International Business and Economics
A. Country Differences
1. Globalization and Political Economy
• Globalization = shift toward more integrated& interdependent world economy (away from selfcontained national economies) —> facets: glob. of markets, glob. of production
• Important drivers (—> + meaning for firms):
- lower barriers to trade (goods&services, capital) and factor movements/ investment —>
firms: whole world as their market, base production in optimal location, BUT may find
homemarket under foreign attack
- technological change —> 1) lower transp. cost (maritime freight, air travel,
containerization, int. phone calls) —> help create global market, allow firms to disperse
production; 2) lower communication& information processing cost (microprocessors,
Internet) —> firms can create&manage globally dispersed production, create electronic
global marketplace, develop worldwide cultur& global consumer product market
• Globalization of markets = markets (historically distinct& separate) are merging into global
market (NO „german market“) —> why? => 1) less/no trade barriers (easier to sell globally), 2)
consumers’ taste& preferences are converging on global norm, 3) firms promote this trend by
offering same products worldwide
• Firms of all sizes benefit (expand revenues around world, reduce costs by choosing cheap
locations) & contribute to the globalizaiton of markets (US: 98% of exporters S/M-firm 2010)
• Exports (goods&services) as percentage of GDP has risen (D 1970: 16% -> 2010: 47%; USA
6% ->13%)
• Globalization of production = firms source goods& services around globe to take advant. of
nat. differences in cost/qualitiy of factors of production (land, labor, energy, capital) => lower
overall cost structure, improve quality/ functionality of product (—> compete more effectively);
first: outsourcing of production activites, later also of service act. (India: abundant supply of
engineers, lower cost, fluent in English, work while US sleeps)
• History: 2000 BC Sumerians produced Bronze using tin from Cornwall& Asia, 1635 Chinese
barbers in Mexico City, 1870-1913: world trade grew 3,5%, production only 2,7% annually
—> Globalization is not that new; BUT: reversal towards more economic integration in times of
war/ Great Depression
• Rodrik (2011): extent of market limited by the reach of workable regulation because markets are
NOT self-creating, -regulating, -stabilizing, -legitimizing —> state as main source of legitimate
governance + international& supranational institutions
• Global Institutions:
- conduct economic policy on int.&supranat. level
- help manage, regulate& police global marketplace
- promote multinat. treaties to govern glob. business system
- help avoid prisoner’s dilemma situations
- Ex.: GATT (General Agreement on Tariffs& Trade) —> WTO (World Trade Organization), IMF
(International Monetary Fund), World Bank, UN, G20
• Secular changes in the global economy: the changing
- 1960s —> US dominance in world economy/ world trade/ FDI, dominance of large
multinat. US firms on internat. business scene, 1/2 globe (communist world) off-limits to
Western internat. businesses => have changed/ are changing!!!
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- world output & world trade picture:
• % of world output —> developed c. less, developing c. (Asia) more & still going —>
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changed composition of their trade since 1960 (agricul. —> manufact. products)
• world trade growth > world economy growth => more comp. disperse production,
nations become more intertwined, world has become wealthier
• forecast: Ch. economy > US economy, 60% world economic activity: developing
nations (2020) => shift in economic geography
FDIs:
• % of FDI —> developed c. less, developing c. more (Asia) & still going —> firms in
developing nations: trend to invest outside borders
• trends: general growth in FDI, developing countries as destinations (inflow=
important stimulus for economic growth there)
• FDI plays increasing role in global economy (long term FDI trends: rising)
MNEs:
• MNE= business with productive activities in 2/ more countries
• since 1960: more non-US- & mini-multinationals (medium-/small-size businesses)
—> Internt is lowering barriers for int. sales
• still more from developed c., but developing slowly growing
world order:
• many former communist nations (Europe&Asia)—> more democratic politics&
market-oriented economies + Latin America —> moving towards freer markets
• —> new opportunities for int. businesses (more attractive for exports&FDIs) BUT
risky (bc. shifting back possible) + new competition from these countries
global economy of 21st century:
• barriers to free flow (goods, services, capital): coming down
• widespread adoption of liberal economic policies
• greater business opportunities BUT also greater risks along with globalization —>
regional crisis can affect entire globe
• Globalization debate:
- is shift towards more integrated/interdependent global economy good thing?
- * —> shift of power from national gvnmts. to supranational organizations (WTO, EU, UN)?
protest
supporters
critics
- lower prices (goods&services)
- greater economic growth
- higher income levels& more jobs
- job losses (unskilled workers)
- environmental degradation
- cultural imperialism of gl. media& MNEs
-> protests at big meetings of gl. institutions
jobs&
income
- countries will specialize (in best) & all
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countries will benefit
benefits > costs
people are biased in their perceptions
- they are aware of wage pressure&
unemployment risk
- they ignore benefits from the low
price of imported goods
wage gap due to technology change
(partly)
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- destroying manufact. jobs / downward
pressure on wages in developed c.
- increase in wage gap high-/low-skilled
labor
environm.
& labor
standards
supporters
critics
- economic growth —> tougher
- move production to c. w/o environmental/
environmental & labor regulations
- hump-shaped relationsh. income&
labor regulations/ enforcement —> firm
avoids costs
pollution levels (first: higher, later: lower)
national
sovereignity*
- organizations’ power is limited to what
poverty
- best way for poor nations to improve is
states grant / lies in ability to persuade
members to follow certain actions
1) debt relief, 2) reduce barriers to
trade& investment, 3) „free market“economic policies, 4) invest in public
projects
- unelected bureaucrats have power to
impose policies on democratilly elected gvnt.
- if gl. was beneficial, divergence rich-poor
nations should not exist
• Globalization & Management: managing intern. business ≠ domestic business —> business
owners need to decide rationally if international or not! —> reasons:
- countries are different —> culture, polit./economic/legal system, economic development
- wider range of (more complex) problems
- must work within limits imposed by gvnt. intervention in intern. trade& investment system
- intern. transactions —> converting money in different currencies
Political
Systems —> shapes economic/legal system of c.; 2 dimensions: degree of
•
individualism/collecitivism & democratic/totalitarian => intertwined (often ind.+dem..; coll.+ tot.)
• Economic Systems (=governs coordination of individ. economic activity) —>
- 3 types: market (private ownership, prices determined by supply&demand, no
monopolitst); command (state-owned, gvntm. plans kind/quantity/price of production for
„good of society“ —> collectivistic), mixed economies (some private-, some state-owned,
state owns struggling firms)
- measurement of level of economic development:
• GNI (gross national income) per person (=total annual income received by
residents of a nation); BUT problems: 1) differences in cost of living => adjust GNI
by PPP (purchasing power parity); if GNI PPP > GNI —> lower cost of living), 2)
black economy transactions (not included in GNI), 3) static picture of development
=> look at economic growth rates in GDP (gross domestic product)
• Amartya Sen: development= process of expanding the real freedoms people
experience (—>no poverty& tyranny, basic health care& educations, …) =>
shouldn’t be measured only by material output!
• => UN: HDI (human development index): life expectancy at birth + education + if
income is enough for basic needs; 0-1 (<0,5 low, 0,5-0,8 middle, >0,8 high HD),
BUT misses Sen’s political freedom!
• Economic progress:
- innovation/ entrepreneurship as engines of long-run economic-growth —> requires:
- 1) market economy (free market), =best for economic growth (—> more incentives for
innovations!; strong relationship!)
- 2) strong property rights (if not: reduced incentives for i./e.);
3) democracy, also possible: totalitarian (only if +market system, strong property
rights!); democracy not always cause of economic progress, but is often
consequence of it!!;
- geograpy& education also influence economic progress —> economic growth: geogr.:
landlocked c. < coastal c., tropical zone < temperate zone; higher ed. —> greater growth
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• States in transition:
- spread of democracy (80s-90s: ) —> reasons: 1) tot. regimes didn’t deliver economic
progress, 2) new inform./communic. technology -> access to uncensored inform.,
3) economic advances-> increase in middle/working class -> pushed for democracy);
2012 c.: 45% free, 30% partly f., 25% not f.
- new world order —> after Cold War/ collapse of communism in eastern Europe/S.U.;
2 theories: 1) universal global civilization based on liberal democr. ideals (Fukuyama),
2) fractured world (different civilizations w/ own ideals; Huntington)
- move towards more free market —> since 80s, bc. command/mixed ec. had lower
economic performance than free markets; entails deregulation, privatization, private
property rights protection (=legal system)
Political,
enocomic (&legal) system => interdepent, part of function for benefits, costs& risks
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of doing business in a country
• Doing business abroad:
- Benefits —> market’s size + consumers’ present wealth (=purchasing power) +
consumers’ future wealth —> identify/invest early in potential future ecnonomic stars =>
first mover advantages (brand loyalty/experience; but also risks)
- Costs —> political (corruption?) + economic (infrastructure, supporting businesses?) +
legal (strict standards, protection?) factors => cost evalution necessary!!
- Risks —> political (social unrest, anti-business trends?) + economic (e.
missmanagement?) + legal (safeguards for contract violations, property rights?)
- => overall attractive of pot. market depends on balancing all 3! most favorable= politically
stable developed/developing c. with free market system and enormous high inflation rate/
private sector-debt
• Summary/ implications for managers:
- glob. of markets (nat. m. merging to 1 gl. m) + glob. of production (pick optimal location)
- main drivers: declining trade barriers, technological changes (communic., inform. transp.)
- developing c. rising
- problems with int. bus.: country differences, wider range of problems, gvnt. interventions,
currencies
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2. Law and Culture
• Legal system = rules that regulate behaviour, influenced by political system; important for
business bc.: define how transactions are executed + identify rights& obligations of parties
• Common law —> based on tradition, precedent and custom (USA, UK)
• Civil law —> based on detailed set of laws organized into codes (Ger, F, R)
• Theocratic law —> based on religious teachings (Iran), most c. also have com./civ. law
• Contracts: detailed in common l., much shorter in civil l. bc. issues already covered in civil code
—> CISG (UN) for dispute on internat. contracts (—> uniform set of rules), BUT < 70 c. have
adopted CISG
• Property rights = legal rights over use of resource and over use made of any income that may
come from the resource; violations trough 1) private action (theft, piracy, blackmail), 2) public
action (legally: excessive taxation, expensive licenses; illegally= corruption: bribes, blackmail)
• Corruption: high —> lower FDI, int. trade, economic growth (bc: less returns on business
investements-> less incentive for domestic/foreign investments)
ranking: corruption index (100=clean, 0= totally corrupt, NZ —> Somalia)
• Ethics= accepted principles of right/wrong, that govern conduct of person/business/organiz.;
Ethical strategy= strategy that doesn’t violate accepted principle;
Business Ethics = accepted principles of rigth&wrong governing conduct of business people;
ethical issues in business:
• corruption —> FCPA (Foreign Corrupt Practices Act, 70s, USA), OECD (organization for
economic cooperation& development) => „convention on combating bribery of foreign
public officials in internat. business transactions“ (= german law for my bribe in Somalia);
exception: facilitating/expediting payments (=grease paym./ speed money) => ethical to
exclude these? —> theories: 1) do bribes for greater good (investment creates jobs,
enhances welfare), 2) corruption reduces business-investm.-returns -> low econ. growth
(=> significant neg. impact on c. growth rate!!); once started, difficult/impossible to stop!!
• employment practices —> which standards should apply? host/home country/mix? —>
may be legal, but unethical to Western standards => demonstrations/ consumer boycotts
• human rights —> ethical to do business in countries without h.r. / with repressive regimes?
investment can force econ./polit./social progress -> raise living standards (but not
always!) => South Africa: Apartheit (Sullivans principles -> don’t obey + promote
abolition) —> divestment US-firms + econ. sanctions (US) led to abolition apartheit +
democr. elections
• environmental regulations —> okay to pollute in host c.? (legal, but unethical) —>
(global) tragedy of commons (= resource held in common by all, but owned by no one,
overused by individuals -> degradation) => carbon-dioxide output -> global warming
• moral obligations (of MNEs) —> power from control over resources/moving product.
—> social responsibility (consider consequences of actions!; recognize nobless oblige=
benevolent behaviour, that is responsib. of successful firms) => social investments?
• Ethical Dilemma —> „ethical“ depends on culture perspective —> no easy answers
• Intellectual property: = product of intellectual activity; protected by patents, copyrights,
trademarks; has become more problematic (digital form -> copied& sold/put on Internet);
protection laws stimulate innovation/creativity, incentive for R&D
• Product safety (sets certain standards) & liability (holds firm responsible in case of injury etc.)
—> liability greater if p. doesn’t conform safety standards; civil&criminal p. liability laws
(payment/ fines, prison)—> ethical to follow host country standards if home country is stricter?
• Culture = system of values& norms shared among group;
• values —> abstract ideas about what is right/good/desirable, form culture’s foundation
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• norms= social rules, guidelines for appropriate behaviour; folkways (everyday life-„rules“) &
mores (norms central to functioning of society)
Society = group who share common values&norms
Cross-cultural-literacy (= understanding how cult. diff. affect how business is practiced)
needed to suceed in diff. c.
relationship culture/cost of doing business might exist, MNEs can be agents of cultural change
Culture—society—nation-state relationship: not strictly one-to-one!!
Determinants of Culture:
• social structure —> = basic social organiz. —> individual/group + social stratification-dim.
(all societies stratified on hierarchial basis into social strata; born into social stratum —> 1)
social mobility (caste system: NO (=closed system of s.s.), class s.: YES (=open s. of s.s.)),
2) significance (affect on business organizations?; class consciousness-> more disputes->
higher cost)
• religion —> =system of shared beliefs& rituals, concerned with realm of sacred (business
implications: shape attitudes toward work/entrepreneurship, affectscost of doing
business); Ethical system= set of moral principles/values used to guide/shape behaviour
(can be product of religion)
• language —> = spoken/unspoken means of communication; one of defining
characteristics of culture; not understanding nonverbal cues —> communication failure
• education —> formal e.= medium trough which people learn indispensable skills for
modern society (language, mathematical, conceptual), determinant of nat. competitive
adv.; general e.= indicator for kinds of products/promotion that might sell in a c.
• political/ economic philosophy
Culture& workplace —> Hofstede’s dimensions of culture (study: 100k IBM-employees,
1967-73):
• Power distance —> way of dealing with (physical/ intellectual) unequality of people
=> Asia: high (strong leader needed/expected); Swed., Switz., Ger: low (flat hierarchy)
• Uncertainty avoidance —> extent to which ambiguity/ uncertainty is accepted;
J, F, G: high (formal process, deviation not wanted); Singapore, Sweden, UK: low (okay)
• Individualism (vs. Collectivism) —> i: everyone responsible for themselves; c: groups are
very important, one’s identity is defined trough group membership
=> Europe, USA: high (Individ.); Asia: low (collect.)
• Masculinity (vs. Femininity) —> importance of masculine values, relationship gender/work;
J, UK, G, USA: high (career focused); Sweden, Netherlands, F: low (quality of life, equality)
• Long-term orientation (= confucian dynamism) —> attitude towards time/persistence/
respect of tradition/ reciprocation of gifts/favors => high in Asia; initial statement: high
confucianism= good for economic growth (doesn’t hold anymore!); UK, USA, G: low (live in
the moment)
Criticism on Hofstede (but still is a starting point for understanding how cultures differ):
• one-to-one relationship between culture/nation-state
• culturally bound study (Eurpean/US-research team)
• IBM as sole source (biased results? strong corp. culture/ empleyee selection process)
• culture is not static —> evolves over time (slowly)
Implications for managers: developing cross-country literacy important! (ill-informed comp.
—> unlikey to suceed) => hire locals + transfer executives to foreign locations regularly + guard
against ethnocentrism (=superiority)!; connection culture—national competitive advantage —>
suggests which countries have most viable competitors + choice of country for production&
business locations
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B. Global Trade and Investment
3. Trade Theory
• Free trade = gvtn. doesn’t influence/ restrict what citizens can buy from/sell to another c.
—> Benefits: c. can specialize (manufacture/export) where they produce efficiently, import
where others more efficiently;
• limits on imports —> can be good for producers, NOT consumers!
• Certain patterns exist: some obvoius (Saudi exports Oil), some not (G, F, J: cars)
• Gvntm’s role in trade:
• Mercantilism (mid-16th century) = promote export& limit import to achieve/maintain trade
surplus (e>i) —> increase nat. wealth; BUT: trade is zero-sum game (A: gain —> B: loss)
• Smith, Ricardo& Heckscher-Ohlin: unrestricted free trade! (market mechanism should
determine what c. ex-/imports)—> always beneficial? —> decrease gains: immobile
resources, diminishing returns, dynamic effects on stock (resources& technogolies), lower
real wages (Samuelson critique), BUT: increase in country’s resource stock (bc available from
abroad), efficiency of resource use, economic growth
• New trade theory& Porter’s theory: limited gvntm. intervention okay (to support
development of export-industries)
• Absolute advantage (Adam Smith, 1776) = country is more efficient in production of sth. than
any other country —> specialize& trade for other goods => trade is positive-sum game (both
gain); production possibility frontier (PPF, graph) for possible combinations of mult. p. product.
• Comparative advantage (David Ricardo, 1817)
• = 1 country has abs. adv. for ALL goods? —> specialize in production where most efficiently
+ buy where production less efficiently, EVEN if production in other country is less efficiently
(comp. adv.= where comparatively more efficient)
• => trade is positive-sum game (both gain + total output is higher)
• full specilization is optimal with fixed input coefficients
• BUT: unrealisitic assumptions: resources move freely from product. of one good to another,
constant returns to scale, trade doesn’t change c.’s stock of resources/efficieny etc…
• —> relaxing these 3 => extension of ricardian model: 1) immobile resources (human workknowledge,…), 2) deminishing returns (need more res. for every addit. unit), 3) dynamic
gains in resource-stock/effiency (free trade generates dynamic gains + economic growth);
4) Samuelson critique (rich&poor c. enter into free trade-> lower real wages in rich c.)
• Heckscher-Ohlin (1919+33): explain comp. adv. by differences in nat. factor endowments
(amount of resource c. has (capital, labor, land)) —> more abundant = cheaper => countries
export what they have abundant factors for, import what’s factors scarce (relatively seen)
• Leontief Paradox (1953): US exports less capital-intesive than US imports (although US
abundant in capital) —> evidence for&against H-O-t. was found
=> today: comp. adv. (and no explanation of it) can explain trade patterns& competitiveness
Product
life-cycle theory (Vernon 1966) = as production matures locations (sale& prod.)
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change/ affect flow/direction of trade;
• Ex: US produces& sells new product, demand in other developed countries grows —> US
exports, later d.c. produce themselves/ US firms set up production in d.c. (limiting US
exports); market matured —> product becomes standardized (price= main competitive
weapon) —> d.c. with lower cost than US can export to US —> developing c. as focus for
production => US imports
• —> explains what happened to photocopiers& technolog. products developed in US
(1960s&70s) => mature industries leave US for low cost locations
• BUT: globalization& integration made P-l-c-t less valid! —> it’s ethnocentric, today: product.
is dispersed globally & products introduced simultaneously in mult. markets
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• New trade theory (1980, Krugman 2008): specialize —> ability to realize economies of scale
—> increase in variety of goods available + decrease in average cost => trade is mutually
beneficial; BUT global market might only can support few firms -> domination of c. whose firms
were first-mover -> they get economies of scale => leading exporter; gvntm.: maybe strategic
trade policies to nurture& protect firms/industries
• Porter’s diamond (1990): national competitive adv.—> why does nation achieve int. success
in particular industrie?; 4 attributes + chance + gvnmt. (regulation, tax, laws) create appropriate
conditions for comeptitive adv. —> BUT not sufficiently tested to know how well it holds up
—> 4 attributes that promote/impede national comp. adv. (all interdependent!):
• Factor endowments —> basic (natural) / advanced res. (know-how, skilled labor, infrastr.)
• Demand conditions —> consumers’ demand, pressure firms to be competitive/better
• Relating& supporting industries —> present/absent?; normal: clustered in countries
• Firm strategy, structure& rivalry —> management affects development of competitive adv.;
rivalry pressure firms to be better
• Summary/ implications for managers: trade-theory offers explanations for competitiveness
—> BUT none can fully explain trade patterns!; comp. adv. & econ. of scale important drivers
of trade; firm should produce where most efficient; first-mover-adv. helps dominate global
trade; firms feel inclined to encourage gvntm. policies that support free trade
4. Trade Policy
• Political reality: many nations nominally committed to free trade, but intervene to protect
interest of politically important groups
• Gvntm. intervention methods —> all benefit (domestic) producers, NOT consumers!
• tariffs (= taxes levied on imports/e. —> raise their costs relative to domestic products) —>
increase gvntm. revenues/ reduce overall efficiency of country& world economy; 1) specific
tariffs (fixed charge for each unit of good), 2) ad valorem tariffs (% of value of good)
• subsidies =(gvntm. payments to domestic producers) —> help compete against low-cost
imports/ gain export markets; consumers pay subsidie-costs; debatable if really benefits (or
protects inefficient/promote excess product.)
• import quotas (= restriction on import-quantity of a good) —> can be equivalent to tariff,
creates quota rent (extra profit producers make bc. supply is limited), enhanced by issuing
import license —> consumers pay more; tariff rate quotas= hybrid: lower tariffs to imports
within quota, higher tariffs if above quota
• voluntary export restraints —> quotas imposed by exp. c. (typically request from imp. c.)
• local content requirements —> demands x% of good to be produced domestically
• administrative policies —> bureaucratic rules, making entering a c. different for imports
(standards & norm, bureaucratic hassle (customs office, security checks))
• antidumping policies / countervailing duties —> punish foreign firms for dumping, protect
domestic producers from „unfair“ foreign competition; dumping= selling in foreign market
below product.-cost/„fair“ market value —> unload excess production => predatory
behaviour (use home-profits to subsidize foreign price, drive out competitors, later rise price)
OR natural outcome of competition in int. oligopoly; commerce departm. can impose
countervailing duties (=antidumping duties, eg. special tariff)
• Reasons for gvntm. intervention: both rarely lead to convinving case for intervention!!
• 1) Political arguments —> concerned with polit. objectives, eg. society’s idea of social justice/
protection of one group’s interest (producers) often at cost of other groups (consumers)
• Protecting jobs (most common reason, bc. unions/industries feel threatened by more
efficient foreign prod.) & industries (esp. if important for national security (aerospace,
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semiconductors)) & consumers from „dangerous“ goods (limit them) & human rights
(promote; in other c.) & environment (int. trade associated with decline in env. quality —>
global warming, enforcement of env. regulations)
• Retaliation for unfair foreign competition (use as bargaining tool; gvntm. threats —> other c.
might remove trade barriers)
• Furthering goals of foreign policy („bad“ trade policy as pressure/punishment for „rogue
states“, „good“ if strong relationship with c. wanted)
• => BUT: consensus, that there are better instruments to achieve these goals
2) Economic arguments —> concerned with boosting overall wealth of nation by reducing
market failure (p&c both benefit)
• Correction of market failure —> trade barriers to create more pos. externalities in a c.
• Infant industry argument —> protect i. until it can develop, be viable& competitve int.;
accepted as justification for temporary trade restrictions by WTO; problem: when is „grown
up“?; critics:“ if c. has potential to develop competitive position, its firms should be capable
of growing up without gvntm. help“ —> boils down to an externality argument
• Strategic trade policy —> 1) shift market power from int. oligopolies towards domestic firms,
2) gvntm. can help their firms attain first-mover-advantages + help overcome barriers to
entry industries where foreign firms have initial advantage
Gvntm. should avoid trade barriers because: 1) retaliation/ trade war —> boost nat. income,
but at expense of other c. -> provoke retaliation, resulting in trade war —> all worse off (collect.
dilemma) ; 2) domestic policies —> trade policy influenced by polit. important interest groups
Emergence of current WT-system:
• until Great Depression 1930s: protectionism (increase through Smoot-Hawley-Act 1930)
• after WW2: value of freer tade realized —> GATT (1947, general agreement on tariffs& trade)
to liberalize trade by eliminating tariffs, subsidies, …
• 1970s - early 1990s: protectionist trends —> 1) oil crises, breakdown of Bretton-Woodscurrency-system& unemployment —> pressure on developed c.; 2) (protectionist) Japan’s
economic success; 3) trade deficits in US; 4) found/use of ways to get around GATT
• Uruguay Round of GATT negotiations 1986-94 —> services, intellectual property&
agriculture (+manufactured goods) with trade issues; establish WTO as more effective
policeman of global trade rules, reduce tariffs
• WTO (1995):
• encompassed GATT, GATS (general agreement on trade in services) & TRIPS
(agreement on trade related aspects of intellectual property rights)
• emerged as: effective advocate& facilitator of trade deals (particularly in service)
—> today: 164 members, policing& enforcement mechanism have positiv effect; most
countries adopted WTO recommendations for trade disputes; but also magnet for
protesters against free trade
• current agenda focus: 1) rise of anti-dumping policies, 2) high level of protectionism in
agriculture, 3) high tariffs on nonagric. goods& services, 4) lack of strong protection of
intell. property rights in many nations;
• Doha Round since 2001: 1) limit use of anti-dumping laws, 2) phase out subsidies to
agric. producers, 3) cut tariffs on industr. goods, services, agric. products; 4) reduce
barriers to cross-border investm., —> BUT stalled bc of opposition from key nations
Trade Barriers & Managers:
• can affect firm’s strategy & implications of gvntm. policy on firm
• raise export-cost; might limit export (voluntary export restraints) —> firms would need to
locate in other countries than they would usually
• managers: incentive to lobby for free trade & trade barriers protecting their firms
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• BUT: complex world economy —> consequences of trade barriers difficult to predict
Regional economic integration = agreements between countries in geogr. region, reduce trade
barriers to free flow of goods, service & factors of production => promote free trade within this
area, but reduce trade with rest of world => soon regional trade blocks compete against each
other???; good for consumers, challenging for some producers
Pro regional integration —>
• 1) economic: unrestricted free trade -> c. can specialize -> greater world prod., stimulates
econom. growth (dynamic gains) + techn./marketing/know-how-transfer => gains from
free trade/investment (=positive-sum game); BUT very difficult to agree with others —>
easier with limited number of c. than with whole world
• 2) political: polit. cooperation —> reduce violent conflict-potential, enhance political
weight/power in the world
• impediments: 1) nation as whole might benefit, but some groups may lose!, 2) concerns
over nat. sovereignty
Con regional integration —> only benefits world if trade creation (high-cost domest. supplier
-> low-cost sup. in free trade are) > trade diversion (lower-cost external sup.-> higher-cost sup.
in area) —> WTO should ensure this, but scope to small => regional trade blocs?
Meaning for managers => open new markets& allow to realize cost economies by centralizing
prod. where mix of factor-cost& skills is optimal BUT business environment more competitive
within groups, risk of being shut out of single market by creation of „trade fortress“;
Levels:
• free trade area —> no barriers to trade of goods/services (among members)=> EFTA, NAFTA
• customs union —> no trade barriers + common external trade policy => Andean Community
• common market —> like customs union+ free movement of production-factors => Mercosur
• economic union —> free flow of products/product.-factors + common ext. trade/currency/
monetary/fiscal policy, harmonized tax rate => EU
• political union —> central political apparatus: coordinates economic, social& foreign policy
=> EU is headed towards this (at least partial)
EU (’93): ’57 EC (eur. community, from treaty of rome)-> Single European Act (to have 1 market);
’92 Maastricht treaty-> € (+ less exchange cost/ risk due to currency fluctuations, increased
price comp.); institutions —> European Council (controlling authority), Europ. Commission
(proposes, implements & monitors compliance with legislation), Europ. Parliament (debates
legislations proposed by commis./ forwarded by counc.), Court of Justice —> major issue in
last years= enlargenment of EU (eastern Europe)
NAFTA —> 1) no tariffs on 99% of goods, 2) no barriers on cross-border flow of services, 3)
protects intellectual property rigths, 4) almost no restrictions on FDI, 5) allows each c. own
environm. standards, 6) 2 commissions to impose fines/ remove trade privileges when
environm. standards/legislation (eg.: health, safety, minimum wages, child labor) ignored
Andean Community (Bolivia, Colombia, Ecuador, Peru) —> Andean Pact 1969 (EU as model),
failed by 1980s, relaunched 1990 as customs union, renamed 1997, 2003: negotiations with
Mercosur for free trade area
Mercosur (Brazil, Arg., Paraguay, Uruguay) —> 1988: B+A free trade pact, 1990: +P,+U, 2005:
+Venezuela (suspended), first made progress, now: efforts stalled
Summary/ implications for managers: trade policies: pro-producer&anti-consumer + rarely
first-best policies& risk collective dilemma situations + real impact difficult to predict; gvntm.
intervention reasons: political objectives/ desire to correct market failure; managers need to
observe t.p.& regional integration to decide about exports/locations + lobby for protection;
regional integration promotes free trade (& competition) within region, but lessens it with other
regions
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5. Foreign Direct Investment
• FDI= firm’s direct investment in new production-/marketing-facilities in foreign country —> form:
- greenfield investment —> establish wholly new operation in foreign c. (= 2/3 of FDI in
developing c.)
- acquisitions/mergers —> with existing firms in foreign c. (= 40-80% of all FDI) => quicker,
easier, less risky (has strategic assets: brand loyalty, CR, trademarks, distribution/prod.
system) + improve efficiency of acquired unit by transferring capital/ techn./ manag. skills
FDI
flow=
amount of FDI undertaken over given time period <—> FDI stock= total accumulated
•
value of foreign-owned assets at given time
• Trends of FDI —> flow& stock increased over last 35 years, grew more rapidly than world trade/
ouptut; reasons for growth —> 1) fear of protectionism (= way to circumvent trade barriers); 2)
polti.&econom. changes encouraged FDI —> more democracy/free markets, deregulation,
privatization& fewer restrictions on FDI; 3) new bilateral investm. treaties (make inv. easier); 4)
globalization of world economy (world as firm’s market)
• Direction/Source of FDI —> inflows: developed nations still largest share (USA,J,EU), but
others emerging (SE-Asia (Ch); Latin America); outflows: US,UK,F,G,J=60%, but China emerging
• Gross fixed Capital Formation= total amount of capital invested in factories, stores, offices,
etc. —> the bigger, the more favorable economy’s future prospects (inward FDI as % of GFCF)
=> FDI= important source of capital investm. & determinant of future growth rate of an econ.
• —> FDI Outflows in $ billion; FDI Inflows in $ billion; Inward FDI as % of GFCF
• Theories of FDI:
• why FDI? —> is expensive, risky, greater possibility for making mistakes => BUT: limitations
of a) exporting: transportation costs, (actual/threatened) trade barriers (= addit. cost);
b) licensing: internalization theory (=market imperfections approach) —> 1) giving
valuable tech. know-how to pot. foreign competitor, 2) no tight control over manufact./
marketing/ strategy in foreign c. (may be required to maximize profits), 3) skills/know-how
might not be amenable to licensing (comp. adv. in managem./ marketing/manufacturing
capabilites)
• Pattern of FDI —> Knickerbocker: FDI as strategic behaviour —> imitation theory;
multipoint compet. (=2 firms in same foreign c., industries; keep rival in check)
• Eclectic paradigm —> Dunning: consider: 1) location-specific-advantages (low-cost
human/natural res. not everywhere available) 2) externalities (knowledge spillover when
firms in same industry locate in same area)
• Political ideology & FDI:
• radical view —> esp. 1945-80s; MNE is instrument of imperialist domination& tool for
exploiting host c. => benefits only capitalist-imperialist home c.
• free market view —> strong shift towards this; MNE is instrument for dispersing production
of goods/services to most efficient locations (comp. adv.) —> increases overall efficiency
of world economy; benefits both c.
• pragmatic nationalism —> „middle“; FDI: benefits (inflow of capital, technology, skills, jobs)
AND costs (profits go to home c., neg. balance of payments effect) -> do as long as b>c
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• Cost& benefit for home/host country: (offshore prod.= FDI undertaken to serve home market)
host
c.
benefits
costs
- resource transfer effects —> brings
- adv. effects on balance of payments
-
home
c.
capital, technology& management r.
employment effects —> brings jobs
balance of payments effects —> helps
achieve account surplus (trade surplus)
effects on competition& econ. growth
—> greenfield i. increase compet. -> lower
prices, higher consumer-welfare —> more
productivity growth, innovat., ec. growth
- emplyoment effects —> jobs for exports
- balance of payments effects —> inward
-
flow of foreign earnings
gains from learning valuable skills in
foreign market—> can be transferred back
to home c.
—> debit on account from input-imports
- adverse effects on compet. —> MNEs have
-
greater econ. power than indigenous compet.
(bc. part of larger intern. organization)
perceived loss of national sovereignty&
autonomy —> decisions mady by foreign w/o
real commitment to c.
- adv. effects on balance of payments
-
—> from initial capital outflow to finance FDI; if
purpose of FDI is serving home market from low
cost labor location/ subsitute for direct exports
neg. effect on employment —> if FDI
substitute for domest. prod. = „exporting jobs“
BUT: international trade theory —> concerns
about offshore-prod. not valid! —> increase
econ. growth& employment (bc. free resources
for specializing where comparative advantage)
• Gvntm.’s influence on FDI —>
encourage
restrict
outward insurance-prog., loans, no double taxation,
persuade host-c. to relax restr.
limit capital outflows, manipulate tax rules,
prohibit FDI
inward
ownership restraints, performance requirem.
(problem of time inconsitency= host gvntm.
gives good conditions at first, but taxes
heavily once invest. is sunk)
incentives (tax concessions, loans, subsidies)
• International Institutions’ influence on FDI —> until 1990s: no consistent involvment; then:
WTO promoted internat. trade/ liberalization of FDI-regulations (esp. services)
• FDI’s meaning for managers —>
• consider trade theory implementations & link gvntm. policy—FDI
• direction explanation: location-specific-adv.-argument (John Dunning)
• consider Internalization theory —> FDI/licensing(/exporting)
• host-gvntm.’s attitude important for decision where to locate
• most bargaining power: host gvntm. values what firm offers + firm hat multiple comparable
alternatives + long time for negotiations
• => consider: transaction cost& trade barriers, locations-spefic advantages, protection of
know-how, intra-industry rivalry & skills available
• decision framework: 1. transportation cost&tariffs a) low —> export; b) high —>
2. is know-how amenable to licensing? a) no —> FDI; b) yes —>
3. tight control over foreign operation required? a) yes —> FDI; b) no —>
4. can know-how be protected by licensing-contract? a) no —> FDI; b) yes —> license
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C. Global Monetary System
6. Foreign Exchange Markets
• FEM= 1) converts cur., 2) provides insurance against FE-risks; events in FEM affect firm sales/
profits/ strategy
• Exchange rate= rate at which one cur. is converted into another —> = relative price of 2 cur.
• Use of FEM for Internat. businesses —> 1) receiving payments for exports, income from
foreign investments/licensing with foreign firms; 2) paying for foreign company’s products; 3)
invest in money markets (short term); involved in currency speculation (short-term movement of
funds; eg. carry trade= borrow money where interest rate on borrowing low, invest this where
i.r. on deposits hig); 4) hegde against currency risk;
• Spot exchange rate= conversion-rate from one currency into another at particular time;
change continually (determined by supply/demand for diff. currencies)
• Forward exchange rate= 2 parties agree to exchange currency+execute deal at specific date in
future —> to insure/hedge against possible adverse foreign exchange movement —>(typically
30, 90, 180 days); futures contract= contract designed by 3rd party for standard amount of
foreign currency delivered/received on standard date (standardized forward offered by 3rd party)
• Indirect quotation (= amount of foreign currency one unit of home currency can buy;
Mengennotierung; 1€=$x) vs. Direct quotation (= value of a unit of home currency for on unit of
foreign currency; Preisnotierung; $1=x€)
• Currency swap= simultaneous purchase& sale of given amount of foreign exchange for 2 diff.
value dates; transacted between a) internat. businesses& their banks, b) banks, c) gvntms;
common swap —> spot against forward; swap insures firm against FE-risk (like forward)
• FEM= global network of banks, brokers, foreign exchange dealers connected by electronic
communication systems; most important trading centers: London, NY, Zurich, Tokyo, Singapore
—> always open somewhere => it never sleeps!; total average/day > $4 trillion; no significant
difference between locations reg. exchange rates —> no opport. for arbitrage (buy low, sell
high); 85% of transactions involve $ —> vehicle currency (others: €, ¥, British pound)
• Participants:
• commercial banks/ depository institutions —> buy/sell deposits in diff. currencies =>
investment purposes
• non-bank financial institutions (funds, insurance comp.) —> buy/sell foreign assets =>
investment purposes
• non-financial businesses —> buy/sell goods/services/assets in foreign currency
• central banks —> conduct official internat. reserves transactions
• => buying/selling in FEM dominated by commercial/investment banks; central banks can
intervene (but effects of their transactions are small); foreign currency of businesses are
minor importance
• Impact on future e.r. movements: country’s price inflation/ interest rate/ market psychology
• Prices —>
• „law of one price“ = in competitive markets (free of transport. cost/trade barriers)
identical products sold in diff. c. must sell for same price (when p expressed in same
currency)! —> otherwise: opportunity of arbitrage;
• purchasing power parity theory (PPP)= price of „basket of goods“ should be roughly
equivalent in each c. (given relatively efficient markets) —> e.r. changes when relative
prices change => BUT: PPP only accurate in long run/ for underdeveloped capital
markets with high inflation, but NOT short term/developed c. with low inflation
• inflation rate —> high=> currency looses value (monetary policy plays role in inflation)
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• Interest rate —> Fisher Effect: „nominal“ i.r. (i) = „real“ i.r. (r) + expected inflation rate (I)
=> i=r+I; free transfer of capital between c. —> (r) will be same in every c. (otherwise:
arbitrage!!)=> diff. (i) reflects diff. (I); + we know from PPP: link inflation&exchange rate —>
link interest& exchange rate => = Internat. Fisher Effect (=for any 2 c. spot e.r. should be
change in equal amount (but opposite direction) to difference in (i) between these 2 c.)
=> S1= spot e.r. at beginning of period; S2= expected spot e.r. at end of period =>
—> BUT: only good predictor in long run, NOT in short run
• Investor psychology —> bandwagon effect: many traders moving in same direction
at same time —> e.r. changes based on group expectations/actions => great effects on
short term e.r. movements; difficult to predict; can be influenced by polit. factors/microec.
events; but: gvntm. can intervene bandwagon from starting (not always effective!)
• Forecasting —> should companies use&pay for this? => 2 theories
• Efficient market= prices reflect all available information; forward e.r. as best possible
unbiased predictors of future spot rates => NO (would be waste of money); „true“
• Inefficient market= prices don’t reflect all available information; forward e.r. are not best
possible predictors for future spot e.r; companies can improve FEM’s estimates of future e.r.
by investing in forecasting services => YES; BUT: track record not good!
• Approaches —> Fundamental analysis: economic factors (interest/inflation rates,
monetary policy, balance of payments) OR Technical analysis: assumption that past
trends/waves are predictors of futre t/w => both not really reliablie in short run!
• Convertibility of Currencies:
• freely convertible= (non-)residents can purchase unlimited amount of foreign cur. with
domestic cur. —> most c. today; BUT often: restriction on amount —> to preserve foreign
exchange reserves/prevent capital flight (many people convert dom. cur. into foreign cur. to
hold value; e.g. when hyperinflation/ economic crisis)
• externally convertible= only non-resid. can convert domestic into foreign cur. w/o limitation
• nonconvertible= (non-)residents prohibited from converting domestic into foreign cur. —>
firms may countertrade (goods/services traded for other g/s; today <10% of world trade)
• Managers —> consider 3 types of foreign exchange risk:
• transaction exposure (short-term) —> extent to which income from transactions affected
by fluctuations in foreign exchange values
• translation exposure (short-term) —> impact of currency e.r. changes on company’s
reported financial statements („paper losses“, unrealized)
• economic exposure (long-term) —> extent to which firm’s future internat. earning power
affected by changes in e.r.
• to minimize e.r. risk:
• for transaction& translation exposure —> buy forwards, use swaps, lead/lag payables/
receivables (lead= collect receivables when currency abut to depreciate + pay payables
before they’re due when cur. about to appreciate; lag= delay collection of receivables if
cur. about to appreciate + delay payables if cur. about to depreciate)
• for economic exposure —> distribute productive assets around globe ( so firm’s wellbeing not severly affected by changes in e.r.); ensure assets not too concentrated in c.
where rises in cur. lead to increase in foreign prices of firm’s goods/services
• central control of exposure —> protect res.; ensure subunits adopt correct mix of tactics/strat.
• distinguish between transaction/translation exp. on one hand, econom. exp. on the other
• attempt to forecast future e.r. (short-run: forward e.r., long run: fundamental economic factors)
• establish good reporting systems (—> so that central finance function can regularly monitor
firm’s exp. position)
• produce monthly foreign exchange exposure reports
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7. International Monetary Sytem
• IMS= institutional arrangements to govern e.r.; different types of e.r. systems —>
• floating e.r. system —> c. allows FEM to determine value of cur. => $, €, ¥, £ float freely
against each other, values determined by market forces, fluctuate day to day
• dirty/ managed float —> c. tries to hold value of cur. within some range of reference cur.
=> China to basket of other cur.; China, Switzerland: policy that sfr/€ not < 1.2
• pegged e.r. system —> c. fixes value of cur. relative to reference c. => gulf states to US-$
• fixed e.r. system —> c. fix thier cur. against each other at mutually agreed on e.r. =>
european monetary system until 1999, Bretton Woods System until 1973; currency union
(all c. same cur.) can be seen as ultimate form
Gold
standard
•
• =cur. pegged to gold/convertibility guaranteed; gold par value= amount cur. for 1 ounce gold
• first: gold coins= medium of exchange/unit of account/value-storage/payment
—> later: paper currency linked to gold (fixed rate)
• 1870-1914 worked well —> during WW1 gvntms. printed money& created inflation —>
people lost confidence in system, demanded gold for their cur. (pressure on gold reserves)
—> 1920s: gold standard was dead;
• powerful mechanism for achieving balance-of.trade equilibrium (= income from
exports=payments on imports) by all c. —> some say to return, but majority says NO
• Bretton Woods System (’44) 44 c.—>new internat. monetary system (for postwar econ. growth)
• 1) IMF —> maintain order in IMS (through discipline& flexibility) to avoid repetition of
competitive devalutations of 1930s/ control price inflation by imposing monetary discipline
in c.; lent to members in balance-of-payments-defict-times
• 2) WB (=IBRD, internat. bank for reconstruction& development) —> promote general econ.
development by low-interest-loans —> a) under IBRD scheme (money raised through bond
sales in internat. capital markets; borrowers pay market rate of interest); b) through IDA
(internat. development agency; since 1960; only for poorest c.)
• fixed e.r. system, all cur. fixed to gold (only $ directly convertible), no use of devaluations
as weapon of competitive trade policy, c. can’t devalue cur. > 10% w/o IMF approval
• worked well till late 60s —> then: US financed Vietnam War/welfare programs by printing
money —> high inflation, account deficits —> $ under attack so US renounced convertibility
into gold (1971) —>1973: BWS collapsed => was dependet on $/its inflation-rate (since
then: managed float system)
• Jamaica Agreement —> new e.r. system (1976, still this today) => floating rates declared
acceptable, gold abandoned as reserve asset, total annual IMF quotas increased (= amount
member c. contribute to IMF) —> current system= „managed-/dirty float syst.“ bc. of amount
of gvnmt. interventions
• E.r. since 1973 —> more volatile& less predictable, reasons —> oil crisis, confidence-loss in
$ after US inflation, rise in $, fall in $, partial collapse in EMS, Asian cur. crisis, global financial
crisis, sovereign debt crisis => increase in e.r. risk for internat. businesses
• Fixed vs. floating e.r —> no real agreement which is better;
• Fixed e.r. —> provides monetary discipline (gvntm. can’t expand money supply at
inflationary rates), minimizes speculation/uncertainty, promotes growth of interna. trade&
investment => BW-style won’t work, but other kind might
• Floating e.r. —> provides monetary autonomy (gvnmt. has control), automatic trade
balance adjustment if deficit exists, help to c. recovering from financial crises
• Today —> free float (21%), managed float (23%), no legal tender of their own (5%; adopted
foreign cur.), inflexible systems (43%, eg. fixed/adjustable pegged system)
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• Why peg? —> imposes monetary discipline (if right cur. chosen), amounts to importing other
c’s. monetary policy, moderates inflationary pressure, typically done by small c. with dominant
trading partner
• Currency board= c. use it to commit to converting their domestic cur. on demand into another
cur. at fixed e.r; holds reserves to foreign cur. equal at fixed e.r. to at least 100% of domestic
cur. issued; issues additional domestic notes/coins only when there are foreign exchange
reserves to back them
• IMF today: focuse on lending money to c. in financial crisis —> crisis manag.; 3 crisis-types,
have common underlying macroec. causes (high inflation rate, rising account deficit, expansion
of domestic borrowing, high gvnmt. deficits
• currency crisis —> = when speculative attack on exchange value of cur. 1) results in
strong depreciation of cur.-value/ 2) forces authorities to spend big of internat. cur.
reserves and strongly increase interest rate to defend prevailing e.r. => Brazil 2002;
• Mexico 1995: result of high debts, pegged e.r. that didn’t allow for natural adjustment
of prices —> $50 billion aid package from IMF + tight monetary policy + publingspending-cuts
• Southeast-Asia 1997: mainreason= under-regulated banking sector, investment boom,
excess capacity, high debt, expanding imports —> 5 countries —> >$100 billion aid
package from IMG + cur. were devalued
• banking crisis —> loss of confidence in banking sytsem —> run on banks (individuals&
companies withdraw their deposits)
• foreign debt crisis —> c. can’t service its foreign debt obligations (private sector/
gvntm.) => Greece& Ireland 2010
• IMF’s policy & critics —> by 2012: loans to 52 c. in crisis (requiring tight macroeconomic/
monetary policy); critcs worry: „on-fits-all“-approach is innapropriate, IMF worsens moral
hazard (behave recklessly, bc. will be saved if things go wrong), IMF too powerful for institution
w/o real mechanism for accountability => Not clear who’s right!!; recently IMF changed policies
& more flexible (urged to adopt fiscal stimulus& monetary easing policies)
• Managers —> understand how IMS affects e.r. risk/need for currency management; current
system is managed float (gvntm./ central bank interventions influence e.r.); speculation can also
create volatile movements in e.r. —> volatility creates opportunities/threats => build strategic
flexibility/limit economic exposure by dispersing production globally
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D. Strategy & Strructure of International Business
8. Sample Test 1
9. Strategy of International Business
• Firm’s strategy —> = actions managers take to attain firm’s goal; should increase:
—> a) profitability (=rate of return of investments) —> 1) reduce costs, 2) add value& raise prices
of p.; b) profit growth —> 1) sell more in existing markets, 2) enter new markets
• Value creation: C= cost of production per unit, P= price per unit (including C), V= value of
product to an average customer (including P&C); V-P= consumer surplus per unit, P-C= profit
per unit sold, V-C= value created per unit => V-C: greater gap=> greater profit => use
1) differentiation (increase attractiveness of p.)/ 2) low cost (lowering prod. cost) strategy
• Strategic positioning —> Porter: pick viable position on efficiency frontier, configure internal
operations to support position, have right organizational structure to execute strategy =>
strategy/operations/organization must be consistent with each other!!!; ALWAYS stay on curve;
e.f. is convex bc. of: diminishing returns (=quality-increase becomes more& more expensive),
not all positions viable (not enough demand); shifting curve to the right (=> higher value, same
price) requires innovation
• Firm’s operations= like value chain composed of series of value creation activities —> Value
Chain—> primary activites=> R&D-> Production-> Marketing&Sales-> Customer Service;
support activities=> Information System, Company Infrastructure/Logistics, HR => all activities
must be managed effectively& be consistent within firm strategy
• Global expansion —> internat. firms can:
• expand their market —> selling goods/services (developed at home) internationally;
success depends on good/service & firm’s core competencies
• realise location economies —> perform value creation activity in optimal location => lower
costs of value creation and/or differentiate product —> global web of v.c. activities
• realise greater cost economies from experience effects —> through 1) learning effects (cost
savings from learning by doing; during startup-phase+2-3y); 2) economies of scale (spread
fixed costs, serve global markets, with larger sales more bargaining power with suppliers);
=> reduce cost of v.c.; experience curve (concave): v: unit costs, h: cumulative output
• realise greater return by leveraging subsidiary skills —> valuable skills can arise anywhere in
firm’s gl. network —> incentive system to encourage employees to acquire new skills,
process for identifying new (in subsidiary) created valuable skills, facilitate skill-transfer
• Competitive pressures —> 2 conflicting types; cost pressures, pressures for local
responsiveness (firms need to adapt product to meet local demands, may raise costs) =>
• => low/low —> „no problem“; low/high —> not too difficult to achieve (bc: price doesn’t
matter); high/low —> standardised product but high cost pressure; high/high —> most
difficult (deal with both pressures simultaneously) => figure out position:
• cost reductions greatest —> commodity-type p. (serve universal needs, price is main
competitive weapon); major competitors are based in low cost locations; persistent excess
capacity; consumer powerful& low switching costs
• local responsiveness arise from —> differences in consumer taste/preferences /
traditional practices/infrastructure / distribution channels, host gvntm. demands
• Choosing a Strategy —> depends on c.p. & l-r.p.!!; intern.& Local. become less viable as
competitor emerge!
• International Strategy (low/low) —> only minimally local customisation for products sold
internationally, produce domestic/sell internat.; BUT: over time compet. will emerge! —>
need to reduce costs (=> high/low OR even high/high)
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• Localisation Strategy (low/high) —> increase profitability by customising goods/services to
match taste/preferences in diff. c.; limits ability for cost reductions; BUT: as over time
compet. will emerge! —> need to reduce costs (=> high/high)
• Global standardisation Strategy (high/low) —> increase profitability& profit growth by cost
reduction (from economies of scale, learning effects, location economies) —> low-cost
strategy on global scale
• Transnational Strategy (high/high) —> simultaneously achieve low costs (from economies
of scale, learning effects, location economies) & differentiate product across geograph.
markets —> foster multidirectional flow of skills between different subsidiaries in firm’s
global network; focus on transferring subsidiary skills => difficult strategy
2)
10. Organization of International Business
• Organizat. architecture= totality of firm’s organization including: (ALL in correl. w/ each other
—> must be internally consistent!/ need to fit strategy!)
• organizational structure —> vertical differentiation (location of decision-making power),
horizontal differentiation (formal division of organiz. into subunits), establishment of
integrating mechanism (to coordinate subunits)
• control systems & incentives —> cs: metrics to measure performance of subunits; i: devices
to reward managerial behaviour
• processes (how decisions/work performed), organizational culture (norms/value-system),
people (recruiting/compensating/retaining employees, type of people, skills/values/orientat.)
• Organizational structure —>
• Vertical differentiation —> a) Centralised (facilitates coordination, decisions consistent with
organization’s objectives, managers can bring org. change, avoids duplication of activities);
b) Decentralised decision making (relieves burden of centralised d-m., motivates
individuals, greater flexibility, can give better decisions& increase control)
=> can make sense to centralise some decisions (overall firm strat., major dec., legal
issues)& decentralise others (operating decisions eg. marketing, R&D, HR)
• Horizontal differentiation —> most firms begin with no formal structure, then 1) —> 2) —>
1)
international structural stages model: 3) —> 4) OR 5) —> 6)
• Functional structure —> functions coordinated/controlled by T-M,
d-m. centralised, product line diversification requires further horiz. diff.
• Product divisional s. —> each division responsible for a product line, operating dec.
decentralised, overall strat. developm./ finance control of divisions centralisedrealise
• International division s. —> when firms initially expand internat.: group all internat.
activieties in 1 i.d.; replicate domestic structure (functional/divisional) internationally
• Worldwide product division s. —> when firms continue expanding a) 4)
—> = worldwide coordination of v.c. activities of each product division;
+ realise location/experience curve economies/ skill-transfer easy,
- lack of local responsiveness => good if product divisional struct./high
diversification (standardisation/internat. strat.)
• Worldwide area s. —> when firms continue expanding b) —> = divides world into
autonomous geogr. areas, decentralises operational authority; + facilitates local
responsiveness; - can fragment organization (transfer difficult), no realization location/
experience curve effects => good if funct. struct./ low diversification (localization strat.)
• Global matrix s. —> product divisons& geogr. areas; doesn’t always work well (bureaucratic/clumsy ) —> firms try „flexible“ matrix s. => (transnat. strat.)
3)
6)
5)
18 von 27
•
•
•
•
•
• Integrating Mechanisms —> need for coordination (loc.<internat.<global<transnat. strat.);
impediments to coordination= managers in diff. subunits have diff. orientations/ no respect
for each other/ communication-difficulties with e.o., subunits have diff. goals => esp. in
MNEs; firms try to achieve coordination by adopting:
• Formal Integrating Mechanisms —> direct contact, liaison roles, teams, matrix
structure (from simple to complex); don’t always work (very bureaucratic, don’t address
problems from diff. subunits)
• Informal Integrating Mechanism —> to avoid problems of formal i.m. => (=for
transmitting informatin within organization, based on informal contacts between
managers) —> non-bureaucratic knowledge-flow within MNE! BUT: for this to work
strong common organiz. culture needed (that overrides diff. subunit orientations)
Control system —> subunits’ actions consistent w/ firm’s overall strat., financ. objectives?
• Personal controls —> personal contact with subordinates (small firms)
• Bureaucratic c. —> rules/procedures to direct subunits’ actions
• Ouput c. —> setting goals for subunits (expressed in performance metrics)
• Cultural c. —> exists when employees „buy into“ norms/value system of firm
Incentive systems: i.= devices to reward (/punish) behavior —> should: vary depending on
employee/his work, promote cooperation between managers in subunits,reflect national
differences (institution&culture); can have unintended consequences (loss in quality?)
Performance ambiguity= when causes of subunit’s (poor) performance not clear; common
when subunit’s performance dependet on other subunits; parallel realtionship w/
interdependence/ costs of control, differs with strategy
Organizational culture= value/norms employees should follow; evolves from founders/leaders/
national social culture/ firm’s history/ decisions that resulted in high performance; „strong“
culture —> managers share consistent set of v./n. that have clear impact on way work is done
=> not always good (maybe beneficial at one point, not at another)
Synthesis: Strategy + Architecture
Structure&
Controls
Localization
Strategy
International S.
Global
Transnational S.
Standardization S.
Vertical diff.
decentralized
core centralized,
rest decentralized
some centralization mixed c.&dc.
Horizontal diff.
worldwide area s.
ww. product
divisons
ww. product
divisions
matrix
Need for cultural
controls /coordination; performance ambiguity
low
moderate
high
very high
Integrat. mechan.
none
few
many
very many
focus on local
responsiveness
create value by
transferring core
competencies
from home to
foreign subsidiaries
f. on realization
locat./experience
curve economies;
headquarters
maintains control
over most dec.;
strong org. culture
encouraged
f.on simultaneously
attaining location/
experience curve
economies, local
responsiveness,
global learning;
strong org. culture
encouraged
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• Organizational change —> needed to adjust to changing environment/meet demands; difficult
(organizational inertia —> existing disribution of power/influence, current culture, managers’
proconceptions, institutional constraints)
=> unfreeze o. through shock therapy -> move o. to new state through proactive change in
architecture -> refreeze o. in new state
11. Entry Strategy & Strategic Alliances
• Basic entry decisions (when expanding globally) —> which markets/ when enter/ on what
scale/ which entry mode
• Which markets? —> depends on long-run profit potential; favorable —> politically stable, free
market systems, relat. low inflation rates/ private sector debt => also markets more attractive
when product not widely available& satisfies unmet need; +demography (wealth, standard of
living, future, how many people?)
• When enter? —>
• early entry (enter before other foreign firms) —> first mover advantages => preempt rivals
by establishing strong brand name, build up sales volume, ride down experience curve
ahead of rivals, gain cost advantage over later entrants, create switching costs that tie
customers to products/services (difficult for later entrants to win business); first mover
disadvantages => pioneering cost (promote product, educate customers -> greater risk of
business failure), changes in regulations
• late entry (entry after other firms already established) —> no f-m-disadv.
• What scale? —> 1) significant scale —> strategic commitment to market (can discourage other
firms to enter) / 2) small scale —> advantage of allowing firm to learn about foreign market while
limiting firm’s exposure to market => „right“ way depends on environment, strategy, …
• Entry modes —> influences on choice: (transport) costs, trade barriers, political/ economic
risks, firm strategy, core competencies (technolog. know-how —> avoid 3,5 (unless techn.
advant. only transitory/ can be established as dominant design); management k-h —> no
problem: low risk of loosing control& significant benefits), pressures for cost reductions (high > 1, 6) => optimal mode varies by situation/ firm’s strategy
exporting
advantages
disadvantages
- realize experience curve/ location
- uneconomical (transport cost, tariffs)
- problems w/ local marketing agents
- lower-cost production locations may exist
turnkey
projects
economies
no development cost
- earn returns from know-how required for
-
process
less risky than conventional FDI
- no long-term interest in foreign c.
- creating competitors
- selling firm’s technology = competitve
adv. to (potential) competitors
licensing
- low development costs/ risks /barriers
-
franchising
to investment
capitalize market opportunities w/o
developing them itself
- low development costs/ risks
- quickly build global presence
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- can’t realize experience curve/ location
economies (—> bc. no tight control)
- no control over technology
- no global strateg. coordination possible
- proprietary assets could be lost
- distance -> less control over quality
- no global strateg. coordination possible
joint
ventures
advantages
disadvantages
- access to local partner’s knowledge
- less control over technology
- no global strateg. coordination possible
- can’t realize experience curve/ location
wholly
owned
subsidiary
(local market, culture, language, polit./
business system)
shared development cost/risk
politically acceptable
economies (—> bc. no tight control)
- conflicts of control if diff. goals (2 owner)
- protects firm’s technology
- high cost/ risk
- tight control in diff. c. -> global strategic
coordination
- realize experience curve/ location
economies
• turnkey projects —> contractor handles everything of project for foreign client (incl. training/
operating personell)
• licensing —> licensor grants property-rights to licensee for time period, receives royalty fee
• franchising —> specialized form of licensing, franchisor sells property to franchisee + insists
on strict rules for way business is done
• joint ventures —> establish w/ local firm a firm jointly owned by 2/more independent firms
• Greenfield vs. acquisition for establishing wholly owned subisidiary (decide for one) —>
• Greenfield strategy —> build from ground, better when firms needs to transfer firm’s
competencies, skills, routines, culture => + build the kind you want; - slower to establish,
risky
• Acquisition strategy —> acquire existing firm, better when well-established/global
competitiors are interested in expanding => + quick to execute, preempt compet., less
risky; - (reasons for failure): firm overpays for acquisition (winner’s curse), cultures clash,
synergies are slow/ difficult to achieve, inadequate pre-acquisition screening => to avoid
problems: carefully screen firm, move rapidly to implement integration plan
• Strategic alliances = cooperative agreements between potential/actual competitors;
• +: facilitate entry into foreign market, share developing costs/risks, complementary
skills/assets, help establish technolog. standards for industry (-> benefit firm);
• - (risk): don’t give away more than you receive;
• successful strat. alliances => 1) „good“ partner —> helps achieve strateg. goals, has
capabilities firm lacks/values, share’s vision for alliance-purpose, no opportunistic behavior
=> select carefully!!!; 2) alliance structure —> difficult to transfer technolog. not meant to
be transferred, contracutal safeguards (against opportunism), minimize opportunism-risk,
skill/technology swaps with equal gains; 3) managing the alliance —> interpersonal
relationships between managers, learn from partners
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E. Business Operations
12. Exporting, Importing& Countertrade
• Export = way of increasing market size/profits; large firms —> proactively seek new export
opportunities; small firms —> reactively, wait for world to come to them; => consider: market
opportunities, foreign e.r, imp./exp. financing, challenges of doing business in foreign market
• Pitfalls —> ignorance of foreign market opport.!!!; poor market analysis/ understanding of
competitve conditions/ distribution program/ executed promotion campaigns; problems
securing financing; underestimate differences/expertise required for foreign market penetration/
amount of paperwork/formalities
• Improve export performance —> many firms unaware of export opportunities available!!
=> collect information; assistance from c./EMC (export management companies)
• c: Ger&J —> institutional structure for promoting exp. —> trade associations, gvnmt
agencies, commercial banks, trading houses (=> experience, skills, inform.,contacts);
US —> information from US Department of Commerce/ local/state gvnmt.
• EMC = export specialists; act as export marketing department/ internat. department for
clients (firms), help identify opport./avoid pitfalls —> 1) firm can take over after
establishment OR 2) EMC can continue being responsible for selling firm’s products
• Reduce risks —> hire EMC + one/few markets at first, small scale entry (esp. small firms!!),
recognize time/managerial commitment (hire add. people), build good relationship w/ local
distributors/customers, hire locals, be proactive about exp. opport.; maybe local production
• Lack of trust —> difference of preference (payment/goods first?) => transactions facilitated by
third party (reputable bank) =impoter’s/exporter’s agent, also possible: 2/ more agents (—>
more steps —> more complicated/complex)
• Letter of credit (L/C) —> center of internat. commerical transactions, issued by bank at
request importer; bank will pay money to exporter; bank might want cash deposit from
importer=> + both parties trust bank; - (importer) 0.5-2% value of L/C as fee, can reduce
ability to get other loan (L/C is liability)
• Draft / Bill of exchange= order by exporter (maker) instructing importer/agent (drawee) to
pay; = instrument to effect payment; 1) sight draft (payable on presentation to drawee), 2)
time draft (allows delay: 30,60,90,120 days; can be sold to bank (get less money, but
immediately), banker’s/trade acceptance)
• Bill of lading (BoL)—> issued to exporter by common carrier (c.c.) transporting goods;
purposes: receipt, contract, document of title (= „bank owns goods“)
Ex:
US ex. + French im. + 1 bank
•
=> 1. F to bank: L/C — 2. Bank shows L/C to US — 3. US exports + bill of lading to bank — 4.
bank pays US — 5. bank gives goods to F — 6. F pays bank
• Ex 2: (typical internat. trade transaction) US ex + F im + US.bank + F.bank
=> 1. F orders goods/ US accepts — 2. L/C (F to F.bank —> F.bank to US.bank —> US.bank to
US ) — 3. goods (US to F) + BoL (c.c to US) — 4. draft + BoL (US to US.bank —> US.bank to
F.bank) — 5. draft accepted + payment (F.bank to US.bank) — 9. payment (F to F.bank)
OR: if time draft: 1. — 2. — 3. — 4. — 5. draft accepted (F.bank to US.bank) — 6. draft sale (US
to US.bank (discount)) + payment (US.bank to US) — 7. payment (F to F.bank —> F.bank to
US.bank)
• Export assistance —>
• financing aid —> from Ex-Im-Bank (US gvnmt.)
• export credit insurance —> US: foreign credit insurance association —> coverage against
commercial/political risks (eg. if no L/C)
• official export credit guarantee scheme —>Ger: Euler Hermes & PricewaterhouseCoopers
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• Countertrade= barter-like agreements, facilitate trade of goods/services for other g/s when
they can’t be traded for money; emerged 60s (USSR&Eastern Europe had nonconvertible
currencies), increase in 80s (developing nations that lacked foreign exchange reserves to
purchase imports), greater increase after 1997 (Asian finanical crisis); forms:
• Barter —> direct exchange g/s between 2 parties w/o cash transaction (=> Saudi Arabia
payd for 10 planes with oil)
• Counterpurchase —> reciprocal buying agrrement (firm agrees to buy materials from c. who
original sale was made)
• Offset —> one party agrees to purchase g/s with specified % of proceeds from original sale;
similar to counterpurchase but greater flexibility
• Buyback/ Compensation —> firm builds plant in / supplies technology/equipment/training/
service to country, gets paid from proceeds (=> build oil plant -> payment in oil)
• Switch trading —> use of specialized third-party trading house in countertrade agreement
(buys counterpurchase credits&sells it to other comp.)
• Pros& Cons of Countertrade: PROS: way to finance export deal if other means not available,
competitive adv. over firm unwilling countertrade, may be required by gvnmt. of c. (that firm
wants to export to); CONS: maybe unusable/poor-quality goods (firm can’t dispose with
profit), establishment of in-house trading department => most attractive for large MNEs with
worldwide network to dispose of goods aquired (use goods somewhere else in firm)
• Summary/ implications for managers: exporters face many problems (delay, pitfalls) +
ignorance of foreign market opportunities; financial devices that cope with lack of trust problem
—> letter of credit, draft, bill of lading
13. Marketing and R&D
• Globalization of markets/brands? —> global standardization not completely possible —>
cultural (taste&preferences) / economic (purchasing power of customers —> luxury products)
differences among nations, trade barriers, differences in product/technical standards
• Market segmentation —>
• = identifiying groups of conusmers whose purchasing behavior differs from others in
important ways (e.g. different marketing needed)
• segmented by —> geography, demography, sociocultural/ psychological factors
• 2 key m.s. issues —> 1) differences between c. in market-segment-structure; 2) existence of
segments that transcend national borders (more in industrial than consumer markets)
• global segment emerging —> „global youth segment“ (global media paved way)‚
• Market mix (= choices firm offers to its targeted market) often varies from c. to c. —> product
attributes, distribution / communication / pricing strategy
• Product attributes (influence market strat.) —> product= bundle of attributes (eg. burger: taste,
texture, size); products sell when attributes match consumers needs (+ prices appropriate) —>
consumer needs depend on culture (trad.!)/ economic developm./ product/technichal standards
• Distribution strategy —> = means firm chooses for delivering product to consumer; depends
on firm’s market entry strategy —> 1) locally production —> sell directly to consumer/retailer/
wholesaler; 2) production outside c. —> same options + selling to import agent
=> optimal strategy: depends on relative costs/ benefits of each alternative
• Retail concentration —> concentrated (Walmart in US, buy once a week, driving distance) /
fragmented (many small retailers, eg Japan, buy on daily basis, walking distance) retail
system => trend: concentration
• Channel length (# of intermediaries between producer&consumer)—> short (when price is
important) / long (if fragmented retail sector, increases cost) channel
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• Ch. exclusivity (how difficult for outsiders to access) —> high (Japan, long lasting
relationship retailers&producers) / low
• Ch. quality (expertise/ competencies/ skills of established retailers in c. & ability to sell/
support products of internat. businesses)
• Communication strategy —> = communicating product attributes to prospective customers (=
critical element in marketing mix), depends partly on choice of channel
• Communication channels —> direct selling, sales promoting, direct marketing, advertising
• Barriers to internat. communication:
• cultural barriers —> difficult to communicate messages across cultures (message
means one thing in one c., other in other c. => develop cross-cultural literacy, use local
input when developing marketing messages)
• Source/ ‚country of origin‘ effects —> s.e.= receiver evaluates message on basis of
status/image of sender; subset => c.o.e.= extent to which manufacturing-place
influences product evaluations; firms try to counter these by deemphasizing foreign
origins; BUT: not always neg. (french wine —> emphasiez foreign origin)
• Noise levels —> = # of other messages competing for potential consumer’s attention,
reduces probability of effective communication
• Communication strategies —> depens on product type& consumer sophistication, channel
length, media availbility; combination of both possible
• push strategy (emphasizes personnel selling) —> industrial/ complex new products,
short distr. ch., few print/electronic media available (+making people familiar w/ product)
• pull strategy (emp. mass media advertising)—> consumer goods, long distr. ch.,
sufficient print/electr. media available to carry marketing message
• Standardized/ global advertising —> + lower costs, creative talent scarce (1 big effort
better than more smaller to develop campaign), brand names are global;
- (significant) cultural differences among c., diff. advertising regulations in c.
=> often: standardize parts of campaign to capture benefits, customize
other parts to respond to local culture/ legal environments
• Pricing strategy —> consider:
• price discriminiation —> = firms charge consumers in different c. diff. prices for same prod.;
to work —> keep national markets separate, c. must have diff. price elasticity of demand
(= measure of responsiveness of demand for prod. to price-changes; —> elastic: small
change in price produces large change in demand, inelastic: large change in price produces
small change in demand —> normally bigger in c. with lower income/ more competitors)
• strategic pricing —> predatory pricing = use profit gained in one market to support
aggressive pricing to drive out competitors in other market; multipoint p. = firm’s p. strategy
in one market may have impact on rival’s p. strat. in other market; experience curve p. =
initially worldwide price < production cost (-> large losses) —> build global sales volume
rapidly —> gain profit with this price later
• regulations affecting pricing decisions —> firm’s ability to set prices limited —>
antidumping relgulations (pred./exp. curve pricing can violate this), competition policy (limit
prices firm can charge, to promote competition/restrict monopolies)
• Configure marketing mix —> standardization vs. customization NOT all or nothing approach
=> standardize some, customizie other things; consider costs/benefits of stand./cust. elements;
depends on marketplace-conditions
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• New-product development —>
• high-risk but potentially high-return activity
• technological change= fast, product life cycle= very short (often); techn. innovation is
creative & destructive => product innovations should be strategic priority!!
• R&D-location —> new prod. ideas come from interactions of scientific R/ demand/
competitive conditions; new-developm.-rate greater in c. where —> strong demand/ „rich“
consumers/ intense competition/ more money for basic/applied R&D
• Close links R&D-marketing-production needed!! —> bc. of high failure-rate => ensure that:
customer needs drive prod. developm., new prod. designed for ease of manufacturing,
developm. cost kept in check, time to market minimized
• Cross-functional teams —> to facilitate cross-functional integration (R&D-M-P); to function
effectively —> „heavyweight“ project manager (high status in organiz.), ≥1 member of
each key function, best all in one location, clear plan/goals for team, develop own
processes for communication/conflict resolution for team
• Global R&D —> integrate R&D/marketing/production, maybe develop diff. versions of p.
for diff. c., diff. R&D-centers around globe, cross-functional teams => complex
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