International Business Exam 4

Discuss the idea of compensation or buybacks as they relate to countertrade. Provide an example of a buyback arrangement.

A buyback occurs when a firm builds a plant in another country—or supplies technology, equipment, training, or other services to the country—and agrees to take a certain percentage of the plant's output as partial payment for the contract. Buyback agreements are a form of countertrade. For example, Occidental Petroleum negotiated a deal with Russia under which Occidental would build several ammonia plants in Russia and as partial payment for the work, it would receive ammonia from the plant over a 20-year period.

Compare and contrast counterpurchase agreements and offset arrangements. Why might an exporter prefer an offset to a counterpurchase deal?

A counterpurchase agreement is a reciprocal buying agreement that occurs when a firm agrees to purchase a certain amount of materials back from a country to which a sale is made. An offset is similar to a counterpurchase insofar as one party agrees to purchase goods and services with a specified percentage of the proceeds from the original sale. The difference is that this party can fulfill the obligation with any firm in the county to which the sale is being made. An offset is more attractive than a straight counterpurchase agreement because it gives an exporter greater flexibility to choose the goods it wishes to purchase.

Compare and contrast time drafts and sight drafts.

A draft, sometimes referred to as a bill of exchange, is the instrument normally used in international commerce to effect payment. A draft is simply an order written by an exporter instructing an importer, or an importer's agent, to pay a specified amount of money at a specified time. Drafts fall into two categories, sight drafts and time drafts. A sight draft is payable on presentation to the drawee. A time draft allows for a delay in payment—normally 30, 60, 90, or 120 days. It is presented to the drawee, who signifies acceptance of it by writing or stamping a notice of acceptance on its face. Once accepted, the time draft becomes a promise to pay by the accepting party. When a time draft is drawn on and accepted by a bank, it is called abanker's acceptance. When it is drawn on and accepted by a business firm, it is called atrade acceptance.

Discuss the notion of cross-functional teams and their role in cross-functional integration. What are the attributes that make a product development team successful?

A firm can achieve cross-functional integration by establishing cross-functional product development teams comprised of representatives from R&D, marketing, and production. The objective of the team should be to take a product development project from the initial concept development to market introduction. The success of such teams is dependent on three attributes. First, the team should be led by "heavyweight" managers who have high status within the organization, and who have the power and authority required to get the financial and human resources the team needs to succeed. Second, the team should be composed of at least one member from each key function. Finally, the team should physically be in one location if possible to create a sense of camaraderie and to facilitate communication.

Discuss the three primary characteristics of a good ally.

A good ally, or partner, has three characteristics. First, a good partner helps the firm achieve its strategic goals, whether they are market access, sharing the costs and risks of product development, or gaining access to critical core competencies. The partner must have capabilities that the firm lacks and that it values. Second, a good partner shares the firm's vision for the purpose of the alliance. If two firms approach an alliance with radically different agendas, the chances are great that the relationship will not be harmonious, will not flourish, and will end in divorce. Third, a good partner is unlikely to try to opportunistically exploit the alliance for its own ends, that is, to expropriate the firm's technological know-how while giving away little in return. In this respect, firms with reputations for "fair play" to maintain probably make the best allies.

What is a joint venture? What type of joint venture is most common? Provide an example of a joint venture.

A joint venture involves establishing a firm that is jointly owned by two or more otherwise independent firms. The most typical joint venture is a 50-50 venture, in which there are two parties, each of which holds a 50 percent ownership stake and contributes a team of managers to share operating control. Fuji-Xerox is an example of a joint venture that was established between Fuji Photo and Xerox.

Compare and contrast licensing agreements and franchising agreements.

A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity for a specified period in exchange for royalties. In contrast, franchising is basically a specialized form of licensing in which the franchiser not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business. Franchising tends to involve longer-term commitments than licensing.

How can the polycentric approach to staffing result in the creation of a "federation" within the firm? Why is this a disadvantage for the firm?

A polycentric approach can lead to a gap between host-country managers and parent-country managers. Language barriers, national loyalties, and a range of cultural differences may isolate the corporate headquarters staff from the various foreign subsidiaries. The lack of management transfers from home to host countries, and vice versa, can exacerbate this isolation and lead to a lack of integration between corporate headquarters and foreign subsidiaries. The result can be a "federation" of largely independent national units with only nominal links to the corporate headquarters. Within such a federation, the coordination required to transfer core competencies or to pursue experience curve and location economies may be difficult to achieve. The federation that may result from a polycentric approach can also be a force for inertia within the firm.

Discuss the advantages and disadvantages of a polycentric approach to staffing.

A polycentric staffing policy requires host-country nationals to be recruited to manage subsidiaries, while parent-country nationals occupy key positions at corporate headquarters. One advantage of adopting a polycentric approach is that the firm is less likely to suffer from cultural myopia. Host-country managers are unlikely to make the mistakes arising from cultural misunderstandings that expatriate managers are subject to. Another advantage of the polycentric approach is that it may be less expensive than other approaches to implement.However, because host-country nationals have limited opportunities for advancement, resentment may arise. Furthermore, a gap may form between host-country managers and parent-country managers, thus leading to a lack of integration between corporate headquarters and foreign subsidiaries.

Discuss the concerns of organized labor.

A principal concern of domestic unions about multinational firms is that a company can counter its bargaining power with the power to move production to another country. Another concern is that an international business will keep highly skilled tasks in its home country and farm out only low-skilled tasks to foreign plants. Such a practice makes it relatively easy for an international business to switch production from one location to another as economic conditions warrant. Consequently, the bargaining power of organized labor is once more reduced. A final concern arises when an international business attempts to import employment practices and contractual agreements from its home country. When these practices are alien to the host country, organized labor fears the change will reduce its influence and power.

Define tax credit and tax treaty.

A tax credit allows an entity to reduce the taxes paid to the home government by the amount of taxes paid to the foreign government. A tax treaty between two countries is an agreement specifying which items of income will be taxed by the authorities of the country where the income is earned.

Discuss Mendenhall and Oddou's assertion that an executive who performs well in a domestic setting may not adapt to a different cultural setting.

According to Mendenhall and Oddou, many managers tend to equate domestic performance with overseas performance potential. However, the researchers suggest that success in a foreign job posting depends not on domestic performance, but instead on four dimensions. First, an expatriate's self-orientation will affect performance. Expatriates with high self-esteem, self-confidence, and mental well-being are more likely to succeed in foreign jobs. Second is others-orientation. The more effectively an expatriate interacts with host-country nationals, the more likely he or she is to succeed. Third, an expatriate's perceptual abilities are important to success. Managers need to be able to understand why people of other countries behave the way they do. Finally, cultural toughness is a measure of how well an expatriate adjusts to a particular situation, especially when the assignment involves a culture that is very different from the home-country culture.

Describe the importance of accounting information in business.

Accounting has often been referred to as "the language of business." This language finds expression in profit and loss statements, balance sheets, budgets, investment analysis, and tax analysis. Accounting information is the means by which firms communicate their financial position to the providers of capital (investors, creditors, and government). It enables the providers of capital to assess the value of their investments or the security of their loans and to make decisions about future resource allocations. Accounting information is also the means by which firms report their income to the government so the government can assess how much tax the firm owes. It is also the means by which the firm can evaluate its performance, control its internal expenditures, and plan for future expenditures and income.

Briefly differentiate accounting standards and auditing standards.

Accounting standards are rules for preparing financial statements. They define what is useful accounting information. Auditing standards specify the rules for performing an audit—the technical process by which an independent person (the auditor) gathers evidence for determining if financial accounts conform to required accounting standards and if they are also reliable.

Discuss the three advantages of acquiring an enterprise in a target market.

Acquisitions have three major points in their favor. First, they are quick to execute. By acquiring an established enterprise, a firm can rapidly build its presence in the target foreign market. Second, in many cases, firms make acquisitions to preempt their competitors. Third, managers may believe acquisitions to be less risky than greenfield ventures—ventures that are wholly owned subsidiaries and are built from the ground up. When a firm makes an acquisition, it buys a set of assets that are producing a known revenue and profit stream.

Discuss the effect of country factors on the decision of where to locate production.

All other things being equal, a firm should locate its manufacturing activities in countries where the political, economic, and cultural conditions are conducive to the performance of those activities. Other country-specific factors that play a role in location decisions include formal and informal trade barriers and rules and regulations regarding foreign direct investment, expected movements in currency exchange rates, and also the quality of the local labor pool.

Describe three factors that complicate the process of an international business.

Among the factors complicating the process for an international business are these: (1) A distinction must be made between cash flows to the project and cash flows to the parent company. (2) Political and economic risks, including foreign exchange risk, can significantly change the value of a foreign investment. (3) The connection between cash flows to the parent and the source of financing must be recognized.

How do levels of economic development affect consumer behavior? What are the implications for marketing strategy?

Consumers in the most advanced countries often shun globally standardized products that have been developed with the lowest common denominator in mind. They are willing to pay more for products that have additional features and attributes customized to their tastes and preferences. In response to this behavior, firms marketing to consumers in highly developed markets tend to build a lot of extra performance attributes into their products. In contrast, consumers in less-developed countries typically demand a more basic product. In addition, product reliability becomes more important as the purchase may account for a greater share of a consumer's income than for the advanced country consumer. Consequently, products sold in developing countries typically lack many of the features found in products sold in advanced countries.

What type of firm is most likely to engage in countertrade? Why?

Countertrade is most attractive to large, diverse multinational enterprises that can use their worldwide network of contacts to dispose of goods acquired in countertrading. Unless there is no alternative, small- and medium-sized companies should probably avoid countertrade deals because they lack the worldwide network of operations that may be required to profitably utilize or dispose of goods acquired through them.

Describe the major arguments put forth by Edward Deming.

Deming identified a number of steps that should be part of any TQM program. He argued that management should embrace the philosophy that mistakes, defects, and poor-quality materials are not acceptable and should be eliminated. He suggested that the quality of supervision should be improved by allowing more time for supervisors to work with employees and by providing them with the tools they need to do the job. Deming recommended that management should create an environment in which employees will not fear reporting problems or recommending improvements. He believed that work standards should not only be defined as numbers or quotas, but should also include some notion of quality to promote the production of defect-free output. He argued that management has the responsibility to train employees in new skills to keep pace with changes in the workplace. In addition, he believed that achieving better quality requires the commitment of everyone in the company.

Explain make-or-buy decisions by giving an example of an international business that must decide whether to outsource an activity.

Examples will vary. International businesses frequently face make-or-buy decisions, decisions about whether they should perform a certain value creation activity themselves or outsource it to another entity. Most manufacturing firms do their own final assembly, but have had to decide whether to vertically integrate and manufacture their own component parts or outsource the production of such parts, purchasing them from independent suppliers. Such make-or-buy decisions are an important aspect of the strategy of many firms. In the automobile industry, for example, the typical car contains more than 10,000 components, so automobile firms constantly face make-or-buy decisions. If proprietary technology is involved in making the product that cannot or should not be shared with outsourcing parties, then the decision would be for the company to make that component rather than to outsource it.

Explain the concept of transfer pricing.

Firms are continually shipping component parts and finished goods between subsidiaries in different countries. The volume of intrafirm transactions in such firms is very high. The price at which such goods and services are transferred is referred to as the transfer price.

Why is there a problem of trust that persists in international business?

Firms engaged in international trade have to trust someone they may have never seen, who lives in a different country, who speaks a different language, who abides by (or does not abide by) a different legal system, and who could be very difficult to track down if he or she defaults on an obligation.Consider a U.S. firm exporting to a distributor in France. The U.S. businessman might be concerned that if he ships the products to France before he receives payment from the French businesswoman, she might take delivery of the products and not pay him. Conversely, the French importer might worry that if she pays for the products before they are shipped, the U.S. firm might keep the money and never ship the products or might ship defective products. Neither party to the exchange completely trusts the other. This lack of trust is exacerbated by the distance between the two parties—in space, language, and culture—and by the problems of using an underdeveloped international legal system to enforce contractual obligations.

What are the two methods of entering foreign marketing using a wholly owned subsidiary?

Firms entering a foreign market via a wholly owned subsidiary, where the firm owns 100 percent of the stock, can either make the investment in a greenfield operation or through an acquisition. A greenfield operation involves the establishment of a new operation, whereas an acquisition involves buying an established firm in the host country and using that firm to promote the company's products.

Why should a firm pursue an ethnocentric approach to staffing? What are the disadvantages of this approach?

Firms pursue an ethnocentric staffing policy for three reasons. First, the firm may believe there is a lack of qualified individuals in the host country to fill senior management positions. Second, the firm may see an ethnocentric staffing policy as the best way to maintain a unified corporate culture. Third, if the firm is trying to create value by transferring core competencies to a foreign operation, it may feel that the best way to do this is to transfer parent-country nationals who have knowledge of that competency to the foreign operation.The disadvantages of the ethnocentric approach to staffing is that the policy limits advancement opportunities for host-country nationals, which can lead to resentment, lower productivity, and increased turnover among that group. The policy can also lead to cultural myopia, the firm's failure to understand host-country cultural differences that require different approaches to marketing and management.

What are first-mover advantages? Discuss these advantages.

First-mover advantages are the advantages frequently associated with entering a market early. One first-mover advantage is the ability to preempt rivals and capture demand by establishing a strong brand name. A second advantage is the ability to build sales volume in that country and ride down the experience curve ahead of rivals, giving the early entrant a cost advantage over later entrants. A third advantage is the ability of early entrants to create switching costs that tie customers into their products or services. Such switching costs make it difficult for later entrants to win business.

Explain how the concept of production efficiency has changed with the rise of flexible manufacturing technologies.

Flexible technology, also known as lean production, covers a range of manufacturing technologies designed to reduce setup times for complex equipment, increase the utilization of individual machines through better scheduling, and improve quality control at all stages of the manufacturing process. A firm that adopts flexible manufacturing technologies can increase efficiency and lower unit costs relative to what can be achieved by the mass production of a standardized output, while at the same time allowing the firm to customize its product offering to a much greater extent than was once thought possible. In fact, flexible manufacturing technologies allow companies to produce a wider variety of products at a unit cost that at one time could only be achieved through the mass production of a standardized output.

Compare and contrast the export assistance provided to German and Japanese companies with that given to American companies. Discuss the implications of the differences between the countries.

Germany, one of the world's most successful exporting nations, provides assistance through government agencies, trade associations, and commercial banks to firms seeking export opportunities. In Japan, similar assistance is provided by the Japanese Ministry of Trade and Industry. In addition, many Japanese firms are associated with the sogo shosha, Japan's great trading houses. The sogo shosha have offices all over the world, and they proactively and continuously seek export opportunities for their companies. In contrast, many American firms are relatively blind when they seek export opportunities because they are information disadvantaged. Consequently, because an institutional structure for promoting exports has yet to evolve in the United States, American firms are at a competitive disadvantage compared to their German and Japanese counterparts.

What is human resource management? Why is HRM an important strategic component?

Human resource management refers to the activities an organization carries out to use its human resources effectively. These activities include determining the firm's human resource strategy, staffing, performance evaluation, management development, compensation, and labor relations. None of these activities is performed in a vacuum; all are related to the strategy of the firm. HRM has an important strategic component. Through its influence on the character, development, quality, and productivity of the firm's human resources, the HRM function can help the firm achieve its primary strategic goals of reducing the costs of value creation and adding value by better serving customers.

What factors affect the rate of new-product development in countries?

Ideas for new products are stimulated by the interactions of scientific research, demand conditions, and competitive conditions. Other things being equal, the rate of new product development seems to be greater in countries where: • More money is spent on basic and applied research and development. • Underlying demand is strong. • Consumers are affluent. • Competition is intense. Basic and applied research and development discovers new technologies and then commercializes them. Strong demand and affluent consumers create a potential market for new products. Intense competition between firms stimulates innovation as the firms try to beat their competitors and reap potentially enormous first-mover advantages that result from successful innovation.

What are the considerations when seeking external financing for international business?

If external financing is required, the firm must decide whether to tap the global capital market for funds or borrow from sources in the host country. If the firm is going to seek external financing for a project, it will want to borrow funds from the lowest-cost source of capital available. The cost of capital is typically lower in the global capital market, by virtue of its size and liquidity, than in many domestic capital markets, particularly those that are small and relatively illiquid. However, despite the trends toward deregulation of financial services, in some cases host-country government restrictions may rule out this option.

Why should a firm be cautious about entering a licensing agreement?

In a licensing agreement, the licensor grants the rights to intangible property to the licensee for a specified period in exchange for royalty payments. Firms considering this type of arrangement should be cautious on three fronts. First, if a firm licenses any of its proprietary know-how (such as its production processes) to another company, it risks losing control over this knowledge by permitting access to it by another firm. Second, licensing is not an effective way of realizing experience curve and location economies by manufacturing a product in a centralized location. If these attributes are important to a firm, licensing may be a poor choice. Finally, competing in a global market may require a firm to coordinate strategic moves across countries by using profits from one country to support competitive attacks in another. Licensing severely limits a firm's ability to do this. A licensee is unlikely to allow a multinational firm to use its profits (beyond the royalty payments) to support a different licensee operating in another country.

Explain the idea of a turnkey project. Why should a firm use this arrangement to expand internationally? In what industries are turnkey arrangements most common?

In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel. At completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation. The know-how required to assemble and run a technologically complex process is a valuable asset. Turnkey projects are a way of earning great economic returns from that asset. The strategy is particularly useful where FDI is limited by host-government regulations. A turnkey strategy can also be less risky than conventional FDI. In a country with unstable political and economic environments, a longer-term investment might expose a firm to unacceptable political and/or economic risks. Turnkey projects are most common in the chemical, pharmaceutical, petroleum refining, and metal refining industries.

What are the main steps in the control process of a typical firm?

In a typical firm, the control process is annual and involves three main steps: (1) head office and subunit management jointly determine subunit goals for the coming year; (2) throughout the year, the head office monitors subunit performance against the agreed goals; (3) if a subunit fails to achieve its goals, the head office intervenes in the subunit to learn why the shortfall occurred, taking corrective action when appropriate.

Consider why a firm should enter a market via a wholly owned subsidiary. What are the advantages and disadvantages of this type of strategy?

In a wholly owned subsidiary, the firm owns 100 percent of the stock. Wholly owned subsidiaries can take two forms, a greenfield investment, which involves the establishment of a new company, or an acquisition.Establishing a wholly owned subsidiary as an entry strategy into a foreign market is appropriate when a firm's competitive advantage is based on technological competence. By establishing a wholly owned subsidiary, a firm reduces the risk of losing control over that competence. In addition, expanding via a wholly owned subsidiary gives a firm tight control over its operations in various countries. This strategy maximizes a firm's potential to engage in global strategic coordination. Furthermore, a wholly owned subsidiary strategy may be required if a firm is trying to realize location and experience curve economies.However, establishing a wholly owned subsidiary is generally the most costly method of serving a foreign market, and since the firm owns 100 percent of the operation, the risks are also the highest.

How is a country's accounting system affected by the providers of capital? Explain with the help of suitable examples.

In countries with well-developed capital markets, such as the United States and Britain, firms typically raised capital by issuing stock or bonds to investors. Investors in these countries demanded detailed accounting disclosures so that they could better assess the risk and likely return on their investments. The accounting system evolved to accommodate these requests. In contrast, in Germany and Switzerland the banks emerged as the main providers of capital to enterprises. Bank officers often sat on the boards of these companies and were privy to detailed information about their operations and financial position. As a consequence, there were fewer demands for detailed accounting disclosures, and public accounts tended to reveal less information. Another important influence has been the political or economic ties between nations. U.S.-style accounting systems were adopted in the Philippines, which was once a U.S. protectorate. Similarly, the vast majority of former colonies of the British Empire have accounting practices modeled after Great Britain's, while former French colonies followed the French system.

Explain why the evaluation of a subsidiary should be kept separate from the evaluation of its manager.

In many international businesses, the same quantitative criteria are used to assess the performance of both a foreign subsidiary and its managers. Many accountants, however, argue that although it is legitimate to compare subsidiaries against each other on the basis of return on investment (ROI) or other indicators of profitability, it may not be appropriate to use these for comparing and evaluating the managers of different subsidiaries. Foreign subsidiaries do not operate in uniform environments; their environments have widely different economic, political, and social conditions, all of which influence the costs of doing business in a country and hence the subsidiaries' profitability. Thus, the manager of a subsidiary in an adverse environment that has an ROI of 5 percent may be doing a better job than the manager of a subsidiary in a benign environment that has an ROI of 20%. Although the firm might want to pull out of a country where its ROI is only 5%, it may also want to recognize the manager's achievement. Accordingly, it has been suggested that the evaluation of a subsidiary should be kept separate from the evaluation of its manager.

Explain how fixed costs impact the decision to where to locate a plant.

In some cases, the fixed costs of setting up a production plant are so high that a firm must serve the world market from a single location or from a very few locations. For example, it now costs up to $5 billion to set up a state-of-the-art plant to manufacture semiconductor chips. Given this, other things being equal, serving the world market from a single plant sited at a single (optimal) location can make sense. Conversely, a relatively low level of fixed costs can make it economical to perform a particular activity in several locations at once. This allows the firm to better accommodate demands for local responsiveness. Manufacturing in multiple locations may also help the firm avoid becoming too dependent on one location.

Discuss the role of technology in new-product development, including the concept of "creative destruction."

In today's world, competition is as much about technological innovation as anything else. The pace of technological change has accelerated greatly, and it continues to do so today. The result has been a dramatic shortening of product life cycles. Technological innovation is both creative and destructive. This "creative destruction" unleashed by technological change makes it critical that a firm stay on the leading edge of technology, lest it loses out to a competitor's innovations. For example, personal computers, which destroyed the market for typewriters, at the same time created new opportunities connected with computers.

Identify a key accounting problem that international businesses are confronted with but that does not confront purely domestic businesses. Substantiate with a suitable example.

International businesses are confronted with a number of accounting problems that do not confront purely domestic businesses. One of these problems is the lack of consistency in the accounting standards of different countries. For example, the accounting rules currently used in China are not the same as those used in more developed markets. This makes it very difficult for international investors to accurately value Chinese firms, and it opens up the possibility that firms seeming to be profitable and financially strong are in fact not.

Discuss the trade-offs associated with large-scale entry versus small-scale entry.

It is important for a firm to think through the implications of large-scale entry into a market and act accordingly. Of particular relevance is trying to identify how actual and potential competitors might react to large-scale entry into a market. Also, the large-scale entrant is more likely than the small-scale entrant to be able to capture first-mover advantages associated with demand preemption, scale economies, and switching costs. Balanced against the value and risks of the commitments associated with large-scale entry are the benefits of a small-scale entry. Small-scale entry allows a firm to learn about a foreign market while limiting the firm's exposure to that market. Small-scale entry is a way to gather information about a foreign market before deciding whether to enter on a significant scale and how best to enter. By giving the firm time to collect information, small-scale entry reduces the risks associated with a subsequent large-scale entry. But the lack of commitment associated with small-scale entry may make it more difficult for the small-scale entrant to build market share and to capture first-mover or early-mover advantages. The risk-averse firm that enters a foreign market on a small scale may limit its potential losses, but it may also miss the chance to capture first-mover advantages.

Describe the three exchange rates that can be used to translate foreign currencies into the corporate currency in setting budgets and in the subsequent tracking of performance that Lessard and Lorange pointed out.

Lessard and Lorange pointed out three exchange rates that can be used to translate foreign currencies into the corporate currency in setting budgets and in the subsequent tracking of performance: (1) the initial rate, the spot exchange rate when the budget is adopted; (2) the projected rate, the spot exchange rate forecast for the end of the budget period (i.e., the forward rate); and (3) the ending rate, the spot exchange rate when the budget and performance are being compared.

Define the term logistics. Compare and contrast production and logistics.

Logistics is the activity that controls the effective flows of physical materials through the value chain, from procurement through production and into distribution. Production and logistics are closely linked since a firm's ability to perform its production activities efficiently depends on a timely supply of high-quality material and information inputs, for which purchasing and logistics are critical functions.

Describe the notion of management development programs as a tool for increasing the overall skill levels of managers. What is the goal of this type of program?

Management development programs are designed to increase the overall skill levels of managers through a mix of ongoing management education and rotations of managers through a number of jobs within the firm to give them a broad range of experience. The goal of this type of program is to improve overall productivity and quality of the firm's management resources. As a strategic tool, management development programs can play an important role in international businesses. These programs can help a firm build a corporate culture that is sensitive to international business issues. Moreover, by rotating managers, firms can build informal management networks, networks that can then be used as a conduit for exchanging information within an organization.

Describe the concept of minimum efficient scale of output. What are the implications of minimum efficient scale?

Minimum efficient scale of output refers to the level of output at which most plant-level scale economies are exhausted. This is the level of output at which a plant must operate to realize all major plant-level scale economies. The concept suggests that the larger the minimum efficient scale of a plant relative to total global demand, the greater the argument for centralizing production in a single location or a limited number of locations. Alternatively, when the minimum efficient scale of production is low relative to global demand, it may be economical to manufacture a product at several locations.

Differentiate between multipoint pricing and experience curve pricing strategies.

Multipoint pricing refers to the fact a firm's pricing strategy in one market may have an impact on its rivals' pricing strategy in another market. Aggressive pricing in one market may elicit a competitive response from a rival in another market. Many firms pursuing an experience curve pricing strategy on an international scale will price low worldwide in attempting to build global sales volume as rapidly as possible, even if this means taking large losses initially. Such a firm believes that in several years, when it has moved down the experience curve, it will be making substantial profits and have a cost advantage over its less aggressive competitors.

What problems do novice exporters typically face when trying to export?

Novice exporters run into significant problems when first trying to do business abroad. Typically, this sours the companies on future export opportunities. Common pitfalls include poor market analysis, a poor understanding of competitive conditions in the foreign market, a failure to customize the product offering to the needs of foreign customers, lack of an effective distribution program, a poorly executed promotional campaign in the foreign market, and problems securing financing. Furthermore, novice exporters tend to underestimate the time and expertise needed to cultivate business in foreign countries. Few realize the amount of management resources that have to be dedicated to this activity. Many foreign customers require face-to-face negotiations on their home turf. An exporter may have to spend months learning about a country's trade regulations, business practices, and more before a deal can be closed.

Explain the term relational capital and the importance this concept plays in managing an effective business alliance.

Once a partner has been selected and an appropriate alliance structure has been agreed upon, the task facing the firm is to maximize its benefits from this business alliance. Managing an alliance successfully requires building interpersonal relationships between the firms' managers, or what is sometimes referred to as relational capital. The belief is that the resulting friendships between the two firms' managers help build trust and facilitate harmonious relations between the two firms. Personal relationships also foster an informal management network between the firms. This network can then be used to help solve problems arising in more formal contexts (such as in joint committee meetings between personnel from the two firms).

Explain 3M's main export principles that have made the company's exporting business so successful.

One of the most successful exporting firms in the world is 3M, originally known as Minnesota Mining & Manufacturing Co. It has built its success on three main principles: enter on a small scale to reduce risks, add additional product lines once the exporting operations start to become successful, and hire locals to promote the firm's products.

What are the three actions taken by organized labor to respond to the increased bargaining power of multinationals? How successful have these efforts been?

Organized labor has responded to the increased bargaining power of multinationals by taking three actions. First, organized labor is trying to establish international labor organizations. Second, labor is lobbying for national legislation to restrict multinationals. Finally, organized labor is trying to achieve international regulations on multinationals through organizations such as the UN. To date, success in these efforts has been limited.In the 1960s, organized labor began to establish international trade secretariats (ITSs) to provide worldwide links for national unions in particular industries. The long-term goal was to be able to bargain transnationally with multinational firms. Organized labor believed that by coordinating union action across countries through an ITS, it could counter the power of a multinational corporation by threatening to disrupt production on an international scale. The ITSs have had virtually no real success. Although national unions may want to cooperate, they also compete with each other to attract investment from international businesses and hence jobs for their members.

Discuss why the repatriation process is so difficult for so many expatriates.

Preparing expatriates for reentry into their home-country organization is generally overlooked, yet represents a huge challenge for firms. Often when expatriates return home after a stint abroad, they face an organization that doesn't know what they have done for the last few years, doesn't know how to use their new knowledge, and doesn't particularly care. In the worst cases, reentering employees have to scrounge for jobs, or firms create standby positions that don't use the expatriate's skills and capabilities and fail to make the most of the business investment the firm has made in that individual.

What are the advantages of using royalties and fees to move money across borders?

Royalties and fees have certain tax advantages over dividends, particularly when the corporate tax rate is higher in the host country than in the parent company's home country. Royalties and fees are often tax-deductible locally (because they are viewed as an expense), so arranging for payment in royalties and fees will reduce the foreign subsidiary's tax liability. If the foreign subsidiary compensates the parent company by dividend payments, local income taxes must be paid before the dividend distribution, and withholding taxes must be paid on the dividend itself.

Describe the information sources that are available to American companies to learn about export opportunities.

Several sources of information are available to American companies looking for export assistance. The most comprehensive source of information is the U.S. Department of Commerce. Within the Department of Commerce, there are two organizations dedicated to providing businesses with intelligence and assistance for attacking foreign markets: the International Trade Administration and the United States and Foreign Commercial Service Agency. These agencies provide the potential exporter with a "best prospects" list, which gives the names and addresses of potential distributors in foreign markets along with the businesses they are in, the products they handle, and their contact person. The Department of Commerce has assembled a "comparison shopping service" where companies can receive a customized market research survey on a product. The survey provides information on marketability, the competition, comparative prices, distribution channels, and names of potential sales representatives. The Small Business Administration is also a source of information for exporters, providing counseling and legal assistance. Finally, most states have active trade commissions that can be a source of information. A number of private organizations are also beginning to provide more assistance to would-be exporters. Commercial banks and major accounting firms are more willing to assist small firms in starting export operations than they were a decade ago.

Briefly describe the Six Sigma methodology.

Six Sigma is the modern successor to TQM. It is a statistically based philosophy that aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout a company. Six Sigma is the principal tool used by most managers to increase the reliability of their product offering. At six sigmas, a production process would be 99.99966 percent accurate, creating just 3.4 defects per million units. Six Sigma quality is a goal to strive toward. The Six Sigma program is particularly informative in structuring global processes that multinational corporations can follow in quality and productivity initiatives. As such, increasingly companies are adopting Six Sigma programs to try to boost their product quality and productivity.

Should a firm pay executives in different countries according to the prevailing standards in each country, or should it equalize pay on a global basis? Defend your answer.

Substantial differences exist in the compensation of executives at the same level in various countries. These differences raise the question of whether a firm should pay its expatriate managers the prevailing wage rate in the country that they are working in, or whether the firm should pay all of its expatriate managers at the same level of responsibility a similar amount of pay? For a U.S. firm, this could mean raising the compensation of foreign nationals to U.S. levels, a policy that could prove to be very expensive. Yet, if a firm does not equalize pay, it could cause considerable resentment among foreign nationals who work with U.S. managers.

Discuss the importance of the Export-Import Bank, its goals, and its operations.

The Export-Import Bank, often referred to as Ex-Im Bank, is a wholly owned U.S. government corporation that was established in 1934. Its mission is to assist in the financing of U.S. exports of products and services to support U.S. employment and market competitiveness. Based on its charter and mandate from the U.S. Congress, the Ex-Im Bank's financing must have a "reasonable assurance of repayment" and should supplement, and not compete with, private capital lending. The bank pursues its mission through various loan and loan-guarantee programs. The agency guarantees repayment of medium- and long-term loans U.S. commercial banks make to foreign borrowers for purchasing U.S. exports. It also guarantees to make the commercial banks more willing to lend cash to foreign enterprises.Ex-Im bank also has a direct lending operation under which it lends dollars to foreign borrowers for use in purchasing U.S. exports. In some cases, it grants loans that commercial banks would not if it sees a potential benefit to the United States in doing so. The foreign borrowers use the loans to pay U.S. suppliers and repay the loan to Ex-Im Bank with interest.

What is the Foreign Credit Insurance Association?

The Foreign Credit Insurance Association (FCIA) is an association of private commercial institutions operating under the guidance of the Export-Import Bank to provide export credit insurance. The FCIA provides coverage against commercial risks and political risks. Losses due to commercial risk result from the buyer's insolvency or payment default. Political losses arise from actions of governments that are beyond the control of either buyer or seller.

Define just-in-time inventory. Explain why a firm might adopt the just-in-time system. Why might a firm choose a different inventory system?

The JIT system was developed by Japanese firms in the 1950s and 1960s. Today, most manufacturing firms have adopted the system in some way. The basic philosophy behind just-in-time (JIT) manufacturing is to economize on inventory holding costs by having materials arrive at a manufacturing plant "just in time" to enter the production process and not before. This results in potential cost savings and quality improvements. A firm might consider a different type of inventory system in some cases because the disadvantage of a JIT system is that it leaves a firm without a buffer stock of inventory. As a result, a labor dispute at a supplier's plant or a disruption in the transportation system could leave a manufacturer without adequate component parts.

Explain briefly the regulatory influences on pricing.

The ability to engage in either price discrimination or strategic pricing may be limited by national or international regulations. Most important, a firm's freedom to set its own prices is constrained by antidumping regulations and competition policy. Antidumping regulations: Both predatory pricing and experience curve pricing can run afoul of antidumping regulations. Dumping occurs whenever a firm sells a product for a price that is less than the cost of producing it. Antidumping rules set a floor under export prices and limit firms' ability to pursue strategic pricing. The rather vague terminology used in most antidumping actions suggests that a firm's ability to engage in price discrimination also may be challenged under antidumping legislation. Competition policy: Most developed nations have regulations designed to promote competition and to restrict monopoly practices. These regulations can be used to limit the prices a firm can charge in a given country.

Discuss the advantages of establishing a greenfield venture in a foreign country.

The big advantage of establishing a greenfield venture in a foreign country is that it gives the firm a much greater ability to build the kind of subsidiary company that it wants. For example, it is much easier to build an organization culture from scratch than it is to change the culture of an acquired unit. Similarly, it is much easier to establish a set of operating routines in a new subsidiary than it is to convert the operating routines of an acquired unit. This is a very important advantage for many international businesses, where transferring products, competencies, skills, and know-how from the established operations of the firm to the new subsidiary are principal ways of creating value.

What are the three main factors that affect the decision of where to locate production?

The decision of where to locate production is determined by three main factors—country factors, technological factors, and production factors. (1) Country factors include a country's economic and political systems, culture, and relative factor costs that differ from country to country. These factors influence the benefits, costs, and risks of doing business in a country. (2) Technological factors: the type of technology a firm uses to perform specific manufacturing activities can be pivotal in location decisions. Three characteristics of a manufacturing technology are the level of fixed costs, the minimum efficient scale, and the flexibility of the technology. (3) Production factors include product features, locating production facilities, and strategic roles for production facilities. Specifically, a product's value-to-weight ratio and whether the product serves universal needs will affect where a firm locates its production activities.

What factors can jeopardize the success of a firm's international communications?

The effectiveness of a firm's international communications can be jeopardized by three critical variables: cultural barriers, source effects, and noise levels. Cultural barriers can make it difficult to communicate messages across cultures. Source effects occur when the receiver of the message evaluates the message based on the status or image of the sender, which can be positive or negative. Finally, noise refers to the amount of other messages competing for a potential consumer's attention.

What are the four main differences between distribution systems across countries?

The four main differences between distribution systems are retail concentration, channel length, channel exclusivity, and channel quality. Retail concentration refers to how many retailers supply most of the market. Channel length refers to the number of intermediaries between the producer and the consumer. Channel exclusivity refers to how difficult it is for outsiders to access the channel. Finally, channel quality refers to the expertise, competencies, and skills of established retailers in a nation and their ability to sell and support the products of international businesses.

Describe the process involved in financing imports and exports using a letter of credit. Why has this system developed? What is the advantage of using this system?

The letter of credit is at the center of international commercial transactions. A letter of credit is issued by a bank at the request of an importer. The letter of credit states the bank will pay a specified sum of money to a beneficiary, normally the exporter, on presentation of particular, specified documents. The advantage of the system is that it introduces an element of trust into the relationship in that both the importer and the exporter are likely to trust reputable banks even if they do not trust each other.

What is the most common approach to expatriate pay? Explain this form of compensation. What is the advantage of this approach?

The most common approach to expatriate pay is the balance sheet approach. This approach has the advantage of equalizing purchasing power across countries so that employees can enjoy the same living standard in their foreign posting as they enjoyed at home. In addition, the approach provides financial incentives to offset qualitative differences between assignment locations. The typical expatriate compensation package is composed of a base salary, a foreign-service premium, allowances of various types, tax differentials, and benefits.

Explain the concept of price elasticity of demand. What are its determining factors?

The price elasticity of demand is a measure of the responsiveness of demand for a product to change in price. Demand is said to be elastic when a small change in price produces a large change in demand; it is said to be inelastic when a large change in price produces only a small change in demand. The elasticity of demand for a product in a given country is determined by a number of factors, of which income level and competitive conditions are the two most important. Price elasticity tends to be greater in countries with low income levels. Consumers with limited incomes tend to be very price conscious; they have less to spend, so they look much more closely at price. In general, the more competitors there are, the greater consumers' bargaining power will be and the more likely consumers will be to buy from the firm that charges the lowest price. Thus, many competitors cause high elasticity of demand. In such circumstances, if a firm raises its prices above those of its competitors, consumers will switch to the competitors' products. The opposite is true when a firm faces few competitors. When competitors are limited, consumers' bargaining power is weaker and price is less important as a competitive weapon. Thus, a firm may charge a higher price for its product in a country where competition is limited than in one where competition is intense.

Discuss the strategic objectives of the production and logistics functions of an international firm.

The production and logistics functions of an international firm have a number of important strategic objectives. A primary objective is to lower costs. Dispersing production activities to various locations around the globe where each activity can be performed most efficiently can lower costs. Costs can also be lowered by managing the global supply chain to better match supply and demand. A second strategic objective is to increase product quality by establishing process-based quality standards and by eliminating defective products from both the supply chain and the manufacturing process. A third objective involves meeting demands for local responsiveness. Finally, production and logistics must be able to respond to shifts in customer demand.

Discuss the reasons expatriate managers fail to complete their foreign assignment.

The question of why expatriates fail to complete their foreign assignments was studied by R.L. Tung, who found that U.S. firms experienced a significantly higher failure rate than either European or Japanese firms. For American firms, the reasons for expatriate failure, in order of importance, were: (1) inability of spouse to adjust, (2) manager's inability to adjust, (3) other family problems, (4) manager's personal or emotional maturity, and (5) inability to cope with larger overseas responsibilities. However, for Japanese firms the reasons for expatriate failure, in order of importance, were: (1) inability to cope with larger overseas responsibilities, (2) difficulties with new environment, (3) personal or emotional problems, (4) lack of technical competence, and (5) inability of spouse to adjust. Perhaps the most striking difference between these two lists is that the importance of the spouse was most important for U.S. expatriate managers but ranked only fifth for Japan. Tung comments that this difference is not surprising given the role and status to which Japanese society traditionally relegates the wife and the fact that most of the Japanese expatriate managers in the study were men. Finally, European firms gave only one reason to explain expatriate failure: the inability of a spouse to adapt. Tung's research has been confirmed by a number of subsequent studies of expatriate failure.

Explain why barter is viewed as the most restrictive countertrade arrangement.

The simplest form of countertrade is barter. Barter is the direct exchange of goods and/or services between two parties without a cash transition. First, if goods are not exchanged simultaneously, one party ends up financing the other for a period. Second, firms engaged in barter run the risk of having to accept goods they do not want, cannot use, or have difficulty reselling at a reasonable price. For these reasons, barter is viewed as the most restrictive countertrade arrangement. It is primarily used for one time-only deals in transactions with trading partners who are not creditworthy or trustworthy.

Explain how the strategic role of foreign factories evolves over time.

The strategic role of foreign factories can evolve over time. Initially, many foreign factories are established where labor costs are low, and at that time, their strategic role is to produce labor-intensive products at as low a cost as possible. Over time, the strategic role of the factories may evolve to one in which the factories become important centers for the design and assembly of products for the global marketplace. This change may take place as factories upgrade their capabilities as the factories respond to pressure to improve their cost structures and/or customize a product to the demands of consumers in a particular nation. In addition, as the local factors of production improve, it is easier for the factories to take on a greater strategic role.

How does the type of technology a firm uses affect its decision of where to locate production?

The type of technology a firm uses to perform specific manufacturing activities can be pivotal in location decisions. The three primary factors that drive location decisions in terms of technology are a manufacturing activity's level of fixed costs, its minimum efficient scale, and its flexibility. When the fixed costs of setting up a manufacturing operation are high, a firm must serve the world market from a single location or from a few locations. In contrast, when fixed costs are low, a firm can scatter its manufacturing activities throughout the world to better accommodate local markets. The larger the minimum efficient scale of a plant, the greater is the argument for centralized production at a single location. Finally, when flexible manufacturing technologies are available, a firm can manufacture products customized to various national markets at a single factory at the optimal location.

Describe the 14 steps in a typical international trade transaction.

The typical international trade transaction involves 14 steps: 1. The importer places an order with the exporter and asks if he would be willing to ship under a letter of credit. 2. The exporter agrees to ship under a letter of credit and specifies relevant information such as prices and delivery terms. 3. The importer applies to the importer's bank (any bank of the importer's country) for a letter of credit to be issued in favor of the exporter for the merchandise the importer wishes to buy. 4. The importer's bank issues a letter of credit in the importer's favor and sends it to the exporter's bank (any bank in the exporter's country). 5. The exporter's bank advises the exporter that a letter of credit has been opened in his favor. 6. The exporter ships the goods to the importer on a common carrier. An official of the carrier gives the exporter a bill of lading. 7. The exporter presents a 90-day time draft drawn on the importer's bank in accordance with its letter of credit and the bill of lading to the exporter's bank. The exporter endorses the bill of lading so title to the goods is transferred to the exporter's bank. 8. The exporter's bank sends the draft and bill of lading to the importer's bank. The importer's bank accepts the draft, taking possession of the documents and promising to pay the now-accepted draft in 90 days. 9. The importer's bank returns the accepted draft to the exporter's bank. 10. The exporter's bank tells the exporter that it has received the accepted bank draft, which is payable in 90 days 11. The exporter sells the draft to his bank at a discount from its face value and receives the discounted cash value of the draft in return. 12. The importer's bank notifies the importer of the arrival of the documents. He/she agrees to pay the in 90 days. The importer's bank releases the documents so the importer can take possession of the shipment. 13. In 90 days, the importer's bank receives the importer's payment, so it has funds to pay the maturing draft. 14. In 90 days, the holder of the matured acceptance presents it to the importer's bank for payment. The importer's bank pays.

Explain how the wide variation in union structure around the world has been an impediment to cooperation between international companies and various unions.

The wide variation in union structure around the world has been an impediment to cooperation between companies and unions. Trade unions developed independently in each country. As a result, the structure and the ideology of unions tend to vary significantly from country to country, as does the nature of collective bargaining. For example, in the UK, France, and Italy, many unions are controlled by left-wing socialists, who view collective bargaining through the lens of "class conflict." In contrast, most union leaders in Germany, the Netherlands, and Scandinavia are far more moderate politically. The ideological gap between union leaders in different countries has made cooperation difficult.

What is Theodore Levitt's contribution to international business?

Theodore Levitt wrote about the globalization of world markets in a now-classic Harvard Business Review article. Levitt suggested that due to technology, the world was moving toward a converging commonalty and the emergence of global markets for standardized consumer products. According to Levitt, this convergence creates an opportunity for the global corporation to serve the entire world as if it were a single entity, or in other words, sell the same thing in the same way everywhere. Most academics believe that Levitt has overstated his case, that globalization in consumer products is probably the exception rather than the rule. Furthermore, cultural and economic differences between countries will continue to limit the effects of any movement toward the standardization of consumer preferences and tastes. In addition, trade barriers and differences in product and technical standards will also constrain a firm's ability to sell standardized products to global markets using a standardized marketing strategy.

Imagine that you are meeting with your superiors to discuss entering a foreign market. Your boss has asked you to analyze a joint venture prospect. Why might you tell your boss that the joint venture isnot a good idea?

There are major disadvantages with joint ventures. A firm that enters into a joint venture risks giving control of its technology to its partner. In addition, a joint venture does not give the firm the tight control over subsidiaries that it might need to realize experience curve or location economies. Finally, a joint venture might not be a good strategy because the shared ownership structure can lead to conflicts and battles for control between the investing firms if their goals and objectives change or if they take different views as to what the strategy should be.

Why do so many firms take a reactive approach to exporting rather than a proactive approach?

There are several reasons firms do not take a proactive approach while seeking export opportunities. One reason is that most firms are unfamiliar with foreign market opportunities, they do not realize how big the potential market is, or where the opportunities are. A second reason firms take a reactive approach to exporting is because they are intimidated by the complexities and mechanics of exporting to countries where business practices, language, culture, legal systems, and currency are very different from the home market. A third reason for firms not being proactive about exporting is the number of problems neophyte exporters typically face when trying to do business abroad.

When does concentration of production make sense?

There are several situations when concentrating production facilities in a centralized location and serving the world from there makes sense. Concentration of production makes sense when the product serves universal needs; the product's value-to-weight ratio is high; trade barriers are low; important exchange rates are expected to remain stable; externalities from the concentration of like enterprises favor certain locations; differences between countries in factor costs, political economy, and culture have a substantial impact on the costs of manufacturing in various countries; and when the production technology has high fixed costs and high minimum efficient scale relative to global demand, or flexibility manufacturing technology exists.

What are the three factors that contribute to the trend toward greater retail concentration in developed countries? How have these factors promoted retail concentration?

There are three factors that contribute to the greater retail concentration in developed countries. First is the increase in car ownership. Second is the increase in the number of households with refrigerators and freezers. Third is the increase in the number of two-income households. All of these factors have changed shopping habits and facilitated the growth of large retail establishments sited away from traditional shopping areas. The last decade has seen consolidation in the global retail industry, with companies such as Walmart and Carrefour attempting to become global retailers by acquiring retailers in different countries. This has increased retail concentration.

What are the arguments for standardized advertising across international markets?

There are three main arguments supporting the notion of standardized advertising across markets. First, such a campaign has significant economic advantages because it lowers the cost of value creation by spreading the fixed costs of developing the advertisements across many countries. Second, because of concerns about the scarcity of creative talent, one large effort to develop a campaign will produce better results than 40 or 50 smaller efforts. Finally, many brand names are global. With the substantial amount of international travel today and the considerable overlap in media across national borders, many international firms want to project a single brand image to avoid confusion caused by local campaigns. This is particularly important in regions such as Western Europe, where travel across borders is almost as common as travel across state lines in the United States.

What are the three types of staffing policies in international business? Briefly describe each one. Which is the most attractive approach and why?

There are three types of staffing approaches in international business. First, the ethnocentric approach is one in which all key management positions are filled by parent-country nationals. Second, the polycentric approach involves recruiting host-country nationals to manage subsidiaries while parent-country nationals occupy key positions at corporate headquarters. Third, the geocentric policy seeks the best people for key jobs throughout the organization, regardless of nationality. This approach is probably the most attractive because it enables the firm to make the best use of its human resources, and it allows the firm to build a cadre of international executives who feel at home working in a number of cultures.

What are the two main issues that managers must be aware of when considering market segmentation in foreign countries?

There are two key issues that managers must be aware of when using market segmentation in foreign countries. First, managers must consider the differences between countries in the structure of market segments, which may differ significantly from country to country. The firm may have to develop a unique marketing mix to appeal to the purchasing behavior of a certain segment in a given country. Second, managers must be aware of the existence of segments that transcend national borders. Such segments would enhance the ability of a company to view the global marketplace as a single entity and pursue a global strategy.

How do product factors affect the decision of where to locate production? Where will you locate your firm's production plant if your firm produces refined sugar?

There are two product factors that affect the decision of where to locate production. First, a product's value-to-weight ratio must be considered because of its effect on transportation costs. Students should recognize that sugar has a low value-to-weight ratio; therefore, other things being equal, there will be pressure to make these products in multiple locations close to major markets to reduce transportation costs.

What are the nine possible combinations of the three exchange rates proposed by Lessard and Lorange in the control process?

These three exchange rates imply nine possible combinations. Lessard and Lorange ruled out four of the nine combinations as illogical and unreasonable. An image comparable to Figure 20.1 would be appropriate to answer this question.

How can a firm increase the probability of selecting a good partner?

To increase the probability of selecting a good partner, the firm should:1. Collect as much pertinent, publicly available information on potential allies as possible.2. Gather data from informed third parties. These include firms that have had alliances with the potential partners, investment bankers that have had dealings with them, and former employees.3. Get to know the potential partner as well as possible before committing to an alliance. This should include face-to-face meetings between senior managers (and perhaps middle-level managers) to ensure that the chemistry is right.

What are the shortcomings of IASB?

To issue a new standard, 75 percent of the 16 members of the board must agree. It can be difficult to get three-quarters agreement, particularly since members come from different cultures and legal systems. Another hindrance to the development of international accounting standards is that compliance is voluntary; the IASB has no power to enforce its standards.

How can firms reduce the bias in performance appraisals of expatriate managers?

Unintentional bias makes it difficult to evaluate the performance of expatriate managers objectively. This bias can be reduced in several ways. First, most expatriates believe that more weight should be given to an on-site manager's appraisal than to an off-site manager's appraisal. If the on-site manager is of the same nationality as the expatriate manager, cultural bias can also be reduced. Finally, when the policy is for foreign on-site managers to write performance evaluations, home-office managers, in an effort to avoid cultural misunderstandings, should be consulted before an on-site manager completes a formal termination evaluation. This gives the home-office manager the opportunity to balance what could be a very hostile evaluation based on a cultural misunderstanding.

Explain the relationship between first-mover disadvantages and pioneering costs.

When a firm enters a market before other international businesses, it can have first-mover disadvantages. These disadvantages may give rise to pioneering costs, costs that an early entrant has to bear that a later entrant can avoid. Pioneering costs arise when the business system in a foreign country is so different from that in a firm's home market that the enterprise has to devote considerable effort, time, and expense to learning the rules of the game. Pioneering costs also include the costs of promoting and establishing a product offering. Finally, an early entrant may be put at a disadvantage, relative to a later entrant, if regulations change in a way that diminishes the value of the early entrant's investments.

Compare and contrast push strategies and pull strategies.

When developing its communications strategy, a firm must decide between a push and a pull strategy. A push strategy emphasizes personal selling rather than mass media advertising in the promotional mix. This type of strategy requires intensive use of a sales force and is relatively costly. In contrast, a pull strategy depends more on mass media advertising to communicate the marketing message to potential customers. Although some firms employ only a pull strategy and others only a push strategy, still other firms combine direct selling with mass advertising to maximize communication effectiveness. Factors that determine the relative attractiveness of push and pull strategies include product type relative to consumer sophistication, channel length, and media availability.

Describe the problem of blocked earnings.

When evaluating a foreign investment opportunity, the parent company should be interested in the cash flows it will receive—as opposed to those the project generates—because those are the basis for dividends to stockholders, investments elsewhere in the world, repayment of worldwide corporate debt, and so on. Stockholders will not perceive blocked earnings as contributing to the value of the firm, and creditors will not count them when calculating the parent's ability to service its debt.