Part II: Business Environment
6
Introduction to Business
3e
Jeff Madura
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Explain motives for engaging in international business.
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Describe global opportunities.
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Describe how firms conduct international business.
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Explain influence of foreign characteristics on a firm’s international business.
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Explain how movements in exchange rates can affect business performance.
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Attract foreign demand
– Competition may prevent firm from increasing market share in U.S.
– Changes in consumer tastes may decrease demand in U.S.
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Capitalize on technology
– Expand into countries where technology is not as advanced.
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The Coca-Cola Company’s Global Expansion
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Exhibit 6.1
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Approximate Hourly Compensation Costs for Manufacturing across Countries
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Exhibit 6.2
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Use inexpensive resources
– Find locations where land and labor are inexpensive.
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Diversify internationally
– Reduce risk and increase performance stability by selling in other countries.
– Geographic diversification reduces exposure to economic risk in U.S.
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Dupont’s Geographic Diversification
(measured by annual sales in millions of dollars)
Source: 2001 annual report
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Exhibit 6.3
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Opportunities in Europe
– Single European Act
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Created more uniform regulations
Removed taxes on goods traded between member countries
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Increased competition
– Removal of the Berlin Wall (1989)
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Encouraged free enterprise and privatization of businesses
– Inception of the Euro
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Allows single monetary policy
Eliminates transaction costs
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Opportunities in Latin America
– NAFTA
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Eliminated trade barriers between U.S.,
Mexico, and Canada.
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U.S. firms have moved production to
Mexico to reduce costs.
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U.S. firms now export products to Mexico.
– Uruguay Round GATT
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Removed import trade restrictions over 10 years among 117 countries.
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World Trade Organization (WTO)
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Opportunities in Asia
– Large population base
– In 1990s many Asian countries reduced their excessive restrictions on foreign investment
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Easier for foreign firms to acquire Asian companies or negotiate licensing agreements with Asian firms.
– Asian economic crisis
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Forced many local firms into bankruptcy
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Created opportunities for foreign firms to acquire struggling Asian companies
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Foreign firms expanded into the U.S. by:
– Establishing new subsidiaries.
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– Acquiring U.S. firms.
U.S. industries are susceptible to foreign competition
– U.S. firms in labor-intensive industries must compete with foreign firms’ lower labor costs.
– Foreign-made products may be perceived as higher quality than U.S.-made products.
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Importing
– The purchase of foreign products or services
Exporting
– The sale of products or services to purchasers residing in other countries
Direct foreign investment
– A means of acquiring or building subsidiaries in one or more foreign countries
Strategic alliances
– A business agreement between firms whereby resources are shared to pursue mutual interests
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Involves the purchase of foreign products or services:
– U.S. consumers purchase foreign automobiles, clothing, cameras, etc.
– U.S. firms import materials or supplies that are used to produce products.
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Trade barriers restrict importing
– Tariffs are taxes on imported products.
– Quotas limit the amounts of specific products that can be imported.
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Involves the sale of products or services to purchasers residing in other countries
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U.S. Balance of Trade
– The level of U.S. exports less the level of its imports; if imports are greater than exports, the result is a trade deficit.
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Internet facilitates exporting
– Provide information to prospective importers
– Accept orders online and track shipments
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Trend of U.S. Exports and Imports
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Exhibit 6.4
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Investments in acquiring or building subsidiaries in one or more foreign countries to:
– Reduce transportation costs.
– Overcome trade barriers
– Acquire advanced technology by offering incentives to firms to establish subsidiaries.
– Reduce labor costs by shifting production facilities to a developing country with lower labor costs.
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Various types of alliances between U.S. and foreign firms can be made:
– Joint venture involves an agreement between two firms about a specific project
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U.S. firm makes the product, foreign firm sells the product in their home country.
Two firms share production of the product - common in the auto industry.
– International licensing agreement
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Firm allows a foreign company (licensee) to produce its product according to specific instructions in exchange for a licensing fee.
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Influence of Foreign Characteristics
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Culture
– Tastes, habits, and customs vary by country
– U.S. products might need to be adjusted to fit the culture
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Economic systems
– Capitalism
– Communism
– Socialism
– Privatization
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Economic conditions
– Economic growth in foreign countries can influence demand for U.S. products:
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Strong economy might increase demand.
Weak economy might decrease demand.
– U.S. firm’s exposure to foreign country’s economy depends on proportion of U.S. firm’s business conducted in that country.
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Comparing the Influence of the
Canadian Economy on Two U.S. Firms
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Exhibit 6.5
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Many successful small firms rely on international sales for a significant portion of their business.
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Risk that a country’s political actions may adversely affect a business
– Expropriation: extreme form of risk occurs when foreign government takes over a U.S. subsidiary without compensating the U.S. firm.
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More common risk occurs when foreign governments impose higher corporate tax rates on foreign subsidiaries.
Other risks impact costs of doing business in the foreign country - stringent building codes, waste disposal restrictions, and pollution controls.
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Exchange rates between the U.S. dollar and other currencies fluctuate over time
– Number of dollars needed by a U.S. firm to purchase foreign supplies may change, even if the actual price does not change
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When U.S. dollar weakens - foreign currency strengthens - U.S. firms need more dollars to purchase a given amount of foreign supplies
Exchange rate affects foreign demand for U.S. products because they impact the actual price paid by the foreign customer.
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Example of Importing by a U.S. Firm
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Exhibit 6.6
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International trade transactions usually require the exchange of one currency for another currency
– Exchange rates vary on a daily basis.
– Exchange rate fluctuations have a favorable or unfavorable effect on firm performance.
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Impact on U.S. importers
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Impact on U.S. exporters
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When foreign currency appreciates against the U.S. dollar–the dollar weakens and loses value
– Causes prices of foreign supplies to increase and adversely impacts U.S. firms that import supplies.
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When foreign currency depreciates against the U.S. dollar–the dollar strengthens and gains value
– Causes prices of foreign supplies to decrease - reduces expenses of U.S. firms that import supplies.
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When foreign currency appreciates against the U.S. dollar–the dollar weakens and loses value
– Causes prices of U.S. products to decrease and demand to increase - has a positive impact on U.S. exporter’s revenues and profits.
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How Exchange Rates Can
Affect the Price of Imports
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Exhibit 6.7
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When foreign currency depreciates against the U.S. dollar–the dollar strengthens and gains value
– Causes prices of U.S. products to increase and demand to decrease - has a negative impact on U.S. exporter’s revenues and profits.
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Example of Exporting by a U.S. Firm
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Exhibit 6.8
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Hedging means to take actions to protect a firm against exchange rate movements
– Hedging future payments and future receivables in foreign currencies
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Request forward contract at a specified exchange rate on a future date.
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Rate is called a forward rate
– Reduces risk because firm knows in advance what the exchange rate will be
– Prevents both favorable and unfavorable exchange rate fluctuations
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How Exchange
Rates Affect the Degree of
Foreign
Competition
Exhibit 6.9
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U.S. firms engage in international business to attract foreign demand, capitalize on technology, use inexpensive resources or diversify internationally.
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Reduction of trade barriers has increased global expansion opportunities for U.S. firms.
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Firms conduct international business via importing, exporting, direct foreign investment and strategic alliances.
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Firms must assess culture, economic systems and conditions, exchange rate risk and political risk when entering foreign markets.
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Exchange rate fluctuations affect importers and exporters in different ways.
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