International Business Review F09

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Oct 30, 2013 (3 years and 11 months ago)

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International Business Review


F09


What is international Business?

T
he trade and investment activities by companies across national borders

exceeding

some 10 trillion dollars


When did globalization start?

1
st

phase
:
1830


1880: during the growth of
efficient transportation, such as railroads
,
ocean transportation, invention of the telephone, and the rise of large manufacturing and
trading companies

2
nd

Phase
: 1900


1930: rise of electricity and steel production until the
worldwide
economic downturn
starting 1929
; western Europe was the most industrialized region,
establishing some of the first

international firms such as Nestle, BP, Shell and Siemens
with foreign manufactur
ing

3
rd

P
hase
:1948


1970s: following WWII, Marshall Plan to rebuild Europe, U
S became
world’s dominant economy (least harm during WWII), an era of high tariffs and trade
barriers


General Agreement on
Tariffs

and Trade

(GATT)
, later WTO

[now 149
Nations]
, was formed to reduce international

trade barriers; other important organizat
ions
fostering global cooperation are Int. Monetary Fund, World Bank, and United Nations.
Forming
MNE

where companies like IBM, Boeing, Texas
Instrument, Xerox,
McDonalds
seeking cost advantages by locating factories in countries with low cost
labor
/resour
ces
. Currency and capital started to flow freely across national borders.

1973
global oil crisis when OPEC proclaimed an oil embargo, followed by a stock market
crash worldwide [Jan 73


Dec 74]
, 70s recession, devaluation of the
almighty
USD [US

(Nixon administration) stopped backing the USD with Gold reserves, also high inflation
]


USD rose above and beyond the true value since most commodities around the world
were traded in US currency

-

including the precious oil commodity
, a corrective meas
ure
requested by Europeans [meaning: dollars would buy fewer yens and marks]
, 1975 the
US began to float the dollar


fiat money
: unbacked by any physical asset

4
th

Phase
:1980


Present: commercialization of the PC, Internet, low cost
communication, modern
ization of manufacturing, liberalization in central and Eastern

Europe
, industrialization of East Asia (4 Asian Tigers [1960s


90s]: HK, Singapore,
South Korea and Taiwan)
, growing integration of mergers and acquisitions, “death of
distance”


shrinking t
he world into a manageable marketplace.

USA

FDI inflows
interrupted by the 9/11/2001 event


Why go international?

Living standards of billions of people are improved due to international trade and
investment


wider selection of products and services at lo
wer prices;

accelerates
development of latest technology


Business:



Earn higher margins

and profits
,



Global

procurement: raw material

(closer to supply sources)



L
ow cost & skilled labor,



Acquire knowledge, opportunities (proactive or reactive motives)

2




Mar
ket diversification, gain new ideas, less intense competition, stronger market
demands



Better serve key customers that relocated overseas



Economies of scale, production and marketing



Confront international competitors


Nations:



Facilitates industries and
workers to be more productive



Allows countries to achieve higher living standards



Without international trade, most nations would be unable to feed, clothe, and
house their citizens at current levels



Not only do nations, companies, and stakeholders benefit

from international trade,
modern life would be virtually impossible without it


Steps of internationalization:

Domestic focus


Experimental

export



asked to send product
/services

overseas


Export/Import
:
increased commitment

tangible merchandise

(clothing, computers, cars) as well
services

(intangible)
such as banking, consulting, etc.

FDI



Foreign direct investment
,
most committed
involvement, long term,
direct
influence on production, distribution and service of one’s product, partial or compl
ete
ownership of acquired assets


Four risks in
I
nternationalization:


Cross
-
cultural risk
: difference in language, lifestyle, mindset, customs, religion, etc.

Country risk
: political risk


government intervention in companies operation and
performance ca
used by political, legal and economic environment in a foreign country
,
Venezuela


Exxon Mobil example


Currency risk
: adverse fluctuation

in exchange rates causing the foreign denomination
to rise sharply, or inflation, etc.

Commercial risk
: potential
loss or failure from poorly developed or executed business
strategies or procedures


Advantage of Internationalization:

Developing new business opportunities

Access to foreign
knowledge base

Reduce poverty
-

China


Disadvantage of Internationali zation:


Lo
ss of sovereignty


ability to govern own affairs: Wal
-
Mart, Coca Cola, Sony;

Complex business structures, either centralized or decentralized


Commitment of substantial funds


Sharing of technical know
-
how


Exchange Currency


Offshoring or outsourcing


r
esults in job losses

in developed markets


Effect on the poor


child labor: 250 million around the world (Nike, sweat shops)

Effect on natural
environment

3


Effect on national culture


McDonaldization, Coca
-
Colonization


erosion of local
traditions, appet
ite for “Western” products


across the world the same
habits:
Hollywood




P
articipants of
I
nternational
B
usiness
:


Focal firms



initialize international

business transaction

Born Global firms



initiates international business very early, more adaptable

to
internationalization, despite limited funding



producing true international products

MNE



large companies with substantial resources, performing various international
businesses through a network of subsidiaries located in multiple countries (170 located
in the US, 70 in Japan, 35 in Germany)

SME



500 or fewer employees


responsible

of 25%

of export from Europe and N.
America

Freight forwarder
:

specialized logistics services


arrange international shipping

Logistics Service Provider
:

DHL, FedEx, UPS, etc.

Foreign distributor
:

foreign market
-
based intermediary that works under contract for an
exporter


clearing products through customs, local advertising and distribution of
products

Trading Companies
:

intermediary that engages in import and export of commodities
(Cargill, Minn
eapolis, MN


50 billion USD annually in sales,
privately

owned)


Theories of International Trade:

Absolute Advantage Principle
:
Adam Smith
: 1776
-

A country benefits by producing
only those products in which it has absolute advantage, or can produce using

fewer
resources than another country
.
The country gains by specializing in producing those
products, exporting them, and then importing the products it does not have an absolute
advantage in producing.

Comparative advantage
:

David Ricardo
: 1817
-

It can b
e beneficial for two countries to
trade without barriers as long as one is more efficient at producing goods or services
needed by the other. What matters is not the absolute cost of production, but rather the
relative

efficiency with which a country can p
roduce the product.


Competitive Advantage of Nations
:

Michael Porter
: 1980
-

the competitive advantage
of a nation is dependent upon the collective competitive advantages of its firms
.
Over
time, this relationship is reciprocal: the competitive advantages

held by the nation tend
to drive the development of new firms and industries with these same competitive
advantages.

Porter’s Diamond Model
:
explains

competitive advantage at the firm and nation levels
as stemming from the presence and quality in the
country of the following four major
elements



Firm Strategy, Structure, and Rivalry / Factor Conditions / Demand
Conditions / Related and supporting Industries

Industrial Cluster
:

A concentration of businesses, suppliers, and supporting firms in the
sam
e industry at a particular location, characterized by a critical mass of human talent,
capital, or other factor endowments

(Silicon Valley, Fashion Industry

-

Northern Italy
)

International Value chain
:
A value chain is a chain of activities. Products pass
through
all activities of the chain in order and at each activity the product gains some value. The
chain of activities gives the products more added value than the sum of added values of
all activities
!

(Dell corporation)





4


Cultural Environment of Inter
national Business:

The challenge of crossing cultural boundaries
-

different cultural environments
characterized by foreign languages and different values.


Culture
refers to the learned, shared, and enduring orientation patterns in a society.
People demonstrate their culture through values, ideas, attitudes, behaviors, and
symbols.

Ethnocentric orientation
:

refers to a home
-
country mind
-
set

Polycentric orientation

refers to a host
-
country mindset

Geocentric orientation

refers to a global mindset where the manager is able to
understand a business without regard to country boundaries

Low
-
context cultures

rely on elaborated verbal explanations, putting much emphasis on

spoken words

(Europe, N. America)

High
-
context cultures
emphasize nonverbal communications and a more holistic
approach to communication that promotes harmonious relationships

(Japan, China)

Monochronic cultures
tend to exhibit a rigid orientation to time

in which the individual
is focused on schedules, punctuality, and time as a resource

(US, Canada
, Germany
)

P
olychro
n
ic cultures
refer to a flexible, non
-
linear orientation to time in which the
individual takes a long
-
term perspective and is capable of mul
ti
-
tasking

(Asia. Latin
America, Middle East)

Stereotypes:

are generalizations about a group of people that may or may not be factual,
often overlooking real, deeper differences.
(Latin Americans tend to procrastinate)



Government Interventions
:

Protecti
onism

refers to national economic policies designed to restrict free trade and
protect domestic industries from foreign competition

Government intervention arises typically in the form of
tariffs
(duty),
nontariff trade
barriers
(e.g. quota)
,
and
investmen
t barriers
(target FDI).

Governments impose trade and investment barriers to achieve political, social, or
economic objectives.



Tariff

(duty)
-

tax imposed by a government on imported products, thus increasing the
cost to the customer

Quota

-

a quantita
tive restriction placed on imports of a specific product over a specified
period of ti
me

Investment barriers

target FDI thus restricting foreign firm operations

National security

-

Countries impose trade restrictions on products viewed as critical to
national defense and security, such as military technology and computers

National culture and identity

-

Governments seek to protect certain occupations,
industries, and public assets that are considered central to national culture and identity
-

prohibit c
ertain imports

(Swiss


watch making)


International Monetary Environment:


Foreign exchange

refers to all forms of money that are traded internationally

F
oreign exchange market

is the global marketplace for buying and selling currencies

(~
175 currencies)


mainly

by banks and governments

Trade deficit

refers to the amount by which a nation's imports exceed its exports for a
specific period of time

Trade surplus

is the amount by which a nation's exports exceed its imports for a specific
period of time

5


D
evaluation
-

government action to reduce the official value of its currency relative to
other currencies

(encourage foreign investors among other reasons
, etc.
)
, it specifically
implies an official lowering of the value of a country's curren
cy within a
fixed
exchange rate system
.

The opposite of devaluation is called
revaluation
.

Depreciation

is used for the unofficial decrease in the exchange rate in a
floating
exchange rate system
.
The opposite of devaluation is called
appreciation.

Exchange rate
-

the price of one currency expressed in terms of another
-

is constantly
changing

Eurodollars
:
d
eposits denominated in US dollars at banks outside the United States, and
thus are not under the jurisdiction of the Federal Reserve
.


Fixed

exchan
ge rate
, sometimes called a
pegged exchange rate
, is a type of
exchange
rate system

wherein a
currency
's value is matched to the value of another single
currency or to a basket of other currencies, or to another measure of value, such as
gold
.

A fixed exch
ange rate is usually used to stabilize the value of a currency, against the
currency it is pegged to. This makes trade and investments between the two countries
easier and more predictable, and is especially useful for small economies where
external trade
forms a large part of their GDP.

It can also be used as a means to control
inflation
. However, as the reference value rises and falls, so does the currency pegged
to it
. Fixed exchange rates may be preferable for their greater stability and certainty.
(Ch
ina)

F
loating exchange rate

or fluctuating exchange
rate

is a type of
exchange rate system

wherein a
currency
's value is allowed to fluctuate according to the
foreign exchange
market
.
The exchange rate system

of floating currencies may more technically be
known as a
managed float

-

allow
ing

a currency price to float freely between an upper
and lower bound, a price "ceiling" and "floor
.

(USA)

Bonds

are debt instruments that allow the borrower to raise capital by promising to repay
the principal with interests on a specified date

Hedging

is the use of financial instruments to ma
nage exposure to currency risk

World's currency
:
only 8 percent

of the wo
rld's currency exists as physical cash
.


D
irect quote
: number of units of the domestic currency needed to acquire one unit of
foreign currency, known as the normal or American quote. The teller might say, “It
will cost you $1.30 to buy €1."

I
ndirect
quote
: the number of units of the foreign currency obtained for one unit of the
domestic currency, known as the reciprocal or European term. The teller might say,
“For $1.00, you can buy €0.74.”

Currency Traders:

Hedgers
, who seek to minimize the risk of
exchange
-
rate fluctuations by buying
forward contracts or similar financial instruments.

Speculators
, who seek profits by investing in currencies, and expect them to rise in
value in the future.

Arbitragers
, who buy and sell the same currency in two or mor
e foreign exchange
markets to take advantage of differences in the currencies exchange rate.

Foreign exchange trading
: a

rather small number of currencies still dominate cross
-
border trade and investment. Two thirds of foreign reserves are in
US dollars
,
25% in
Euros, 7% in the yen and British pound, and 2% in the world's remaining 150 national
currencies. Yet, about $3 trillion worth of currency is traded every day. Currency trade
occurs within large banks and through brokers that specialize in matching
buyers and
sellers


6


Transaction exposure
:

is currency risk by firms when accounts receivable or payable are
denominated in foreign currencies

Regulating

Exchange Rates:

Since dollar exchange rates are set on the open market, the Government can only indirectly
impact exchange rates. (In countries, like China, where the rate is fixed, the government can
directly change the rate.) The most direct way is by raising the
Fed Fu
nds Rate
, which
increases
interest rates

throughout the banking system, reduces the supply of money, and
makes the dollar stronger relative to other currencies. If the Fed lowers the Funds rate, then of
course the opposite occurs, and the dollar becomes we
aker.

The Treasury Department can also print more money, which increases the supply, weakening
the dollar. It can also borrow more money from other countries, known as selling Treasury
notes. This not only increases the supply of money, but it also increa
ses the
debt
, both of which
weaken the dollar.

Euro appreciation:

If the euro/dollar exchange rate goes from one euro equals $1.25 to a new
rate of one euro equals $1.50 → due to increased demand for Euros or decreased supply of
Euros, the euro becomes ex
pensive to U.S. customers, and fewer BMWs will be sold.

Euro depreciation:

If the euro/dollar exchange rate goes from one euro equals $1.25 to a new
rate of one euro equals $1.00 → the euro then becomes cheap to the U.S. consumer, and more
BMWs will be so
ld.

Factors that influence the supply and demand for a currency: (1) economic growth, (2) interest
rates and inflation, (3) market psychology, and (4) government action.

How exchange rates are determined:

In a free market, the “price” of any currency (rate of exchange) is determined by supply and
demand.

o

The greater the supply of a currency, the lower its price

o

The lower the supply of a currency, the higher its price

o

The greater the demand for a currency,
the higher its price

o

The lower the demand for a currency, the lower its price

Economic exposure
:

also known as operating exposure, is currency risk from exchange
-
rate
fluctuations that affect the pricing of products, the cost of inputs, and the value of fo
reign
investments.



When a firm prices its products, exchange
-
rate fluctuations either help or hurt
sales because products are either more or less expensive to foreign buyers.



For example, the British pound has appreciated against the US dollar. US firm
s
should expect to sell more goods in the UK, because British customers have
stronger buying power when purchasing dollars.



By the same token, a British firm's sales may fall in the US unless management
lowers its US prices by an amount equivalent to the

fall of the dollar