Chapter 8 Foreign Direct Investment Flow of FDI – the amount of direct investment into a country in a defined time period undertaken by foreign entries (FDI inflow), or the amount of direct investment info foreign countries made by entities resident in a country in a defined period of time. (FDI outflow) Stock of FDI – total accumulated value of foreign‐owned assets at a given time. Main reason of FDI growth 1. Globalization – most countries lowered trade and investment barriers 2. FDI is used as a way to circumventing future trade barriers (tariff, quota) 3. Political and Economic change in developing nations – shift toward democracy and free market economies. TWO forms of FDI 1. Greenfield Investment – establishment of a new operation. 2. Acquisition – acquiring or merging with an existing firm in the foreign country. Why Foreign Direct Investment 1. Exporting – producing goods at home country and then shipping them to the receiving country for resale. 1.1 Limitations of export – transportation cost, trade barriers 2. Licensing – granting a foreign entity the right to produce and sell the firm produce. 2.1 Limitations of licensing – firm is giving away valuable technology know‐how, firm doesn’t have a tight control over manufacturing, and firm’s competitive advantages. 3. Strategic Behavior – FDI flows are a reflection of strategic rivalry between firms in the global marketplace. Oligopoly – an industry composed of a limited number of large firms. Multipoint Competition – arise when two or more enterprises encounter each other in different regional markets, national markets, or industries. 4. Produce Life Cycle – firms that pioneer a product in their home market undertakes FDI to produce a product in foreign countries. 4.1 New produce stage – a good produce in home country due to uncertain demand. 4.2 Maturing product stage – firm invest in other advanced countries when local demand grows large enough to support local production. 4.3 Standardized product stage – shift production to low cost developing countries to reduce cost and price 5. Eclectic Paradigm – combine best aspects of other theories into a single explanation. 5.1 Local specific advantages (resources endowment) ‐ Natural resources ‐ Human resources ‐ Externalities 5.2 Firm’s own unique assets – company ownership of some special asset, such as brand recognition, technical, knowledge, or management ability. Political Ideology and FDI 1. The Radical view – hostile to all FDI 2. The free market view – no barriers for FDI 3. The pragmatic nationalist view – FDI should be allowed only if the benefits outweigh costs Benefits and Cost of FDI Host country benefits 1. Resource transfer effects – FDI can bring capital, technology, and management resource to host. 2. Employment effects – for the direct effect is MNE employs a number of host country citizens. Indirect effects are; jobs are created in local suppliers as a result of investment and jobs are created because of increased local spending by MNE’s employees 3. Balance of payments effects – national account that tracks both payments to and receipts from other countries. 3 parts: current account, capital account and financial account. 4. Effects in competition and Economic growth Host country costs 1. Adverse effects on competition 2. Adverse effects on the balance of payments 3. National sovereignty and autonomy Home country benefits 1. Balance of payment effect – foreign subsidiaries remit earnings back 2. Employment effects – foreign subsidiaries import material from home country 3. Reserve resource transfer effects – MNE learns valuable skills from foreign markets that can be transferred back to home country. Home country costs 1. Balance of payment suffer – FDI’s initial capital outflow, FDI is a substitute for direct export. 2. Employment effects – FDI is seen as a substitute for domestic production. Home Policies encouraging outward FDI 1. offer insurance program to cover major types of foreign investment risk. 2. grant loans to firms wishing to created their investment aboard. 3. eliminate double taxation of foreign income. 4. apply political pressure on other nations to get them to relax their restrictions inbound investment. Home Policies restricting outward FDI 1. limit amount of capital a firm could take out of the country. 2. manipulate tax rules to make it more favorable for firms to invest at home. 3. restrict firm from investing in certain nations for political reasons. Host Policies encouraging inward FDI 1. tax concession 2. low interest loan 3. grants or subsidies Host Policies restricting inward FDI 1. Ownership restriction ‐ foreign companies are excluded from specific fields on the ground of national security or competition. ‐ foreign ownership may be permitted although a significant proportion of equity of subsidiary must be owned by local investors. 2. Performance demand – control over the behavior of the MNE’s local subsidiary, such as local content, export, technology transfer. Chapter 9 Regional economic integration The agreement between countries in a geographic region to reduce tariff and non‐tariff barriers. Level of regional integration 1. Free trade area (FTA) – remove all barriers (tariff and quotas) to trade of goods and services among members. Ex. AFTA, NAFTA, EFTA 2. Custom union – Eliminates trade barriers between member countries and adopts a common external trade policy (common tariff) which nonmembers. FTA + common trade policy. 3. Common market – allow factors of producing to move freely among members. CU + factor mobility 4. Economic union – demand a coordinating bureaucracy, member need to sacrifice of the significant amounts of national sovereignty. CM + common currency + harmonization of tax rate + common monetary and fiscal policy. 5. Political union ‐ a central political apparatus that coordinated economic, social and foreign policy. Stage of EI Abolition of tariff & quotas among members Common Tariff & Quota system Free Harmonization Harmonization
Factor of Economic of Political mobility Policy policy NO NO NO NO YES 1. FTA NO NO NO YES YES 2. Custom union NO NO YES YES YES 3. Common market NO YES YES YES YES 4. Economic union YES YES YES YES YES 5. Political union Case for Regional Integration 1. Economic case for integration – it is easier to establish a free trade and investment regime among a limited number of adjacent countries. 2. Political case for integration – increase political corporation between the neighboring states and reduce violent conflict. Impediments to integration 1. EI has cost – certain group may lose from a regional free trade agreement. 2. EI can result in a loss of national sovereignty. Case against regional integration 1. Trade creation – when high cost producers are replaced by low cost producers within free trade areas. 2. Trade Diversion – when low cost external suppliers are replaced by higher cost supplier within the free trade.  European Union (EU) – group of 27 European nations  North American free trade area (NAFTA) – USA, Canada and Mexico.  Association of Southeast Asian Nations (ASEAN) – FTA between Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. Chapter 10 Foreign Exchange Market A market for converting the currency of one country into that of another country. Exchange rate – is a simply the rate at which one currency is converted into another. 1. Spot exchange rate – rate at which a foreign exchange dealer converts one currency into another currency on a particular day. 2. Forward exchange rate – the exchange rate governing a transaction to exchange currency and execute the deal at some specific date in the future. Functions of foreign exchange market 1. Currency conversion – enables the conversion of the currency of one country into the currency of another. 4 main uses of foreign exchange market. 1.1 To covert income received from export, foreign investments, or from licensing agreements 1.2 To pay a foreign company for importing products or services 1.3 To invest spare cash for short terms in money market 1.4 Currency speculation – short term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates. Carry Trade – borrowing in one currency where interest rate are low, and then using then proceed to invest in another currency where interest rate are high. 2. Insuring against foreign exchange risk 2.1 forward exchange – occur when two parties agree to exchange currency and execute the deal a some specific date in the future at the specified forward exchange rate. 2.2 currency swap – simultaneous purchase and sale of foreign exchange for two different dates. Nature of Foreign Exchange Market ‐ foreign exchange market is not located in any one place. ‐ it is a global network of banks, brokers, and foreign exchange dealer. Three features ‐ Market never sleeps ‐ Integration of the various trading centers ‐ Most transactions involve U.S. dollars on one side Price and Exchange rate 1. The law of one price – in competitive markets free of transportation costs and barriers to trade , identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency. 2. Purchase Power Parity (PPP) – in efficient markets, the price of a ‘basket of goods’ should be equivalent in each country. Relative Price changes exchange rate will be changed 3. Money Supply and Inflation – inflation can affect exchange rate  Inflation ‐ Inflation occurs when money supply increases faster than increase in outputs. ‐ When government prints more money. ‐ Country with high inflation, its currency will depreciate. Interest rate and Exchange rate 1. Fisher effect – real interest rate should be the same in all countries to prevent arbitrage opportunity Nominal interest rate (i) = Real interest rate (r) + Inflation rate (IF) 2. International Fisher Effect (IFE) – for any two countries, spot exchange rate should in an equal amount to the difference in nominal interest rates between two countries (but the opposite direction) Investor Psychology and Bandwagon Effects ‐ Psychological factors play an important role in determining the short term movement of exchange rate.  Bandwagon effect – when traders move like a herd, all in the same direction and same time, in response to each other perceived action. Currency Convertibility  Freely Convertibility – country’s government allows both residents and nonresidents to purchase unlimited amount of a foreign currency with it.  Externally Convertibility – only nonresidents can convert their holdings of domestic currency into foreign currencies but the ability of resident to convert the currency is limited.  Nonconvertible – neither residents nor nonresidents all allowed to convert currencies.  Counter trade – trade of goods and services for others goods and serviced. Chapter 12 Strategy of International Business  Localization Strategy ‐ Local country managers have considerable autonomy over manufacturing and marketing.  Global Strategy ‐ Corporate center exercises more control over manufacturing, marketing, & product development decision. Strategy & the Firm  Strategy Position ‐ Actions that manager take to attain the goals of firm. Profitability  measured by rate of return the firm makes on invested capital (ROIC) Return on Invested Capital (ROIC) = Net Profit Total Invested Capital x 100  Profit growth  measured by percentage increased in net profits over time Determinants of Enterprise VALUE Reduce Costs Profitability Add Value & Raise Price Enterprise Value  Sell more in EXISTING markets Profit Growth  Enter NEW markets  Product Value (V) ‐ The more value customers place on a firm product, the higher price the firm can charge  Value Creation (VC) Value creation =Product’s VALUE (V) –Cost of production (C) Operations: The firm as a value chain The various value creation activities a firm undertakes 1. Primary Activities – have to do with the design, creation, and delivery of the product; it marketing; and its support and after sale service. Support Activities Company infrastructure Information systems Logistics Human resources Customer Marketing &
R&D Production
Services Sales Primary activities  Research & Development (R&D) – design of product and production process.  Production – creation of goods and services.  Marketing and Sales – can create value through brand positioning and advertising, discovering consumer needs and communicating back to G&D department.  Customer service – after sale service and support can increase value in consumers’ mind. 2. Support Activities – provide inputs that allow the primary activities to occur. Support activities can be as important as primary activities. Organization: The implementation of Strategy Make sure that the firm has a right organization structure in place to execute its strategy  Organization Architecture – can be used to refer to the totality of a firm’s organization, including formal organization structure, control systems and incentives, organizational culture, process and people. Processes Structure People
Incentives & Controls
Culture
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Controls – are the metrics used to measure the performance of subunits and make judgments about how well managers are running those subunits Incentives – are the devices used to reward appropriate managerial behavior. Processes – the manner in which decisions are made and work is performed within any organization. Organization Culture – the values and norms shared among an organization’s employees. People – the employees of the organization, the strategy used to recruit, compensate, and retain those individuals and the type of people that they are in terms of their skills, values and orientation. Supports In sum: Strategic Fit Its strategy must make sense given market condition and the organization architecture of the firm must match the operations and strategy of the firm. Supports Operation Strategy Market Fits
Conditions Strategy
Organization Supports
Architecture High Low Pressures for local cost reductions Global Expansion, Profitability, and Profit Growth 1. Expand the market for their domestic product offering by selling those products in international markets. 2. Realize location economies by dispersing individual value creation activities to those locations around the globe where there can be performed most efficiently and effectively. 3. Realize greater cost economies from experience effects by serving an expanded global market from a central location, thereby reducing the costs of value creations. 4. Earn a greater return by leveraging any valuable skills developed in foreign operations and transferring them to other entities within the firm’s global network of operations. Location Economies – cost advantages from performing a value creation activity at the optimal location for the activity. Creating a Global web – when different stages of value chain are dispersed to those locations around the globe where value added is maximized or where costs of value creation are minimized. Experience Effects – refers to systematic reductions in production costs that have been observed to occur over the life of a product.  Learning effects – cost savings that come from learning by doing.  Economies of scale – cost advantages associated with large‐scale production. Leveraging subsidiary skills – earlier discussion of core competencies is the idea that valuable skills are develop first at home and then transferred to foreign operations. Cost Pressures and Pressures for Local Responsiveness 1. Pressures for cost reductions – require a firm to try to lower the costs of value creation. 2. Pressures for local responsiveness – requires a firm to differentiate its products and marketing strategy from country to country to accommodate these factors. 2.1 Differences in customer tastes and preferences 2.2 Differences in infrastructure and traditional practices 2.3 Differences in distributions channels 2.4 Host‐government demands Choose a Strategy Global Transnational
Standardization Strategy Strategy International
Localization
Strategy Strategy Low High Pressures for local responsiveness 1. Global Standardization Strategy – a firm focus on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies. 2. Localization Strategy – Increasing profitability by customizing the firm’s goods and services so that they provide a good match to tastes and preferences in different national markets. 3. Transnational Strategy – Attempt to simultaneously achieve low costs through location economies, economies of scale, and learning effects while also differentiating product offerings across geographic markets to account for local differences and fostering multidirectional flow of skills between different subsidiaries in the firm’s global network of operation. 4. International Strategy – a firm trying to create value by transferring core competencies to foreign markets where indigenous competitors lack those competencies. Strategic Alliances Refer to cooperative agreements between potential or actual competitors. The advantages of strategic alliances 1. It may facilitate entry into a foreign market 2. Allow firms to share the fixed cost of developing new products or processes. 3. Is a way to bring together complementary skills and assets that neither company could easily develop on its own. 4. Will help firm establish technological standard for the industry that will benefit to the firm. The disadvantages of strategic alliances 1. They give competitors low‐cost route to new technology and markets. 2. Unless a firm is careful, it can give away more than it receives. Making Alliances work  Partner Selection – a good partner helps firm achieve its strategy goals and partner must capabilities that the firm lack and that it values. Also, good partner share the firm’s vision for the purpose of the alliance.  Alliance Structure – alliances can be designed to make it difficult to transfer technology not mean to be transferred. Second, both parties to an alliance can agree in advance to swap skills and technologies that the other coves, thereby ensuring a chance for equitable gain.  Managing the Alliance – managers need to make allowances for these in dealing with their partner. Firm must try to learn from its partner and then apply the knowledge within its own organization. Chapter13: Entering Foreign Markets Basic Entry Decisions ‐ Which Foreign Markets? Which markets firm want to enter? ‐ Timing of Entry Entry is early when an international business enters a foreign market before other foreign firms and late when it enters after other international businesses have established themselves. ‐ Scale of Entry Large Scale – commitment of significant resources. Small Scale – allows firm to learn about foreign market before deciding. Entry Modes ‐ Exporting Advantage – lower cost than establishing subsidiaries in host country. Disadvantage – lower‐cost manufacturing locations can be found aboard. ‐ Turnkey Project The contractor agrees to handle every detail of the project for the client including the training of operating personnel. Advantages – earning great economic return from its know‐how assets. ‐ useful where FDI is limited by host‐government regulation. ‐ less risk Disadvantage – may create competitor in the future. ‐ Licensing An arrangement whereby a licensor grant the right to intangible property to another licensee for a specified period, and in return, the licensor receives a royalty fee from the licensee. Advantages – firms does not have to bear the development cost and risk associated with opening a foreign market. ‐ firm can avoids barriers to trade and investment Disadvantages – firm does not have tight control over manufacturing, marketing and strategy. ‐
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Franchising A specialized form of licensing in which the franchiser not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business. Advantage – can avoid costs and risks of opening up a foreign market. Disadvantages – service firms don’t need to coordinate the manufacturing. Joint Venture Establishing a firm that is jointly owned by two or more otherwise independent firms. Advantages – benefit from a local partner’s knowledge ‐ share costs and risks of opening a foreign market with a local partner. ‐ firms can avoid the risk of nationalization or other adverse government interference. Disadvantages – risks from giving control of its technology to its partner ‐ no tight control. ‐ can lead to conflicts and battle between two firms. Wholly Owned Subsidiaries 1. Greenfield Venture 2. Acquisition Advantage – reduce risks of losing control over its core competence. ‐ firm have tight control. ‐ get 100% share in profits. Disadvantage – firms bear the full costs and risks of setting up overseas operations. Chapter14: Exporting, Importing, and Countertrade Lack of Trust ‐ Exporters prefer to be paid in advance ‐ Importer prefer to pay after shipment arrives Three Important Documents ‐ Letter of credit (L/C) The bank will pay a specified sum of money to a beneficiary, normally the exporter, on presentation of particular, specified document. ‐ Bill of Exchange (B/E) An order written by an exporter instructing an importer to pay a specified amount of money at a specified time. ‐ Bill of Lading (B/L) A document issued to the exporter by the common carrier transporting the merchandise. Countertrade ‐ Barter Direct exchange of goods and services between two parties without a cash transaction. ‐ Counterpurchase Firm agrees to purchases a certain amount of specified product back from a country which a sale is made. ‐ Offset Similar to counterpurchase, but the firm can buy any products from the country which it sells. ‐ Switch Trading The use of specialized third‐party‐trading house in a countertrade arrangement Arise when a firm enters a counterpurchase or offset. ‐ Compensation or Buyback A firm builds a plant or supplies technology, equipment training, or other services to the country. Reason for Countertrade ‐ Importing countries lacks the hard currency to pay for imports. ‐ Government limit the convertibility of its currency. ‐ Countertrade may be required by the government of the country. Pros of Countertrade ‐ A way for firms to finance an export deal when other means are not available. ‐ Can be used to capture demand to preempt rival. Cons of Countertrade ‐ Most firms prefer to be paid in hard currency. ‐ It may involve the exchange of unusable or poor‐quality goods. Chapter16: Global Marketing and R&D Marketing Mix (4P) ‐ Product attributes (product) ‐ Distribution strategy (place) ‐ Communication strategy (promotion) ‐ Pricing strategy (price) Market segmentation Identifying distinct group of consumers whose purchasing behavior differs from others in important ways ‐ Geography – แบ่งตามพื ้นที่ ‐
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Demography – sex, age, income, race and education level Sociocultural factors – social class, values, religion, lifestyle Psychological factors – personality Product attributes Products sell well when their attributes match consumer needs ‐ Cultural Difference – most important aspect is the impact of tradition on eating habit ‐ Level of Economic Development 1. Less‐developed countries 2. High‐developed countries ‐ Product and Technical Standards Distribution Strategy The mean it chooses for delivering the product to the consumer. Differences between countries 1. Retail Concentration Concentrated System – a few retailers supply most of the market Fragmented System – many retailers supply a market ‐ no one of which has a major share of the market. 2. Chanel Length Number of intermediaries between the producer and the buyer. Short Chanel – few intermediaries Long Chanel – many intermediaries 3. Chanel Exclusivity Retailers tend to prefer to carry the products of established manufacturers rather than unknown firm. 4. Channel Quality The expertise and skills of established retailers in a nation. Communication Strategy ‐ Personal Selling ‐ Sales Promotion ‐ Direct Marketing ‐ Advertising Barriers to International Communication 1. Culture Barriers Because of culture difference, a message that means one thing in one country many mean something different in another. 2. Source and Country of Origin Effects Source Effects – occur when the receiver of message evaluate the message based on the status or image of sender. Country of Origin Effect – place of manufacturing influences product evaluation. 3. Noise Levels The amount of other message competing for a potential consumers’ attention. Tend to reduce the probability of effective communication. Push Versus Pull Strategy ‐ Push Strategy Design to push channel members to carry a product and promote it to final users. Emphasizing personal selling. ‐ Pull Strategy Emphasizing mass media advertising. Generate buyer demand to pull products through distribution channels. Factors that determine effectiveness of Push and Pull strategies ‐ Product types and Consumer sophistication ‐ Channel Length ‐ Media Availability ‐
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Push Strategy For industrial products or complex new product. Low literacy consumers. When distribution channel is short. Few print or electronic media are available. ‐
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Pull Strategy For consumer goods. High literacy consumers. When distribution is long. Sufficient print or electronic media are available. Pricing Strategy 1. Price Discrimination (Dumping) ‐ Charging consumers in different countries different prices for the same product. 2. Strategic Pricing ‐ Predatory Pricing Reduce price below fair market value as a weapon to drive competitors out of the market. ‐ Multi‐point Pricing A firm’s pricing strategy in one market may have an impact on a rival’s pricing strategy on another market. ‐ Experience Curve Pricing Pricing low worldwide to build global sales volume as rapidly as possible. 3. Regulatory Influence on Price ‐ Antidumping duty Set a floor under export prices.