Chapter 13: Strategy of International Business (Lecture 7)

Definition of Strategy: Actions managers take to attain the goals of the firm. Strategies important to increase profitability and profit growth Profitability: Add value, lower costs Profit Growth: sell more in existing markets, expand internationally.

Value Chain Analysis: Firms need to create value Value= V-C (price charge-production costs) High Profits= More Value at Lower Costs Profits increased by: Differentiation/ Low Cost Strategy Value Chain: firms operations composed of series of activities Value creation activities: Primary and Support Primary Activities: R&D> Production> Marketing/Sales> Customer Service Support Activities: Information Systems>logistics> Human Resource

Two competitive pressures in global marketplace: Pressures for cost reductions Pressures to be locally responsive (adapt to meet local demand)

4 Basic Strategies used by MNEs to compete internationally: Appropriateness of each strategy depends on the 2 pressures discussed above. 1. 2. 3. 4. Global Standardization- High pressure for cost reduction, Low local responsiveness International Low cost and local responsiveness pressures Transnational- High cost and local responsiveness pressures Localization- High local responsiveness, Low cost reduction pressure Chapter 15: Entry Strategy & Strategic Alliances (Lecture 8) Modes (6) for entering a foreign market: Licensing- licensor grants rights to intangible property for a specified time for a royalty fee (Patents, formulas, processes, designs, copyrights, trademarks, inventions) Joint Venture- with a host country firm. Jointly owned by 2 or more firms 50:50 Franchising- A form of licensing in which the franchisor not only sells intangible rights but must abide by strict rules given. Exporting- common first step for manufacturing firms. Turnkey projects- contractor handles everything for client.

Wholly-Owned Subsidiary- firm owns 100% of stock. New operation. Or Acquire established firm

** Firms who want to expand international, must first decide which markets to enter, when to enter and on what scale and which entry mode to use. Advantages and Disadvantages of First Movers: Once attractive markets are identified, must consider timing of entry. (First or last) First Movers: Advantages Build sales volume experience 1st- Cost advantage over later entrants-ride down the experience curve b4 rivals Obstruct rivals by creating strong brand name Create switching costs to tie customers w/ you making it difficult for later entrants to get them Disadvantages Pioneering Costs- must take time, effort and expense to learn about market since business system is so different Cost of business failure-if makes mistakes Cost of promoting / establishing/ educating about product

1. Choose Market 2. Decide Timing of Entry 3. Decide scale of entry

Chapter16: Exporting, Importing & Countertrade (Lecture 9)

Letter of Credit: are guarantees of payment to help you make purchases or transact business with companies with whom you have limited trading experience or credit history 3rd party in-between that ensures both operating parties receive their payments and goods, usually by banks. (An LC is issued by a
bank at the request of an importer) Flow Chart of an LC Transaction:

1. Both parties must agree to ship under LC. Then relevant info is exchanges. The importer requests his bank to issue LC.
2. 3. 4. 5. 6. 7. 8. 9. Importers bank agrees to issue LC based on exporter creditworthiness, stating that the bank will pay the exporter for the goods as long as it follows instructions. The LC is then sent to the exporter bank. Exporters bank informs him that LC is received, and he can go ahead and ship the wheat. Ships wheat to importer Once shipment is sent, exporter presents draft to his bank for payment in accordance to the terms of the LC and attaches required doc as Bill of Lading. His bank forwards the draft and docs to the importers bank Importers bank will honor the draft, if all terms are met, he will send payment to exporter bank. Exporter bank will give exporter the payment Importers bank will collect payment from importer.

Countertrade: Exchanging goods or services that are paid for, in whole or part, with other goods or services. OR: agreements that facilitate the trade of goods and services for other goods and services when they cannot be traded for money. Forms of Countertrade: 1. 2. 3. 4. Barter: Direct exchange of goods/services without cash transaction. One time only deals usually. Counter purchase: Reciprocal buying agreement. Firm agrees to purchase certain amount of materials back from a country to which a sale is made. rd Switch Trading: Use of specialized 3 party trading house in a countertrade agreement. Happens when rd 3 party buys firms counter purchase credits and sells them to another firm for better use. Buyback- firm builds a plant in a country and agrees to take % of output as partial payment for contract.

Chapter 18: Global Marketing/ R&D (Lecture 10) 1. Four differences in distribution systems. Retail Concentration- Concentrated/Fragmented - Concentrated: few retailers who supply market (developed country) - Fragmented: many retailer, none have majority share (developing country) Channel Length- number of intermediaries btw producer and consumer. Short/Long - Short Channel: producer sells directly to consumer. (concentrated system) - Long Channel: producer sells to import agent, wholesaler, and retailer. (fragmented system) Chanel exclusivity- how difficult for outsiders to access. (japan system very exclusive) Channel Quality- ability to support products of IB 3 Barriers to International Communication: 1. Cultural Barriers: difficult to communicate across cultures. Message may be interpreted different in another country, hence firms much develop cross literacy and use local input when creating message. 2. Source & Country of Origin Effects: source effect- when receive evaluates message on status of sender. COE- location of manufacturing influences product evaluations 3. Noise Levels: competition for consumers attention. 3 Aspects of Strategic Pricing: 1. Predatory Pricing: drive competitors out of market by using profits from another market until they leave. Then once out, raise prices, earn more profits. 2. Multi-point Pricing: pricing strategy in 1 market may have impact on rivals pricing strategy in another market. 3. Experience curve pricing: Low prices worldwide to build global sales volume fast, incur losses initially. (further on experience cure have cost advantage)

Chapter 8: Foreign Direct Investment (Lecture 11) Definition of FDI: An investment made by a company based in one country into a company in another country to acquire lasting interest. Entities are considered making foreign direct investment if they typically have a significant degree of influence, management control and own at ownership share of least 10% Five (5) Types of FDI: Greenfield Investment New venture and build new companies in foreign country from scratch. Multinational Co enter developing countries Combine with or take over an existing firm in foreign country

Merger and Acquisition

Horizontal Integration Vertical Integration Joint Venture

Acquisition of additional business activities that are alike Integration of multiple stages of production Business arrangement in which 2 parties pool resources together.

Advantages and Disadvantages of FDI: Advantages of FDI: Host Country Resource transfer Effects (capital, tech, mgmt) Employment Effects (more jobs) Balance of payment Effects (current acc surplus) Home Country Gains from learning valuable skills from foreign markets can be t/f back to home country Employment effects that arise from outward FDI Effect on capital acc. of home country balance due to inward flow of foreign earnings increase

Effects on competition & economic growth Disadvantages of FDI: Host Country Inward FDI= 3 costs Adverse effects of FDI on competition within host nation (foreign co. may have more power) Adverse effects on the balance of payments (when foreigner imports inputs, host country had debit on current account balance of payments Perceived loss of national sovereignty and autonomy ( foreigner makes decision that will affect the host country. Home Country Employment can be negatively affected if FDI is substitute for domestic production. Home countrys balance of payments can suffer

Or may stimulate economic growth and employment in the home country by freeing resources to specialize in activities where the home country has comparative advantage.

Acquisition VS Green Field Investment: Acquisition: simply purchase an existing company in the foreign country. Greenfield: to create a new site of operation from the start in a foreign country. Businesses tend to be more inclined to acquire an existing foreign business in situations where it is difficult to enter foreign market. It makes in simpler and easier and will have resources already. It may also have a good name, intangible assets and such. Means Less cost, less risk. Also, it may be the only viable way to enter a foreign market.

3 Theoretical Approaches to FDI: 1. Radical View: says the MNE is an instruments of domination and a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries. 2. Free Market View- international production should be distributed among countries according to the theory of comparative advantage. 3. Pragmatic Nationalism- FDI has both benefits (inflows of capital, tech, skills, jobs) and costs (repatriation of profits to the home country and a negative balance of payments effects) This approach states that FDI should be allowed only if Benefits outweighs costs

Chapter 19: Global Human Resource Management (Lecture 12) Staffing Policy Concerned with section of employees for certain jobs. Tool for developing and promoting firms corporate culture Strong culture and help firm implement its strategy

3 Main Approaches to Staffing Policy: 1. Ethnocentric Approach: all key mgmt. position are filled by parent-country nationals 2. Recruit host country nationals to manage subsidiaries in their own country. Parent national for positions at headquarters. 3. Geocentric Approach: seek the best people, regardless of nationality.

Expatriate: staff temporarily is working in a country, other that country of legal residence. Inpatriate: international staff working in home country (headquarters) of organization.