Final Exam MGMT Ch 8-13 Chapter 8: Regional Economic Integration Regional trade agreements lower trade barriers and open new markets. Regional economic integration- process whereby countries in a geographic region cooperate to reduce or eliminate barriers to the international flow of products, people, or capital. Also know as regionalism. Regional trading bloc- group of nations in a geographic region undergoing economic integration. Levels of Regional Integration Free trade area- countries seek to remove all barriers to trade between themselves, but each country determines its own barriers against nonmembers. Lowest level of economic integration. Customs union- countries remove all barriers to trade between themselves but erect a common trade policy against nonmembers. Main difference: they agree to treat trade with nonmember nations in a similar manner. Common market- countries remove all barriers to trade and the movement of labor and capital between themselves but erect a common trade policy against nonmembers. Difference: adds the free movement of important factors of production. Difficult to attain. Economic union- countries remove barriers to trade and the movement of labor and capital, erect a common trade policy against nonmembers, and coordinate their economic policies. Member nations have to create a common currency. Political union- economic and political integration whereby countries coordinate aspects of their economic and political systems. Member nations accept a common stance on economic and political matters regarding nonmember nations. Benefits of Regional Integration Gains in output and consumption Greater specialization, increased efficiency, greater consumption, and higher standards of living. Trade creation Increase in level of trade between nations that results from regional economic integration. Wider selection of goods and services not available before. Lower costs after removal of trade barriers?lower priced products tend to drive higher demand for goods and services b/c they increase purchasing power. Greater consensus Easier to gain consensus from fewer members versus the 153 countries comprising the WTO. Political cooperation Employment opportunities Drawbacks of Regional Integration Trade diversion Diversion of trade away from nations not belonging to a trading bloc and toward member nations. Can actually result in increased trade with a less-efficient producer within the trading bloc and reduced trade with a more-efficient, non member producer. Shifts in employment Loss of national sovereignty European Union Most sophisticated and advanced example of regional integration The Single European Act and the Maastricht Treaty were two important milestones contributing to the continued progress of the EU. Single European Act- remove remaining trade barriers, increase harmonization, and thereby enhance the competitiveness of European companies. Maastricht Treaty- called for banking in a single, common currency, circulation of coins and paper currency. Set up monetary and fiscal policies. Called for political union of the nations. European monetary union- European Union plan that established its own central bank and currency. Management implications of the Euro The euro removes financial obstacles created by the use of multiple currencies. Completely eliminates exchange-rate risk for business deals. Reduces transaction costs by eliminating cost of conversion. Makes prices more transparent, making it difficult to charge different prices in different markets. Structure of the EU European Parliament- 800 members elected by popular vote within each member nation. Voice their political views on EU matters. Council of the EU- legislative body of the EU. European Commission- executive body of the EU. Appoint the president and commissioners. Court of Justice- court of appeals. Court of auditors- auditing the EU accounts and implementing budgets. NAFTA?free trade agreement Canada, Mexico, and the U.S. Must abide by local content requirements and rules of origin. ?certificate of origin? Opponents claim NAFTA created job losses and damages the environment MERCOSUR (Southern Common Market) Argentina, Brazil, Paraguay, Uruguay, Venezuela and associate members. Acts as a customs union Most powerful trading bloc in all of Latin America FTAA (Free Trade Area of the Americas) Objective is to create the largest trade area on the planet Would comprise 34 nations and work alongside existing trade blocs Likely that it will be many years before such an agreement will be realized. ASEAN (Association of Southeast Asian Nations) 10 ASEAN countries including: Indonesia, Philippines, Malaysia, Singapore, and Thailand. Main objectives: Promote economic, cultural, and social development in the region Safeguard the region?s economic and political stability Serve as a forum in which differences can be resolved peacefully China, Japan and South Korea accelerating their efforts to join APEC (Asia Pacific Economic Cooperation) 21 members Desires to strengthen the multilateral trading system and expand the global economy by simplifying and liberalizing trade and investment procedures among member nations. Hopes to have completely free trade and investment by 2020. Chapter 9 International Financial Markets The two interrelated systems that comprise the international financial markets are the international capital market and the foreign exchange market. International Capital Market Capital market- system that allocates financial resources in the form of debt and equity according to their most efficient uses. Purposes of National Capital Market Two primary means by which companies obtain external financing: debt and equity. Debt- loan in which the borrower promises to repay the borrowed amount (principal) plus a predetermined rate of interest. Normally takes the form of bonds- instrument that specifies the timing of principal and interest payments. Equity- part ownership of a company in which the equity holder participates with other part owners in the company?s financial gains and losses. Normally takes the form of stock- shares of ownership in a company?s assets that give shareholders a claim on the company?s future cash flows. Rewarded with dividends- payments made out of surplus funds-not guaranteed. Liquidity- ease with which bondholders and shareholders may convert their investments into cash. Purposes of the International Capital Market International capital market- network of individuals, companies, financial institutions, and governments that invest and borrow across national boundaries. Expands money supply for borrowers Reduces cost of money for borrowers Reduces risk for lenders Investors enjoy a greater set of opportunities from which to choose. Reduce portfolio risk by spreading their money over greater number of instruments. Investing in international securities benefits investors because some economies are growing while others are in decline Forces expanding the International Capital Market Information technology Deregulation Financial instruments Securitization- unbundling and repackaging of hard-to-trade financial assets into more liquid, negotiable, and marketable financial instruments. World Financial Centers The world?s three most important financial centers are London, New York, and Tokyo. Offshore financial centers- country or territory, who financial sector features very few regulations, and few, if any, taxes. Sources of funding for companies with multinational operations. Main Components of the International Capital Market The international bond, international equity, and Eurocurrency markets International bond market- market consisting of all bonds sold by issuing companies, governments, or other organizations outside their own countries. Eurobond- bond issued outside the country in whose currency it is denominated. Eurobonds account for 75-80% of all international bonds. Traditional markets: Europe and North America. Foreign bonds- bond sold outside the borrower?s country and denominated in the currency of the country which it was sold. Yen-denominated bond issued by the German carmaker BMW in Japan?s domestic bond market. Account for about 20-25% of international bonds. Foreign bonds are subject to the same rules and regulations as the domestic bonds of the country in which they are issued. Yankee bonds- foreign bonds issued in U.S. Samurai bonds- foreign bonds issued in Japan Bulldog bonds-?? issued in United Kingdom Dragon bonds-?? issued in Asia outside Japan International equity market- all stocks bought and sold outside the issuer?s home country. Stock exchanges that list the greatest number of companies from outside their own borders are Frankfurt, London, and New York. Eurocurrency market- all the world?s currencies that are banked outside their countries of origin. U.S. dollars deposited in a bank in Tokyo are called Eurodollars and British pounds deposited in New York are called Europounds. Japanese yen deposited in Frankfurt are called Euroyen. Valued at around 6 trillion with London accounting for about 20% of all deposits. The main appeal of the Eurocurrency market is the complete absence of regulation, which lowers the cost of banking. Deposits primarily from four sources: Governments with excess funds Commercial banks with large deposits of excess currency International companies with large amounts of excess cash Extremely wealthy individuals Interbank interest rates- rates that the world?s largest banks charge one another for loans. Foreign Exchange Market Foreign exchange market- market in which currencies are bought and sold and their prices are determined. Exchange rate- rate in which one currency is exchanged for another. Bid quote- price at which it will buy Ask quote- price at which it will sell Bid-ask spread- difference between the two Functions of the Foreign Exchange Market Not really a source of corporate finance. It facilitates corporate financial activities and international transactions. Investors use the FEM for four main reasons: Currency conversion Currency hedging- practice of insuring against potential losses that result from adverse changes in exchange rates. Currency arbitrage- instantaneous purchase and sale of a currency in different markets for profit. Interest arbitrage- profit-motivated purchase and sale of interest-paying securities denominated in different currencies. Currency speculation- purchase or sale of a currency with the expectation that its value will change and generate profit. How the Foreign Exchange Market Works Quoting Currencies There are two components to every quoted exchange rate: the quoted currency and the base currency. Quoted currency- the numerator in a quoted exchange rate, or the currency with which another currency is to be purchased. Base currency- the denominator, or the currency that is to be purchased with another currency. Yen/dollar exchange rate of Y110/$ means 110 yen are needed to buy one dollar. Direct and Indirect rate quotes The practice of quoting the U.S. dollar in direct terms is called U.S. terms. Direct quote on the numerator and an indirect quote of the denominator. Direct quote = 1/ Indirect quote Indirect quote= 1/ direct quote Example: Given an indirect quote on the U.S. dollar of Y106.81/$. Divide Y106.81 into 1 $1/ Y 106.81= $.0009362/Y Exchange-rate risk (foreign exchange risk)- risk of adverse changes in exchange rates. Cross-rate- exchange rate calculated using two other exchange rates. Spot rate- exchange rate requiring delivery of the traded currency within two business days. Forward rates- exchange rate at which two parties agree to exchange currencies on a specified future date. Based upon expectations of a country?s present and future economic conditions as well as social and political situation. Forward contract- requires the exchange of an agreed-upon amount of a currency on a agreed-upon date at a specific exchange rate. Commonly signed for 30,90, and 180 days in the future Belong to a family of financial instruments called derivatives- instruments whose value derives from other commodities or financial instruments. If forward rate is higher that the spot rate, the currency is trading at a premium If forward rate is lower than the spot rate, it is trading at a discount. Swaps, Options, and Futures Used in the forward market Currency swap- simultaneous purchase and sale of foreign exchange for two different dates. Currency option- right, or option, to exchange a specific amount of currency on a specific date at a specific rate. Currency future contracts- contract requiring the exchange of a specific amount of currency on a specific date at a specific exchange rate, with all conditions fixed and not adjustable. Foreign Exchange Market Today 3 countries account for more than half of all global currency trading: United Kingdom, United States, and Japan. Financial capitals: London, New York, Tokyo. U.S. dollar is the currency dominates the foreign exchange market. U.S is the world?s largest trading nation. Vehicle currency- currency used as an intermediary to convert funds between two other currencies. Institutions of the Foreign Exchange Market The Interbank Market- market in which the world?s largest banks exchange currencies at spot and forward rates. Securities exchange- exchange specializing in currency futures and options transactions Over-the counter market- decentralized exchange encompassing a global computer network of foreign exchange traders and other market participants. All transactions can be performed in the OTC market. Currency Convertibility Convertible (hard) currency- currency that trades freely in the foreign exchange market, with its price predetermined by the forces of supply and demand. Goals of Currency Restriction Preserve a country?s reserve of hard currencies with which to pay debts owed to other nations Preserve hard currencies to pay for imports and to finance trade deficits. Protect a currency from speculators. Keep resident individuals and businesses from investing in other nations. Countertrade- practice of selling goods and services that are paid for, in whole or in part, with other goods and services. Barter- goods exchanged for other of equal value. Countertrade is one way to get around national restrictions on currency convertibility. Chapter 10 Weak Currency- Valued low relative to other currencies. Strong Currency- Valued high relative to other currencies. When a country?s currency is weak, the price of its exports on world markets declines and the price of its imports rise When a country?s currency is strong, the price of its exports on world markets rise and the price of imports declines A company can improve profits if it sells in a country with a strong currency, while paying workers at home in its weak currency. Devaluation- The intentional lowering of a currency?s value by the nation?s government. This lowers the price of a country?s exports on world markets and increases the price of imports. Revaluation- The intentional raising of a currency?s value. Increases the price of exports and reduces the price of the imports. Translating subsidiary earnings from a weak host country currency into a strong home currency reduces the amt of these earnings when stated in the home currency, and vice versa. Law of one price? Says that when price is expressed in a common currency, an identical product must have an identical price in all countries. (for this principle to apply, products must be identical in quality and content in each country and be entirely produced within each country Purchasing Power Parity (PPP) ? The exchange rate between 2 nations? currencies that is equal to the ratio of their price levels. Law of one goods holds for single products, PPP is meaningful only when applied to a basket of goods Rate of inflation - inflation is the result of the supply and demand for a currency. If additional money is injected into an economy that is not producing greater output, people will have more money to spend on the same amount of products as before Impact of money-supply decisions: Because of damaging effects of inflation governments try to manage the supply of and demand for the currencies. They do this using monetary and fiscal policies to influence?s the nation?s money supply Monetary policy ? refers to activities that directly affect a nation?s interest rates or money supply. Selling government securities reduces a nation?s money supply because investors pay money to the government?s treasury to acquire the securities. Buying government securities on the open market, cash is infused into the economy and the money supply increases Fiscal policy ? involves using taxes and government spending to influence the money supply indirectly Ex) to reduce the amount of money in the hands of consumers, governments increase taxes; lowering taxes increases the amount of money in the hands of consumers Governments can also increase their spending activities to increase the amount of money circulating in the economy or cut gov. spending to reduce it Inflation occurs when money is injected into a static economy, or when employers raise wages to attract employees and then pass increased labor costs on to consumers. Interest rates affect inflation by affecting the cost of borrowing money. Low interest rates encourage spending and higher debt, whereas high rates prompt savings and lower debt. Because real interest rates are theoretically equal across countries, a rate difference between 2 countries must be due to different expected rates of inflation. A country that has inflation higher than that of another country should see the relative value of its currency fall. Role of Interest Rates: Fisher Effect?Principle that the nominal interest rate is the sum of the real interest rate and the expected rate of inflation over a specified period. Nominal interest rates = real interest rate + inflation rate Explains relationship between inflation and interest rates International Fisher Effect?Principle that a difference in nominal interest rates supported by 2 countries? currencies will cause an equal but opposite change in their spot exchange rates: the rate quoted for delivery of the traded currency within 2 business days. Explains relationship between exchange rates and interest rates Because real interest rates are theoritcially equal across countries, any difference in interst rates in 2 coutnries must be due to different expected rates of inflation A country that is experiencing inflation higher than that of another country should see the value of its currency fall (the exchange rate is the adjusted to reflect this value) ?ex) 5% in Australia and 3% in Canada, to adjust this expected inflation is 2% higher in Australia; therefore the value of the Australian dollar will fall 2% against the Canadian dollar Evaluating PPP: PPP is better at predicting long-term exchange rates (more than 10 days); but short term plans are more beneficial to international managers; Short-term plans must assume future economic and political conditions in different countries: added costs, trade barriers, and investor psychology -Forecasting Exchange rates Efficient Market View?Prices of financial instruments reflect all publicly available info at any given time. Which means forward exchange rates accurately forecast future exchange rates. A forward exchange rate reflects a market?s expectations about the future values of 2 currencies. Reflect all relevant publicly available info at any given time, considered the best possible predicators of exchange rates. Inefficient Market View?Prices of financial instruments don?t reflect all available info, meaning that forecasts can be improved by info not reflected in forward exchange rates. Forecasting Techniques: Fundamental Analysis?Technique that uses statistical models based on fundamental economic indicators to forecast exchange rates. (includes economic variables such as inflation interest rates, money supply, tax rates and government spending) Technical Analysis?Employs charts of past trends of currency prices and other factors to forecast the exchange rates. (using highly statistical models and charts of past data trends, analysts examine conditions that prevailed during changes in exchange rates and they try to estimate the timing, magnitude, and direction of future changes) -International Monetary System? Collection of agreements and institutions that govern exchange rates. -Gold Standard?International monetary system in which nations linked the value of their paper currencies to specific values of gold. Par Value ? The value of a currency expressed in terms of gold The gold standard required a nation to fix the value of its currency to an ounce of gold Fixed Exchange-rate system?System for which the exchange rate for converting one currency into another is fixed by international agreement. Advantages of the Gold System Reduces the risk in exchange rates Imposes strict monetary policies on all countries that participate in the system. Help correct a nation?s trade imbalance. Collapse of the Gold Standard Nations involved in the first world war needed to finance their enormous war expenses, and they did so by printing more paper currency Because the gold standard links currencies to one another, devaluation of one currency in terms of gold affects the exchange rates between curriences Bretton Woods Agreement (1944)?Created an international monetary system based on the value of the U.S. dollar and used the Gold Standard to link paper currencies to specific values of gold. Important Features: Fixed exchange rates, built in flexibility, funds for economic development, and an enforcement mechanism. Fundamental Disequilibrium?Economic condition in which a trade deficit causes a permanent negative shift in a country?s balance f payments. Special Drawing Right (SDR)?IMF asset whose value is based on a ?weighted basket? of four currencies. Fixed Exchange Rates: BWA improved on the gold standard by extending the right to exchange gold for dollars only to national governments, rather than anyone who demanded it World Bank?Funds poor nations? economic development projects such as the development of transportation networks, power facilities, and agricultural and educational programs. International Monetary Fund (IMF)?Regulates fixed exchange rates and enforces the rules of the international monetary system. (Established by The Bretton Woods Agreement) Floating Exchange Systems Jamaica Agreement (1976)? This Endorsed a managed float system of exchange rates in which currencies float against one another with limited government intervention to stabilize currencies at a target exchange rate. Managed Float System: currencies float against one another, with governments intervening to stabilize their currencies at particular target exchange rates Free Float System?Currencies float freely against one another without governments Within today?s managed float system, certain countries try to maintain more stable exchange rates by tying their currencies with another country?s stronger currency. Today?s exchange rate arrangements: today?s international monetary system remains in large part a managed float system (most currencies float against each other another and governments engage in limited intervention to realign exchange rates) Currency Board?Monetary regime that is based on an explicit commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate. The government with the currency board is legally bound to hold an amount of foreign currency that is least equal to the amount of domestic currency Helps cap inflations because a currency board restricts a government from issuing additional domestic currency (depends on wise budget policies Chapter 11 Planning?Process of identifying and selecting an organization?s objectives and deciding how the organization will achieve those objectives. Strategy?Set of planned actions taken by managers to help a company meet its objectives. International Strategy: The strategy-formulation process involves both planning and strategy. Permits managers to step back from day-to-day activities and get a fresh perspective on the current and future direction of the company and its industry Mission Statement?written statement of why a company exists and what it plans to accomplish. Mission statements often spell out how a company?s operations affect is Stakeholders-- All parties, ranging from suppliers and employees to stockholders and consumers, who are affected by a company?s activities. The mission statements of other businesses focus on other issues, including superior shareholder returns, profitability, market share, and corporate social responsibility Core Competency?Special ability of a company that competitors find extremely difficult or impossible to equal. Refers to multiple skills that are coordinated to form a single technological outcome Although skills can be leaned through on-the-job training and personal experience, core competences develop over longer periods of time and are difficult to teach Value-chain Analysis?Process of dividing a company?s activities into primary and support activities and identifying those that create value for customers. Each primary and support activities is a source of strength or weakness for a company. Managers determining whether each activity enhances or detracts from customer value, and they incorporate this knowledge into the strategy-formulation process Primary activities managers often look for areas in which the company can increase the value provided to its customers (inbound logistics, operations, outbound logistics, marketing and sales, and service) Support activities assist companies in performing their primary activities (procurement, technology development, human resource management, and firm infrastructure) Multinational Strategy?Adapting products and their marketing strategies in each national market to suit local preferences. (a separate strategy for each of the multiple nations in which a company markets its products) Main benefit is that it allows companies to monitor buyer preferences closely in each local market and to respond quickly and effectively to emerging buyer preferences Main drawback is that companies cant exploit scale economies in product development, manufacturing, or marketing (typically increases the cost structure for international companies and forces them to charge higher prices to recover such costs) Global Strategy?offering the same marketing strategy in all national markets. (usually take advantage of scale and location economies by producing entire inventories of products or components Main benefit is cost savings due to product and marketing standardization Main problem is it can cause a company to overlook important differences in buyer preferences from one market to another Corporate Level Strategies Growth Strategy?Strategy designed to increase the scale (size) or scope (kinds) of a corporations operations. Retrenchment Strategy? Strategy designed to reduce the scale or scope of a corporations business. Stability Strategy?Strategy designed to guard against change and used by corporations to avoid either growth or retrenchment. Combinations Strategy?Strategy designed to mix growth, retrenchment, and stability across a corporations business units. Business-Level Strategies Low-cost Leadership Strategy? Strategy in which a company exploits economies of scale to have the lowest cost structure of any competitor in its industry. (Companies that pursue this position also try to conatin administrative costs and the cost of their various primary activits: marketing advertisng and distribution) (works best with mass-marketed products aimed at price-sensitive buyers; and we suited to companies with standardized product and marketing promotions) Differential Strategy? Strategy in which a company designs its products to be perceived as unique by buyers throughout its industry. (differentiated by improving their reputation for quality, by distinctive brand images, and product design-the sum of features by which a product looks and functions according to customer requirements) Focus Strategy? Strategy in which a company focuses on serving the needs of a narrowly defined market segment by being the low-cost leader, by differentiating its product, or both. (designing products and promotions aimed at consumers who are either dissatisfied with existing choices or who want something distinctive) Organizational Structure? Way in which a company divides its activities among separate units and coordinates activities among those units. -Companies rarely centralize or decentralize all decision making. Rather, they seek an approach that will result in the greatest efficiency and effectiveness -International Companies may centralize decision making in certain geographic markets while decentralizing it in others. Numerous factors influence this decision, including the need for product modification and the abilities of managers at each location. Centralized decision making ? Concentrates decision making at a high organizational level in one location, such as headquarters. helps coordinate the operations of international subsidiaries (important for companies that operate in multiple lines of business or in many international markets; also important when one subsidiaries? output in another?s input) Decentralized decision making ? disperses decisions to lower organizational levels, such as to international subsidiaries Is beneficial when fast-changing national business environments put a premium on local responsiveness Can rslut in products that are better suited to the needs and preferences of local buyers beucase subsidiary managers are in closer contact witht hto local business environments. Chains of Command? Lines of authority that run from top management to individual employees and specify internal reporting relationships. International Division Structure? Organizational structure that separates domestic from international business activities by creating a separate international division with its own manager. International Area Structure? Organizational structure that organizes a company?s entire global operations into countries or geographic regions. Global Product Structure? Organizational structure that divides worldwide operations according to a company?s product areas. Global Matrix Structure? Organizational structure that splits the chain of command between product and area divisions. Forces employee to report to two bosses- the general manager of the division and the general manager of the geographic area. Self-managed Team? Team in which the employees from a single department take on the responsibilities of their former supervisors. Cross-functional Team? Team composed of employees who work at similar levels in different functional departments. Global Team?Team of top managers from both headquarters and international subsidiaries who meet to develop solutions to company-wide problems. Chapter 12 Screening Potential Markets and Sites: -2 important issues concern managers during market- and site-screening process: 1. They want to keep search costs as low as possible 2. They want to examine every potential market and every possible location -to accomplish these 2 goals, managers can segment the screening of markets and sites into a 4-step process: 1. Identify basic appeal 2. Assess the national business environment 3. Measure market or site potential 4. Select the market or site 1. Identify basic appeal: First step in identifying potential markets is to asses basic demand for a product The first step in searching for potential markets means finding out whether there is a basic demand for a company?s product (country?s climate is important in determining basic appeal) First step in selecting a site for a facility to undertake production, R&D, or some other activity is to explore the availability of the resources required Companies that require particular resources to carry out local business activities must be sure they are available. Raw materials needed for manufacturing must either rbe found in the national market or imported. The availability of labor is essential to production in any country. (Many companies choose to relocate to countries where workers wages are lower than they are in the home country.) Companies that hope to secure financing in a market abroad must determine the availability and cost of local capital 2. Assess the National Business Environment -how domestic forces in the business environment actually affect the location-selection process: Cultural Forces A company must assess how the local culture in a candidate market might affect the salability of its product. Cultural elements in the business environment can also affect site-selection decisions When substantial product modifications are needed for cultural reasons, a company might choose to establish production facilities in the target market itself A qualified workforce is important to a company no matter what activity it is to undertake at a particular site. The people at a potential site must display an appropriate work ethic and an educational attainment Political and Legal Forces: Government Regulations: A government?s attitude toward trade and investment is reflected in the quantity and types of restrictions it places on imports, exports, and investment in its country. Government regulations can quickly eliminate a market or site from further consideration: They can create investment barriers to ensure domestic control of a company or industry (do this by imposing investment rules on matters such as business ownership) Governments can restrict international companies from freely removing profits earned in the nation (forces a company to hold cash in the host country or to reinvest it in new projects there) Governments can impose very strict environmental regulations. Governments can also require that companies divulge certain information Government Bureaucracy ? a lean and smoothly operating government bureaucracy an make a market or site more attractive; yet a bloated and cumbersome system of obtaining approvals and licenses from government agencies can make it less appealing. Companies will endure a cumbersome bureaucracy if the opportunity is sufficient to offset any potential delays and expenses Political Stability: Every nation?s business environment is affected to some degree by political risk Political risk is the likelihood that a society will undergo political changes that negatively affect local business activity; can threaten The market of an exporter The production facilities of a manufacturer The ability of a company to remove profits from the country in which they were earned The key element of political risk that concerns companies is unforeseen political change Economic and Financial Forces: Managers must carefully analyze a nation?s economic policies before selecting it as a new market or site for opeatons Currency and liquidity problems pose special challenges for international compines Other Forces: Transport costs and country image also play important roles in the assessment of national business environments Cost of transportation materials and goods: Logistics ? Management of the physical flow of products from the point of origin as raw materials to end users as finished products Country Image: Because country image embodies every facet of a nation?s business environment, it is highly relevant to the selection of sites for production, R&D, or any other activity. 3. Measure Market or Site Potential Measuring Market Potential Industrialized markets: The information needed to estimate the market potential for a product in industrialized nations tends to be more readily available than in emerging markets Income elasticity ? Sensitivity of demand for a product relative to changes in income (used to forecast the growth or contraction of a potential market) The income-elasticity coefficient for a product is calculated by dividing a % change in the quantity of a product demanded by a % change in income A coefficient greater that 1.0 conveys an income-elastic product, or one for which demand increase more relative to an increase in income Ex) if the income-elasticity coefficient for carbonated beverages is .7, the demand for carbonated beverages will increase .7% for every 1.0% in increase in income. Emerging Markets: Companines considering entering emerging markets often face special problems related to a lack of information Market-Potential Indicator (only useful to companies considering exporting), variables included: Market Size Market Growth Rate Market Intensity Market Consumption Capacity Commercial Infrastructure Economic Freedom Market Receptivity Country Risk Measuring Site potential: managers must assess the quality of the resources that will be used locally-human resources both labor and management 4. Select the Market or Site: Involves the most intensive efforts of assessing remaingin potential markets and sites (typically less than 12, sometimes just one or two) At this stage, managers normally want to visit each remaining location to confim earlier expectations and to perform a competitor analysis. Field Trips: Gives managers an opportunity to experience the culture, observe in action the workforce that they might soon employ, or make personal contact with potential new customers and distributors. Competitor Analysis: should address- Number of competitors in each market Market share of each competitor Whether each competitor?s product appeals to a small market segment or has mass appeal Whether each competitor focuses on high quality or low price Whether competitors tightly control channels of distribution Customer loyalty commanded by competitors Potential threat from substitute products Potential entry of new competitors into the market Competitor?s control of key production inputs Conducting International Research -Increasing global competition forces companies to engage in high-quality research and analysis before selecting new markets and sites for operations. Market research ? Collection and analysis of information used to assist managers in making informed decisions Difficulties of Conducting International Research: 3 main difficulties: Availability of data Comparability of data (hard to compare poverty, consumption, and literacy) Cultural Differences: Sources of secondary International Data: Secondary market research ? Process of obtaining information that already exists within the company or that can be obtained from outside sources Managers often use information gathered from secondary research activities to broadly estimate market demand for a product or to form a general impression of antain?s business environment Relatively inexpensive because it hs already been collected, analyzed, and summarized by another party Main sources of secondary data International Organizations Government Agencies: Commerce departments and international trade agencies of most countries typically supply info about import and export regulations, quality, standards, and size of various markets Industry and Trade Associations: Companies often join associations composed of firms w/in their own industry or trade Service organizations Internet and World Wide Web-can be especially useful in seeking info about potential production sites Methods of Conducting Primary International Research: Primary market research ? Process of collecting and analyzing original data and applying the results to current research needs Trade Shows and Trade Missions: Trade show ? Exhibition at which members of an industry or group of industries showcase their latest products, study activities of rivals, and examine recent trends and opportunities Trade mission ? International trip by government officials and businesspeople that is organized by agencies of national or provincial governments for the purpose of exploring international business opportunities. Interviews and Focus Groups Focus group ? Unstructured but in-depth interview of a small group of individuals (8-12 people) by a moderator to learn the group?s attitudes about a company or its product Consumer panel ? Research in which people record, in personal diaries, information on their attitudes, behaviors, or purchasing habits Survey ? Research in which an interviewer asks current or potential buyers to answer written or verbal questions to obtain facts, opinions, or attitudes Environmental scanning ? Ongoing process of gathering, analyzing, and dispensing information for tactical or other resources into a market Chapter 13 -The decision of how to enter a new market abroad must take into account many factors, including the local business environment and a company?s own core competency. -Entry mode ? Institutional arrangement by which a firm gets its products, technologies, human skills, or other resources into a market -3 types of entry modes: 1. Exporting, importing, and countertrade 2. Contractual entry 3. Investment entry Exporting, Importing, and Countertrade -The most common method of buying and selling goods internationally is exporting and importing. Why Companies Export: 3 main reasons: Expand Sales ? Most large companies use exporting as a means of expanding total sales when the domestic market has become saturated. Diversify Sales ? Exporting permits companies to diversify their sales. (can offset slow sales in one national market with increased sales in another) Gain Experience ? Companies often use exporting as a low-cost, low-risk way of getting started in international business Developing an Export Strategy: A 4-Step Model: Identify a Potential Market Match Needs to Abilities Initiate Meetings Commit Resources Degree of Export Involvement Direct Exporting ? Practice by which a company sells its products directly to buyers in a target market Don?t have to sell to end users but they take full responsibility for getting their goods into the target market by selling directly to local buyers and not going through intermediary companies Sales Representatives ? represents only its own company?s products, not those of other companies. They do not take title to the merchandise, they are hired by a company and normally are compensated with a fixed salary plus commissions based on the value of their sales. Distributors: a direct exporter can sell in the target market through distributors, who take ownership of the merchandise when it enters their country. Indirect Exporting ? Practice by which a company sells its products to intermediaries who then resell to buyers in a target market The choice of an intermediary depends on many factors, including the ratio of the exporter?s international sales to its total sales, the company?s available resources, and the growth rate of the target market Different types of intermediaries: Agents ? Individuals or organizations that represent one or more indirect exporters in a target market. Typically receive compensation in the form of commissions on the value of sales Export management Companies (EMC) ? Company that exports products on behalf of indirect exporters. Works as contractually either as an agent or distributor (biggest adv. is usually their deep understanding of the culture, political, legal, and economic conditions of the target market. Export trading company (ETC) ? Company that provides services to indirect exporters in addition to activities related directly to clients? exporter activities (an EMC is restricted to export-related activities, an ETC assists its clients by providing import, export, and countertrade services; developing and expanding distribution channels; providing storage facilities; financing trading and investment projects; and even manufacturing products.) Avoid Export and Import Blunders: there are several errors common to companies new to exporting: Many businesses fail to conduct adequate market research before exporting Many companies fail to obtain adequate export advice To better ensure that it will not make embarrassing blunders, an inexperienced exporter might also want to engage the services of a freight forwarder: Specialist in export-related activities such as customs clearing, tariff schedules, and shipping and insurance fees. Countertrade: Selling of goods or services that are paid for, in whole or part, with other goods or services Companies are sometimes unable to import merchandise in exchange for financial payment. Fortunately, there is a way for firms to trade by using either a small amount of hard currency or none at all. Types of Countertrade: Barter ? Exchange of goods or services directly for other goods or services without the use of money (oldest known form of countertrade) Counterpurchase ? Sale of goods or services to a country by a company that promises to make a future purchase of a specific product from the country (allows country to earn back some of the currency that it paid for the original imports) Offset ? Agreement that a company will offset a hard-currency sale to a nation by making a hard-currency purchase of an unspecified product from that nation in the future (only specifies amount that will be spent) Switch trading ? Practice in which one company sells to another its obligation to make a purchase in a given country (If the trading company has no use for the merchandise, it can arrange for yet another buyer who needs the product to make the purchase) Buyback ? Export of industrial equipment in return for products produced by that equipment (usually typifies long-term relationships between the companies involved Export/Import Financing: -International trade poses risks for both exporters and importers: -Exporters run the risk of not receiving payment after their products are delivered -Importers fear that delivery might not occur once payment is made for a shipment Methods designed to reduce the risk to which exporters and importers are exposed Advance payment ? Export/import financing in which an importer pays an exporter for merchandise before it is shipped (this is common when 2 parties are unfamiliar with each other, the transaction is relatively small, or the buyer is unable to obtain credit because of a poor credit rating at banks. Documentary Collection ? Export/Import financing in which a bank acts as an intermediary without accepting financial risk (usually used when there is an ongoing business relationship between 2 parites); Broken down into 3 main stages and 9 smaller steps Before shipping merchandise, the exporter draws up a Draft (bill of exchange) ? Document ordering an importer to pay an exporter a specified sum of money at a specified time (sight draft requires the importer to pay when goods are delivered, a time draft extends the period of time following delivery.) Following the creation of the draft, the exporter delivers the merchandise to a transportation company for shipment to the importer. The exporter then delivers to its banker a set of documents that includes the draft, a packing list of items, shipped, and a bill of lading ? Contract between an exporter and a shipper that specifies merchandise destination and shipping costs (proof the exporter has shipped the merchandise) After receiving appropriate documents from the exporter, the exporters bank sends the documents to the importer?s bank. After the importer fulfills the terms stated on the draft and pays its own bank, the bank issues the bill of lading to the importer. Letter of Credit ? Export/Import financing in which the importer?s bank issues a document stating that the bank will pay the exporter when the exporter fulfills the terms of the document (used when a an importer?s credit rating is questionable, when the exporter needs a letter of credit to obtain financing and when a market?s regulations require it; 3 types Irrevocable letter of credit A revocable letter of credit A Confirmed letter of credit Open account ? Export/Import financing in which an exporter ships merchandise and later bills the importer for its value (used when the parties are very familiar with each other or for sales between 2 subsidiaries within an international company Contractual Entry Modes -Licensing ? Practice by which one company owning intangible property (the licensor) grants another firm (the licensee) the right to use that property for a specified period of time (grants companies the right to use process technologies inherent to the production of a particular good) Exclusive license grants a company the exclusive rights to produce and market a property, or products made from that property, in a specific geographic region Nonexclusive license grants a company the right to use a property but does not grant it sole access to a market Cross Licensing ? Practice by which companies use licensing agreements to exchange intangible property with one another Advantages of Licensing: Licensors can use licensing to finance their international expansion Licensing can be a less risky method or international expansion for a licensor than other entry modes Licensing can help reduce the likelihood that a licensor?s product will appear on the black market Licenses can benefit by using licensing as a method of upgrading existing production technologies Disadvantages of Licensing It can restrict a licensor?s future activities Licensing might reduce the global consistency of the quality and marketing of a licensor?s product in different national markets Licensing might amount to a company ?lending? strategically important property to its future competitors -Franchising ? Practice b which one company (the franchiser) supplies another (the franchisee) with intangible property and other assistance over an extended period Franchising differs from licensing, it gives a company greater control over the sale of its product in a target market. Also, although licensing is fairly common in manufacturing industries, franchising is primarily used in service industries, and although licensing normally involves a one-time transfer of property, franchising requires ongoing assistance from the franchiser Advantages of franchising: Franchisers can use franchising as a low-cost, low-risk entry mode into new markets Franchising is an entry mode that allows for rapid geographic expansion Franchisers can benefit from the cultural knowledge and know-how of local managers Disadvantages of Franchising Franchisers may find it cumbersome to manage a large number of franchisees in a variety of national markets Franchisees can experience a loss of organizational flexibility in franchising agreements -Management Contracts ? Practice by which one company supplies another with managerial expertise for a specific period of time Advantages of management contracts: A firm can award a management contract to another company and thereby exploit an international business opportunity without having to place a great deal of its own physical assets at risk Governments can award companies management contracts to operate and upgrade public utilities, particularly when a nation is short of investment financing Governments use management contracts to develop the skills of local workers and managers Disadvantages of Management Contracts Although management contracts reduce the exposure of physical assets in another country, the same is not true for the supplier?s personnel; political or social turmoil can threaten mangers? lives Suppliers of expertise may end up nurturing a formidable new competitor in the local market -Turnkey (build-operate-transfer) project ? Practice by which one company designs, constructs, and tests a production facility for a client firm Advantages of turnkey projects: Turnkey projects permit firms to specialize in their core competencies and to exploit opportunities that they could not undertake alone Turnkey projects allow governments to obtain designs for infrastructure projects from the world?s leading companies Disadvantages of Turnkey Projects: A company may be awarded a project for political reasons rather than for technological know-how (because turnkey projects are often of high monetary value and awarded by government agencies, the process of awarding them can be highly politicized) Like management contracts, turnkey projects can create future competitors Investment Entry Modes: entail direct investment in plant and equipment in a country coupled with ongoing involvement in the local operation. Entry modes in this category take a company?s commitment in a market to a higher level; 3 common forms 1) Wholly owned subsidiary ? Facility entirely owned and controlled by a single parent company Companies can establish a wholly owned subsidiary either by forming a new company and constructing entirely new facilities or by purchasing an existing company and internalizing its facilities Advantages of Wholly Owned Subsidiaries: Managers have complete control over day-to-day operations in the target market and access to valuable technologies, processes, and other intangible properties w/in the subsidiary Is a good mode of entry when a company wants to coordinate the activities of all its national subsidiaries Disadvantages of Wholly Owned Subsidiaries They can be expensive undertakings because companies must typically finance investments internally or raise funds in financial markets Risk exposure is high because a wholly owned subsidiary requires substantial company resources 2) Joint Ventures ? Separate Company that is created and jointly owned by two or more independent entities to achieve a common business objective (can be privately owned companies, government agencies, or government-owned companies Joint venture configurations: 4 types Forward Integration Joint Venture: The parties choose to invest together in downstream business activities ? activities farther along in the ?value system? that are normally performed by others. Backward Integration Joint Venture ? The joint venture signals a move by each company into upstream business activities ? activities earlier in the value system that are normally performed by others Buyback Joint Venture ? is formed when each partner requires the same component in its production process Multistage Joint Venture ? Results when one company produces a good or service required by another Advantages of Joint Venture Above all, companies rely on joint ventures to reduce risk. Companies can use joint ventures to penetrate international markets that are otherwise off-limits A company can gain access to another company?s international distribution network through the use of a joint venture Companies from international joint ventures for defensive reasons Disadvantages of Joint Venture Joint venture ownership can result in conflict between partners Loss of control over a joint venture?s operations can also result when the local government is a partner in the joint venture 3) Strategic alliance ? Relationship whereby two or more entities cooperate (but do not form a separate company) to achieve the strategic goals of each. (can be established between a company and its suppliers, its buyers and eve its competitors Advantages of Strategic alliances Companies use strategic alliances to share the cost of an international investment project Companies use strategic alliances to tap into competitors? specific strengths Companies turn into strategic alliances for many of the same reasons that they turn to joint ventures Disadvantages of Strategic alliances: Perhaps the most important disadvantage is that it can create a future local or even global competitor Strategic Factors in Selecting an Entry Mode: Cultural Environment ? Dimensions of culture: values, beliefs, customs, languages, religions ? can differ greatly from one nation to another; the importance of cultural differences diminishes when managers are knowledgeable about the culture of the target market Political and Legal Environments ? political instability in a target market increases the risk exposure of investments. A target market?s legal system also influences the choices of entry mode. Certain important regulations cause as high tariffs or low quota limits, can encourage investment Market Size ? The size of a potential market also influences the choice of entry mode Production and Shipping costs ? By helping to control total costs, low-cost production and shipping can give a company an advantage International Experience ? Most companies enter the international marketplace through exporting. As companies gain international experience, they tend to select entry modes that require deeper involvement. But this means business must accept greater risk in rerun for greater control over operations and strategy.
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