Introduction to International Business

1. Introduction to International Business Final Review April 27, 2007 Sanny Liao/Brian Chen

2. Exam Format • Exactly the same as the midterm • Non-cumulative. Covers chapters 12, 14, 15, 16, 17, 18, and 20 • Exam Format • Part A: 22 Multiple choice questions • Part B: Answer 2 of 3 questions from Hill text • Part C: Answer 1 of 2 questions from articles • Part D: Answer 1 of 2 questions from the cases

3. Chapter 12 The Strategy of International Business --Overview • Focus shift • from the environment  actions managers can take to compete more effectively as an international business • This chapter looks at how firms can increase their profitability by • expanding their operations in foreign markets • the different strategies that firms pursue when competing internationally • and the various factors that affect a firm’s choice of strategy.

4. Chapter 12 Review • Strategy and the Firm • Strategy • – set of action managers can take to attain the goal of the firm – in most case, it is to maximize profitability • Value Creation • – a way to increase profitability • Strategic position - firms should be explicit about it choice between value creation, and configure its internal operation to support their choice. • Operations: The Firm as a Value Chain • Global Expansion, Profitability and Profit Growth • Expanding the Market: Leveraging Products and Core Competencies • Location Economies • – performing a value creation activity in the optimal location for that activity • Experience Effects • – systematic reduction of costs over the life of a product through learning effects and economies of scale • *2 main types of competitive pressure - cost pressures and pressures for local responsiveness • *Choosing a Strategy • Global Standardization Strategy • High cost pressures, low customization pressures • Localization Strategy • Low cost pressures, high customization pressures • Transnational Strategy • High cost pressures, high customization pressures • International Strategy • Low cost pressures, low customization pressures

5. Chapter 14 – Entry Strategy and Strategic Alliances • Key concept: first mover advantage, first mover disadvantage, core competencies • Firms must consider 3 basic decision when it wants to expand into foreign markets • Which foreign market? • When to enter (1st mover advantages and disadvantages) • Scale of entry and subsequent strategic commitment

6. Chapter 14 – Modes of Entry • 5 modes of entry (know the benefits and costs, p494) • Exporting • Turnkey projects • Licensing • Franchising • Joint ventures • When should a firm choose greenfield or acquisition ventures? • Strategic Alliances • Cooperative agreements between potential or actual competitors • Advantages: • Facilitate entry into market • Share fixed costs • Bring together skills and assets that neither company has or can develop • Establish industry technology standards • Disadvantages: • Competitors get low cost route to technology and markets

7. Chapter 15 Exporting, Importing and Countertrade - Overview • This chapter discusses how exporting is carried out • Exporting is not just for large enterprises. This chapter covers the problems that small and large exporting firms face and how they address these problems.

8. Chapter 15 Review • Exporting can be very profitable, but firms are often slow to recognize these opportunities, are ignorant about the market that they are going into, and the procedures to export, etc. • Solution: • Improving Export Performance • Information Sources (DOC: ITA/ USFCSA, SBA, state/city agencies, commercial banks) • Export Management Companies (EMC) • Choosing exporting strategies carefullly • Export and Import Financing • Lack of Trust/ Letter of Credit • Draft/ Bill of Lading • Know the Typical International Trade Transaction • Export Assistance • Export–Import Bank/ Export Credit Insurance

9. Chapter 16 – Global Production, Outsourcing, and Logistics • Overview: this chapter discusses factors that firms should consider in determining the optimal way to manage production internationally • 4 Main topics: • Where should production be located at? • The evolving strategic role of foreign factories • Benefits and costs of outsourcing • How to manage a global supply chain efficiently?

10. Chapter 16 – Review • Factors that firms should consider in determining where to locate production • Country factors (economic, political, and cultural differences, trade barriers, location externalities, exchange rates) • Technological factors (high/low fixed costs, minimum efficient scale, feasibility of flexible manufacturing and mass customization) • Product factors (value to weight ratio, universality) • Evolving role of foreign factories • Upward migration from provider of cheap labor to research centers, economic development of developing countries • Outsourcing dilemma – essentially a make-or-buy decision • Also evolved over time • When to make? When to buy? • Things to recognize when managing a global supply chain • We like “just-in-time” systems because it reduces inventory holding costs and has the potential to help firms improve product quality • BUT “JIT” leaves firms with no buffer stock of inventory • Information technology can aid the functioning of “JIT”

11. Chapter 17 Global Marketing and R&D – Overview • Focus: • how marketing and R&D can be performed so they will reduce the costs of value creation and add value by better serving customer needs. • Standardization or not? • By mass-producing a standardized output, the firm can realize substantial unit cost reductions from experience curve and other scale economies. • But ignoring country differences in consumer tastes and preferences can lead to failure. • Thus, an international business’s marketing function needs to determine when product standardization is appropriate and when it is not, and to adjust the marketing strategy accordingly.

12. Chapter 17 Review • The Globalization of Markets and Brands • But differences persist… • Market Segmentation • Groups of consumers who purchasing behavior differs from others • Product Attributes • Cultural Differences • Fish cakes in Great Britain, Coq au vin in France • Economic Development • Top of the line four-wheel-drive SUVs in the US only • Product and Technical Standards • TV signals – NTSC in US and some Asian countries, PAL/SECAM in Europe • Distribution Strategy • Differences between Countries • Retail concentration; channel length; channel exclusivity; channel quality • Choosing a Distribution Strategy • Depends on the factors above • Communication Strategy • Barriers to International Communication • Benetton Ads with varying success in different countries • Push versus Pull Strategies • What are they? When is one preferable over the other? • Pricing Strategy • Price Discrimination • What are the necessary conditions? • Strategic Pricing / Regulatory Influences on Prices • What are the different pricing strategies? What influence does regulation have on prices?

13. Chapter 18 – Global Human Resource Management • Overview: this chapter discusses how firms can most effectively manage its human resource internationally • Firms must customize its HR strategies to fit its firm-wide international strategies

14. Chapter 18 – Review • Firms should first decide on its international strategy: • Global Standardization Strategy • Localization Strategy • Transnational Strategy • International Strategy • Firms should then decide its international human resource management strategy according to a benefit and cost analysis (p623, table 18.1) • Ethnocentric • Polycentric • Geocentric • There is a high attrition rate about expatriates, why in Japan, why in the U.S.? • Ways to mitigate the attrition of expatriates • Selection & training • Why is performance appraisal in foreign locations tough? • What are the components of expatriate pay?

15. Chapter 20 – Financial Management in the International Business • Involves a set of 3 questions • Investment decisions – what activities to finance • Financing decisions – how to finance • Money management decisions – how to manage the firm’s financial resources most efficiently

16. Investment Decisions • Evaluate the expected profitability of investments to the parent company through capital budgeting • Quantify the benefits, costs and risks of an investment • We care about cash flow to the parent company more than the to the project itself • Investment in Iraq • Adjust for political risks • Investment in Argentina (has a history of currency devaluation) • Adjust for economic risks

17. Financing Decisions • Firms who need money to invest can obtain capital through 2 main ways • Debt issue – cost is interest rate • Equity issue – cost is dividend and expected capital gain • The cost of capital is lower if a firm can raise money internationally (especially true for firms in developing countries, but is limited by government regulations and exchange rate uncertainties) • The debt/equity mix vary across countries

18. Global Money Management: The Efficiency Objective • Def: Money Management decisions • Attempt to manage the firm’s global cash resources most efficiently through minimizing cash balances and reducing transaction costs. • Cash balances is necessary for firm operations but offer very little return. Transferring capital from one location to anther involves transaction costs • Def: Transaction Costs are costs of exchange, including commissions and transfer fees. • Firms can use centralized depositories and multilateral netting to more efficiently manage the global cash resources • Centralized depository – more efficient for firms to hold all their cash in one centralized depository than to hold them in many different locations • Multilateral netting – pay the net difference in cash flow among various locations, rather than making multiple payments

19. The Tax Objective • Tax credit – allows an entity to reduce the taxes paid to the home government by the amount of taxes paid to the foreign government • Tax treaty – an agreement between two countries where the income is earned • Deferral principle – parent companies are not taxed on foreign soruce income until they actually receive a divident

20. Managing the Differences in Tax Rates Across Countries • International businesses can transfer funds from one location to another via unbundling many techniques • Dividend remittances • Royalty payments and fees – remuneration paid to the owners of technology, patents, or trade names for use – are often tax-deductible locally • Transfer prices – the price at which goods and services are transferred between entities within the firm (can be used to reduce tax liabilities, reduce exposure to currency devaluations, reduce import duties when an ad valorem tariff is in force) • Fronting loans – loan between a parent and it subsidiary channeled through a financial intermediary (again can be used to reduce tax liabilities)

21. Suggestion on how to study for material in the book • Concentrate on the material covered in these slide and mini-summaries after each section (not at the end of the chapter) provided in the book for a general idea

22. Articles to Focus On • Wireless Wonder • The Future of Fast Fashion • With Profits Elusive, Wal-Mart to Exit Germany • Wal-Mart to Enter India in Venture • Western Firms Find Hiring, Retention in China Surprisingly Tough

23. Cases to Focus On • Diebold • Megahertz Communications • Competitive Advantage at Dell, Inc. • Molex

24. Good Luck!