Introduction to
International Business
Chapter 1
Managing the Risks of
International Business

“THE MANAGEMENT OF
INTERNATIONAL BUSINESS IS THE
MANAGEMENT OF RISK”
1999 West Educational Publishing
2
Managing Risk





Market entry strategy
Shifting the risk
Using the contract to fix
responsibility, allocate risk and
price accordingly
Payment and credit risk
Managing distance and
communications
1999 West Educational Publishing
3
Managing Risk


Managing language and cultural
differences
Managing currency and exchange
rate risk
1999 West Educational Publishing
4
Managing Risk




Political risk?
Causes?
How to handle?
Foreign courts and foreign law?
See DIP SpA v. Commune di
Bassano p.39 challenging Italian
retail licensing requirements. What
result?
1999 West Educational Publishing
5
Managing Risks
Currency/Exchange Rate Risks
 Transaction Risks
*
delivery risk
*
marine risk
*
litigation risk- Gaskin, p.34

1999 West Educational Publishing
6
Political Risks



Managing political risk
Managing risk of foreign law and
courts - choice of law and forum
clauses
Risk of international hostilities
1999 West Educational Publishing
7
Implications for International Business


Political, economic, and legal environments of a
country
 influence attractiveness
 raise ethical Issues
Attractiveness
 balance long-term risks with short-term benefits of
doing business in a foreign country
 benefits depend on: size, wealth, future economic
growth
 first mover advantages
 identify “star” future economies
 costs are affected by:
 political payoffs
 economic sophistication (may be more costly to
operate in LDCs, no infrastructure)

legal framework impact on costs
1999 West Educational Publishing
8
Implications for
International Business

Ethical Issues


human rights
adherence to same standards abroad
as at home




product safety
work safety
environmental protection
bribes


Foreign Corrupt Practices Act (1977)
what is unethical is not necessarily
illegal
1999 West Educational Publishing
9
Legal Systems and
International Business

Legal Systems and International Business

property rights





use of a resource
use made of income from resource
enforcement issues
Public vs private action violations
protection of Intellectual Property





patent: inventors’ exclusive rights to manufacture, use,
sale an invention
copyright: same for authors, composers, artists,
publishers
trademarks: unique designs and names, often officially
registered
Paris Convention for the Protection of Industrial Property
(96 countries)
WTO/GATT
1999 West Educational Publishing
10
Legal Systems and
International Business

product safety and product liability


criminal / civil liability
contract law

document that specifies



conditions under which an exchange will happen
rights/obligations of parties
differences based on legal tradition


common law system
civil law system
1999 West Educational Publishing
11
Forms of International
Business



Trade
International licensing of
technology and intellectual
property (trademarks, patents and
copyrights)
Foreign direct investment
1999 West Educational Publishing
12
External or “arms-length”
Modes of Entry

Firm does business overseas without
investing in owned assets and own
human resources in target market

Exporting


Sell “domestically” produced products into
foreign markets through local independent
agents or directly to customers
Turnkey projects



Special case of exporting for firms that set up
production plants or build facilities for others
The “exporting firm” builds the facility
overseas, starts it up, turns it over to the host
country owner, and then departs
Oil firms, construction firms, manufacturers
1999 West Educational Publishing
13
External or “arms-length”
Modes (cont.)

Licensing





Franchising



Licensor grants rights to licensee for use of intangible
property over a specified period in return for a fee
Intangible property: patents, inventions, formulas,
processes, designs, copyrights, trademarks
Licensing agreement likely allows licensor quality
assurance rights over actual use of intangible asset
If licensee sells to consumers using the licensor’s brand
name, the license may also give the licensor rights to
strategic brand control
Franchisor, grants franchisee use of intangibles under the
condition that franchisee follow strict rules of operating
the business
Mode of operation is part of the brand image
International strategic alliances
1999 West Educational Publishing
14
“Internal” Modes of Entry

These involve Foreign Direct Investment
 Wholly owned subsidiaries
 Firms owned 100% by a company in a
foreign country
 International joint ventures
 Firms that are owned jointly by two or
more otherwise independent firms; most
IJVs are between two firms
 One (or more) parent firms are nonresident in the host market
 Ownership % may vary from majority
foreign owned, to 50%-50% owned, to
minority owned by the foreign firm
1999 West Educational Publishing
15
Trade



Exporting
Importing
Subject to government controls
over trade:



Tariffs
non tariff barriers
Trade in services - increasing
1999 West Educational Publishing
16
Intellectual Property and
Licensing

Intellectual Property Rights:



Copyrights: legal rights to an artistic or
written work
Trademarks: the legal right to use a name or
symbol; that identifies a firm or its product
Patents: governmental grants to inventors
assuring them of the legal right to produce,
use and sell their invention for a period of
years
1999 West Educational Publishing
17
International Licensing
Agreements



International licensing agreements:
contracts by which the holder of
intellectual property will grant certain
rights in that property to a foreign firm
to use for a period of time under certain
conditions in return for a licensing fee
Technology transfer
Franchising Agreements : licenses to
use trademark and form of business
operations
1999 West Educational Publishing
18
Protecting Intellectual
Property


Importance of IP for US trade
Difficulty of combating piracy
1999 West Educational Publishing
19
Legal and Political Issues in
Technology Transfer Agreements

Regulated by some governments


generally in Asia, Latin America, and
the Middle East
terms restricted to benefit the
developing country
1999 West Educational Publishing
20
Foreign Direct Investment




Ownership and active control of
ongoing business concerns
including investment in
manufacturing, mining, farming
and other production facilities
Wholly owned foreign subsidiary
Joint venture
Mergers and acquisitions
1999 West Educational Publishing
21
The Legal Environment in
Developing Countries





How different?
Examples: foreign exchange,
controls on trade, licensing and
investments
Bhopal discussion
Reform and privatization
Transition to market economies
1999 West Educational Publishing
22
Ethical Issues



“The law is a floor…but ethical
codes and personal values call on
us to exceed that which is required
by law.”
Do you agree?
Source of ethics?
1999 West Educational Publishing
23
Ethical Issues




Bribes?
Child labor?
Different working conditions and
wages?
Corporate response?
1999 West Educational Publishing
24
Conclusion



Global knowledge
Trade, licensing and investment
How to manage risk? Good
research, understand risk, know
the law and use contract to protect
you and help you manage risk.
1999 West Educational Publishing
25
Web Sites







www.firstgov.gov
www.ita.doc.gov/
www.ciber.bus.msu.edu/busres.htm
www.ustr.gov
www.wto.org
www.bea.doc.gov
www.worldbank.org
1999 West Educational Publishing
26
Pro Golf Case


First Flight v. Pro. Golf, p.15
Facts: Pro Golf negotiated with Wynn to
act as sales representative in Japan.
Wynn incorporated FFA in Japan.
ProGolf entered into an agreement
where FFA could use First Flight
trademark. FFA tried to sublicense the
trademark.
1999 West Educational Publishing
27
Pro Golf Case


Progolf terminated the agreement. Pro
Golf learned that they had not properly
registered their trademark in Japan. FFA
sued for breach of contract and Pro Golf
counterclaimed for royalties.
Holding: Pro Golf was permitted to
terminate its Japanese sales agency
with FFA because it was terminable at
will.
1999 West Educational Publishing
28
Pro Golf Case (cont.)

However Pro Golf was not entitled
to royalties because they had not
perfected their rights to the
trademark under Japanese law.
1999 West Educational Publishing
29
Franchising Case


Raymond Dayan v. McDonald’s p. 18
Facts: Dayan had franchise to operate
McDonald’s in Paris. There was a serious
problem with QSC (quality, service and
cleanliness standards. McDonald’s
wanted to terminate the franchise but
Dayan objected.
1999 West Educational Publishing
30
Dayan v. McDonald’s Corp.


Holding: After much legal
maneuvering on two continents,
McDonald’s was able to terminate
the franchise. Dayan was able to
continue his restaurants under a
different name.
What is the impact of this on the
franchiser?
1999 West Educational Publishing
31
DIP SpA v. Commune di
Bassano

“…it is sufficient to observe that
rules such as those contained in
the Italian Act make no distinction
according to the origin of the
goods distributed by the
businesses concerned, that their
purpose is not to regulate trade in
goods…
1999 West Educational Publishing
32
DIP SpA v. Commune di
Bassano

And that the restrictive effect
which they might have on the free
movement of goods are too
uncertain and indirect for the
obligation which they impose to be
regarded as hindering trade
between member states.”
1999 West Educational Publishing
33
Gaskin v. Stumm Handel



Facts:
Issue: Is the forum selection clause in
the contract which had been written in
German designating the courts of
Germany enforceable thus precluding
the plaintiff from proceeding in a U.S.
Court?
Yes
1999 West Educational Publishing
34
Gaskin v. Stumm Handel



Why did the court rule for the
defendant?
What circumstances might have
altered the result?
What advice do you have for the
plaintiff for the future?
1999 West Educational Publishing
35