Chapter01 IM

Instructor’s ManualInternational Business

Third Edition

Alan M. RugmanIndiana University and University of Oxford

Richard M. HodgettsFlorida International University

Prepared byCecilia Brain

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Pearson Education Limited 2003Lecturers adopting the main text are permitted to photocopy the book as required.

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First published 2003


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Rugman, Hodgetts: International Business, Third Edition, Instructor’s Manual

Contents

Chapter support material ............................................................................. v1. Regional and Global Strategy .............................................................. 12. The Multinational Enterprise ............................................................... 113. The Triad and International Business ................................................... 194. International Politics ............................................................................ 285. International Culture ............................................................................ 396. International Trade ............................................................................... 517. International Finance ............................................................................ 638. Multinational Strategy .......................................................................... 769. Organizing Strategy ............................................................................. 8910. Production Strategy .............................................................................. 10111. Marketing Strategy ............................................................................... 11312. Human Resource Management Strategy ............................................... 12513. Political Risk and Negotiation Strategies .............................................. 14014. International Financial Management .................................................... 15215. Corporate Strategy and National Competitiveness ................................ 16716. European Union ................................................................................... 17817. Japan .................................................................................................... 19118. North America ..................................................................................... 20519. Non-Triad Nations ............................................................................... 21920. The Future Challenges of International Business .................................. 233

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Introduction

This resource manual has been developed as a teaching and examination aid for International Business, Third Edition (Pearson Education, 2003). It contains the following:

Suggested class schedules and assignments for a 15-week semester and a 10-week quarter.

Chapter objectives, chapter summary, chapter outline, and lecture outline for each chapter in the book.

Answers to all the review and discussion questions at the end of each chapter.

Chapter support material

In this section of the resource manual there is detailed material that can be used in teaching each chapter. This material includes: (a) a list of the chapter’s objectives; (b) a summary of the chapter material; (c) a chapter outline that presents all headings and subheadings in the chapter; (d) a lecture outline that provides information and material related to each of the major areas of the chapter outline; (e) answers to all the review and discussion questions at the end of the chapter; and (f) answers to all the questions that accompany the Real Cases at the end of the chapter.

A final note

I have made every effort to ensure that this resource manual is accurate and complete. However, if you find any mistakes or inconsistencies, please convey this information to me at:

Cecilia Brainc/o Professor Alan M. RugmanIndiana UniversityKelley School of Business 451BloomingtonIN 47405USA

Thank you for your assistance.

Cecilia Brain

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CHAPTER 1

Regional and Global Strategy

Chapter objectives

1. Define the terms “international business” and “multinational enterprise”.

2. Discuss the two primary ways in which international business occurs: trade and foreign direct investment.

3. Examine the impact of the triad on international trade and investment.

4. Describe the current state of world economies and the role of government and trade regulations in the conduct of international business.

5. Discuss the importance of technology and the role of small and medium-sized enterprises in the international business arena.

6. Examine how multinational enterprises use triad/regional strategies to compete effectively in the international marketplace.

7. Discuss the determinants of national competitive advantage.

8. Present the model that will be used in this text for studying international business.

Chapter summary

1. International business is the study of transactions taking place across national borders for the purpose of satisfying the needs of individuals and organizations. Two of the most common types of international business activity are export/import and foreign direct investment (FDI). In recent years both have been on the rise. Much of this is a result of large multinational enterprises (MNEs) headquartered in triad countries. In particular, triad members account for most of the worldwide trade and FDI.

2. At the present time world economies are slowing down and many MNEs are cutting back their workforces in order to compete more effectively in this environment. Small and medium-sized enterprises are also finding themselves being challenged. Another important international business development is the emergence of trade regulation. Today the World Trade Organization is the major group responsible for governing the international trading system. A third major development that is changing the way MNEs do business is technology as seen by the changes taking place in both communication and production technologies.

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3. One way in which these firms are competing is by drawing up strategies that focus on regions and geographic areas, thus ensuring that they are addressing the needs of their local customers. Another way is by continuing to be innovative. A third is by maintaining position by addressing the determinants of national competitive advantage (a) creating the necessary factor conditions; (b) having strong local demand for the goods and services that are being produced; (c) having related and supporting industries that are internationally competitive; and (d) having a suitable strategy and structure and domestic rivalry that encourages continued innovation.

Chapter outline

Introduction

World business: a brief overviewExports and importsForeign direct investmentThe triad

Today’s global environmentWorld economiesInternational trade regulationTechnologySmall and medium-sized enterprises (SMEs)

Globalization and strategic managementRegional triad strategiesMaintaining economic competitiveness

Factor conditionsDemand conditionsRelated and supporting industriesFirm strategy, structure, and rivalryPorter’s determinants as a system

Multinationals in actionVolkswagenCarrefourKawasaki and Suzuki

The study of international businessFrom general to strategic emphasisFramework for this book

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Lecture outline

A. Introduction

1. International business is the study of transactions taking place across national borders for the purpose of satisfying the needs of individuals and organizations. These economic transactions consist of trade, as in the case of exporting and importing, and direct investment of funds in overseas operations.

2. Another popular area of international business activity is the international joint venture, which is an agreement between two or more partners to own and control an overseas business.

B. World business: a brief overview

1. Exports are goods and services produced in one country and then sent to another country. Imports are goods and services produced in one country and then brought in by another country. Information about exports and imports helps us to explain the impact of international business on the economy.

2. Foreign direct investment (FDI) is equity funds invested in other nations. Industrialized countries have invested large amounts of money in other industrialized nations and smaller amounts in less developed countries (LDCs), such as those in Eastern Europe, or in newly industrialized countries (NICs), such as Hong Kong, South Korea, and Singapore. Most of the world’s FDI is in the US, the European Union (EU), and Japan. As nations have become more affluent, they have pursued FDI in geographic areas that have economic growth potential. The Japanese, for example, have been investing heavily in the EU in recent years.

3. Over 50 per cent of world trade and over 80 per cent of foreign direct investment is conducted by three regional economic hubs: the US, the EU and Japan. Collectively, these areas are referred to as the “triad”. The triad is a group of three major trading and investment blocs in the international arena.

C. Today’s global environment

1. Over the last few decades an increasing number of countries have embraced trade and investment liberalization. Notwithstanding, triad countries have often had disagreements about implementation. A number of mechanisms to solve disputes among countries have evolved; the main one is the World

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Trade Organization (WTO), established in 1995. Today, the WTO is the umbrella organization that governs the international trading system. When member countries have a dispute they turn to the WTO’s dispute-settlement mechanism to help resolve it. For example, the US and the EU have brought cases against each other in such matters as banana imports, beef hormones, steel, and foreign sales corporations. The WTO can enforce its decisions. Countries that refuse to comply can find themselves suffering severe consequences in the form of trade retaliation.

2. Technology is having a major impact on the way multinational enterprises MNEs do business. Over the last few years, communication technology has allowed all business to use computers, mobile phones and to rely on the World Wide Web to access and send information. New technological developments have also been applied to the production of goods and services. Companies can now implement quality programs and improve manufacturing flexibility, among other things.

3. International business is not limited to giant multinational enterprises. Many small and medium-sized businesses are also involved in this arena. These include service industries, which currently employ about 70 per cent of all workers in the US and Canada.

D. Globalization and strategic management

1. A common misconception about international business is that MNEs have far-flung operations and earn most of their revenues overseas. In fact, most MNEs earn the bulk of their revenues either within their home country or by selling in nearby locales. Of the largest 500 MNEs, 198 are headquartered in North America, 156 are in the EU and 125 are in Japan/Asia. These firms are not spread around the world but are clustered in the triad and engage in triad/regional competition. MNEs do not develop homogeneous products for the world market but must adapt their product to local markets. For example, there is no global car but regional-based auto factories that are supported by regional/local suppliers and design cars to meet the preferences of local/regional customers.

2. There are three things a nation must do to gain and hold strong international trading and investment positions: (a) maintain economic competitiveness; (b) influence trade regulations so that other countries open their doors for its goods and services; and (c) develop a global orientation that allows firms to operate as MNEs, not just as local firms doing business overseas.

3. Research shows that the best way for companies to achieve competitive advantage is through innovation. Often this is accomplished through ongoing improvement of goods or services. A second way is by making

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existing products obsolete, by developing new and better products that replace old ones.

4. Why can some firms innovate consistently while others cannot? According to Porter, the answer rests in four broad attributes that individually and interactively determine national competitive advantage: factor conditions, demand conditions, related and supporting industries, and firm strategy, structure and rivalry.

5. Factor conditions include land, labor, and capital that are used to develop international market niches and tap world markets. Demand conditions require a sophisticated local demand that helps businesses fashion and shape the goods and services that will later be offered on the world market. Related and supporting industries help MNEs remain abreast of low-cost inputs and knowledge regarding what is happening in their industry. Firm strategy, structure, and rivalry help organizations create, organize, and manage their operations in the face of competitiveness.

6. Each of the four determinants in Porter’s model often depends on the others. For example, if a country has sophisticated buyers that can provide a company with feedback regarding how to modify or improve its product (demand conditions), this information will not be useful if the firm lacks personnel with the skills to carry out these functions (factor conditions). Similarly, if suppliers can provide the company with low-cost inputs and fresh ideas for innovation (related and supporting industries), but the firm clearly and easily dominates the industry (firm strategy, structure, and rivalry) and does not feel a need to upgrade the quality of its products and services, it will eventually lose this competitive advantage.

7. Porter notes that government and chance influence the four determinants in Figure 1.1. Government policies, for example, can have serious consequences for international trade, since government intervention for the purpose of protecting home industries usually results in less competitive national companies. There is often strong domestic pressure to provide such protection. Yet research shows that a government’s major role in international business may well be that of world trade negotiator.

8. Many companies do business in other countries, but they have not developed the needed international perspective. This requires attention in three areas: experience, focus, and attitude. One way to create an international perspective is to hire individuals with international experience. A second way is to emphasize the importance of international activities. A third way is to change the attitudes that many managers have toward their work.

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E. The study of international business

1. During the 1970s, 1980s, and 1990s the field of international business changed dramatically. The new millennium is seeing the emergence of a strategic management focus for drawing together the field of international business. The descriptive ideas of the 1950s and 1960s and the analytical ideas of the 1970s, 1980s, and 1990s are being combined into an integrative approach in the new century.

2. This book employs a strategic management approach to the study of international business. There are five major parts in the text. Part One is an introduction; Part Two examines the environment of international business; Part Three focuses on the strategic planning of MNEs and the major components of their overall strategy; Part Four examines the ways in which the information presented thus far can be used in doing business throughout the world; and Part Five examines the future of international business.

Answers to review and discussion questions

1. What is international business all about? In your answer be sure to include a definition of the term.

International business is the study of transactions taking place across national borders for the purpose of satisfying the needs of individuals and organizations. This study includes areas such as exporting, importing, and foreign direct investment.

2. What are the two primary ways in which world trade is conducted?

The two primary ways in which world trade is conducted are export/import and foreign direct investment. Exports are goods and services produced in one country and then sent to another country. Imports are goods and services produced in one country and then brought in by another country. Foreign direct investment consists of equity funds invested in other countries.

3. Will foreign direct investment increase or decrease in the current decade? Why?

It is highly likely that FDI will increase during the new millennium. One of the most compelling reasons is that FDI has been continually increasing, decade after decade, and the current decade is likely to attract even greater FDI. A second reason is that international trade is increasing on an annual basis, and FDI is an important element in this development.

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4. How important are the triad nations in promoting international commerce? Explain.

Triad nations are the engines of international commerce, accounting for over half of the world trade and over 80 per cent of foreign direct investment outlays. Over 90 per cent of the world’s 500 largest multinationals have their home base in the triad and it is these companies that are responsible for the bulk of international business. These companies lobby their governments and foreign governments for favorable trade conditions. In fact, the triad governments are very active in promoting international business. They promote the interests of domestic companies overseas and encourage inward foreign investment by foreign MNEs. They also participate in international trade agreements.

5. What role does the World Trade Organization play in the international business arena? Is the WTO helpful to international trade or is it a hindrance? Why?

The World Trade Organization has two main functions: First, it acts as a conference organizer for trade-related discussions among member countries. In this function it provides research information and the means to enact trade legislation. Second, the WTO acts as a dispute-settlement mechanism with the ability to impose sanctions on member nations that do not comply with its resolutions.

6. Multinational enterprises do not formulate worldwide strategies, but rather regional strategies. What does this statement mean and how does it help us better understand international business?

MNEs see the world as a set of segmented markets with different factor conditions, demand conditions, related and supporting industries, and structure of firms and rivalry. For instance, while a strategy of producing spacious cars might be successful in the US, auto manufacturers must look at the particular demand conditions in Europe and Japan and adapt to the particular preferences of these customers. In the case of food, most MNEs will adapt their ingredients and menus to respond to cultural and religious factors in the regions in which they operate. Similarly, an input that is available in one region might have to be substituted for a similar input in another region (related and supported industries). For MNEs, regional strategies help them better compete in foreign markets. Understanding that MNEs formulate regional (not global) strategies allows us to see the different factors that influence the production and marketing of non-homogenous products across the world.

7. How do the four determinants of national competitive advantage help explain how companies can maintain their economic competitiveness? Be complete in your answer.

The four determinants of national competitive advantage are: factor conditions; demand conditions; related and supporting industries; and structure of firms and

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rivalry. A country or business makes effective use of factor conditions to maintain economic competitiveness in a number of ways. One is by training and educating the work force so that these people are able to produce more efficient and/or higher-tech goods. A second is by investing capital in high-tech discoveries and developing robots and other machines that can produce goods and services more efficiently than before. Demand conditions are important to the maintenance of economic effectiveness because a strong local market helps a company better develop goods and services for the international arena. For example, French customers help the local wine makers produce wine for the world market by providing the companies with sophisticated feedback regarding the quality of their output. Related and supporting industries are important because they assist MNEs by providing low-cost inputs and by supplying the company with information regarding the industry environment and changes that are taking place. For example, suppliers to Italian tile firms keep these companies abreast of changes in technology, factor inputs, and developments in the industry.

Firm strategy is important because it helps dictate the competitors against whom the firm will fight and the market niche it will choose. The experience the company obtains from these decisions helps it to become more economically viable. Company competitiveness in the German chemical industry is an example. The structure is important because some firms need simple structures, while others require more complex ones; some need bureaucratic designs, while others succeed with simpler, more participative forms. In the case of German firms, for example, many companies are hierarchical because this approach best suits the needs of the personnel. Firm rivalry is important because, by competing against others, a firm hones its skills and becomes more internationally competitive. A good example is the way that the Japanese auto-makers have become competitive in the world market by taking on the major US and European auto producers.

The four determinants are interrelated. Each is influenced by the others and, in turn, influences the others. For example, demand conditions help to influence the firm’s rivalry, and factor conditions affect the number and type of related and supporting industries.

8. What are two of the advantages associated with using strategic alliances?

A foreign company that enters a strategic alliance with a local company can access important cultural and market information through its partner. The local partner thus shields the foreign company from the uncertainties of the local environment. Strategic alliances between two companies with complementary proprietary information can allow both companies to develop these complementarities.

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Answers to Real Cases

Big oil gets bigger

1. Are companies such as Exxon Mobil, BP Amoco, and Royal Dutch/Shell MNEs? What criteria do they meet that makes them MNEs?

Exxon Mobil, BP Amoco and Royal Dutch/Shell are MNEs because they are headquartered in one nation but have operations in many other nations. For instance, Exxon Mobil has exploration and/or production operations in all five continents but is headquartered in the US. BP Amoco is headquartered in the UK but does exploration and refining in the US and is the largest offshore gas producer in China. Royal Dutch/Shell is headquartered in the Netherlands but has operations in 140 countries and territories.

2. How important is an understanding of governmental regulation to success in this industry?

The energy industry is heavily regulated across the world. To succeed, oil companies must be aware of market regulations, environmental regulations and health and safety regulations. In addition, since foreign companies are often competing against national companies for exploration rights, companies must also have a good understanding of the regulations surrounding the bidding process.

3. In terms of Porter’s determinants of national competitive advantage that are presented in Figure 1.1, which one of these four determinants is most important for these oil companies? Why?

All four determinants are important to these companies. Factor conditions include considerations such as oil and gas deposits, the quality, quantity and cost of the labor force, and the availability of necessary capital equipment. Demand conditions include the preference of their customers. A country where the population puts a strong value on air quality will push companies doing business to create better and cleaner fuels. The structure of firms will reflect on the cultures of both the host and home countries. Strong firm rivalry will increase the quality of their products, thus making them more competitive overall. Finally, related and supporting industries, such as a strong auto industry, will increase the flow of information and cooperation for the development of better products.

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Pizza Hut in Russia

1. Why is Pizza Hut making a direct investment in Russia? Would they not have made more profit by putting these funds into a new, US-based unit?

There are a number of reasons why Pizza Hut is making a direct investment in Russia. One is that it sees a huge potential market yet to be tapped. A second is that it believes it can gain a large local market share and take advantage of this position during the new millennium. It might be able to make more profit by investing in a US-based unit, but it is likely that in the long run it will do even better in Russia.

2. How does Pizza Hut use demand conditions to help revise operating strategy?

Demand conditions are based on how local customers relate to a company’s goods and services. Pizza Hut has learned that Russian customers like American cuisine and do not want a “Moscow” taste. As a result, the company offers American cuisine.

3. How important is an understanding of government regulations to the success of the Moscow operation? Why?

Pizza Hut needs to understand government regulations because they hinder the efficiency of its operations. The company is also learning that much of the “red tape” can be circumvented in order to get things done. Simply put, it is all a matter of going up the learning curve and finding out how to survive in spite of the system!

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