna Udayasankar
Chapter 3
Differences in Culture
What Is Cross-Cultural Literacy? Cross-cultural literacy is an understanding of how cultural differences across and within nations can affect the way in which business is practiced A relationship may exist between culture and the costs of doing business in a country or region
Copyright © 2011 McGraw-Hill/Irwin
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What Is Culture? Culture is a system of values and norms that are shared among a group of people and that when taken together constitute a design for living where values are abstract ideas about what a group believes to be good, right, and desirable norms are the social rules and guidelines that prescribe appropriate behavior in particular situations
Society refers to a group of people who share a common set of values and norms Copyright © 2011 McGraw-Hill/Irwin
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What Are Values And Norms? Values provide the context within which a society’s norms are established and justified and form the bedrock of a culture Norms include folkways - the routine conventions of everyday life mores - norms that are seen as central to the functioning of a society and to its social life
Copyright © 2011 McGraw-Hill/Irwin
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How Are Culture, Society, And The Nation-State Related? The relationship between a society and a nation state is not strictly one-to-one Nation-states are political creations can contain one or more cultures
A culture can embrace several nations
Copyright © 2011 McGraw-Hill/Irwin
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What Are The Determinants Of Culture? The values and norms of a culture evolve over time Determinants include religion political and economic philosophies education language social structure Copyright © 2011 McGraw-Hill/Irwin
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What Is A Social Structure? Social structure refers to a society’s basic social organization Consider the degree to which the basic unit of social organization is the individual, as opposed to the group the degree to which a society is stratified into classes or castes
Copyright © 2011 McGraw-Hill/Irwin
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How Are Individuals And Groups Different? A group is an association of two or more people who have a shared sense of identity and who interact with each other in structured ways on the basis of a common set of expectations about each other’s behavior In Western societies, there is a focus on the individual individual achievement is common dynamism of the U.S. economy high level of entrepreneurship
But, creates a lack of company loyalty and failure to gain company specific knowledge competition between individuals in a company instead of than team building less ability to develop a strong network of contacts within a firm Copyright © 2011 McGraw-Hill/Irwin
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How Are Individuals And Groups Different? In many Asian societies, the group is the primary unit of social organization discourages job switching between firms encourages lifetime employment systems leads to cooperation in solving business problems
But, might also suppress individual creativity and initiative Copyright © 2011 McGraw-Hill/Irwin
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What Is Social Stratification? All societies are stratified on a hierarchical basis into social categories, or social strata Must consider 1. The degree of social mobility - the extent to which individuals can move out of the strata into which they are born caste system - closed system of stratification in which social position is determined by the family into which a person is born change is usually not possible during an individual's lifetime
class system - form of open social stratification position a person has by birth can be changed through achievement or luck
2. The significance attached to social strata in business contacts Class consciousness is a condition where people tend to perceive themselves in terms of their class background, and this shapes their relationships with others Copyright © 2011 McGraw-Hill/Irwin
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How Do Religious And Ethical Systems Differ?
Religion is a system of shared beliefs and rituals that are concerned with the realm of the sacred Religion and ethics are often closely intertwined Four religions dominate society 1. 2. 3. 4.
Christianity Islam Hinduism Buddhism
Confucianism is also important in influencing behavior and culture in many parts of Asia Ethical systems are a set of moral principles, or values, that are used to guide and shape behavior Copyright © 2011 McGraw-Hill/Irwin
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How Do Religious And Ethical Systems Differ? World Religions
Copyright © 2011 McGraw-Hill/Irwin
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What Is Christianity? Christianity the world’s largest religion found throughout Europe, the Americas, and other countries settled by Europeans the Protestant work ethic (Max Weber, 1804) hard work, wealth creation, and frugality is the driving force of capitalism
Copyright © 2011 McGraw-Hill/Irwin
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What Is Islam? Islam the world’s second largest religion extends the underlying roots of Christianity to an all-embracing way of life that governs one's being Islamic fundamentalism is associated in the Western media with militants, terrorists, and violent upheavals, but in fact Islam teaches peace, justice, and tolerance fundamentalists, who demand rigid commitment to religious beliefs and rituals, have gained political power in many Muslim countries, and blame the West for many social problems people do not own property, but only act as stewards for God people must take care of that which they have been entrusted with
supportive of business, but the way business is practiced is prescribed Copyright © 2011 McGraw-Hill/Irwin
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What Is Hinduism? Hinduism practiced primarily on the Indian sub-continent focuses on the importance of achieving spiritual growth and development, which may require material and physical self-denial Hindus are valued by their spiritual rather than material achievements promotion and adding new responsibilities may not be important, or may be infeasible due to the employee's caste Copyright © 2011 McGraw-Hill/Irwin
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What Is Buddhism? Buddhism has about 350 millions followers stresses spiritual growth and the afterlife, rather than achievement while in this world does not emphasize wealth creation entrepreneurial behavior is not stressed does not support the caste system, individuals do have some mobility and can work with individuals from different classes Copyright © 2011 McGraw-Hill/Irwin
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What Is Confucianism? Confucianism ideology practiced mainly in China teaches the importance of attaining personal salvation through right action high morals, ethical conduct, and loyalty to others are stressed three key teachings of Confucianism - loyalty, reciprocal obligations, and honesty - may all lead to a lowering of the cost of doing business in Confucian societies Copyright © 2011 McGraw-Hill/Irwin
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What Is The Role Of Language In Culture? Language - the spoken and unspoken (nonverbal communication such as facial expressions, personal space, and hand gestures ) means of communication One of the defining characteristics of culture countries with more than one language often have more than one culture English is the most widely spoken language in the world Chinese is the mother tongue of the largest number of people English is also becoming the language of international business knowledge of the local language is still beneficial, and in some cases, critical for business success failing to understand the nonverbal cues of another culture can lead to communication failure
Copyright © 2011 McGraw-Hill/Irwin
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What Is The Role Of Education In Culture? Formal education is the medium through which individuals learn many of the language, conceptual, and mathematical skills that are indispensable in a modern society important in determining a nation’s competitive advantage general education levels can be a good index for the kinds of products that might sell in a country Copyright © 2011 McGraw-Hill/Irwin
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How Does Culture Impact The Workplace? 1. 2.
3. 4.
Management processes and practices must be adapted to culturally-determined work-related values Geert Hofstede identified four dimensions of culture Power distance - how a society deals with the fact that people are unequal in physical and intellectual capabilities Uncertainty avoidance - the relationship between the individual and his fellows Individualism versus collectivism - the extent to which different cultures socialize their members into accepting ambiguous situations and tolerating ambiguity Masculinity versus femininity -the relationship between gender and work roles Copyright © 2011 McGraw-Hill/Irwin
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How Does Culture Impact The Workplace? Work-Related Values for 20 Countries
Copyright © 2011 McGraw-Hill/Irwin
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Was Hofstede Right? Hofstede later expanded added a fifth dimension called Confucian dynamism captures attitudes toward time, persistence, ordering by status, protection of face, respect for tradition, and reciprocation of gifts and favors
Hofstede’s work has been criticized because made the assumption there is a one-to-one relationship between culture and the nation-state study may have been culturally bound used IBM as sole source of information culture is not static – it evolves
But, it is a starting point for understanding how cultures differ, and the implications of those differences for managers Copyright © 2011 McGraw-Hill/Irwin
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Does Culture Change? Culture evolves over time changes in value systems can be slow and painful for a society
Social turmoil - an inevitable outcome of cultural change as countries become economically stronger, cultural change is particularly common
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What Do Cultural Differences Mean For Managers? 1. It is important to develop cross-cultural literacy companies that are ill informed about the practices of another culture are unlikely to succeed in that culture managers must beware of ethnocentric behavior, or a belief in the superiority of one's own culture
2. There is a connection between culture and national competitive advantage suggests which countries are likely to produce the most viable competitors has implications for the choice of countries in which to locate production facilities and do business
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Review Question Abstract ideas about what a group believes to be good, right, and desirable are called a) norms b) values c) folkways d) mores
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Review Question The basic social organization of a society is its a) culture b) social strata c) social structure d) caste system
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Review Question The group is the primary unit of social organization in a) Japan b) the United States c) Switzerland d) Mexico
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Review Question Which of the following is not characteristic of individualism? a) individual achievement b) low managerial mobility c) low company loyalty d) entrepreneurial behavior Copyright © 2011 McGraw-Hill/Irwin
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Review Question Which religion promotes the notion that a moral force in society requires the acceptance of certain responsibilities called dharma? a) Islam b) Buddhism c) Hinduism d) Confucianism Copyright © 2011 McGraw-Hill/Irwin
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Review Question _______ focuses on how society deals with the fact that people are unequal in physical and intellectual capabilities. a) power distance b) individualism versus collectivism c) uncertainty avoidance d) masculinity versus femininity Copyright © 2011 McGraw-Hill/Irwin
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International Business An Asian Perspective By Charles W.L. Hill Chow-Hou Wee Krishna Udayasankar
Chapter 4 Ethics in International Business
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
What Is Ethics? Ethics refers to accepted principles of right or wrong that govern the conduct of a person the members of a profession the actions of an organization
Business ethics are the accepted principles of right or wrong governing the conduct of business people Ethical strategy is a strategy, or course of action, that does not violate these accepted principles 4-106
Which Ethical Issues Are Most Relevant To International Firms? The most common ethical issues in business involve 1. 2. 3. 4. 5.
employment practices human rights environmental regulations corruption the moral obligation of multinational companies 4-107
How Are Ethics Relevant To Employment Practices? Suppose work conditions in a host nation are clearly inferior to those in the multinational’s home nation Which standards should apply? home country standards host country standards something in between
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How Are Ethics Relevant To Human Rights? Basic human rights are taken for granted in developed countries freedom of association freedom of speech freedom of assembly freedom of movement
What are the responsibilities of firms in countries where basic human rights are not respected? 4-109
How Are Ethics Relevant To Environmental Regulations? Some parts of the environment are a public good that no one owns, but anyone can despoil The tragedy of the commons occurs when a resource held in common by all, but owned by no one, is overused by individuals, resulting in its degradation What happens when environmental regulations in host nations are far inferior to those in the home nation? Is it permissible for multinationals to pollute in developing countries simply because there are no regulations against it? 4-110
How Are Ethics Relevant To Corruption? The U.S. Foreign Corrupt Practices Act outlawed the practice of paying bribes to foreign government officials in order to gain business The Convention on Combating Bribery of Foreign Public Officials in International Business Transactions adopted by the Organization for Economic Cooperation and Development (OECD), obliges member states to make the bribery of foreign public officials a criminal offense But, is it permissible for multinationals to pay government officials facilitating payments if doing so creates local income and jobs?
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How Are Ethics Relevant To Moral Obligations? Social responsibility refers to the idea that managers should consider the social consequences of economic actions when making business decisions, and that there should be a presumption in favor of decisions that have both good economic and good social consequences it is the right way for a business to behave
Advocates argue that businesses need to recognize their noblesse oblige - honorable and benevolent behavior that is the responsibility of successful companies give something back to the societies that have made their success possible
But, are multinationals morally required to use their power to enhance local welfare? 4-112
What Are Ethical Dilemmas? Ethical dilemmas are situations in which none of the available alternatives seems ethically acceptable The ethical obligations of a multinational corporation toward employment conditions, human rights, corruption, environmental pollution, and the use of power are not always clear cut 4-113
Why Do Managers Behave Unethically? 1.
Several factors contribute to unethical behavior including Personal ethics - the generally accepted principles of right and wrong governing the conduct of individuals
2.
expatriates may face pressure to violate their personal ethics because they are away from their ordinary social context and supporting culture managers fail to question whether a decision or action is ethical, and instead rely on economic analysis when making decisions
Decision-making processes - the values and norms that are shared among employees of an organization
organization culture that does not emphasize business culture encourages unethical behavior 4-114
Why Do Managers Behave Unethically? 3. Organizational culture - organizational culture can legitimize unethical behavior or reinforce the need for ethical behavior 4. Unrealistic performance expectations encourage managers to cut corners or act in an unethical manner 5. Leadership - helps establish the culture of an organization, and set the examples that others follow when leaders act unethically, subordinates may act unethically, too 4-115
Why Do Managers Behave Unethically? Determinants of Ethical Behavior
4-116
What Are The Philosophical Approaches To Ethics? There are several different approaches to business ethics Straw men approaches deny the value of business ethics or apply the concept in an unsatisfactory way Others approaches are favored by moral philosophers and are the basis for current models of ethical behavior 4-117
What Are The Straw Men Approaches To Business Ethics? There are four common straw men approaches 1. Friedman doctrine - the only social responsibility of business is to increase profits, so long as the company stays within the rules of law 2. Cultural relativism - ethics are culturally determined and firms should adopt the ethics of the cultures in which they operate “when in Rome, do as the Romans do” 3. Righteous moralist - a multinational’s home country standards of ethics should be followed in foreign countries 4. Naïve immoralist - if a manager of a multinational sees that firms from other nations are not following ethical norms in a host nation, that manager should not either All approaches offer inappropriate guidelines for ethical decision making 4-118
What Are Utilitarian And Kantian Approaches To Ethics? Utilitarian ethics - the moral worth of actions or practices is determined by their consequences actions are desirable if they lead to the best possible balance of good consequences over bad consequences but, it is difficult to measure the benefits, costs, and risks of an action the approach fails to consider justice
Kantian ethics - (Immanuel Kant) - people should be treated as ends and never purely as means to the ends of others 4-119
What Are Rights Theories? Rights theories - human beings have fundamental rights and privileges which transcend national boundaries and cultures establish a minimum level of morally acceptable behavior the Universal Declaration of Human Rights specifies the basic principles that should always be adhered to irrespective of the culture in which one is doing business
Moral theorists argue that fundamental human rights form the basis for the moral compass that managers should navigate by when making decisions which have an ethical component 4-120
What Are Justice Theories? Justice theories focus on the attainment of a just distribution of economic goods and services a just distribution is one that is considered fair and equitable
John Rawls argued that all economic goods and services should be distributed equally except when an unequal distribution would work to everyone’s advantage impartiality is guaranteed by the veil of ignorance everyone is imagined to be ignorant of all his or her particular characteristics 4-121
How Can Managers Make Ethical Decisions? To encourage ethical decision making, firms should 1. Hire and promote people with a well grounded sense of personal ethics refrain from promoting individuals who have acted unethically prospective employees should find out as much as they can about the ethical climate in an organization prior to taking a position
2. Build an organizational culture that places a high value on ethical behavior articulate values that place a strong emphasis on ethical behavior emphasize importance of code of ethics - formal statement of the ethical priorities a business adheres to implement a system of incentives and rewards that recognize people who engage in ethical behavior and sanction those who do not 4-122
How Can Managers Make Ethical Decisions? 3. Make sure that leaders within the business articulate the rhetoric of ethical behavior and act in a manner that is consistent with that rhetoric 4. Develop moral courage enables managers to walk away from a decision that is profitable, but unethical gives an employee the strength to say no to a superior who instructs her to pursue actions that are unethical gives employees the integrity to go public to the media and blow the whistle on persistent unethical behavior in a company 4-123
How Can Managers Make Ethical Decisions? 5. Put decision making processes in place that require people to consider the ethical dimension of business decisions ask whether decisions fall within the accepted values of standards that typically apply in the organizational environment decisions can be communicated to all stakeholders affected by it if colleagues would approve of decisions 4-124
How Can Managers Make Ethical Decisions? Managers can also use a five step process to think through ethical problems: Step1: Identify which stakeholders (the individuals or groups who have an interest, stake, or claim in the actions and overall performance of a company) a decision would affect and in what ways internal stakeholders are people who work for or who own the business such as employees, the board of directors, and stockholders external stakeholders are the individuals or groups who have some claim on a firm such as customers, suppliers, and unions
Step 2: Determine whether a proposed decision would violate the fundamental rights of any stakeholders 4-125
How Can Managers Make Ethical Decisions? Step 3: Establish moral intent - place moral concerns ahead of other concerns in cases where either the fundamental rights of stakeholders or key moral principles have been violated Step 4: Engage in ethical behavior Step 5: Audit decisions and review them to make sure that they are consistent with ethical principles 4-126
What Is An Ethics Officer? Ethics officers ensure all employees are trained in ethics ethics is considered in the decision-making process the company’s code of conduct is followed
In the end, there are clearly things that an international business should do, and there are things that an international business should not do But, not all ethical dilemmas have a clean and obvious solution 4-127
Review Question All of the following except ____ contribute to unethical behavior by international managers. a) Decision-making processes b) Leadership c) Personal ethics d) National culture 4-128
Review Question According to ________, a company’s home country standards of ethics are the appropriate ones to follow in foreign countries. a) the righteous moralist b) the naïve immoralist c) the Friedman doctrine d) cultural relativism 4-129
Review Question ________ recognize that human beings have fundamental rights and privileges which transcend national boundaries and cultures. a) Kantian ethics b) Utilitarian approaches c) Straw men d) Rights theories 4-130
Review Question The _____ suggests that everyone is imagined to be ignorant of all his or her particular characteristics. a) tragedy of the commons b) veil of ignorance c) code of ethics d) the Universal Declaration of Human Rights 4-131
Review Question What is a company’s formal statement of ethical priorities called? a) Mission statement b) Code of ethics c) Code of values d) Organizational culture 4-132
Review Question Which is not an area where multinational firms are concerned about ethics? a) Human rights b) Trade regulations c) Environmental regulations d) Corruption 4-133
International Business An Asian Perspective By Charles W.L. Hill Chow-Hou Wee Krishna Udayasankar
Chapter 5
International Trade Theory McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
Why Is Free Trade Beneficial? Free trade - a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country Trade theory shows why it is beneficial for a country to engage in international trade even for products it is able to produce for itself International trade allows a country to specialize in the manufacture and export of products that it can produce efficiently import products that can be produced more efficiently in other countries 5-136
Why Do Certain Patterns Of Trade Exist? Some patterns of trade are fairly easy to explain it is obvious why Saudi Arabia exports oil, Ghana exports cocoa, and Brazil exports coffee
But, why does Switzerland export chemicals, pharmaceuticals, watches, and jewelry? Why does Japan export automobiles, consumer electronics, and machine tools? 5-137
What Role Does Government Have In Trade? The mercantilist philosophy makes a crude case for government involvement in promoting exports and limiting imports Smith, Ricardo, and Heckscher-Ohlin promote unrestricted free trade New trade theory and Porter’s theory of national competitive advantage justify limited and selective government intervention to support the development of certain export-oriented industries 5-138
What Is Mercantilism? Mercantilism suggests that it is in a country’s best interest to maintain a trade surplus -to export more than it imports advocates government intervention to achieve a surplus in the balance of trade
Mercantilism views trade as a zero-sum game - one in which a gain by one country results in a loss by another 5-139
What Is Smith’s Theory Of Absolute Advantage? Adam Smith argued that a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods for the goods produced by other countries
5-140
How Does The Theory Of Absolute Advantage Work? Assume that two countries, Ghana and South Korea, both have 200 units of resources that could either be used to produce rice or cocoa In Ghana, it takes 10 units of resources to produce one ton of cocoa and 20 units of resources to produce one ton of rice Ghana could produce 20 tons of cocoa and no rice, 10 tons of rice and no cocoa, or some combination of rice and cocoa between the two extremes
In South Korea it takes 40 units of resources to produce one ton of cocoa and 10 resources to produce one ton of rice South Korea could produce 5 tons of cocoa and no rice, 20 tons of rice and no cocoa, or some combination in between
5-141
How Does The Theory Of Absolute Advantage Work? Without trade Ghana would produce 10 tons of cocoa and 5 tons of rice South Korea would produce 10 tons of rice and 2.5 tons of cocoa
With specialization and trade Ghana would produce 20 tons of cocoa South Korea would produce 20 tons of rice Ghana could trade 6 tons of cocoa to South Korea for 6 tons of rice
After trade Ghana would have 14 tons of cocoa left, and 6 tons of rice South Korea would have 14 tons of rice left and 6 tons of cocoa
If each country specializes in the production of the good in which it has an absolute advantage and trades for the other, both countries gain 5-142
How Does The Theory Of Absolute Advantage Work? Absolute Advantage and the Gains from Trade
5-143
What Is Ricardo’s Theory Of Comparative Advantage? David Ricardo asked what might happen when one country has an absolute advantage in the production of all goods Ricardo’s theory of comparative advantage suggests that countries should specialize in the production of those goods they produce most efficiently and buy goods that they produce less efficiently from other countries, even if this means buying goods from other countries that they could produce more efficiently at home 5-144
How Does The Theory Of Comparative Advantage Work? Assume Ghana is more efficient in the production of both cocoa and rice in Ghana, it takes 10 resources to produce one ton of cocoa, and 13 1/3 resources to produce one ton of rice So, Ghana could produce 20 tons of cocoa and no rice, 15 tons of rice and no cocoa, or some combination of the two in South Korea, it takes 40 resources to produce one ton of cocoa and 20 resources to produce one ton of rice so, South Korea could produce 5 tons of cocoa and no rice, 10 tons of rice and no cocoa, or some combination of the two 5-145
How Does The Theory Of Comparative Advantage Work? With trade Ghana could export 4 tons of cocoa to South Korea in exchange for 4 tons of rice Ghana will still have 11 tons of cocoa, and 4 additional tons of rice South Korea still has 6 tons of rice and 4 tons of cocoa if each country specializes in the production of the good in which it has a comparative advantage and trades for the other, both countries gain
Comparative advantage theory provides a strong rationale for encouraging free trade 5-146
How Does The Theory Of Comparative Advantage Work? Comparative Advantage and the Gains from Trade
5-147
Is Unrestricted Free Trade Always Beneficial? Unrestricted free trade is beneficial, but the gains may not be as great as the simple model of comparative advantage would suggest immobile resources diminishing returns dynamic effects and economic growth
Opening a country to trade could increase a country's stock of resources as increased supplies become available from abroad the efficiency of resource utilization and so free up resources for other uses economic growth 5-148
Could A Rich Country Be Worse Off With Free Trade? Paul Samuelson - the dynamic gains from trade may not always be beneficial free trade may ultimately result in lower wages in the rich country
The ability to offshore services jobs that were traditionally not internationally mobile may have the effect of a mass inward migration into the United States, where wages would then fall But, protectionist measures could create a more harmful situation than free trade 5-149
What Is The Heckscher-Ohlin Theory? Eli Heckscher and Bertil Ohlin comparative advantage arises from differences in national factor endowments – the extent to which a country is endowed with resources like land, labor, and capital predict that countries will export goods that make intensive use of those factors that are locally abundant, and import goods that make intensive use of factors that are locally scarce 5-150
Does The Heckscher-Ohlin Theory Hold? Wassily Leontief theorized that since the U.S. was relatively abundant in capital compared to other nations, the U.S. would be an exporter of capital intensive goods and an importer of labor-intensive goods. However, he found that U.S. exports were less capital intensive than U.S. imports Since this result was at variance with the predictions of trade theory, it became known as the Leontief Paradox 5-151
What Is The Product Life Cycle Theory? The product life-cycle theory - (Raymond Vernon) - as products mature both the location of sales and the optimal production location will change affecting the flow and direction of trade the size and wealth of the U.S. market gave U.S. firms a strong incentive to develop new products initially, the product would be produced and sold in the U.S. as demand grew in other developed countries, U.S. firms would begin to export demand for the new product would grow in other advanced countries over time making it worthwhile for foreign producers to begin producing for their home markets
5-152
What Is The Product Life Cycle Theory? U.S. firms might set up production facilities in advanced countries with growing demand, limiting exports from the U.S. As the market in the U.S. and other advanced nations matured, the product would become more standardized, and price the main competitive weapon Producers based in advanced countries where labor costs were lower than the United States might now be able to export to the United States If cost pressures were intense, developing countries would acquire a production advantage over advanced countries Production became concentrated in lower-cost foreign locations, and the United States became an importer of the product 5-153
What Is The Product Life Cycle Theory? The Product Life Cycle Theory
5-154
Does The Product Life Cycle Theory Hold? The product life cycle theory accurately explains what has happened for products like photocopiers and a number of other high technology products developed in the United States in the 1960s and 1970s But, the globalization and integration of the world economy has made this theory less valid today the theory is ethnocentric production today is dispersed globally products today are introduced in multiple markets simultaneously 5-155
What Is New Trade Theory? New trade theory suggests that the ability of firms to gain economies of scale (unit cost reductions associated with a large scale of output) can have important implications for international trade 1. Through its impact on economies of scale, trade can increase the variety of goods available to consumers and decrease the average cost of those goods without trade, nations might not be able to produce those products where economies of scale are important with trade, markets are large enough to support the production necessary to achieve economies of scale so, trade is mutually beneficial because it allows for the specialization of production, the realization of scale economies, and the production of a greater variety of products at lower prices
5-156
What Is New Trade Theory? 2. In those industries when output required to attain economies of scale represents a significant proportion of total world demand, the global market may only be able to support a small number of enterprises first mover advantages - the economic and strategic advantages that accrue to early entrants into an industry economies of scale first movers can gain a scale based cost advantage that later entrants find difficult to match 5-157
What Are The Implications Of New Trade Theory For Nations? Nations may benefit from trade even when they do not differ in resource endowments or technology a country may dominate in the export of a good simply because it was lucky enough to have one or more firms among the first to produce that good
Governments should consider strategic trade policies that nurture and protect firms and industries where first mover advantages and economies of scale are important
5-158
What Is Porter’s Diamond Of Competitive Advantage?
1.
Michael Porter tried to explain why a nation achieves international success in a particular industry and identified four attributes that promote or impede the creation of competitive advantage Factor endowments - a nation’s position in factors of production necessary to compete in a given industry
2.
can lead to competitive advantage can be either basic (natural resources, climate, location) or advanced (skilled labor, infrastructure, technological know-how)
Demand conditions - the nature of home demand for the industry’s product or service
influences the development of capabilities sophisticated and demanding customers pressure firms to be competitive
5-159
What Is Porter’s Diamond Of Competitive Advantage? 3.
Relating and supporting industries - the presence or absence of supplier industries and related industries that are internationally competitive
4.
can spill over and contribute to other industries successful industries tend to be grouped in clusters in countries
Firm strategy, structure, and rivalry - the conditions governing how companies are created, organized, and managed, and the nature of domestic rivalry
different management ideologies affect the development of national competitive advantage vigorous domestic rivalry creates pressures to innovate, to improve quality, to reduce costs, and to invest in upgrading advanced features 5-160
What Is Porter’s Diamond Of Competitive Advantage? Determinants of National Competitive Advantage: Porter’s Diamond
5-161
Does Porter’s Theory Hold? Government policy can affect demand through product standards influence rivalry through regulation and antitrust laws impact the availability of highly educated workers and advanced transportation infrastructure.
The four attributes, government policy, and chance work as a reinforcing system, complementing each other and in combination creating the conditions appropriate for competitive advantage So far, Porter’s theory has not been sufficiently tested to know how well it holds up 5-162
What Are The Implications Of Trade Theory For Managers? 1.
Location implications - a firm should disperse its various productive activities to those countries where they can be performed most efficiently
2. 3.
firms that do not, may be at a competitive disadvantage
First-mover implications - a first-mover advantage can help a firm dominate global trade in that product Policy implications - firms should work to encourage governmental policies that support free trade
firms should lobby the government to adopt policies that have a favorable impact on each component of the diamond
5-163
What Is The Balance Of Payments?
A country’s balance of payments accounts keep track of the payments to and receipts from other countries for a particular time period Balance of payments accounting uses double entry bookkeeping
1.
There are three main accounts The current account records transactions that pertain to goods, services, and income, receipts and payments
2. 3.
so, the sum of the current account balance, the capital account and the financial account should always add up to zero
current account deficit - a country imports more than it exports current account surplus – a country exports more than it imports
The capital account records one time changes in the stock of assets The financial account records transactions that involve the purchase or sale of assets
net change in U.S. assets owned abroad foreign owned assets in the United States 5-164
What Is The Balance Of Payments? United States Balance of Payments Accounts, 2007
5-165
Is A Current Account Deficit Bad? Does current account deficit matter? a current account deficit implies a net debtor so, a persistent deficit could limit future economic growth
But, even though capital is flowing out of as payments to foreigners, much of it flows back in as investments in assets Yet, suppose foreigners stop buying domestic assets and sell their dollars for another currency A currency crisis could occur
5-166
Review Question All of the following theories advocated free trade except a) b) c) d)
Mercantilism Comparative Advantage Absolute Advantage Heckscher-Ohlin 5-167
Review Question Which theory suggested that comparative advantage arises from differences in national factor endowments? a) mercantilism b) absolute advantage c) Heckscher-Ohlin d) comparative advantage 5-168
Review Question Which theory suggests that as products mature the optimal production location will change? a) Mercantilism b) Comparative Advantage c) Absolute Advantage d) Product life-cycle 5-169
Review Question Economies of scale and first mover advantages are important to which trade theory? a) Mercantilism b) Product life cycle c) New trade theory d) Comparative advantage 5-170
Review Question Porter’s diamond of competitive advantage includes all of the following except a) Factor endowments b) Demand conditions c) First-mover advantages d) Firm strategy, structure, and rivalry 5-171
Review Question _________ refer to the nature of home demand for the industry’s product or service. a) Demand conditions b) Factor endowments c) Firm strategy, structure, and rivalry d) Related and supporting industries 5-172
International Business An Asian Perspective By Charles W.L. Hill Chow-Hou Wee Krishna Udayasankar
Chapter 6 The Political Economy of International Trade
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
What Is The Political Reality Of International Trade? Free trade occurs when governments do not attempt to restrict what citizens can buy from another country or what they can sell to another country While many nations are nominally committed to free trade, they tend to intervene in international trade to protect the interests of politically important groups 6-175
How Do Governments Intervene In Markets? Governments use various methods to intervene in markets including 1. Tariffs - taxes levied on imports that effectively raise the cost of imported products relative to domestic products Specific tariffs - levied as a fixed charge for each unit of a good imported Ad valorem tariffs - levied as a proportion of the value of the imported good Tariffs
increase government revenues force consumers to pay more for certain imports are pro-producer and anti-consumer reduce the overall efficiency of the world economy
6-176
How Do Governments Intervene In Markets? 2.
Subsidies - government payments to domestic producers Subsidies help domestic producers compete against low-cost foreign imports gain export markets Consumers typically absorb the costs of subsidies
3.
Import Quotas - restrict the quantity of some good that may be imported into a country Tariff rate quotas - a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota A quota rent - the extra profit that producers make when supply is artificially limited by an import quota
6-177
How Do Governments Intervene In Markets? 4. Voluntary Export Restraints - quotas on trade imposed by the exporting country, typically at the request of the importing country’s government Import quotas and voluntary export restraints benefit domestic producers raise the prices of imported goods
5. Local Content Requirements - demand that some specific fraction of a good be produced domestically benefit domestic producers consumers face higher prices 6-178
How Do Governments Intervene In Markets? 6.
Administrative Polices - bureaucratic rules designed to make it difficult for imports to enter a country
7.
polices hurt consumers by limiting choice
Antidumping Policies – aka countervailing duties designed to punish foreign firms that engage in dumping and protect domestic producers from “unfair” foreign competition
dumping - selling goods in a foreign market below their costs of production, or selling goods in a foreign market below their “fair” market value enables firms to unload excess production in foreign markets may be predatory behavior - producers use profits from their home markets to subsidize prices in a foreign market to drive competitors out of that market, and later raise prices
6-179
Why Do Governments Intervene In Markets? There are two main arguments for government intervention in the market 1. Political arguments - concerned with protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers) 2. Economic arguments - concerned with boosting the overall wealth of a nation – benefits both producers and consumers 6-180
What Are The Political Arguments For Government Intervention? 1.
Protecting jobs - the most common political reason for trade restrictions
2.
3.
results from political pressures by unions or industries that are "threatened" by more efficient foreign producers, and have more political clout than consumers
Protecting industries deemed important for national security - industries like aerospace or electronics are often protected because they are deemed important for national security Retaliating to unfair foreign competition - when governments take, or threaten to take, specific actions, other countries may remove trade barriers
if threatened governments do not back down, tensions can escalate and new trade barriers may be enacted
6-181
What Are The Political Arguments For Government Intervention? 4. 5.
Protecting consumers from “dangerous” products – limit “unsafe” products Furthering the goals of foreign policy - preferential trade terms can be granted to countries that a government wants to build strong relations with
6.
trade policy can also be used to punish rogue states the Helms-Burton Act and the D’Amato Act, have been passed to protect American companies from such actions
Protecting the human rights of individuals in exporting countries – through trade policy actions
the decision to grant China MFN status in 1999 was based on this philosophy
6-182
What Are The Economic Arguments For Government Intervention? 1. The infant industry argument - an industry should be protected until it can develop and be viable and competitive internationally accepted as a justification for temporary trade restrictions under the WTO
Question: When is an industry “grown up” ? Critics argue that if a country has the potential to develop a viable competitive position its firms should be capable of raising necessary funds without additional support from the government 6-183
What Are The Economic Arguments For Government Intervention? 2. Strategic trade policy - in cases where there may be important first mover advantages, governments can help firms from their countries attain these advantages governments can help firms overcome barriers to entry into industries where foreign firms have an initial advantage
6-184
When Should Governments Avoid Using Trade Barriers? Paul Krugman argues that strategic trade policies aimed at establishing domestic firms in a dominant position in a global industry are beggarthy-neighbor policies that boost national income at the expense of other countries countries that attempt to use such policies will probably provoke retaliation
Krugman argues that since special interest groups can influence governments, strategic trade policy is almost certain to be captured by such groups who will distort it to their own ends 6-185
How Has The Current World Trading System Emerged? Until the Great Depression of the 1930s, most countries had some degree of protectionism Smoot-Hawley tariff (1930)
After WWII, the U.S. and other nations realized the value of freer trade established the General Agreement on Tariffs and Trade (GATT) - a multilateral agreement to liberalize trade
In the 1980s and early 1990s protectionist trends emerged Japan’s perceived protectionist (neo-mercantilist) policies created intense political pressures in other countries persistent trade deficits by the U.S use of non-tariff barriers increased
6-186
How Has The Current World Trading System Emerged? The Uruguay Round of GATT negotiations began in 1986 focusing on 1. Services and intellectual property going beyond manufactured goods to address trade issues related to services and intellectual property, and agriculture
2. The World Trade Organization it was hoped that enforcement mechanisms would make the WTO a more effective policeman of the global trade rules 6-187
How Has The Current World Trading System Emerged? The WTO encompassed GATT along with two sisters organizations the General Agreement on Trade in Services (GATS) the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS)
The WTO has emerged as an effective advocate and facilitator of future trade deals, particularly in such areas as services So far, the WTO’s policing and enforcement mechanisms are having a positive effect Most countries have adopted WTO recommendations for trade disputes 6-188
What Is The Future Of The World Trade Organization? The WTO has become a magnet for various groups protesting free trade The current agenda of the WTO focuses on the rise of anti-dumping policies the high level of protectionism in agriculture the lack of strong protection for intellectual property rights in many nations continued high tariffs on nonagricultural goods and services in many nations 6-189
What Is The Future Of The World Trade Organization? The WTO launched a new round of talks at Doha, Qatar in 2001 The agenda includes cutting tariffs on industrial goods and services phasing out subsidies to agricultural producers reducing barriers to cross-border investment limiting the use of anti-dumping laws
6-190
What Do Trade Barriers Mean For Managers? Managers need to consider how trade barriers affect the strategy of the firm and the implications of government policy on the firm 1. Trade barriers raise the cost of exporting products to a country 2. Voluntary export restraints (VERs) may limit a firm’s ability to serve a country from locations outside that country 3. To conform to local content requirements, a firm may have to locate more production activities in a given market than it would otherwise Managers have an incentive to lobby for free trade, and keep protectionist pressures from causing them to have to change strategies 6-191
Review Question When tariffs are levied as a fixed charge for each unit of a good imported, they are called a) Specific tariffs b) Ad valorem tariffs c) Tariff rate quotas d) Transit tariffs 6-192
Review Question A ________ demands that some specific fraction of a good be produced domestically a) subsidy b) quota rent c) voluntary export requirement d) local content requirement 6-193
Review Question Which of the following is not a political argument for government intervention? a) protecting jobs b) protecting infant industries c) protecting industries deemed important for national security d) protecting consumers from “dangerous” products
6-194
Review Question What is the most common political reason for trade barriers? a) To protect infant industries b) Strategic trade policy c) To protect jobs d) To protect industries that are important for national security
6-195
Review Question Which theory suggests that in cases where there may be important first mover advantages, governments can help firms from their countries attain these advantages? a) The infant industry argument b) Strategic trade theory c) Comparative advantage theory d) The Leontief paradox 6-196
Review Question All of the following except _____ are key issues on the table at the Doha Round. a) Anti-dumping policies b) Protectionism in agriculture c) Intellectual property rights d) Infant industry protection 6-197
International Business An Asian Perspective By Charles W.L. Hill Chow-Hou Wee Krishna Udayasankar
Chapter 7
Foreign Direct Investment McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
What Is FDI? Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to produce and/or market in a foreign country the firm becomes a multinational enterprise
FDI can be in the form of greenfield investments - the establishment of a wholly new operation in a foreign country acquisitions or mergers with existing firms in the foreign country
The flow of FDI refers to the amount of FDI undertaken over a given time period Outflows of FDI are the flows of FDI out of a country Inflows of FDI are the flows of FDI into a country
The stock of FDI refers to the total accumulated value of foreign-owned assets at a given time 7-200
What Are The Patterns Of FDI? Both the flow and stock of FDI have increased over the last 30 years Most FDI is targeted towards developed nations - United States and EU South, East, and South East Asia - China – and Latin America are emerging
FDI has grown more rapidly than world trade and world output firms still fear the threat of protectionism democratic political institutions and free market economies have encouraged FDI globalization is forcing firms to maintain a presence around the world
Gross fixed capital formation - the total amount of capital invested in factories, stores, office buildings, and the like the greater the capital investment in an economy, the more favorable its future prospects are likely to be
So, FDI is an important source of capital investment and a determinant of the future growth rate of an economy
7-201
What Are The Patterns Of FDI? FDI Outflows 1982-2008 ($ billions)
7-202
What Are The Patterns Of FDI? FDI Inflows by Region 1995-2008 ($ billion)
7-203
What Are The Patterns Of FDI? Inward FDI as a % of Gross Fixed Capital Formation 1992-2007
7-204
What Is The Source Of FDI? Since World War II, the U.S. has been the largest source country for FDI the United Kingdom, the Netherlands, France, Germany, and Japan are other important source countries together, these countries account for 56% of all FDI outflows from 1998-2006, and 61% of the total global stock of FDI in 2007
7-205
What Is The Source Of FDI? Cumulative FDI Outflows 1998-2007 ($ billions)
7-206
Why Do Firms Choose Acquisition Versus Greenfield Investments? Most cross-border investment is in the form of mergers and acquisitions rather than greenfield investments Firms prefer to acquire existing assets because mergers and acquisitions are quicker to execute than greenfield investments it is easier and perhaps less risky for a firm to acquire desired assets than build them from the ground up firms believe that they can increase the efficiency of an acquired unit by transferring capital, technology, or management skills 7-207
Why Does FDI In Services Occur? FDI is shifting away from extractive industries and manufacturing, and towards services The shift to services is being driven by the general move in many developed countries toward services the fact that many services need to be produced where they are consumed a liberalization of policies governing FDI in services the rise of Internet-based global telecommunications networks 7-208
Why Choose FDI? 1.
Exporting - producing goods at home and then shipping them to the receiving country for sale
2.
exports can be limited by transportation costs and trade barriers FDI may be a response to actual or threatened trade barriers such as import tariffs or quotas
Licensing - granting a foreign entity the right to produce and sell the firm’s product in return for a royalty fee on every unit that the foreign entity sells Internalization theory (aka market imperfections theory) suggests that licensing has three major drawbacks compared to FDI
firm could give away valuable technological know-how to a potential foreign competitor does not give a firm the control over manufacturing, marketing, and strategy in the foreign country the firm’s competitive advantage may be based on its management, marketing, and manufacturing capabilities
7-209
What Is The Pattern Of FDI? Why do firms in the same industry undertake FDI at about the same time and the same locations? Knickerbocker - FDI flows are a reflection of strategic rivalry between firms in the global marketplace multipoint competition -when two or more enterprises encounter each other in different regional markets, national markets, or industries
Vernon - firms undertake FDI at particular stages in the life cycle of a product But, why is it profitable for firms to undertake FDI rather than continuing to export from home base, or licensing a foreign firm? According to Dunning’s eclectic paradigm- it is important to consider location-specific advantages - that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets externalities - knowledge spillovers that occur when companies in the same industry locate in the same area
7-210
What Are The Theoretical Approaches To FDI? The radical view - the MNE is an instrument of imperialist domination and a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries The free market view- international production should be distributed among countries according to the theory of comparative advantage embraced by advanced and developing nations including the United States, Britain, Chile, and Hong Kong
Pragmatic nationalism - FDI has both benefits (inflows of capital, technology, skills and jobs) and costs (repatriation of profits to the home country and a negative balance of payments effect) FDI should be allowed only if the benefits outweigh the costs
Recently, there has been a strong shift toward the free market stance creating a surge in FDI worldwide an increase in the volume of FDI in countries with newly liberalized regimes
7-211
How Does FDI Benefit The Host Country? 1.
2. 3. 4.
There are four main benefits of inward FDI for a host country Resource transfer effects - FDI brings capital, technology, and management resources Employment effects - FDI can bring jobs Balance of payments effects - FDI can help a country to achieve a current account surplus Effects on competition and economic growth greenfield investments increase the level of competition in a market, driving down prices and improving the welfare of consumers
can lead to increased productivity growth, product and process innovation, and greater economic growth
7-212
What Are The Costs Of FDI To The Host Country? 1.
Inward FDI has three main costs: Adverse effects of FDI on competition within the host nation
2.
Adverse effects on the balance of payments
3.
subsidiaries of foreign MNEs may have greater economic power than indigenous competitors because they may be part of a larger international organization when a foreign subsidiary imports a substantial number of its inputs from abroad, there is a debit on the current account of the host country’s balance of payments
Perceived loss of national sovereignty and autonomy
decisions that affect the host country will be made by a foreign parent that has no real commitment to the host country, and over which the host country’s government has no real control
7-213
How Does FDI Benefit The Home Country? The benefits of FDI for the home country include 1. The effect on the capital account of the home country’s balance of payments from the inward flow of foreign earnings 2. The employment effects that arise from outward FDI 3. The gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home country 7-214
What Are The Costs Of FDI To The Home Country? 1. The home country’s balance of payments can suffer from the initial capital outflow required to finance the FDI if the purpose of the FDI is to serve the home market from a low cost labor location if the FDI is a substitute for direct exports
2. Employment may also be negatively affected if the FDI is a substitute for domestic production But, international trade theory suggests that home country concerns about the negative economic effects of offshore production (FDI undertaken to serve the home market) may not be valid
7-215
How Does Government Influence FDI? Governments can encourage outward FDI government-backed insurance programs to cover major types of foreign investment risk
Governments can restrict outward FDI limit capital outflows, manipulate tax rules, or outright prohibit FDI
Governments can encourage inward FDI offer incentives to foreign firms to invest in their countries gain from the resource-transfer and employment effects of FDI, and capture FDI away from other potential host countries
Governments can restrict inward FDI use ownership restraints and performance requirements
7-216
How Do International Institutions Influence FDI? Until the 1990s, there was no consistent involvement by multinational institutions in the governing of FDI Today, the World Trade Organization is changing this by trying to establish a universal set of rules designed to promote the liberalization of FDI
7-217
What Does FDI Mean For Managers? Managers need to consider what trade theory implies about FDI, and the link between government policy and FDI The direction of FDI can be explained through the locationspecific advantages argument associated with John Dunning However, it does not explain why FDI is preferable to exporting or licensing, must consider internalization theory
A host government’s attitude toward FDI is an important variable in decisions about where to locate foreign production facilities and where to make a foreign direct investment
7-218
What Does FDI Mean For Managers? A Decision Framework
7-219
Review Question The establishment of a wholly new operation in a foreign country is called A) an acquisition B) a merger C) a greenfield investment D) a multinational venture 7-220
Review Question The amount of FDI undertaken over a given time period is known as A) the flow of FDI B) the stock of FDI C) FDI outflow D) FDI inflow 7-221
Review Question Most FDI is direct toward a) developed countries b) emerging economies c) the United States d) China
7-222
Review Question Advantages that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets are a) First mover advantages b) Location advantages c) Externalities d) Proprietary advantages 7-223
Review Question Benefits of FDI include all of the following except a) The resource transfer effect b) The employment effect c) The balance of payments effect d) National sovereignty and autonomy 7-224
Review Question Which of the following is not a cost of outward FDI for host countries? a) the initial capital outflow required to finance the FDI b) when FDI is a substitute for direct exports c) gains from learning valuable skills from foreign markets d) the effect on employment is FDI is a substitute for domestic production 7-225
International Business An Asian Perspective By Charles W.L. Hill Chow-Hou Wee Krishna Udayasankar
Chapter 8
Regional Economic Integration McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
What Is Regional Economic Integration? Regional economic integration - agreements between countries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other Question: Do regional trade agreements promote free trade? In theory, yes, but the world may be moving toward a situation in which a number of regional trade blocks compete against each other 8-228
What Are The Levels Of Regional Economic Integration? 1. A free trade area eliminates all barriers to the trade of goods and services among member countries European Free Trade Association (EFTA) - Norway, Iceland, Liechtenstein, and Switzerland North American Free Trade Agreement (NAFTA) - U.S., Canada, and Mexico
2. A customs union eliminates trade barriers between member countries and adopts a common external trade policy Andean Pact (Bolivia, Columbia, Ecuador and Peru)
3. A common market has no barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production MERCOSUR (Brazil, Argentina, Paraguay, and Uruguay)
8-229
What Are The Levels Of Regional Economic Integration? 4. An economic union has the free flow of products and factors of production between members, a common external trade policy, a common currency, a harmonized tax rate, and a common monetary and fiscal policy European Union (EU)
5. A political union involves a central political apparatus that coordinates the economic, social, and foreign policy of member states The EU is headed toward at least partial political union, and the United States is an example of even closer political union 8-230
What Are The Levels Of Regional Economic Integration? Levels of Economic Integration
8-231
Why Should Countries Integrate Their Economies? All countries gain from free trade and investment - regional economic integration is an attempt to exploit the gains from free trade and investment Linking countries together, making them more dependent on each other creates incentives for political cooperation and reduces the likelihood of violent conflict gives countries greater political clout when dealing with other nations 8-232
What Limits Efforts At Integration? Economic integration can be difficult because while a nation as a whole may benefit from a regional free trade agreement, certain groups may lose it implies a loss of national sovereignty
Regional economic integration is only beneficial if the amount of trade it creates exceeds the amount it diverts trade creation occurs when low cost producers within the free trade area replace high cost domestic producers trade diversion occurs when higher cost suppliers within the free trade area replace lower cost external suppliers 8-233
What Is The Status Of Regional Economic Integration In Europe? Europe has two trade blocs 1. The European Union (EU) with 27 members 2. The European Free Trade Area (EFTA) with 4 members The EU is seen as the world’s next economic and political superpower
8-234
What Is The Status Of Regional Economic Integration In Europe? Member States of The European Union in 2009
8-235
What Is The European Union? The devastation of two world wars on Western Europe prompted the formation of the EU Members wanted lasting peace and to hold their own on the world’s political and economic stage
Forerunner was the European Coal and Steel Community (1951) The European Economic Community (1957) was formed at the Treaty of Rome with the goal of becoming a common market The Single European Act (1987) committed the EC countries to work toward establishment of a single market by December 31, 1992 was born out of frustration among EC members that the community was not living up to its promise provided the impetus for the restructuring of substantial sections of European industry allowing for faster economic growth than would otherwise have been the case
8-236
What Is The Political Structure Of The European Union? The European Council - resolves major policy issues and sets policy directions The European Commission - responsible for implementing aspects of EU law and monitoring member states to ensure they are complying with EU laws The Council of the European Union - the ultimate controlling authority within the EU The European Parliament - debates legislation proposed by the commission and forwarded to it by the council The Court of Justice - the supreme appeals court for EU law
8-237
What Is The Euro? The Maastricht Treaty committed the EU to adopt a single currency created the second largest currency zone in the world after that of the U.S. dollar used by 16 of the 27 member states Britain, Denmark and Sweden opted out
since its establishment January 1, 1999, the euro has had a volatile trading history with the U.S. dollar 8-238
Is The Euro A Good Thing? Benefits of the euro savings from having to handle one currency, rather than many it is easier to compare prices across Europe, so firms are forced to be more competitive gives a strong boost to the development of highly liquid pan-European capital market increases the range of investment options open both to individuals and institutions
Costs of the euro loss of control over national monetary policy EU is not an optimal currency area 8-239
Should The EU Continue To Expand? Many countries have applied for EU membership Ten countries joined in 2004 expanding the EU to 25 states In 2007, Bulgaria and Romania joined bringing membership to 27 countries Turkey has been denied full membership because of concerns over human rights 8-240
What Is The Status Of Economic Integration In The Americas? There is a move toward greater regional economic integration in the Americas The biggest effort is the North American Free Trade Area (NAFTA) Other efforts include the Andean Community and MERCOSUR A hemisphere-wide Free Trade of the Americas is under discussion 8-241
What Is The Status Of Economic Integration In The Americas? Economic Integration in the Americas
8-242
What Is The North American Free Trade Agreement? The North American Free Trade Area (NAFTA, 1994) includes the United States, Canada, and Mexico
abolished tariffs on 99% of the goods traded between members removed most barriers on the cross-border flow of services protects intellectual property rights removes most restrictions on FDI between the three member countries allows each country to apply its own environmental standards establishes two commissions to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum wages, or child labor are ignored
8-243
Is The North American Free Trade Area Beneficial? Supporters of NAFTA claimed that Mexico would benefit from increased jobs as low cost production moves south and will see more rapid economic growth as a result
the U.S. and Canada would benefit from access to a large and increasingly prosperous market the lower prices for consumers from goods produced in Mexico low cost labor and the ability to be more competitive on world markets 8-244
Is The North American Free Trade Area Beneficial? Critics of NAFTA claimed that jobs would be lost and wage levels would decline in the U.S. and Canada Mexican workers would emigrate north pollution would increase due to Mexico's more lax standards Mexico would lose its sovereignty
8-245
Who Was Right? Research indicates that NAFTA’s early impact was subtle, and both advocates and detractors may have been guilty of exaggeration NAFTA is credited with helping create increased political stability in Mexico Other Latin American countries would like to join NAFTA 8-246
What Is The Andean Community? The Andean Pact formed in 1969 using the EU model had more or less failed by the mid-1980s was re-launched in 1990, and now operates as a customs union signed an agreement in 2003 with MERCOSUR to restart negotiations towards the creation of a free trade area
8-247
What Is MERCOSUR? MERCOSUR originated in 1988 as a free trade pact between Brazil and Argentina was expanded in 1990 to include Paraguay and Uruguay may be diverting trade rather than creating trade, and local firms are investing in industries that are not competitive on a worldwide basis initially made progress on reducing trade barriers between member states, but more recently efforts have stalled
8-248
What Is The Central American Trade Agreement And CARICOM? There are two other trade pacts in the Americas the Central American Trade Agreement –(CAFTA, 2005) - to lower trade barriers between the U.S. and members CARICOM (1973) - to establish a customs union
Neither pact has achieved its goals yet In 2006, six CARICOM members formed the Caribbean Single Market and Economy (CSME) - to lower trade barriers and harmonize macroeconomic and monetary policy between members 8-249
What Is Free Trade Of The Americas? Talks began in April 1998 to establish a Free Trade of The Americas (FTAA) by 2005 The FTAA was not established and now support from the U.S. and Brazil is mixed the U.S. wants stricter enforcement if intellectual property rights Brazil and Argentina want the U.S. to eliminate agricultural subsidies and tariffs
If the FTAA is established, it will have major implications for cross-border trade and investment flows within the hemisphere would create a free trade area of 850 million people who accounted for nearly $18 trillion in GDP in 2008
8-250
What Is The Status Of Economic Integration In Asia? Various efforts at integration have been attempted in Asia Association of Southeast Asian Nations (ASEAN) Asia-Pacific Economic Cooperation (APEC)
8-251
What Is The Association Of Southeast Asian Nations? The Association of Southeast Asian Nations (ASEAN, 1967) currently includes Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, Vietnam, Myanmar, Laos, and Cambodia wants to foster freer trade between member countries and to achieve some cooperation in their industrial policies
An ASEAN Free Trade Area (AFTA) between the six original members of ASEAN came into effect in 2003 ASEAN and AFTA are moving towards establishing a free trade zone 8-252
What Is The Association Of Southeast Asian Nations? ASEAN Countries
8-253
What Is The Asia-Pacific Economic Cooperation? The Asia-Pacific Economic Cooperation (APEC) has 21 members including the United States, Japan, and China wants to increase multilateral cooperation member states account for 55% of world’s GNP, and 49% of world trade
8-254
What Is The Asia-Pacific Economic Cooperation? APEC Members
8-255
What Is The Status Of Economic Integration In Africa? Many countries are members of more than one of the nine blocs in the region But, since many countries support the use of trade barriers to protect their economies from foreign competition, meaningful progress is slow The East African Community (EAC) was re-launched in 2001, however so far, the effort appears futile 8-256
What Does Economic Integration Mean For Managers? Regional economic integration opens new markets allows firms to realize cost economies by centralizing production in those locations where the mix of factor costs and skills is optimal
But within each grouping, the business environment becomes competitive there is a risk of being shut out of the single market by the creation of a “trade fortress” 8-257
Review Question All barriers to the free flow of goods and services between member countries are removed, and a common policy toward nonmembers is established in a a) Free trade area b) Customs union c) Common market d) Economic union 8-258
Review Question NAFTA is an example of a(n) a) Free trade area b) Customs union c) Common market d) Economic union
8-259
Review Question When higher cost suppliers within the free trade area replace lower cost external suppliers a) The bloc as a whole benefits b) There is trade creation c) There is trade diversion d) External suppliers benefit
8-260
Review Question _______ is the ultimate decision making body of the European Union. a) Council of the European Union b) European Parliament c) Court of Justice d) European Commission 8-261
Review Question _______ is responsible for proposing EU legislation. a) Council of the European Union b) European Parliament c) Court of Justice d) European Commission 8-262
Review Question Which of the following is not true of NAFTA? a) It created a free trade area of nearly 800 million people b) It created the background for increased political stability in Mexico c) Several other Latin American countries have indicated their desire to eventually join NAFTA d) Its participants are the United States, Canada, and Mexico 8-263
International Business An Asian Perspective By Charles W.L. Hill Chow-Hou Wee Krishna Udayasankar
Chapter 9
The Foreign Exchange Market McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
Why Is The Foreign Exchange Market Important? The foreign exchange market 1. is used to convert the currency of one country into the currency of another 2. provides some insurance against foreign exchange risk - the adverse consequences of unpredictable changes in exchange rates
The exchange rate is the rate at which one currency is converted into another Events in the foreign exchange market affect firm sales, profits, and strategy 9-266
When Do Firms Use The Foreign Exchange Market? International companies use the foreign exchange market when the payments they receive for exports, the income they receive from foreign investments, or the income they receive from licensing agreements with foreign firms are in foreign currencies they must pay a foreign company for its products or services in its country’s currency they have spare cash that they wish to invest for short terms in money markets they are involved in currency speculation - the shortterm movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates 9-267
How Can Firms Hedge Against Foreign Exchange Risk? The foreign exchange market provides insurance to protect against foreign exchange risk - the possibility that unpredicted changes in future exchange rates will have adverse consequences for the firm A firm that insures itself against foreign exchange risk is hedging To insure or hedge against a possible adverse foreign exchange rate movement, firms engage in forward exchanges - two parties agree to exchange currency and execute the deal at some specific date in the future 9-268
What Is The Difference Between Spot Rates And Forward Rates? The spot exchange rate is the rate at which a foreign exchange dealer converts one currency into another currency on a particular day spot rates change continually depending on the supply and demand for that currency and other currencies
A forward exchange rate is the rate used for hedging in the forward market rates for currency exchange are typically quoted for 30, 90, or 180 days into the future
9-269
What Is A Currency Swap? A currency swap is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates Swaps are transacted between international businesses and their banks between banks between governments when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange rate risk
9-270
What Is The Nature Of The Foreign Exchange Market? The foreign exchange market is a global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems the most important trading centers are London, New York, Tokyo, and Singapore the market is always open somewhere in the world—it never sleeps
9-271
Do Exchange Rates Differ Between Markets? High-speed computer linkages between trading centers mean there is no significant difference between exchange rates in the differing trading centers If exchange rates quoted in different markets were not essentially the same, there would be an opportunity for arbitrage - the process of buying a currency low and selling it high Most transactions involve dollars on one side—it is a vehicle currency along with the euro, the Japanese yen, and the British pound 9-272
How Are Exchange Rates Determined? Exchange rates are determined by the demand and supply for different currencies Three factors impact future exchange rate movements 1. A country’s price inflation 2. A country’s interest rate 3. Market psychology 9-273
How Do Prices Influence Exchange Rates? The law of one price states that in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency Purchasing power parity theory (PPP) argues that given relatively efficient markets (markets in which few impediments to international trade and investment exist) the price of a “basket of goods” should be roughly equivalent in each country predicts that changes in relative prices will result in a change in exchange rates
9-274
How Do Prices Influence Exchange Rates? A positive relationship exists between the inflation rate and the level of money supply When the growth in the money supply is greater than the growth in output, inflation will occur PPP theory suggests that changes in relative prices between countries will lead to exchange rate changes, at least in the short run a country with high inflation should see its currency depreciate relative to others
Empirical testing of PPP theory suggests that it is most accurate in the long run, and for countries with high inflation and underdeveloped capital markets 9-275
How Do Interest Rates Influence Exchange Rates? The International Fisher Effect states that for any two countries the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between two countries In other words: (S1 - S2) / S2 x 100 = i $ - i ¥
where i $ and i ¥ are the respective nominal interest rates in two countries (in this case the US and Japan), S1 is the spot exchange rate at the beginning of the period and S2 is the spot exchange rate at the end of the period 9-276
How Does Investor Psychology Influence Exchange Rates? The bandwagon effect occurs when expectations on the part of traders turn into self-fulfilling prophecies - traders can join the bandwagon and move exchange rates based on group expectations government intervention can prevent the bandwagon from starting, but is not always effective
9-277
Should Companies Use Exchange Rate Forecasting Services? There are two schools of thought 1. The efficient market school argues that forward exchange rates do the best possible job of forecasting future spot exchange rates, and, therefore, investing in forecasting services would be a waste of money An efficient market is one in which prices reflect all available information if the foreign exchange market is efficient, then forward exchange rates should be unbiased predictors of future spot rates
Most empirical tests confirm the efficient market hypothesis suggesting that companies should not waste their money on forecasting services 9-278
Should Companies Use Exchange Rate Forecasting Services? 2.
The inefficient market school argues that companies can improve the foreign exchange market’s estimate of future exchange rates by investing in forecasting services An inefficient market is one in which prices do not reflect all available information
in an inefficient market, forward exchange rates will not be the best possible predictors of future spot exchange rates and it may be worthwhile for international businesses to invest in forecasting services
However, the track record of forecasting services is not good
9-279
How Are Exchange Rates Predicted? There are two schools of thought on forecasting 1. Fundamental analysis draws upon economic factors like interest rates, monetary policy, inflation rates, or balance of payments information to predict exchange rates 2. Technical analysis charts trends with the assumption that past trends and waves are reasonable predictors of future trends and waves
9-280
Are All Currencies Freely Convertible? A currency is freely convertible when a government of a country allows both residents and non-residents to purchase unlimited amounts of foreign currency with the domestic currency A currency is externally convertible when non-residents can convert their holdings of domestic currency into a foreign currency, but when the ability of residents to convert currency is limited in some way A currency is nonconvertible when both residents and non-residents are prohibited from converting their holdings of domestic currency into a foreign currency
9-281
Are All Currencies Freely Convertible? Most countries today practice free convertibility, although many countries impose some restrictions on the amount of money that can be converted Countries limit convertibility to preserve foreign exchange reserves and prevent capital flight when residents and nonresidents rush to convert their holdings of domestic currency into a foreign currency When a country’s currency is nonconvertible, firms may turn to countertrade - barter like agreements by which goods and services can be traded for other goods and services 9-282
What Do Exchange Rates Mean For Managers? 1.
Managers need to consider three types of foreign exchange risk Transaction exposure - the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values
2.
Translation exposure - the impact of currency exchange rate changes on the reported financial statements of a company
3.
includes obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing or lending of funds in foreign currencies concerned with the present measurement of past events gains or losses are “paper losses” –they are unrealized
Economic exposure - the extent to which a firm’s future international earning power is affected by changes in exchange rates
concerned with the long-term effect of changes in exchange rates on future prices, sales, and costs
9-283
How Can Managers Minimize Exchange Rate Risk? 1. 2. 3.
To minimize transaction and translation exposure, managers should Buy forward Use swaps Lead and lag payables and receivables
lead strategy - attempt to collect foreign currency receivables early when a foreign currency is expected to depreciate and pay foreign currency payables before they are due when a currency is expected to appreciate lag strategy - delay collection of foreign currency receivables if that currency is expected to appreciate and delay payables if the currency is expected to depreciate Lead and lag strategies can be difficult to implement 9-284
How Can Managers Minimize Exchange Rate Risk? To reduce economic exposure, managers should 1. Distribute productive assets to various locations so the firm’s long-term financial well-being is not severely affected by changes in exchange rates 2. Ensure assets are not too concentrated in countries where likely rises in currency values will lead to damaging increases in the foreign prices of the goods and services the firm produces 9-285
How Can Managers Minimize Exchange Rate Risk? In general, managers should 1. Have central control of exposure to protect resources efficiently and ensure that each subunit adopts the correct mix of tactics and strategies 2. Distinguish between transaction and translation exposure on the one hand, and economic exposure on the other hand 3. Attempt to forecast future exchange rates 4. Establish good reporting systems so the central finance function can regularly monitor the firm’s exposure position 5. Produce monthly foreign exchange exposure reports 9-286
Review Question The ________ is the rate at which one currency is converted into another. a) Exchange rate b) Cross rate c) Conversion rate d) Foreign exchange market 9-287
Review Question The _______ is the rate at which a foreign exchange dealer converts one currency into another currency on a particular day. a) Currency swap rate b) Forward rate c) Specific rate d) Spot rate 9-288
Review Question Which of the following does not impact future exchange rate movements? a) A country’s price inflation b) A country’s interest rate c) A country’s arbitrage opportunities d) Market psychology 9-289
Review Question When a government of a country allows both residents and non-residents to purchase unlimited amounts of foreign currency with the domestic currency, the currency is a) Nonconvertible b) Freely convertible c) Externally convertible d) Internally convertible 9-290
Review Question The extent to which a firm’s future international earning power is affected by changes in exchange rates is called a) Accounting exposure b) Translation exposure c) Transaction exposure d) Economic exposure 9-291
Review Question Firms that want to minimize transaction and translation exposure can do all of the following except a) buy forward b) have central control of exposure c) use swaps d) lead and lag payables and receivables 9-292
International Business An Asian Perspective By Charles W.L. Hill Chow-Hou Wee Krishna Udayasankar
Chapter 12 The Strategy of International Business
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
What Is Strategy? A firm’s strategy refers to the actions that managers take to attain the goals of the firm Firms need to pursue strategies that increase profitability and profit growth Profitability is the rate of return the firm makes on its invested capital Profit growth is the percentage increase in net profits over time
To increase profitability and profit growth , firms can add value lower costs sell more in existing markets expand internationally
12-295
What Is Strategy? Determinants of Enterprise Value
12-296
How Is Value Created? The firm’s value creation is the difference between V (the price that the firm can charge for that product given competitive pressures) and C (the costs of producing that product) Profits can be increased by 1. Using a differentiation strategy - adding value to a product so that customers are willing to pay more for it the higher the value customers place on a firm’s products, the higher the price the firm can charge for those products
2. Using a low cost strategy - lowering costs 12-297
How Is Value Created? Value Creation
12-298
Why Is Strategic Positioning Important? Michael Porter argues that firms need to choose either differentiation or low cost, and then configure internal operations to support the choice So, to maximize long run return on invested capital, firms must pick a viable position on the efficiency frontier configure internal operations to support that position have the right organization structure in place to execute the strategy 12-299
Why Is Strategic Positioning Important? Strategic Choice in the International Hotel Industry
12-300
How Are A Firm’s Operations Configured? A firm’s operations can be thought of a value chain composed of a series of distinct value creation activities including production, marketing, materials management, R&D, human resources, information systems, and the firm infrastructure Value creation activities can be categorized as 1. Primary activities R&D, production, marketing and sales, customer service
2. Support activities information systems, logistics, human resources 12-301
How Are A Firm’s Operations Configured? The Value Chain
12-302
How Can Firms Increase Profits Through International Expansion? International firms can 1. Expand their market - sell in international markets 2. Realize location economies - disperse value creation activities to locations where they can be performed most efficiently and effectively 3. Realize greater cost economies from experience effects -serve an expanded global market from a central location 4. Earn a greater return - leverage skills developed in foreign operations and transfer them elsewhere in the firm
12-303
How Can Firms Leverage Their Products And Competencies? Firms can increase growth by selling goods or services developed at home internationally The success of firms that expand internationally depends on the goods or services they sell their core competencies - skills within the firm that competitors cannot easily match or imitate core competencies enable the firm to reduce the costs of value creation and/or to create perceived value so that premium pricing is possible
12-304
Why Are Location Economies Important? Location economies are the economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be By achieving location economies, firms can lower the costs of value creation and achieve a low cost position differentiate their product offering
Firms that take advantage of location economies in different parts of the world, create a global web of value creation activities different stages of the value chain are dispersed to locations where perceived value is maximized or where the costs of value creation are minimized
12-305
Why Are Experience Effects Important? The experience curve refers to the systematic reductions in production costs that occur over the life of a product by moving down the experience curve, firms reduce the cost of creating value to get down the experience curve quickly, firms can use a single plant to serve global markets
Learning effects are cost savings that come from learning by doing When labor productivity increases individuals learn the most efficient ways to perform particular tasks managers learn how to manage the new operation more efficiently
12-306
Why Are Experience Effects Important? The Experience Curve
12-307
Why Are Experience Effects Important? Economies of scale refer to the reductions in unit cost achieved by producing a large volume of a product Sources of economies of scale include spreading fixed costs over a large volume utilizing production facilities more intensively increasing bargaining power with suppliers
12-308
How Can Managers Leverage Subsidiary Skills? Managers should 1. Recognize that valuable skills that could be applied elsewhere in the firm can arise anywhere within the firm’s global network - not just at the corporate center 2. Establish an incentive system that encourages local employees to acquire new skills 3. Have a process for identifying when valuable new skills have been created in a subsidiary 4. Act as facilitators to help transfer skills within the firm 12-309
What Types Of Competitive Pressures Exist In The Global Marketplace? Firms that compete in the global marketplace face two conflicting types of competitive pressures the pressures limit the ability of firms to realize location economies and experience effects, leverage products, and transfer skills within the firm
1. Pressures for cost reductions - force the firm to lower unit costs 2. Pressures to be locally responsive - require the firm to adapt its product to meet local demands in each market—a strategy that raises costs 12-310
What Types Of Competitive Pressures Exist In The Global Marketplace? Pressures for Cost Reductions and Local Responsiveness
12-311
When Are Pressures For Cost Reductions Greatest? Pressures for cost reductions are greatest 1. In industries producing commodity type products that fill universal needs (needs that exist when the tastes and preferences of consumers in different nations are similar if not identical) where price is the main competitive weapon 2. When major competitors are based in low cost locations 3. Where there is persistent excess capacity 4. Where consumers are powerful and face low switching costs
12-312
When Are Pressures For Local Responsiveness Greatest? Pressures for local responsiveness arise from 1. Differences in consumer tastes and preferences strong pressure emerges when consumer tastes and preferences differ significantly between countries
2. Differences in traditional practices and infrastructure strong pressure emerges when there are significant differences in infrastructure and/or traditional practices between countries
3. Differences in distribution channels need to be responsive to differences in distribution channels between countries
4. Host government demands economic and political demands imposed by host country governments may require local responsiveness 12-313
Which Strategy Should A Firm Choose?
There are four basic strategies to compete in international markets
1.
Global standardization - increase profitability and profit growth by reaping the cost reductions from economies of scale, learning effects, and location economies
2.
the appropriateness of each strategy depends on the pressures for cost reduction and local responsiveness in the industry
goal is to pursue a low-cost strategy on a global scale makes sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal
Localization - increase profitability by customizing goods or services so that they match tastes and preferences in different national markets
makes sense when there are substantial differences across nations with regard to consumer tastes and preferences and when cost pressures are not too intense
12-314
Which Strategy Should A Firm Choose? 3.
Transnational - tries to simultaneously achieve low costs through location economies, economies of scale, and learning effects, differentiate the product offering across geographic markets to account for local differences, and foster a multidirectional flow of skills between different subsidiaries in the firm’s global network of operations
4.
makes sense when cost pressures are intense and pressures for local responsiveness are intense
International – take products first produced for the domestic market and sell them internationally with only minimal local customization
makes sense when there are low cost pressures and low pressures for local responsiveness
12-315
Which Strategy Should A Firm Choose? Four Basic Strategies
12-316
How Does Strategy Evolve? An international strategy may not be viable in the long term to survive, firms may need to shift to a global standardization strategy or a transnational strategy in advance of competitors
Localization may give a firm a competitive edge, but if the firm is simultaneously facing aggressive competitors, the company will also have to reduce its cost structures would require a shift toward a transnational strategy 12-317
How Does Strategy Evolve? Changes in Strategy over Time
12-318
Review Question What is the rate of return the firm makes on its invested capital? a) Profit growth b) Profitability c) Net return d) Value created 12-319
Review Question Which of the following is not an example of a primary activity? a) Logistics b) Marketing and sales c) Customer service d) Production 12-320
Review Question What is created when different stages of a value chain are dispersed to locations where value added is maximized or where the costs of value creation are minimized? a) Experience effects b) Learning effects c) Economies of scale d) A global web 12-321
Review Question Which of the following is not a pressure for local responsiveness? a) Excess capacity b) Host government demands c) Differences in consumer tastes and preferences d) Differences in distribution channels 12-322
Review Question Which strategy tries to simultaneously achieve low costs through location economies, economies of scale, and learning effects, and differentiate the product offering across geographic markets to account for local differences? a) Internationalization b) Localization c) Global standardization d) Transnational
12-323
Review Question Which strategy makes sense when pressures are high for local responsiveness, but low for cost reductions? a) Global standardization strategy b) International strategy c) Transnational strategy d) Localization strategy 12-324
International Business An Asian Perspective By Charles W.L. Hill Chow-Hou Wee Krishna Udayasankar
Chapter 13 The Organization of International Business
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
What Is Organizational Architecture? Organizational architecture is the totality of a firm’s organization including 1. Organizational structure the formal division of the organization into subunits the location of decision-making responsibilities within that structure - centralized versus decentralized the establishment of integrating mechanisms to coordinate the activities of subunits including cross-functional teams or panregional committees
2. Control systems and incentives control systems - the metrics used to measure performance of subunits incentives - the devices used to reward managerial behavior 13-327
What Is Organizational Architecture? 3. Processes, organizational culture, and people Processes - the manner in which decisions are made and work is performed within the organization Organizational culture - the norms and value systems that are shared among the employees of an organization People - the employees and the strategy used to recruit, compensate, and retain those individuals and the type of people they are in terms of their skills, values, and orientation
To be the most profitable the elements of the organizational architecture must be internally consistent the organizational architecture must fit the strategy the strategy and architecture must be consistent with each other, and consistent with competitive conditions 13-328
What Is Organizational Architecture? Organizational Architecture
13-329
What Are The Dimensions Of Organizational Structure? Organizational structure has three dimensions 1. Vertical differentiation - the location of decision-making responsibilities within a structure 2. Horizontal differentiation - the formal division of the organization into sub-units 3. Integrating mechanisms - the mechanisms for coordinating sub-units
13-330
Why Is Vertical Differentiation Important? Vertical differentiation determines where decision-making power is concentrated Centralized decision-making facilitates coordination ensures decisions are consistent with organization’s objectives gives managers the means to bring about organizational change avoids duplication of activities
Decentralized decision-making relieves the burden of centralized decision-making has been shown to motivate individuals permits greater flexibility can result in better decisions can increase control 13-331
Why Is Horizontal Differentiation Important? Horizontal differentiation refers to how the firm divides into sub-units usually based on function, type of business, or geographical area
Most firms begin with no formal structure, but as they grow, the organization is split into functions reflecting the firm’s value creation activities - functional structure functions are coordinated and controlled by top management decision-making is centralized product line diversification requires further horizontal differentiation
Firms may switch to a product divisional structure where each division is responsible for a distinct product line 13-332
What Is A Functional Structure? A Typical Functional Structure
13-333
What Is A Product Divisional Structure? A Typical Product Divisional Structure
13-334
What Happens When Firms Expand Globally? When firms expand internationally, they often group all of their international activities into an international division Over time, manufacturing may shift to foreign markets firms with a functional structure at home would replicate the functional structure in the foreign market firms with a divisional structure would replicate the divisional structure in the foreign market
In either case, there is the potential for conflict and coordination problems between domestic and foreign operations 13-335
What Is An International Divisional Structure? One Company’s International Divisional Structure
13-336
What Happens Next? Firms that continue to expand will move to either a Worldwide product divisional structure - adopted by firms that are reasonably diversified allows for worldwide coordination of value creation activities of each product division helps realize location and experience curve economies facilitates the transfer of core competencies does not allow for local responsiveness
Worldwide area structure - favored by firms with low degree of diversification and a domestic structure based on function
divides the world into autonomous geographic areas decentralizes operational authority facilitates local responsiveness can result in a fragmentation of the organization is consistent with a localization strategy
13-337
What Is A Worldwide Product Division Structure? A Worldwide Product Divisional Structure
13-338
What Is A Worldwide Area Structure? A Worldwide Area Structure
13-339
How Does Organizational Structure Change Over Time? The International Structural Stages Model
13-340
What Is The Global Matrix Structure? The global matrix structure is an attempt to minimize the limitations of the worldwide area structure and the worldwide product divisional structure allows for differentiation along two dimensions - product division and geographic area has dual decision–making - product division and geographic area have equal responsibility for operating decisions can be bureaucratic and slow can result in conflict between areas and product divisions can result in finger-pointing between divisions when something goes wrong
13-341
What Is The Global Matrix Structure? A Global Matrix Structure
13-342
How Can Subunits Be Integrated? Regardless of the type of structure, firms need a mechanism to integrate subunits need for coordination is lowest in firms with a localization strategy and highest in transnational firms coordination can be complicated by differences in subunit orientation and goals simplest formal integrating mechanism is direct contact between subunit managers, followed by liaisons temporary or permanent teams composed of individuals from each subunit is the next level of formal integration the matrix structure allows for all roles to be integrating roles 13-343
How Can Subunits Be Integrated? Formal Integrating Mechanisms
13-344
How Can Subunits Be Integrated? Many firms are using informal integrating mechanisms A knowledge network is a network for transmitting information within an organization that is based not on formal organization structure, but on informal contacts between managers within an enterprise and on distributed information systems a non bureaucratic conduit for knowledge flows must embrace as many managers as possible and managers must adhere to a common set of norms and values that override differing subunit orientations 13-345
How Can Subunits Be Integrated? A Simple Management Network
13-346
What Are The Different Types Of Control Systems? 1.
Personal controls –personal contact with subordinates
2.
Bureaucratic controls –a system of rules and procedures that directs the actions of subunits
3.
budgets and capital spending rules
Output controls – setting goals for subunits to achieve and expressing those goals in terms of objective performance metrics
4.
most widely used in small firms
compare actual performance against targets and intervene selectively to take corrective action
Cultural controls – exist when employees “buy into” the norms and value systems of the firm
strong culture implies less need for other forms of control
13-347
What Are Incentive Systems? Incentives are the devices used to reward behavior usually closely tied to performance metrics used for output controls should vary depending on the employee and the nature of the work being performed should promote cooperation between managers in subunits should reflect national differences in institutions and culture can have unintended consequences 13-348
What Is Performance Ambiguity? Performance ambiguity exists when the causes of a subunit’s poor performance are not clear is common when a subunit’s performance is dependent on the performance of other subunits is lowest in firms with a localization strategy is higher in international firms is still higher in firms with a global standardization strategy is highest in transnational firms
13-349
What Is The Link Between Control, Incentives, And Strategy? Interdependence, Performance Ambiguity, and the Costs of Control for the Four International Business Strategies
13-350
What Are Processes? Processes refer to the manner in which decisions are made and work is performed many processes cut across national boundaries as well as organizational boundaries processes can be developed anywhere within a firm’s global operations network formal and informal integrating mechanisms can help firms leverage processes
13-351
What Is Organizational Culture? Organizational culture refers to the values and norms that employees are encouraged to follow and evolves from founders and important leaders national social culture the history of the enterprise decisions that resulted in high performance
Organizational culture can be maintained through hiring and promotional practices reward strategies socialization processes communication strategies
Organizational culture tends to change very slowly 13-352
What Is Organizational Culture? Managers in companies with a “strong” culture share a relatively consistent set of values and norms that have a clear impact on the way work is performed A “strong” culture is not always good may not lead to high performance could be beneficial at one point, but not at another
Companies with adaptive cultures have the highest performance 13-353
What Is The Link Between Strategy And Architecture? A Synthesis of Strategy, Structure, and Control Systems
13-354
What Is The Link Between Strategy And Architecture? 1.
Firms pursuing a localization strategy focus on local responsiveness
2.
they do not have a high need for integrating mechanisms performance ambiguity and the cost of control tend to be low the worldwide area structure is common
Firms pursuing an international strategy create value by transferring core competencies from home to foreign subsidiaries
the need for control is moderate the need for integrating mechanisms is moderate performance ambiguity is relatively low and so is the cost of control the worldwide product division structure is common 13-355
What Is The Link Between Strategy And Architecture? 3.
Firms pursuing a global standardization strategy focus on the realization of location and experience curve economies
4.
headquarters maintains control over most decisions the need for integrating mechanisms is high strong organizational cultures are encouraged the worldwide product division is common
Firms pursuing a transnational strategy focus on simultaneously attaining location and experience curve economies, local responsiveness, and global learning
some decisions are centralized and others are decentralized the need for coordination and cost of control is high an array of formal and informal integrating mechanism are used a strong culture is encouraged matrix structures are common
13-356
What Is The Link Between Environment, Strategy, Architecture, And Performance? For a firm to succeed 1. The firm’s strategy must be consistent with the environment in which the firm operates 2. The firm’s organization architecture must be consistent with its strategy firms need to change their architecture to reflect changes in the environment in which they are operating and the strategy they are pursuing
13-357
How Can Firms Implement Organizational Change? To implement organization change 1. Unfreeze the organization through shock therapy requires taking bold actions like plant closures or dramatic structural reorganizations
2. Move the organization to a new state through proactive change in architecture requires a substantial and quick change in organizational architecture so that it matches the desired new strategic posture
3. Refreeze the organization in its new state requires that employees be socialized into the new way of doing things
Organizations can be difficult to change because of the existing distribution of power and influence, the current culture, managers’ preconceptions about the appropriate business model or paradigm, and/or institutional constraints
13-358
Review Question Which of the following is not an advantage of centralized decision-making? a) It facilitates coordination b) It motivates employees c) It gives top-level managers the means to bring about organizational change d) It avoids duplication of activities 13-359
Review Question Most firms begin their international expansion with a(n) ________ structure. a) Matrix b) Worldwide product division c) Worldwide area division d) International division 13-360
Review Question Which type of organization structure has a dual decision-making system? a) Matrix b) Worldwide product division c) Worldwide area division d) International division 13-361
Review Question Which is not one of the four types of control systems? a) Cultural control b) Personal control c) Input control d) Bureaucratic control 13-362
Review Question Which type of organizational structure is often associated with a transnational strategy? a) worldwide area division b) worldwide product division c) matrix d) international division 13-363
Review Question The norms and value systems that are shared among the employees of an organization are called a) processes b) organizational culture c) control systems d) incentives 13-364
International Business An Asian Perspective By Charles W.L. Hill Chow-Hou Wee Krishna Udayasankar
Chapter 14
Entry Strategy and Strategic Alliances McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
What Are The Basic Decisions Firms Make When Expanding Globally? 1. 2. 3.
Firms expanding internationally must decide Which markets to enter When to enter them and on what scale Which entry mode to use
exporting licensing or franchising to a company in the host nation establishing a joint venture with a local company establishing a new wholly owned subsidiary acquiring an established enterprise 14-367
What Influences The Choice Of Entry Mode? Several factors affect the choice of entry mode including transport costs trade barriers political risks economic risks costs firm strategy
The optimal mode varies by situation – what makes sense for one company might not make sense for another 14-368
Which Foreign Markets Should Firms Enter? The choice of foreign markets will depend on their long run profit potential Favorable markets are politically stable have free market systems have relatively low inflation rates have low private sector debt
Less desirable markets are politically unstable have mixed or command economies have excessive levels of borrowing
Markets are also more attractive when the product in question is not widely available and satisfies an unmet need 14-369
When Should A Firm Enter A Foreign Market? Once attractive markets are identified, the firm must consider the timing of entry 1. Entry is early when the firm enters a foreign market before other foreign firms 2. Entry is late when the firm enters the market after firms have already established themselves in the market
14-370
Why Enter A Foreign Market Early? First mover advantages include the ability to pre-empt rivals by establishing a strong brand name the ability to build up sales volume and ride down the experience curve ahead of rivals and gain a cost advantage over later entrants the ability to create switching costs that tie customers into products or services making it difficult for later entrants to win business 14-371
Why Enter A Foreign Market Late? First mover disadvantages include pioneering costs - arise when the foreign business system is so different from that in a firm’s home market that the firm must devote considerable time, effort and expense to learning the rules of the game the costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes the costs of promoting and establishing a product offering, including the cost of educating customers 14-372
On What Scale Should A Firm Enter Foreign Markets? After choosing which market to enter and the timing of entry, firms need to decide on the scale of market entry entering a foreign market on a significant scale is a major strategic commitment that changes the competitive playing field
Firms that enter a market on a significant scale make a strategic commitment to the market - the decision has a long term impact and is difficult to reverse small-scale entry has the advantage of allowing a firm to learn about a foreign market while simultaneously limiting the firm’s exposure to that market 14-373
Is There A “Right” Way To Enter Foreign Markets? No, there are no “right” decisions when deciding which markets to enter, and the timing and scale of entry - just decisions that are associated with different levels of risk and reward
14-374
How Can Firms Enter Foreign Markets? These are six different ways to enter a foreign market 1. Exporting - common first step for many manufacturing firms later, firms may switch to another mode
2. Turnkey projects - the contractor handles every detail of the project for a foreign client, including the training of operating personnel at completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation
3. Licensing - a licensor grants the rights to intangible property to the licensee for a specified time period, and in return, receives a royalty fee from the licensee patents, inventions, formulas, processes, designs, copyrights, trademarks
14-375
How Can Firms Enter Foreign Markets? 4.
Franchising - a specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business
5.
Joint ventures with a host country firm - a firm that is jointly owned by two or more otherwise independent firms
6.
used primarily by service firms
most joint ventures are 50:50 partnerships
Wholly owned subsidiary - the firm owns 100 percent of the stock
set up a new operation acquire an established firm
14-376
Why Choose Exporting? Exporting is attractive because it avoids the costs of establishing local manufacturing operations it helps the firm achieve experience curve and location economies
Exporting is unattractive because there may be lower-cost manufacturing locations high transport costs and tariffs can make it uneconomical agents in a foreign country may not act in exporter’s best interest 14-377
Why Choose A Turnkey Arrangement? Turnkey projects are attractive because they are a way of earning economic returns from the know-how required to assemble and run a technologically complex process they can be less risky than conventional FDI
Turnkey projects are unattractive because the firm has no long-term interest in the foreign country the firm may create a competitor if the firm's process technology is a source of competitive advantage, then selling this technology through a turnkey project is also selling competitive advantage to potential and/or actual competitors 14-378
Why Choose Licensing? Licensing is attractive because the firm avoids development costs and risks associated with opening a foreign market the firm avoids barriers to investment the firm can capitalize on market opportunities without developing those applications itself
Licensing is unattractive because the firm doesn’t have the tight control required for realizing experience curve and location economies the firm’s ability to coordinate strategic moves across countries is limited proprietary (or intangible) assets could be lost to reduce this risk, firms can use cross-licensing agreements 14-379
Why Choose Franchising? Franchising is attractive because it avoids the costs and risks of opening up a foreign market firms can quickly build a global presence
Franchising is unattractive because it inhibits the firm's ability to take profits out of one country to support competitive attacks in another the geographic distance of the firm from franchisees can make it difficult to detect poor quality
14-380
Why Choose Joint Ventures? Joint ventures are attractive because firms benefit from a local partner's knowledge of local conditions, culture, language, political systems, and business systems the costs and risks of opening a foreign market are shared they satisfy political considerations for market entry
Joint ventures are unattractive because the firm risks giving control of its technology to its partner the firm may not have the tight control to realize experience curve or location economies shared ownership can lead to conflicts and battles for control if goals and objectives differ or change over time
14-381
Why Choose A Wholly Owned Subsidiary? Wholly owned subsidiaries are attractive because they reduce the risk of losing control over core competencies they give a firm the tight control over operations in different countries that is necessary for engaging in global strategic coordination they may be required in order to realize location and experience curve economies
Wholly owned subsidiaries are unattractive because the firm bears the full cost and risk of setting up overseas operations 14-382
Which Entry Mode Is Best? Advantages and Disadvantages of Entry Modes
14-383
How Do Core Competencies Influence Entry Mode? The optimal entry mode depends to some degree on the nature of a firm’s core competencies When competitive advantage is based on proprietary technological know-how avoid licensing and joint ventures unless the technological advantage is only transitory, or can be established as the dominant design
When competitive advantage is based on management know-how the risk of losing control over the management skills is not high, and the benefits from getting greater use of brand names is significant 14-384
How Do Pressures For Cost Reductions Influence Entry Mode? When pressure for cost reductions is high, firms are more likely to pursue some combination of exporting and wholly owned subsidiaries allows the firm to achieve location and scale economies and retain some control over product manufacturing and distribution firms pursuing global standardization or transnational strategies prefer wholly owned subsidiaries 14-385
Which Is Better – Greenfield or Acquisition? The choice depends on the situation confronting the firm 1. A greenfield strategy - build a subsidiary from the ground up greenfield venture may be better when the firm needs to transfer organizationally embedded competencies, skills, routines, and culture
2. An acquisition strategy – acquire an existing company acquisition may be better when there are wellestablished competitors or global competitors interested in expanding 14-386
Why Choose Acquisition? Acquisitions are attractive because they are quick to execute they enable firms to preempt their competitors they may be less risky than greenfield ventures
Acquisitions can fail when the acquiring firm overpays for the acquired firm the cultures of the acquiring and acquired firm clash attempts to realize synergies run into roadblocks and take much longer than forecast there is inadequate pre-acquisition screening
To avoid these problems, firms should carefully screen the firm to be acquired move rapidly to implement an integration plan 14-387
Why Choose Greenfield? The main advantage of a greenfield venture is that it gives the firm a greater ability to build the kind of subsidiary company that it wants But, greenfield ventures are slower to establish Greenfield ventures are also risky
14-388
What Are Strategic Alliances? Strategic alliances refer to cooperative agreements between potential or actual competitors range from formal joint ventures to short-term contractual agreements the number of strategic alliances has exploded in recent decades
14-389
Why Choose Strategic Alliances? Strategic alliances are attractive because they facilitate entry into a foreign market allow firms to share the fixed costs and risks of developing new products or processes bring together complementary skills and assets that neither partner could easily develop on its own help a firm establish technological standards for the industry that will benefit the firm
But, the firm needs to be careful not to give away more than it receives 14-390
What Makes Strategic Alliances Successful? The success of an alliance is a function of 1. Partner selection A good partner helps the firm achieve its strategic goals and has the capabilities the firm lacks and that it values shares the firm’s vision for the purpose of the alliance will not exploit the alliance for its own ends 14-391
What Makes Strategic Alliances Successful? 2.
Alliance structure The alliance should
3.
make it difficult to transfer technology not meant to be transferred have contractual safeguards to guard against the risk of opportunism by a partner allow for skills and technology swaps with equitable gains minimize the risk of opportunism by an alliance partner
The manner in which the alliance is managed Requires
interpersonal relationships between managers learning from alliance partners 14-392
Review Question _______ refers to the time and effort spent learning the rules of a new market. a) First mover advantages b) Strategic commitments c) Pioneering costs d) Market entry costs 14-393
Review Question How do most firms begin their international expansion? a) with a joint venture b) with a wholly owned subsidiary c) with licensing or franchising d) with exporting 14-394
Review Question What is the main disadvantage of wholly owned subsidiaries? a) they make it difficult to realize location and experience curve economies b) the firm bears the full cost and risk of setting up overseas operations c) they may inhibit the firm's ability to take profits out of one country to support competitive attacks in another d) high transport costs and tariffs can make it uneconomical
14-395
Review Question If a firm wants the option of global strategic coordination, the firm should choose a) franchising b) joint ventures c) licensing d) a wholly owned subsidiary 14-396
Review Question All of the following are advantages of acquisitions except a) they are quicker to execute b) it is easy to realize synergies by integrating the operations of the acquired entities c) they enable firms to preempt their competitors d) they may be less risky 14-397
Review Question Which of the following is not important to a successful strategic alliance? a) establishing a 50:50 relationship with partner b) creating strong interpersonal relationships c) a shared vision d) learning from the partner 14-398
International Business An Asian Perspective By Charles W.L. Hill Chow-Hou Wee Krishna Udayasankar
Chapter 15
Exporting, Importing, and Countertrade McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
Why Export? Exporting is a way to increase market size and profits increasing thanks to lower trade barriers under the WTO and regional economic agreements such as the EU and NAFTA
Large firms often proactively seek new export opportunities, but many smaller firms export reactively often intimidated by the complexities of exporting
Exporting firms need to identify market opportunities deal with foreign exchange risk navigate import and export financing understand the challenges of doing business in a foreign market
15-401
What Are The Pitfalls Of Exporting? Common pitfalls include poor market analysis poor understanding of competitive conditions a lack of customization for local markets a poor distribution program poorly executed promotional campaigns problems securing financing a general underestimation of the differences and expertise required for foreign market penetration an underestimation of the amount of paperwork and formalities involved 15-402
How Can Firms Improve Export Performance? Many firms are unaware of export opportunities available Firms need to collect information Firms can get direct assistance from some countries and/or use an export management companies both Germany and Japan have developed extensive institutional structures for promoting exports Japanese exporters can use knowledge and contacts of sogo shosha - great trading houses U.S. firms have far fewer resources available 15-403
What Are Export Management Companies? Export management companies (EMCs) are export specialists that act as the export marketing department or international department for client firms EMCs normally accept two types of assignments 1. They start export operations with the understanding that the firm will take over after they are established not all EMCs are equal—some do a better job than others
2. They start services with the understanding that the EMC will have continuing responsibility for selling the firm’s products but, firms that use EMCs may not develop their own export capabilities 15-404
How Can Firms Reduce The Risks Of Exporting? To reduce the risks of exporting, firms should hire an EMC or export consultant to identify opportunities and navigate paperwork and regulations focus on one, or a few, markets at first enter a foreign market on a small scale in order to reduce the costs of any subsequent failures recognize the time and managerial commitment involved develop a good relationship with local distributors and customers hire locals to help establish a presence in the market be proactive consider local production 15-405
How Can Firms Overcome The Lack Of Trust in Export Financing? Because trade implies parties from different countries exchanging goods and payment the issue of trust is important Exporters prefer to receive payment prior to shipping goods, but importers prefer to receive goods prior to making payments To get around this difference of preference, many international transactions are facilitated by a third party - normally a reputable bank By including the third party, an element of trust is added to the relationship 15-406
How Can Firms Overcome The Lack Of Trust in Export Financing? The Use Of A Third Party
15-407
What Is A Letter Of Credit? A letter of credit is issued by a bank at the request of an importer and states the bank will pay a specified sum of money to a beneficiary, normally the exporter, on presentation of particular, specified documents main advantage is that both parties are likely to trust a reputable bank even if they do not trust each other 15-408
What Is A Draft? A draft (also called a bill of exchange) is an order written by an exporter instructing an importer, or an importer's agent, to pay a specified amount of money at a specified time the instrument normally used in international commerce for payment
A sight draft is payable on presentation to the drawee while a time draft allows for a delay in payment - normally 30, 60, 90, or 120 days 15-409
What Is A Bill Of Lading? The bill of lading is issued to the exporter by the common carrier transporting the merchandise It serves three purposes 1. It is a receipt - merchandise described on document has been received by carrier 2. It is a contract - carrier is obligated to provide transportation service in return for a certain charge 3. It is a document of title - can be used to obtain payment or a written promise before the merchandise is released to the importer 15-410
How Does An International Trade Transaction Work? A Typical International Trade Transaction
15-411
Where Can Firms Get Export Assistance? 1. Financing aid is available from the ExportImport Bank (Eximbank) or equivalent agency in different countries provides financing aid to facilitate exports, imports, and the exchange of commodities between the U.S. and other countries achieves its goals though loan and loan guarantee programs
2. Export credit insurance - provides coverage against commercial risks and political risks protects exporters against the risk that the importer will default on payment 15-412
What Is Countertrade? Countertrade refers to a range of barter-like agreements that facilitate the trade of goods and services for other goods and services when they cannot be traded for money emerged as a means purchasing imports during the1960s when the Soviet Union and the Communist states of Eastern Europe had nonconvertible currencies, grew in popularity in the 1980s among many developing nations that lacked the foreign exchange reserves required to purchase necessary imports notable increase after the 1997 Asian financial crisis 15-413
What Are The Forms Of Countertrade? There are five distinct versions of countertrade 1. Barter - a direct exchange of goods and/or services between two parties without a cash transaction the most restrictive countertrade arrangement used primarily for one-time-only deals in transactions with trading partners who are not creditworthy or trustworthy
2. Counterpurchase - a reciprocal buying agreement occurs when a firm agrees to purchase a certain amount of materials back from a country to which a sale is made
3. Offset - similar to counterpurchase insofar as one party agrees to purchase goods and services with a specified percentage of the proceeds from the original sale difference is that this party can fulfill the obligation with any firm in the country to which the sale is being made 15-414
What Are The Forms Of Countertrade? 4.
5.
A buyback occurs when a firm builds a plant in a country—or supplies technology, equipment, training, or other services to the country—and agrees to take a certain percentage of the plant’s output as a partial payment for the contract Switch trading - the use of a specialized third-party trading house in a countertrade arrangement
when a firm enters a counterpurchase or offset agreement with a country, it often ends up with counterpurchase credits which can be used to purchase goods from that country switch trading occurs when a third-party trading house buys the firm’s counterpurchase credits and sells them to another firm that can better use them 15-415
What Are The Pros Of Countertrade? Countertrade is attractive because it gives a firm a way to finance an export deal when other means are not available it give a firm acompetitve edge over a firm that is unwilling to enter a countertrade agreement
In some cases, a countertrade arrangement may be required by the government of a country to which a firm is exporting goods or services 15-416
What Are The Cons Of Countertrade? Countertrade is unattractive because it may involve the exchange of unusable or poor-quality goods that the firm cannot dispose of profitably it requires the firm to establish an in-house trading department to handle countertrade deals
Countertrade is most attractive to large, diverse multinational enterprises that can use their worldwide network of contacts to dispose of goods acquired in countertrade deals 15-417
Review Question Which of the following is not a common pitfall of exporting? a) a product offering that is customized to the local market b) a poor understanding of competitive conditions in he foreign market c) poor market analysis d) problems securing financing 15-418
Review Question A _______ is an order written by an exporter instructing an importer to pay a specified amount of money at a specified time. a) letter of credit b) draft c) bill of lading d) confirmed letter of credit 15-419
Review Question Which type of countertrade arrangement involves the use of a specialized third-party trading house? a) a buyback b) an offset c) a counterpurchase d) switch trading 15-420
Review Question Which of the following is not a purpose of the bill of lading? a) It is a contract b) It is a document of title c) It is a form of payment d) It is a receipt 15-421
Review Question ________ is the most restrictive countertrade arrangement. a) counterpurchase b) switch trading c) barter d) offset 15-422
Review Question Countertrade is attractive for all of the following reasons except a) It may involve the exchange of unusable or poorquality goods that the firm cannot dispose of profitably b) It can give a firm a way to finance an export deal when other means are not available c) It can be a strategic marketing weapon d) It can give a firm an advantage over firms that are unwilling to engage in countertrade arrangements 15-423
International Business An Asian Perspective By Charles W.L. Hill Chow-Hou Wee Krishna Udayasankar
Chapter 16
Global Production, Outsourcing, and Logistics McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
What Are The Main Production Issues For Firms? International firms must answer five interrelated questions 1. Where should production activities be located? 2. What should be the long-term strategic role of foreign production sites? 3. Should the firm own foreign production activities or outsource those activities to independent vendors? 4. How should a globally dispersed supply chain be managed, and what is the role of Internet-based information technology in the management of global logistics? 5. Should the firm manage global logistics itself, or should it outsource the management to enterprises that specialize in this activity? 16-426
How Are Strategy, Production, And Logistics Related? 1.
Production - activities involved in creating a product Logistics - procurement and physical transmission of material through the supply chain, from suppliers to customers Questions: How can production and logistics Lower the costs of value creation?
2.
disperse production to the most efficient locations manage the global supply chain efficiently to better match supply and demand
Add value by better serving customer needs?
eliminate defective products from the supply chain and the manufacturing process 16-427
How Can Quality Be Improved? Most firms use the Six Sigma program - a direct descendant of total quality management (TQM) aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout the company
In the European Union, firms must meet ISO 9000 standards before gaining access to the European marketplace Improved quality reduces costs
16-428
How Can Quality Be Improved? The Relationship Between Quality and Costs
16-429
Where Should Production Be Located? Firms should locate production so that production and logistics can be locally responsive production and logistics can respond quickly to shifts in customer demand
1. 2. 3.
Firms should consider Country factors Technological factors Product factors 16-430
Why Are Country Factors Important? Manufacturing should be located where economic, political, and cultural conditions are most conducive to the performance of that activity Firms should consider the availability of skilled labor and supporting industries formal and informal trade barriers expectations about future exchange rate changes transportation costs regulations affecting FDI 16-431
Why Are Technological Factors Important? 1.
Firms should consider The level of fixed costs
2.
if fixed costs are high, produce in a single location or a few locations when fixed costs are low, multiple production plants may be possible – allows firms to respond to local demands
The minimum efficient scale
when minimum efficient scale (the level of output at which most plant-level scale economies are exhausted) is high, choose centralized production in a single location or a limited number of locations when minimum efficient scale is low, respond to local market demands and hedge against currency risk by operating in multiple locations 16-432
Why Are Technological Factors Important? 3. The flexibility of the technology flexible manufacturing technology or lean production reduces set up times for complex equipment increases the utilization of individual machines improves quality control
Flexible manufacturing allows firms to produce a wide variety of end products at a relatively low unit cost Mass customization Flexible machine cells 16-433
What Should a Firm Do? Production should be concentrated in a few locations when fixed costs are substantial the minimum efficient scale of production is high flexible manufacturing technologies are available
Production in multiple locations makes sense when both fixed costs and the minimum efficient scale of production are relatively low appropriate flexible manufacturing technologies are not available 16-434
Why Are Product Factors Important To Location Decisions? Two product factors impact location decisions 1. The product's value-to-weight ratio If the value-to-weight ratio is high, produce the product in a single location and export to other parts of the world If the value-to-weight ratio is low, there is greater pressure to manufacture the product in multiple locations across the world
2. Whether the product serves universal needs When products serve universal needs, the need for local responsiveness falls, and concentrating manufacturing in a central location makes sense 16-435
How Are Location, Strategy, And Production Related? Location, Strategy, and Production
16-436
What Is The Strategic Role Of Foreign Factories? The strategic role of foreign factories and the strategic advantage of a particular location can change over time factories established to take advantage of low cost labor can evolve into facilities with advanced design capabilities
Improvement in a facility comes from 1. Pressure to lower costs or respond to local markets 2. An increase in the availability of advanced factors of production 16-437
What Is The Strategic Role Of Foreign Factories? Many companies now see foreign factories as globally dispersed centers of excellence supports the development of a transnational strategy global learning - valuable knowledge can be found in foreign subsidiaries implies that firms are less likely to switch production to new locations simply because some underlying variable like wage rates has changed 16-438
Should A Firm Outsource Production? Should a firm make or buy the component parts to go into its final product? Make-or-buy decisions are important to firms' manufacturing strategies service firms also face make-or-buy decisions decisions involving international markets are more complex than those involving domestic markets 16-439
Why Make? Vertical integration - making component parts in-house 1. Lowers costs - if a firm is more efficient at that production activity than any other enterprise, manufacturing in-house makes sense 2. Facilitates investments in highly specialized assets internal production makes sense when substantial investments in specialized assets are required 3. Protects proprietary technology – in-house production makes sense when component parts contain proprietary technology 4. Facilitates the scheduling of adjacent processes planning, coordination, and scheduling of adjacent processes can be easier with in-house production 16-440
Why Buy? Buying component parts from independent suppliers 1. Gives the firm greater flexibility important when changes in exchange rates and trade barriers alter the attractiveness of various supply sources over time
2. Helps drive down the firm's cost structure avoids challenges of coordination and control of additional subunits avoids the lack of incentive associated with internal suppliers avoids the difficulties with setting appropriate transfer prices
3. Helps the firm capture orders from international customers can help firms gain orders from suppliers’ countries 16-441
Do Strategic Alliances With Suppliers Make Sense? Sometimes, firms can capture the benefits of vertical integration without the associated organizational problems by forming longterm strategic alliances with key suppliers However, these commitments may actually limit strategic flexibility
16-442
How Do Firms Manage The Global Supply Chain? Logistics encompasses the activities necessary to get materials to a manufacturing facility, through the manufacturing process, and out through a distribution system to the end user The goal is to manage a global supply chain at the lowest possible cost and in a way that best serves customer needs establish a competitive advantage through superior customer service
16-443
What Is The Role Of Just-In-Time Inventory? Just-in-time (JIT) systems economize on inventory holding costs by having materials arrive at a manufacturing plant just in time to enter the production process JIT systems generate major cost savings from reduced warehousing and inventory holding costs can help the firm spot defective parts and take them out of the manufacturing process to boost product quality
But, a JIT system leaves the firm with no buffer stock of inventory to meet unexpected demand or supply changes 16-444
What Is The Role Of Information Technology And The Internet? Web-based information systems play a crucial role in materials management allow firms to optimize production scheduling according to when components are expected to arrive
Electronic Data Interchange (EDI) facilitates the tracking of inputs allows the firm to optimize its production schedule lets the firm and its suppliers communicate in real time eliminates the flow of paperwork between the firm and its suppliers 16-445
Review Question What allows firms to increase efficiency by improving capacity utilization and reducing work-in-progress? a) mass customization b) Six Sigma technology c) ISO 9000 d) flexible machine cells 16-446
Review Question Firms should produce in multiple locations when a) fixed costs are low b) fixed costs are substantial c) the minimum efficient scale of production is high d) flexible manufacturing technologies are available
16-447
Review Question All of the following are key factors that influence the decision of where to produce except a) country factors b) competitor factors c) technological factors d) product factors 16-448
Review Question When _______, firms will favor decentralized production. a) there are substantial differences in political economy b) fixed costs are high c) the product’s value-to-weight ratio is high d) exchange rates are volatile 16-449
Review Question Concentrated production makes sense when a) minimum efficient scale is high b) location externalities are not important c) the product does not serve universal needs d) there are few trade barriers
16-450
Review Question Which of the following is not an advantage of buying from independent suppliers? a) it gives the firm greater flexibility b) it helps drive down the firm's cost structure c) it protects proprietary property d) it helps the firm to capture orders from international customers 16-451
International Business An Asian Perspective By Charles W.L. Hill Chow-Hou Wee Krishna Udayasankar
Chapter 17
Global Marketing and R&D McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
What Is The Marketing Mix? The marketing mix (the choices the firm offers to its targeted market) is comprised of 1. 2. 3. 4.
Product attributes Distribution strategy Communication strategy Pricing strategy
17-454
Should The Marketing Mix Be Changed For Each Market? Question: Are markets and brands becoming global? Theodore Levitt argued that world markets were becoming increasingly similar making it unnecessary to localize the marketing mix Question: Is Levitt right? Probably not! Levitt’s theory has become a lightening rod in the debate about globalization
The current consensus is that while the world is moving towards global markets, global standardization is not possible because of cultural and economic differences among nations trade barriers and differences in product and technical standards 17-455
What Is Market Segmentation? Market segmentation - identifying distinct groups of consumers whose purchasing behavior differs from others in important ways Markets can be segmented by
geography demography socio-cultural factors psychological factors
Two key market segmentation issues 1. The differences between countries in the structure of market segments 2. The existence of segments that transcend national borders when segments transcend national borders, a global strategy is possible 17-456
How Do Product Attributes Influence Marketing Strategy? A product is like a bundle of attributes Products sell well when their attributes match consumer needs if consumer needs were the same everywhere, a firm could sell the same product worldwide
But, consumer needs depend on 1. Culture tradition, social structure, language, religion, education 17-457
How Do Product Attributes Influence Marketing Strategy? 2. Level of economic development consumers in highly developed countries tend to demand a lot of extra performance attributes consumers in less developed nations tend to prefer more basic products
3. Product and technical standards national differences can force firms to customize the marketing mix 17-458
How Does Distribution Influence Marketing Strategy? Distribution strategy refers to the means the firm chooses for delivering the product to the consumer How a product is delivered depends on the firm’s market entry strategy firms that manufacturer the product locally can sell directly to the consumer, to the retailer, or to the wholesaler firms that manufacture outside the country have the same options plus the option of selling to an import agent 17-459
How Does Distribution Influence Marketing Strategy? A Typical Distribution Strategy
17-460
How Do Distribution Systems Differ? 1.
There are four main differences in distribution systems Retail concentration – concentrated or fragmented
2.
in a concentrated retail system, a few retailers supply most of the market – common in developed countries in a fragmented retail system there are many retailers, no one of which has a major share of the market – common in developing countries
Channel length - the number of intermediaries between the producer and the consumer
short channel - when the producer sells directly to the consumer – common with concentrated systems long channel - when the producer sells through an import agent, a wholesaler, and a retailer – common with fragmented retail systems
17-461
How Do Distribution Systems Differ? 3. Channel exclusivity – how difficult it is for outsiders to access Japan's system is an example of a very exclusive system
4. Channel quality - the expertise, competencies, and skills of established retailers in a nation, and their ability to sell and support the products of international businesses the quality of retailers is good in most developed countries, but is variable at best in emerging markets and less developed countries firms may have to devote considerable resources to upgrading channel quality 17-462
Which Distribution Strategy Should A Firm Choose? The optimal strategy depends on the relative costs and benefits of each alternative When price is important, a shorter channel is better each intermediary in a channel adds its own markup to the products
When the retail sector is very fragmented, a long channel can be beneficial economizes on selling costs can offer access to exclusive channels 17-463
Why Is Communication Strategy Important? Communicating product attributes to prospective customers is a critical element in the marketing mix How a firm communicates with customers depends partly on the choice of channel Communication channels available to a firm include direct selling sales promotion direct marketing advertising 17-464
What Are The Barriers to International Communication? The effectiveness of a firm's international communication can be jeopardized by 1. Cultural barriers - it can be difficult to communicate messages across cultures a message that means one thing in one country may mean something quite different in another firms need to develop cross-cultural literacy, and use local input when developing marketing messages 17-465
What Are The Barriers to International Communication? 2. Source and country of origin effects – Source effects occur when the receiver of the message evaluates the message on the basis of status or image of the sender can counter negative source effects by deemphasizing their foreign origins
Country of origin effects - the extent to which the place of manufacturing influences product evaluations
3. Noise levels - the amount of other messages competing for a potential consumer’s attention in highly developed countries, noise is very high in developing countries, noise levels tend to be lower 17-466
How Do Firms Communicate With Customers? Firms have to choose between two types of communication strategies 1. A push strategy emphasizes personnel selling 2. A pull strategy emphasizes mass media advertising
17-467
Which Is Better – Push Versus Pull? The choice between strategies depends on 1. Product type and consumer sophistication a pull strategy works well for firms in consumer goods selling to a large market segment a push strategy works well for industrial products
2. Channel length a pull strategy works better with longer distribution channels
3. Media availability a pull strategy relies on access to advertising media a push strategy may be better when media is not easily available 17-468
What Is The Optimal Mix? In general, a push strategy is better for industrial products and/or complex new products when distribution channels are short when few print or electronic media are available
A pull strategy is better for consumer goods products when distribution channels are long when sufficient print and electronic media are available to carry the marketing message 17-469
Should A Firm Use Standardized Advertising? Standardized advertising makes sense when it has significant economic advantages creative talent is scarce and one large effort to develop a campaign will be more successful than numerous smaller efforts brand names are global
Standardized advertising does not make sense when cultural differences among nations are significant advertising regulations limit standardized advertising
Some firms standardize parts of a campaign to capture the benefits of global standardization, but customize others to respond to local cultural and legal environments
17-470
What Pricing Strategy Should Firms Use? 1. 2. 2.
Firms need to consider Price discrimination Strategic pricing Regulations that affect pricing decisions
17-471
What Is Price Discrimination?
Price discrimination - occurs when firms charge consumers in different countries different prices for the same product For price discrimination to work
must be able to keep national markets separate countries must have different price elasticities of demand measure of the responsiveness of demand for a product to changes in price
demand is elastic when a small change in price produces a large change in demand demand is inelastic when a large change in price produces only a small change in demand
Typically, price elasticities are greater in countries with lower income levels and larger numbers of competitors 17-472
What Is Price Discrimination? Elastic and Inelastic Demand Curves
17-473
What Is Strategic Pricing? 1.
Strategic pricing has three aspects Predatory pricing - use profit gained in one market to support aggressive pricing designed to drive competitors out in another market
2.
Multi-point pricing - a firm’s pricing strategy in one market may have an impact on a rival’s pricing strategy in another market
3.
after competitors have left, the firm will raise prices
managers should centrally monitor pricing decisions
Experience curve pricing - price low worldwide in an attempt to build global sales volume as rapidly as possible, even if this means taking large losses initially
firms that are further along the experience curve have a cost advantage relative to firms further up the curve 17-474
How Do Regulations Influence Pricing? A firm’s ability to set its own prices may be limited by 1. Antidumping regulations – dumping occurs whenever a firm sells a product for a price that is less than the cost of producing it antidumping rules set a floor under export prices and limit a firm’s ability to pursue strategic pricing
2. Competition policy – most industrialized nations have regulations designed to promote competition and restrict monopoly practices can limit the prices that a firm can charge 17-475
How Should Firms Configure The Marketing Mix? Standardization versus customization is not an all or nothing concept Most firms standardize some things and customize others Firms should consider the costs and benefits of standardizing and customizing each element of the marketing mix
17-476
Why Is New Product Development Important? Firms today need to make product innovation a priority Today, competition is as much about technological innovation as anything else The pace of technological change is faster than ever and product life cycles are often very short New innovations can make existing products obsolete, but at the same time, open the door to a host of new opportunities Firms need close links between R&D, marketing, and manufacturing 17-477
Where Should R&D Be Located? New product ideas come from the interactions of scientific research, demand conditions, and competitive conditions The rate of new product development is greater in countries where more money is spent on basic and applied research and development demand is strong consumers are affluent competition is intense 17-478
How Can R&D, Marketing, And Production Be Integrated? Since new product development has a high failure rate, new product development efforts should involve close coordination between R&D, marketing, and production Integration will ensure that customer needs drive product development new products are designed for ease of manufacture development costs are kept in check time to market is minimized 17-479
Why Are Cross-Functional Teams Important? Cross-functional integration is facilitated by crossfunctional product development teams Effective cross functional teams should be led by a heavyweight project manager with status in the organization include members from all the critical functional areas have members located together establish clear goals develop an effective conflict resolution process 17-480
How Can Firms Build Global R&D Capabilities? To adequately commercialize new technologies, firms need to integrate R&D and marketing To successfully commercialize new technologies, firms may need to develop different versions for different countries so, a firm may need R&D centers in North America, Asia, and Europe that are closely linked by formal and informal integrating mechanisms with marketing operations in each country in their regions, and with the various manufacturing facilities 17-481
Review Question Which of the following is not an element in the marketing mix? a) product attributes b) communication strategy c) distribution strategy d) production strategy 17-482
Review Question The main differences between distribution systems include all of the following except a) retail concentration b) product attributes c) channel length d) channel exclusivity 17-483
Review Question Standardized advertising makes sense in all of the following situations except a) when cultural differences among nations are significant b) when a firm is trying to save money c) when creative talent is scarce and one large effort to develop a campaign will be more successful than numerous smaller efforts d) when brand names are global 17-484
Review Question A pull strategy is best a) for industrial products b) when distribution channels are short c) when sufficient print and electronic media are available to carry the marketing message d) for complex new products 17-485
Review Question A firm is using _________ when it uses a pricing strategy aimed at giving a company a competitive advantage over its rivals. a) predatory pricing b) multipoint pricing c) experience curve pricing d) strategic pricing 17-486
Review Question Which of the following does not promote new product development? a) spending more money on basic and applied research and development b) weak demand c) affluent consumers d) intense competition 17-487
International Business An Asian Perspective By Charles W.L. Hill Chow-Hou Wee Krishna Udayasankar
Chapter 18 Global Human Resource Management
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
What Is Human Resource Management? Human resource management (HRM) refers to the activities an organization carries out to utilize its human resources effectively These activities include determining the firm's human resource strategy staffing performance evaluation management development compensation labor relations
Firms need to ensure there is a fit between their human resources practices and strategy 18-490
What Is The Strategic Role Of HRM In International Firms? HRM can help the firm reduce the costs of value creation and add value by better serving customer needs more complex in an international business differences between countries in labor markets, culture, legal systems, economic systems, etc.
HRM must also determine when to use expatriate managers - citizens of one country working abroad who should be sent on foreign assignments how they should be compensated how they should be trained how they should be reoriented when they return home
18-491
What Is The Strategic Role Of HRM In International Firms? The Role of Human Resources in Shaping Organizational Architecture
18-492
What Is A Staffing Policy? A firm’s staffing policy is concerned with the selection of employees who have the skills required to perform a particular job can be a tool for developing an promoting the firm’s corporate culture - the organization’s norms and value system a strong corporate culture can help the firm implement its strategy
There are three main approaches to staffing policy within international businesses 1. The ethnocentric approach 2. The polycentric approach 3. The geocentric approach 18-493
What Is An Ethnocentric Staffing Policy? The ethnocentric approach to staffing fills key management positions with parent-country nationals makes sense for firms with an international strategy
Firms that pursue an ethnocentric policy believe that there is a lack of qualified individuals in the host country to fill senior management positions it is the best way to maintain a unified corporate culture value can be created by transferring core competencies to a foreign operation via parent country nationals
But it limits advancement opportunities for host country nationals it can lead to "cultural myopia"
18-494
What Is A Polycentric Staffing Policy? The polycentric approach recruits host country nationals to manage subsidiaries in their own country, and parent country nationals for positions at headquarters makes sense for firms pursuing a localization strategy can minimize cultural myopia may be less expensive to implement than an ethnocentric policy
But host country nationals have limited opportunities to gain experience outside their own country and so cannot progress beyond senior positions in their own subsidiaries a gap can form between host country managers and parent country managers
18-495
What Is A Geocentric Staffing Policy? The geocentric approach seeks the best people, regardless of nationality for key jobs consistent with building a strong unifying culture and informal management network makes sense for firms pursuing a global or transnational strategy enables the firm to make the best use of its human resources builds a cadre of international executives who feel at home working in a number of different cultures
But can be limited by immigration laws is costly to implement
18-496
Which Staffing Policy Is Best? Comparison of Staffing Approaches
18-497
What Is Expatriate Failure? Firms using an ethnocentric or geocentric staffing strategy will have expatriate managers Expatriate failure is the premature return of an expatriate manager to the home country each expatriate failure can cost between $250,000 and $1 million between 16 and 40% of all American expatriates in developed countries fail and almost 70% of Americans assigned to developing countries fail
18-498
What Is The Rate Of Expatriate Failure? Expatriate Failure Rates
18-499
Why Do Expatriate Managers Fail? The main reasons for U.S. expatriate failure are
the inability of an expatriate's spouse to adapt the manager’s inability to adjust other family-related reasons the manager’s personal or emotional maturity the manager’s inability to cope with larger overseas responsibilities
The reason for European expatriate failure is the inability of the manager’s spouse to adjust
The main reasons for Japanese expatriate failure are
the inability to cope with larger overseas responsibility difficulties with the new environment personal or emotional problems a lack of technical competence the inability of spouse to adjust
18-500
How Can Firms Reduce Expatriate Failure? Firms can reduce expatriate failure through improved selection procedures Four dimensions that predict expatriate success are 1. Self-orientation - the expatriate's self-esteem, selfconfidence, and mental well-being 2. Others-orientation - the ability to interact effectively with host-country nationals 3. Perceptual ability - the ability to understand why people of other countries behave the way they do 4. Cultural toughness – the ability to adjust to the posting
18-501
Why Is A Global Mindset Important? A global mindset may be the fundamental attribute of a global manager cognitive complexity cosmopolitan outlook
A global mindset is often acquired early in life from a family that is bicultural living in foreign countries learning foreign languages as a regular part of family life 18-502
What Is Training And Management Development? After selecting a manager for a position, training and development programs should be implemented Training focuses upon preparing the manager for a specific job Management development is concerned with developing the skills of the manager over his or her career with the firm gives the manager a skill set and reinforces organizational culture
Historically, most firms focus more on training than on management development 18-503
Why Is Training Important For Expatriate Managers? Training can reduce expatriate failure Cultural training - fosters an appreciation for the host country's culture Language training - an exclusive reliance on English diminishes an expatriate's ability to interact with host country nationals Practical training - helps the expatriate and her family ease themselves into day-to-day life in the host country But, studies show only about 30% of managers sent on one- to five-year expatriate assignments received training before their departure
18-504
What Happens When Expatriates Return Home? Training and development should include preparing and developing expatriate managers for reentry into their home country organization need good programs for re-integrating expatriates back into work life within their home country organization and for utilizing the knowledge they acquired while abroad
18-505
Why Is Management Development Important To Firm Strategy? Management development programs increase the overall skill levels of managers through ongoing management education rotations of managers through jobs within the firm to give them varied experiences
Management development can be a strategic tool to build a strong unifying culture and informal management network, both of which are supportive of a transnational and global strategy 18-506
How Should Expatriates Be Evaluated? Evaluating expatriates can be especially complex typically, both host nation managers and home office managers evaluate the performance of expatriate managers
But, both types of managers are subject to unintentional bias home country managers tend to rely on hard data when evaluating expatriates host country managers can be biased towards their own frame of reference 18-507
How Can Performance Appraisal Bias Be Reduced? To reduce bias in performance appraisal more weight should be given to an on-site manager's appraisal than to an off-site manager's appraisal a former expatriate who has served in the same location should be involved in the process home office managers should be consulted before an on-site manager completes a formal termination evaluation 18-508
What Are The Key Issues In Compensating Expatriates? Two key issues on compensation 1. How to adjust compensation to reflect differences in economic circumstances and compensation practices 2. How to pay expatriate managers
18-509
How Should National Differences In Compensation Be Treated? Currently, there are substantial differences in executive compensation across countries a top U.S. executive made an average of $525,923 in the 2005-2006 period, compared to $237,697 in Japan, and $158,146 in Taiwan
Question: Should pay be equalized across countries? Many firms have recently moved toward a compensation structure that is based on global standards especially important in firms with a geocentric staffing policy
But, most firms still set pay according to the prevailing standards in each country
18-510
How Should Expatriates Be Paid? Most firms use the balance sheet approach - equalizes purchasing power across countries so employees have the same living standard in their foreign posting as at home A compensation package has five components 1. Base salary - normally in the same range as the base salary for a similar position in the home country can be paid either in the home currency or in the local currency
2. Foreign service premium - extra pay the expatriate receives for working outside his country of origin generally offered as an incentive to accept foreign assignments
18-511
How Should Expatriates Be Paid? 3. Various allowances - hardship, housing, costof-living, education 4. Tax differentials - may have to pay income tax to both the home country and the host-country governments if the host country does not have a reciprocal tax treaty with the expatriate’s home country company usually covers extra tax assessments
5. Benefits – many firms provide the same level of medical and pension benefits abroad that employees receive at home 18-512
Why Are International Labor Relations Important? Question: Can organized labor limit the choices available to an international business? Labor unions can limit a firm's ability to pursue a transnational or global strategy HRM needs to foster harmony and minimize conflict between management and organized labor 18-513
What Are The Concerns Of Organized Labor? Organized labor is concerned that 1. Multinationals can counter union bargaining power by threatening to move production to another country 2. Multinationals will farm out only low-skilled jobs to foreign plants making it easier to switch production locations 3. Multinationals will import employment practices and contractual agreements from their home countries and reduce the influence of unions
18-514
How Does Organized Labor Respond To MNC Power? Organized labor has responded to the increased bargaining power of multinational corporations by 1. Trying to set-up their own international organizations 2. Lobbying for national legislation to restrict multinationals 3. Trying to achieve regulation of multinationals through international organizations such as the United Nations
So far, these efforts have had only limited success 18-515
How Are MNCs Responding To Organized Labor? Many firms are centralizing labor relations to enhance the bargaining power of the multinational vis-à-vis organized labor in the past, labor relations were usually decentralized to individual subsidiaries
The way in which work is organized within a plant can be a major source of competitive advantage so it is important for management to have a good relationship with labor 18-516
Review Question The three types of staffing approaches for international firms include all of the following except a) Transnational b) Ethnocentric c) Geocentric d) Polycentric 18-517
Review Question Firms using _______ fill all key management positions with parent-country nationals. a) b) c) d)
An ethnocentric staffing policy A geocentric staffing policy A polycentric staffing policy A transcentric staffing policy 18-518
Review Question When a firm wants to pursue a transnational strategy, a _________ approach to staffing makes sense. a) Ethnocentric b) Geocentric c) Polycentric d) Transcentric 18-519
Review Question The most common reason for expatriate failure is a) The manager’s inability to adjust b) The manager’s emotional or personal maturity c) The inability of the spouse to adjust d) The manager’s lack of technical competence
18-520
Review Question Which of the following does not help predict success in a foreign positing? a) Others-orientation b) Cultural toughness c) Perceptual ability d) Technical expertise 18-521
Review Question Which of the following is not a response by labor to the increased bargaining power of multinationals? a) Establishing global unions b) Setting-up their own international organizations c) Lobbying for national legislation to restrict multinationals d) Trying to achieve regulation of multinationals through international organization such as the United Nations 18-522
