1

Economic Integration and Emerging Market Economies (Chapter 6)

Economic Integration / Free Trade

• The tendency toward economic unification of nations within a region, as a means of attaining goals that they cannot achieve in isolation.

• Based on the premise that, through economic cooperation, nations in aregion connected by history, geography, culture, politics, or economicfactors, can gain substantial economic advantages by trading freely.

• An outgrowth of efforts since 1945 to liberalize trade worldwide.

• There are already nearly 30 free trade zones already in place or indevelopment around the world — free trade is here to stay.

Tariff: A tax on imported goods

Nontariff Barrier: A government policy or measure that restricts trade

2

Effects of Economic Integration

Governments decrease or eliminate trade barriers between countrieswithin a region:

==> Leads to trade creation and trade diversion

==> Market for producers within the region increases in size, leading to increased demand for goods/services made within the region.

==> Producers internationalize to exploit greater economies of scale and scope in production, marketing, finance, etc.

==> Competition increases in most industries; company efficiency increases; production, marketing, and other costs go down.

Allows firms to become more competitive in global markets.

==> Consumers reap lower prices and a greater selection of goods and services.

==> Reduced environmental damage, less illegal immigration, and a more peaceful world (?)

3

Disadvantages of Economic Integration

==> Companies, especially smaller businesses in smaller partner countries, are impacted as trade barriers slide away. Some firms go out of business.

==> Factories in various industries may be forced to close or relocate. This causes job losses and impacts local communities.

==> Each nation's economy is disrupted in ways that cause certain groups to suffer — a process of "creative destruction."

==> Increased competition may result in substantial corporate restructurings, leading to layoffs and other unhappy

consequences.

4

North American Free Trade

Started out as the Free Trade Agreement, initiated with Canada in 1989.

Mexico was incorporated when NAFTA was activated in 1994.

NAFTA does the following (for Canada, USA, and Mexico):

Phased out all tariffs on goods and lowered nontariff barriers on both goods and services;

Eliminated virtually all import and export quotas;

Improved climate for bilateral trade by liberalizing restrictions on foreign investment;

Established local content rules which grant preferential treatment to trade in goods originating in the USA, Canada, or Mexico, as opposed to goods originating in other countries (diverts trade);

Strengthened protections under intellectual property rights.

5

The European Union

Main goal: Create a uniform,integrated market to advance the competi-tiveness of European industries and companies in the world marketplace.

The EU economic unification program seeks to:

Eliminate all trade and transportation barriers in Europe to the movement of of goods, services, people, and capital;

Harmonize technical and quality standards Europe-wide in the production ofgoods and services;

Harmonize fiscal and taxation policies, as well as social policy regarding workers.

Generally, American products can be marketed to the EU without majorimpediments. However, US exporters may still face EU duties of 5% to 20%. Duties can be avoided by establishing a local presence (assuming 60% local

content).

Evolving business strategy:

Completely Completelycustomized = = = = > standardized product product |---------------------------------------------------------------------------|

6

Other Economic Alliances

Southern Cone Common Market (‘Mercosur’)Brazil, Argentina, Paraguay, Uruguay, Chile, Bolivia

Andean Common MarketBolivia, Columbia, Ecuador, Peru, Venezuela

Central American Common Market (CACM)Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua

Caribbean Common Market (CARICOM)

Association of SouthEast Asian Nations (ASEAN)

Asia Pacific Economic Cooperation (APEC)

The entire Western Hemisphere and Pacific Rim countries are gradually evolving toward one large free trade area

7

Emerging Market Economies: RUSSIA

Geography: Land area nearly twice that of the USA, involving the widest varietyof topographic and climatic types. World’s biggest country in area butunfavorably located regarding major sea lanes, hindering trade

Natural Resources: Wide natural resource base including major deposits of oil,natural gas, coal, and many strategic minerals, timber (however, majorobstacles of climate, terrain, and distance hinder exploitation)

Population: About 150 million

Education: 98% literacy rate. Russians are well educated.

Gross Domestic Product: About $700 billion on PPP basis

Per Capita Income : About $5,000

Average inflation rate: Varies, but is typically double or triple digits

Industries: Coal, oil, gas, chemicals, and metals; all forms of machine building from

rolling mills to high-performance aircraft and space vehicles; ship-building; road and

rail transportation equipment; communications equipment; agricultural machinery,

tractors, and construction equipment; electric power generating and transmittingequipment; medical and scientific instruments; consumer durables

8

Russia’s Economy

In spite of huge natural resources, a well educated population, and adiverse industrial base, Russia continues to experience seriousdifficulties in moving from a centrally planned to a market economy.

Economic reform program included the following steps:

- Freed nearly all prices

- Slashed defense spending

- Eliminated old centralized distribution system

- Initiated ambitious voucher program for privatization of industry

- Established private financial institutions

- Decentralized foreign trade

9

Russia: Three Overriding Problems

1. Poor economic infrastructure -

Unstable economy, high inflation, inadequate banking system,

shortage of loanable funds, etc.

2. Poor facilities and capital infrastructure -

Transportation, communications, information technology, factories, equipment, etc. Russia’s plant and equipment on average are twice the age of the West’s

3. Poor human infrastructure for market economy -

Distrust and insufficient understanding among the people of how a market economy works, shortage of capable managers, dislike of wealthy people, etc.

10

Russian Problems (Cont’d)

Russia has made limited progress in key areas needed to provide a solid foundationfor a market economy.

Financial stability is elusive, with wide swings in monthly inflation rates (makesbusiness planning difficult; discourages private investment).

Limited restructuring of industry has occurred so far because of scarceinvestment funds and failure of managers to make hard cost-cutting decisions.

Federal government has failed to develop a social safety net that would allow fasterrestructuring by securing lives of the displaced.

Existing legal framework is insufficient to fully support market economy and toencourage foreign investment (e.g., poor protection of intellectual property rights).

Many Russians believe they are worse off now than under the old system becauseof growing crime, health problems, mounting wage arrears, and job uncertainty. (Itis very difficult, politically, to carry out needed reforms in such an environment.)

11

Factors Making Russia’s Case Worse than those of Eastern European Countries

• Communism started in Russia and hence, its legacy will be harder to throw off. (Communism was forced on Eastern Europe and was always seen as an alien force hindering national destinies.)

• Communism started in Russia in 1917 and ended in 1989; there are fewRussians today who did not live under communism or current chaos for all their lives. (Communism didn’t arrive in Eastern Europe until the 1940s; many Eastern European entrepreneurs who fled to the West since that time are returning to their home countries to aid in economic reform.)

• The chain of practical knowledge regarding non-communist approaches was repeatedly broken during this century via purges and other means. (Much practical knowledge has been retained and passed on to youngergenerations in Eastern Europe.)

12

Common Characteristics of Russian and Eastern European Manufacturing

Outdated manufacturing equipment

Inventory hoarding instead of inventory management

Insufficient shop floor control

Insufficient quality control

Low levels of productivity

Lack of meaningful employee involvement

Inadequate information systems

Poor distribution and delivery performance

Lack of flexibility / responsiveness

No supply chain management

13

CHINA (People’s Republic of China)

Geography: Slightly larger than the coterminous United States. Twothirds of China is mountainous or desert, and only one-tenth is cultivated.

Population: 1.25 billion (280 million in the USA)

Population Density: 315 per square mile; 25% urban (70 per square mile,

76% urban in the USA)

People: The population is heterogeneous; ethnic Chinese constitute 92%of the total. Most Chinese high school graduates are better educatedthan their American counterparts (and they work for only a few dollarsper day; hence the massive shift of manufacturing to China)

Industries: Iron and steel, textiles, agriculture implements, trucks.

Chief crops: Grains, rice, cotton, tea, silk

14

CHINA (Cont’d)

Labor force: 60% agricultural; 25% industrial & commercial.

GDP: Probably over $4 trillion (About $8 trillion in USA)

Per capita GDP: About $3,500 in PPP terms, much lower in non-PPP terms

Biggest Trading Partners:Imports — Japan, Taiwan, United States, Hong KongExports — Hong Kong, Japan, United States, South Korea

Infrastructure:Electricity - capacity: About 250 million kW (750 million in USA)Railroads: About 40,000 miles of track (144,000 in USA)Highways: About 700,000 miles (385,000,000 in USA)Airports: About 200 (over 5,000 in USA)Telephones: About 1 per 20 persons (1 per 1.5 persons in USA)Distribution networks in general are primitive.

15

CHINA (Cont’d)

Economic System:

• Formerly centrally planned, now creating a "socialist market economy."

• State sector has shrunk; private sector has grown dramatically.

• Has become the world’s third largest economy in aggregate GNP terms.

• China will likely become a ‘wealthy country’ within coming few decades.

• Fast growth is largely the result of huge investments by offshoreChinese (from places like Hong Kong, Singapore, Taiwan, & Indonesia).

• Guangdong and other areas in SE China closest to Hong Kong/Taiwan have become centers of intense capitalism.

• China's present per capita GDP is similar to that of Japan in the 1950s.However, China’s overall level of industrialization is greatly inferior to Japan of the 1950s.

16

Problems Facing China in Attempting to Modernize

• Very poor infrastructure.(transportation, communications, electrification, machinery, etc.)

• 75% of the population are spread out across the vast countryside (creating huge distribution problems).

• Conditions in the countryside are still primitive; attitudes there will change slowly.

However, if China continues to grow very quickly, it could put atremendous burden on the world's natural resources.

Moreover, as the East Coast prospers, massive migration is occurring from

the western regions, overwhelming eastern infrastructure. Thus, theChinese government is rushing to modernize the national infrastructure,an expensive process likely to delay private sector growth.

17

Comparison of Reform in Russia and China

Russia

- Low savings rate

- Ineffective government

- 93% of workers formerly employed in large state enterprises

- Political and economic reforms are being carried out simultaneously

China

- Very high savings rate (as high as 40%)

- Effective government

- Only 18% of workers formerly employed in large state enterprises;

others were local entrepreneurs

- Economic reforms are being carried out first; political reforms

(supposedly) will occur later

Question: Which country is more likely to succeed in the long run?

(End of Chapter 6)

18

National Trade and Investment Policies (Chapter 7)

Governments impose tariff and non-tariff barriers on imported goods inorder to achieve specific policy objectives

Tariff (aka ‘duty’): A government tax levied on imported goods

Non-Tariff Trade Barriers

Specific Limitations on Trade (e.g., quotas, import licensing requirements, local

content rules)

Administrative Barriers (e.g., unfair valuation systems, unfair tariff classification

systems, bureaucratic delays, unreasonably tough standards and testing methods,

unusual packaging and labeling standards)

Government Participation in Trade (e.g., subsidies, biased governmentprocurement policies, domestic assistance programs)

“Voluntary” Export Restraints

19

Protectionism

Efforts by governments to restrict imports through imposition of trade barriers.While exceptions exist, protectionism tends to do a country more harm than good.

For example, in the USA tariffs tend to. . .

increase inflation (because a fixed amount of dollars chases fewer goods and because domestic firms can charge higher prices)

special interests' privileges

government control and political considerations in economic matters (thus, controlled more by politics, less by natural market forces)

the number of tariffs (tariffs beget tariffs)

restrict manufacturers' supply sources and choices available to consumers

competition (thereby leading to weak industries, unable to compete efficiently in world markets)

weaken international understanding (leading to trade wars and other conflicts)

20

Rationale for Government-Imposed Trade Barriers (Protectionism)

Unemployment: Free trade tends to result in job losses at home (mainly in the

short run)

Protection of an Infant Industry: Infant industries may need protection untilthey are strong enough to compete on even terms with foreign firms

Industrialization of Underdeveloped Countries: Industrialization may notsucceed if the country is constantly faced with foreign competition at home.

Economic Relations with Other Countries: Due to unfavorable economicconditions in some countries (e.g., trade deficits, high inflation), some tradeintervention may be warranted

Political Objectives: Protectionism viewed as necessary to maintain or protect

essential industries dealing with ‘enemy’ countries (e.g., we don’t exportplutonium to Libya), or maintaining a national identity in certain industries (e.g.,media, special real estate, sports)

21

Trade Barriers Based on Culture, Customs, and Related Factors: Example

USA / AmericansJapan / Japanese

Culture very open; are usually relatively closed; usually willing to buy foreign goods prefer Japan-made goods

Language world business language; spoken only in Japan; not very difficult to learn hard to learn

Quality not extremely quality extremely qualityconsciousness conscious conscious

Distribution Systemrelatively simple and open complex / relatively closed

Business relatively user-friendly hard to navigateinfrastructure for foreigners (even for

Japanese)

Government attitude tend not to interfere with tend to favor

toward imports the marketplace Japanese goods

Big conglomerate weak; often illegal very strong; promotenetworks (‘keiretsu’) due to anti-trust laws

Japanese business interests

Loyalty in relatively disloyal to extremely loyal tobusiness relationships suppliers, workers, etc.

suppliers, workers, etc.

Overall orientation favors consumers favors producers

22

General Agreement on Tariffs and Trade (GATT)

First trade agreement aimed at reducing trade barriers worldwide.

Signed by the USA and 22 other countries in 1947.

GATT created:

(1) process to reduce tariffs through negotiations among member nations;

(2) agency to serve as a watchdog over world trade;

(3) forum for resolving trade disputes.

GATT members have met eight times since 1947 to negotiate agreements

to reduce trade barriers (most recent meeting — "Uruguay Round" —ended in 1994).

Today GATT has 130 member and associate nations, accounting for morethan 90 percent of world trade.

23

GATT (Cont’d)

GATT has been extremely successful in reducing trade barriers since1947, leading to dramatic increase in world trade.

Uruguay Round (1986 - 1994) accomplished the following:

(1) One-third reduction in tariffs on manufactured goods

(2) Better protections for intellectual property rights

(3) More open markets for trade in services and agriculture

(4) Better dispute settlement procedures

(5) Established the World Trade Organization (WTO), replacing the GATT.

(End of Chapter 7)

24

The Legal and Political Environment of Global Business (Chapter 8)

KEY LEGAL ISSUES IN INTERNATIONAL BUSINESS

International law

International treaties

Contractual relationships

Dispute resolution

Extraterritoriality

Trade and investment regulation

Financial flows regulation

Ownership regulation

Sanctions and embargoes

Intellectual property protection

Reporting requirements

25

Private International Law / Contracts

Private international law is concerned with three areas:

(1) Choice of law (e.g., When making a contract with a distributor in France, Microsoft determines in advance which country’s laws should be used to enforce the contract)

(2) Choice of forum (which country has jurisdiction to hear / try cases in the event of a conflict)

(3) Recognition and enforcement of judgements

26

Private International Law / Contracts (Cont’d)

International contracts attach rights, duties, and obligations to thecontracting parties in three types of business transactions:

(1) Sales of goods and services (directly or via an intermediary)

(2) Licensing and franchising (a contract allowing a firm to manufacture and/or sell a good or service abroad, usually in conjunction with the use, for a fee, of the original manufacturer’s intellectual property, marketing assets, or other)

(3) Direct Investment (the operation of a foreign branch office or other facility, creation of a foreign subsidiary, or participation in a joint venture with another firm, abroad)

27

Legal Recourse for Resolving Disputes

Conciliation: A formal process of negotiation whose objective is toresolve differences in a "friendly" manner. Less aggressive thanarbitration. Practiced particularly in China.

Arbitration: Dispute settlement procedure in which an objective thirdparty hears both sides and makes a decision. Uses intermediaries such asrepresentatives of chambers of commerce, trade associations, or thirdcountry institutions (e.g., London Court of Arbitration; InternationalChamber of Commerce; Chamber of Commerce of Paris).

Litigation: Lawsuits carried out in public courts. Considered the lastresort for resolving disputes and avoided by most firms because of cost,delays, aggravation, etc. Often, the biggest winners are the lawyers.

28

Extraterritoriality

Reflects a government’s attempts to set or enforce its own laws andpolicies outside of the home country.

Antitrust laws • Regulate business activities that restrain competition or trade; • Means by which US government prevents the creation of

monopolies;• Vary from country to country (e.g. strong in USA; weak in Japan);• Extraterritoriality example: The US government sued Pilkington

PLC, a British glassmaker, for perceived violation of US antitrust laws.

Foreign Corrupt Practices Act• Passed in 1977, made it illegal for Americans to offers bribes or

similar forms of payment in the conduct of international business;• Ignores the fact that bribery is a way of life in some countries.

29

Bases for Legal Systems: Four TypesIslamic Law Middle East, Africa, and many parts of Asia (about 1/5 of the world population) Based on the Koran, prescribes behavior regarding social and economic activity Overriding objective is social justice Some elements are many centuries old

Socialist Law: Former USSR and its satellites; derived from the Marxist-Socialist system Emphasizes rights of the state over rights of the individual Now becoming “Westernized”

Common Law UK, Canada, Hong Kong, and other countries (formerly) of the British empire Based on tradition, past practices, and legal precedents established by the courts More open to interpretation by courts and thus more flexible than Code Law

Code Law: Most countries of the world Based on comprehensive written statutes (laws enacted by legislative bodies) All inclusive (in contrast to Common Law), covering all aspects of commercial, civil, and criminal behavior, although subject to some interpretation by courts

Example: Under Common Law, intellectual property rights are determined by use; under

Code Law, determined by registration

30

Global Political Environment and Its Affect on (International) Business

INTEREST GROUP EXAMPLE ISSUE

Government / Politicians ==> National industrial policy favoring local firms

General Public ==> Nationalism / Concerns about local culture

Religious Bodies ==> Anti-Islam concerns

Big Labor ==> Anti-imports

Competing Businesses ==> Concerns about local resource consumption

Customers ==> Pricing policies

Stockholders ==> Insufficient profits

Minority Groups ==> Perceived discrimination / Sexual harassment

Conservationists ==> Environmental protection

Other Special Interest Groups ==> You name it

31

Company Strategy for Dealing with Political Issues

1. Constantly scan the environment to track existing and potential issues

2. When an issue is identified, define its nature

3. Identify current and potential action of special interest group(s)

4. Identify key individuals and institutions that can influence issue outcomes (e.g., government agencies, courts, the media)

5. Formulate objectives for addressing the issue and strategies for reaching those objectives

6. Determine the impact of implementing various strategies (e.g., via cost/benefit analysis)

7. Choose best strategy(s) and implement

32

SAMPLING OF INTERNATIONAL ACCOUNTING PRACTICES

Foreign financial statements often don’t come out for up to a yearfollowing year’s end (compared with a few months in the USA)

ASSETS• Securities Valuation

– Most countries: lower of cost or market value– Denmark: Cost method– Brazil: Encourages firms to adjust to reflect monetary corrections.

• Receivables– USA: Carried net of an allowance of uncollectable accounts– Belgium, France, India, Spain, South Africa: The allowance has

generally not been established.– Germany: Allowance may be carried as a liability rather than as a

contra-asset.

• Inventory Valuation– Most common method worldwide: FIFO – Japan and Brazil: Weighted average cost is preferred– Australia: LIFO is not allowed

33

INTERNATIONAL ACCOUNTING PRACTICES (CONT’D)

• Ownership Stakes over 50%– Most places: Full consolidation into headquarters financial statements– India and South Korea: Usually don’t consolidate– Switzerland: Consolidated statements are often unaudited– Germany, Italy,Finland: Foreign firms may be excluded from consolidation

• Plant, Property, and Equipment Valuation– USA, Canada, Japan, Germany: Historical cost– Latin America and Much of Europe: Replacement cost or other– Latin America: Inflation-adjusted market value– South Korea: Fixed assets may be periodically revalued for inflation but are

subject to a 3% revaluation tax.

INCOME STATEMENT• Depreciation

– Most of the world: Straight line depreciation is the norm– Latin America & other high inflation countries: Based on re-valued book

value (thus, total accumulated depreciation can exceed original purchase cost)

• R&D Costs– Most of the world: Expensed as incurred– South Korea and Spain: Capitalized– Belgium, Malaysia, and Italy: Both conventions are practiced.

(End of Chapter 8)

34

Organization, Management, and Control of Global Operations (Chapter

9)

The basic functions of an organization are to provide a. . .

(1) place for decision-making and a route for coordination of business activities,

(2) system for communications among business entities and for reporting on business progress and results.

Generally, organizations evolve as the firm internationalizes. International

organizational structure depends on:

(1) degree of internationalization of the firm;

(2) requirements for grouping resources and people to best achieve organizational goals; and

(3) type and degree of control to be exercised by headquarters.

Decentralization: granting a high degree of autonomy to subsidiaries

Centralization: concentrating control and strategic decision making at headquarters

35

Organizational Structure

Export Department Structure (Fig. 9.1)• Export department as a separate entity, within or outside the firm;• Common to smaller firms and those new to international business;• Inadequate where international activities involve much more than

exporting.

International Division Structure (Fig. 9.2)• Centralizes in one entity and creates a critical mass of international

expertise;• Best serves firms with few products that are relatively standardized;• Popular with U.S. firms because of large domestic market;• Campbell Soup Co.

Global Product Structure (Fig. 9.3)• Gives total responsibility for worldwide production and marketing to

individual product divisions;• Popular in highly international firms with diverse product lines;• Maximal cost efficiency achieved through centralization of production;• Global synergy and ability to coordinate may suffer;• Motorola, Westinghouse

36

Organizational Structure (Cont’d)

Geographic Area Structure (Fig. 9.4)• Geographic divisions are responsible for all manufacturing and marketing

in their respective areas;• Ideal where product characteristics and operating conditions vary

dramatically, and when foreign operations are extensive and not dominated by a single region or country;

• May lead to costly duplication in the divisions; thus, careful coordination is needed;

• Nestle, Asea Brown Boveri

Global Functional Structure (Fig. 9.5)• Arranges the firm’s international activities along functional lines;• Works best in firms with narrow and similar product lines;• Exxon, Alcoa

Matrix Structure • Attempts to combine product, geographic, and functional structures in

some ideal fashion;• May be the hardest type to manage well;• AT&T, Eastman Kodak

37

The Multinational Corporation (MNC)

Companies that carry out production, marketing, and other such business functionsin more than one country

Such firms are usually large, operate in several countries at once, and have anintegrated global philosophy encompassing both domestic and overseas operations.

Running an MNC is usually much more complex than running a strictly domestic firm.

Complex issues facing MNC management include:

• Locations of decision-making, production, and R&D (e.g., centralized ordecentralized decision-making? Which production locations are best in light oflocal business environments, upstream and downstream operations?)

• Markets to be served / products to be offered

• Operating strategies(e.g.,choice among exporting, licensing, manufacturing, JV, etc.)

• Operating tactics (e.g., What pricing methods, which distribution approaches, which methods to minimize taxes and trade barriers? How to appease local interests?)

• How to manage the most important resource in each location: people

38

The MNC and Constituencies

The MNC must satisfy everybody:

Stockholders

Employees

Upstream channel members

Downstream channel members

Customers

Host country governments / politicians

Host country competitors / business groups (e.g., Toys R Us in Japan)

Host country special interest groups (e.g., big labor in France)

International special interest groups (e.g., Greenpeace)

Society at large

Decisions made in one country have repercussions elsewhere

39

Impact of the MNC on Host Countries

Positive Impact

Capital formation

Technology and management skills transfer

Industrial development

Internal competition and entrepreneurship

Favorable effect on balance of payments

Increased employment / Increased use of unemployed factors of production

Negative Impact

Industrial dominance

Technological dependence

Disturbance of host country sovereignty / economic plans (some MNCs “economies” are larger than the economies of numerous host countries)

Harm local entrepreneurship

Decrease local R&D undertakings

Cultural change

40

Challenges Facing MNCs

Exchange rate volatility / Unfavorable exchange rates

Cost of capital / High interest rates in the host country

Coordination / Control of far-flung operations

Tariff and non-tariff trade barriers and restrictions

Inadequate business infrastructure in host country (e.g., communications, transportation, electricity)

Political risk

Extraterritoriality (e.g., for US firms operating abroad: Foreign Corrupt Practices Act, US antitrust laws)

Adapting operations to suit local conditions

41

Strategies for Dealing with Constituents

Constituents include stockholders, employees, upstream channel members,downstream channel members, customers, host country governments/ politicianshost country competitors /small business groups, host country special interestgroups, international special interest groups, society at large.

• Scan local business environment constantly; be alert for potential problems

Be open about corporate activities; emphasize social, economic, and other benefits of these activities

Use corporate power responsibly, always weighing local interests

Develop contingency plans to deal with disasters and counter criticisms

Maintain integrity: avoid actual wrongdoing as well as the mere appearance of it

Be clear and sensitive in communications; speak the local language

When possible, get involved in local projects that advance societal interests and the public good

Be a good corporate citizen overseas

42

Global Strategy versus Multidomestic Strategy

Global Multidomestic Strategy Strategy |-----------------------------------------------------------------------------|(lower costs) (higher revenues)

Global StrategyTo minimize costs, the firm configures its various value chains in cost-effective locations around the world. The firm then seeks to optimize resource transference and generally coordinate steps across its value chains.

Global strategy emphasizes. . .(1) Standardization of products and marketing (reduces costs, but may result in

lost revenues)(2) Systematic dealings with stakeholders (e.g., consistent pricing, consistent

policies in dealing with governments)

43

Global Strategy versus Multidomestic Strategy

Multidomestic StrategyProducts and marketing are produced in and/or tailored for each foreign location, often due to unfavorable cost economies or highly specific local tastes.

Multidomestic strategy emphasizes. . .(1) Customization of products and marketing (increases revenues, but also

increases costs)(2) Individualized dealings with stakeholders (e.g., pricing locally, dealing with

unique aspects of local and national governments)

Transnational Strategy• A hybrid of global and multidomestic strategies• Emphasizes the exploitation of knowledge and capabilities obtained from

the firm’s operations anywhere in the world• Information flows up and down, vertical and horizontal

44

Foreign Direct Investment (FDI)

An investment that gives the investor a controlling interest in a foreigncompany (10% per US Department of Commerce definition);

Direct investments in facilities to produce and/or market a product or servicein a foreign country

• Horizontal FDI: investment in the same industry

• Vertical FDI: investment upstream or downstream in the firm’s own value chain

Growth of FDI– In 1998, global stock of FDI exceeds $3 trillion.– During the 80s, FDI grew twice as fast as the growth in world trade.– From 1988 to 1998, flow of worldwide FDI increased four fold.

Parts / ComponentsPurchasing

Production /Assembly

Shipping EU Distribution

EU Sales

45

FDI Determinants / Rationale

Market expansion / marketing factors

Desire / need to expand sales

Lack of domestic capacity / size of foreign market

Need to maintain close customer contact

Dissatisfaction with existing market arrangements

Desire to follow customers / competition

Trade restrictions

Government trade barriers (e.g., Japanese auto firms in US)

Country-of-origin effects / local preference for local product

46

FDI Determinants / Rationale (Cont’d)

Resource-acquisition investments / cost factors

Desire / need to be near source of supply

Availability of appropriate factors of production (e.g., raw materials, capital, technology)

Lower cost of factors of production (e.g., cheap labor)

Achieve economies of scale (spread production and marketing costs over many markets)

Lower cost of transportation (e.g., cement, tires, yogurt)

Favorable investment climate

Favorable tax structure or investment incentives

Stable / unstable foreign exchange

Familiarity with country

Globalization strategy (significant presence in every region of the world)

47

International Control

• Key questions:

– Where are decisions made?

– How should worldwide operations be structured so as to optimize results?

– How can headquarters “control” foreign operations?

• Foreign control is more difficult because of:

– Distance - takes more time and distance to communicate and to

transport people and assets

– Diversity - environmental differences make it hard to control and

compare far-flung operations

– Uncontrollables - there are many more uncontrollable variables in

international business

– Degree of certainty - there are often rapid changes in the environment

and problems in obtaining reliable data

(End of Chapter 9)

48

GLOBAL BUSINESS AND MARKETING RESEARCH (Chapter 10)

Two major decisions facing the international firm:

Where to sell Where to produce

INTERNATIONAL BUSINESS RESEARCH

The systematic gathering, recording, and analyzing of data to provide information

useful to international business decision making;

The international business environment is usually much more complex than thedomestic market;

Failure to do research is the greatest cause of international business failure;

Cost of research is almost always cheaper than the cost of blunders that resultfrom not doing research;

Research allows the firm to discover disqualifying problems early and plan for asuccessful venture.

49

International Business Research (Cont’d)

Two types of data

Secondary data: Information already collected by others and available inmagazines, trade journals, books, and in reports from entities like the U.N., WorldBank, or from governments (e.g., Exporter’s Encyclopedia).

Primary data: Information collected specifically for the purpose of theinvestigation at hand.

Potential problems with secondary data:

(1) Availability — may be hard or impossible to obtain;

(2) Reliability — may not be very reliable; (e.g., governments often exaggerate to serve their own purposes);

(3) Comparability - may be presented in inconvenient units or may be out of date.

When these problems are severe, firm may need to collect primary data

Problem with primary data: it’s expensive to get

50

The Exporter’s Encyclopedia, Published by Dun & Bradstreet

Lists nearly every country in the world in alphabetical order. Under each heading,the exporter can find out about all the requirements licenses, documentation,packing requirements, tariffs, taxes, and non-tariff barriers for shippingproducts to the given country.

For example, for the countries shown, required documentation:

France: commercial invoice, bill of lading, certificate of origin. Depending on thenature of the product being shipped, some special documents covering, for example,sanitation and health, may also be required.

People's Republic of China: bill of lading, packing list, commercial invoice, andcertificate of origin.

Canada: commercial invoice, certificate of origin, bill of lading, and a multitude of other special certificates issuance of which depends on the nature of the productor on the request for such by the importer (especially true for Quebec).

Argentina: bill of lading, packing list, commercial invoice, and certificate of origin.

51

Most Important International Information

MACRO DATA

Tariff barriers to trade

U.S. export / import data

Non-Tariff barriers to trade

Foreign export / import data

Government trade policy

MICRO DATA

Local laws and regulations

Market size / Market intensity

Local standards and specifications

Distribution system

Competitive activity

Source: Czinkota, M. 1991. International Information Needs for U.S. Competitiveness. Business Horizons, 34 (6): 86-91.

52

Common Methods for Collecting Primary Data

Observation: Situation of interest is watched and relevant facts, actions, orbehaviors are recorded.

Examples:

• Fischer-Price Inc. invites a group of local pre-schoolers to its offices in Rio de

Janeiro and allows them to play in a room containing a variety of their toy products. The children are observed from behind a one-way glass to see which toys Brazilian children seem to prefer.

• Microsoft sends researchers into software stores in Germany to check on the

prices charged for various competing brands of spreadsheet software.

• Market researchers for Tylenol review a large collection of Japanese magazine ads to see how aspirin is typically promoted in magazine ads in Japan.

53

Collecting Primary Data (Cont’d)

Experimentation: Type of investigation in which a researcher manipulates andcontrols one or more independent variables (such as advertising or price) andobserves how a dependent variable (such as sales volume) changes in response tothe manipulations.

Examples:

• In Russia, Coca-Cola conducts controlled taste tests of Diet Coke to see how local consumers respond. (Here, differences in the taste of Diet Coke are the independent variables and consumer preference is the dependent variable.)

• McDonalds conducts extensive newspaper advertising in Shanghai, but no newspaper advertising in Peking, and then records changes in sales volume at McDonald’s outlets in each city. The purpose is to see if newspaper advertising is an effective approach for promoting McDonald’s restaurants in China.

• Hewlett-Packard charges $17 for a certain type of calculator in Bombay and $26 for the same calculator in Calcutta, in order to estimate price elasticity of demand for calculators in India.

54

Collecting Primary Data (Cont’d)

Surveys: The gathering of primary data from respondents by mail, by telephone, or

through personal interviews.

Examples:

• In Poland, Procter & Gamble researchers stop people at supermarkets and interview them about their habits regarding the washing of clothes (e.g., hot water vs. cold; use vs. nonuse of anti-static devices; etc.)

• In Australia, Compaq Computers conducts a mail survey in which they quiz respondents on the various features and benefits they are seeking in personal computers and the prices they are willing to pay with regard to different computer configurations.

• Researchers in Italy telephone households at random to find out, on behalf of International Red Cross, their attitudes about donating blood.

55

Focus GroupsInvolves the meeting of a specially trained interviewer with up to a dozen localconsumers at once for a period of two to four hours. A specific topic is introducedand thoroughly discussed by all participants.

Advantages:• Hidden or subtle issues are often raised that would not otherwise emerge in

individual interviews.

• Can provide very detailed information about perceptions, emotions, and attitudes

• A highly efficient method for rapidly collecting a large amount of information.

Disadvantages: • Participants may not be representative of consumers in the given market.

• Peer pressure or other group phenomena may lead to biased or invalid responses.

• May not work in cultures where highly participatory interaction is discouraged.

* * * * * * * * * Best guide on collecting primary data in international business: Douglas, S. andS. Craig (1983), International Marketing Research. Englewood Cliffs, NJ: Prentice-Hall

(End of Chapter 10)