MKT 310 exam 3
strategic pricing
-predatory pricing - profit gained in one market used to support aggressive pricing to drive others out of another market -multi-point pricing - a firm's pricing strategy in one market may have impact on a rival's pricing strategy in another market -aggressive pricing in one market can prompt a competitive response from a rival in another market -central monitoring of pricing decisions around the world is important -experience curve pricing - price low worldwide in an attempt to build global sales volume as rapidly as possible even if this means taking large losses initially
exporting
1. Exporting is often the first method firms use to enter foreign market •Exporting is attractive because -it is relatively low cost -firms may achieve experience curve economies •Exporting is not attractive when -lower-cost manufacturing locations exist -transport costs are high -tariff barriers are high -foreign agents fail to in the exporter's best interest won't export because they are soft service
1. A government can increase the supply of money, which makes it easier for individuals and businesses to get credit. This, in turn, can increase the demand for goods and services, which should grow at the same rate to avoid inflation. Long-Range Predictor Correct 2. Market traders tend to follow the actions of other traders but the individual effects can be hard to predict. Short-Term Predictor Correct 3. Evidence reveals that various psychological factors play an important role in determining the expectations of market traders. Short-Term Predictor Correct 4. Nominal interest rate is the sum of the required "real" rate of interest and the expected rate of inflation during the loan period. A strong relationship exists between nominal interest rates and inflation rates. Long-Range Predictor Correct 5. Expectations of market traders tend to become self-fulfilling prophecies. Short-Term Predictor Correct 6. If the growth in a country's money supply is faster than the growth in its output, price inflation is fueled. Long-Range Predictor
1. Guarantees—Reduces uncertainty of FX transactions Forward Exchange Rate Correct 2. Real time—Price of currency now Spot Exchange Rate Correct 3. Changes—Based on supply and demand changes Spot Exchange Rate Correct 4. Future—Rates quoted 30 days, 90 days, and 180 days into the future Forward Exchange Rate Correct 5. Conversion—Happens in a day or two Spot Exchange Rate Correct 6. Majority—Two-thirds of all foreign exchange transactions Forward Exchange Rate
pattern of FDI
1. Strategic Behavior •Knickerbocker explored the relationship between FDI and rivalry in oligopolistic industries (industries composed of a limited number of large firms) -FDI flows reflect strategic rivalry between firms •This theory can be extended to multipoint competition (when two or more enterprises encounter each other in different regional markets, national markets, or industries)
methods of payment
1.Cash in Advance 2.Letters of Credit 3.Time or Sight Draft 4.Open Account 5.Consignment
locational advantages
1.Cultural proximity - going to a country most like your own 2.Market size - want large market 3.Competitors' moves 4.Geographic proximity 5.Low cost land and labor global - not important they expand into world class cities, has a franchise alternative multinational - very important because they adapt to cultural differences
four types of retail internationalization
1.Global 2.Multinational 3.Acquisition 4.Pure Franchising
types of letter credit
1.Revocable letter of credit -Can be amended or canceled at any time by the opening bank at the request of the buyer or account party. 2.Irrevocable letter of credit -Cannot be changed without the permission of both seller and buyer.
issues
1.Unbanked - people who don't have a bank account and deal only with cash 2.Capital Flight - when people don't trust the banking system so they invest elsewhere 3.Corruption
What are two reasons businesses prefer acquisition as a means of FDI over a greenfield investment? (Check all that apply.)
Acquisitions are faster to execute than greenfield investments. Businesses believe they can increase the efficiency of the acquired unit.
identify two costs of FDI to a home country
Balance of payments are negatively affected if FDI is a substitute for direct exports. Balance of payments are negatively affected if purpose of FDI is to develop a low-cost production location.
a successful global expansion requires a dedicated international growth strategy
Be strategic, don't rush: Make sure to make the right decisions at the right time. Entering one or several new markets at the same time is challenging for any organization and proper preparation is indispensable. One size doesn't fit all: Being successful in the domestic market, doesn't set an organization up for being a global player. Local market requirements and customer needs vary significantly across countries and have to be addressed from the beginning. Be committed for the long-haul: If an organization decides to expand globally, it must show long-term commitment. Many companies have failed in the past due to insufficient preparation or lack of commitment to the market. This does not only lead to significant financial loss but might also impact a company's reputation and brand perception. Use a structured approach: Ensure long-term success of global expansion by using the Global Market Expansion framework. The framework will help an organization to structure all key decision around defining goals for international growth, selecting the right target markets and the best method of entry.
Exporting—Benefit Exporting—Drawback Licensing—Benefit Licensing—Drawback FDI—Benefit FDI—Drawback
Centralized manufacturing can result in scale economies from global sales volume. Transportation costs can make it unprofitable to ship some products over a long distance. A firm does not have to bear development costs and risks of opening a foreign market. A firm can quickly lose control over its technology, manufacturing, and marketing. A firm controls operations in different countries, can use profits from one country to support another. A firm bears the costs and risks of overseas operations, and operating in a new culture.
The text notes two reasons why FDI has outpaced world trade and world output. What are those two reasons?
Despite the decline in trade barriers, firms still fear protectionist pressures. FDI has been driven by political and economic changes in developing nations.
competitive pressures
Firms that compete in the global marketplace typically face two types of competitive pressures 1.Pressures for cost reductions 2.Pressures to be locally responsive These pressures place conflicting demands on the firm
summary
Firms that expand internationally can increase their profitability and profit growth by 1.Entering markets where competitors lack similar competencies 2.Realizing location economies 3.Exploiting experience curve effects 4.Transferring valuable skills within the organization
global expansion and profits
Firms that operate internationally can 1.Expand the market for their domestic product offerings by selling those products in international markets 2.Realize location economies by dispersing individual value creation activities to locations around the globe where they can be performed most efficiently and effectively 3.Realize greater cost economies from experience effects by serving an expanded global market from a central location, thereby reducing the costs of value creation 4.Earn a greater return by leveraging any valuable skills developed in foreign operations and transferring them to other entities within the firm's global network of operations
Description/example of transaction exposure Way to mitigate transaction exposure Description/example of translation exposure Way to mitigate translation exposure Description/example of economic exposure Way to mitigate economic exposure
Income from the individual obligations for the immediate purchase or sale of goods and services at agreed prices; the borrowing or lending of funds in foreign currencies is affected by fluctuations in foreign exchange values. Entering into forward exchange contracts and buying swaps can be used. Concerned with the present measurement of past events. Using lead and lag strategies can help accelerate payments from weak currency to strong currency countries, and vice versa. Concerned with the long-term effect of changes in exchange rates on future prices, sales, and costs. Distribute the firm's productive assets to various locations so the firm's long-term financial well-being is not severely affected by adverse changes in exchange rates.
what are the two characteristics of the eclectic paradigm
It combines the best aspects of other theories of foreign direct investment into a single explanation It provides a single holistic explanation of foreign direct investment
Based on the internalization theory, what are the three major drawbacks to licensing? (Check all that apply.)
Licensing does not allow a firm tight control over basic business operations which is necessary to maximize profitability. Licensing does not account for capabilities in management, marketing, and manufacturing. Licensing may give away valuable technological know-how to a potential foreign competitor.
two benefits of FDI to a home country
MNE learns skills from exposure to foreign market Foreign subsidiary creates demand for home-country exports
Spot Rates
Market forces affecting spot rates: •The "price" of any currency (its rate of exchange) is determined by supply and demand. •The greater the supply of a currency, the lower its price •The lower the supply of a currency, the higher its price •The lower the demand of a currency, the lower its price •The greater the demand of a currency, the higher its price
advantages to FDI
Overcomes high transportation costs Allows for tight control over the firm's operations Allows the firm to maintain control over technological know-how
Japan has interest rates of 4% with one-year maturity and expected inflation of 2%. The US has interest rates of 7% with one year maturity and inflation of 5%. Exchange rate is $1=1,200 Japanese yen. Forecast the spot exchange rate one year from today.
Real interest rate in both the US and Japan is 2%. The international Fisher effect says that the exchange rate will change in an equal amount but opposite direction to the difference in nominal interest rates. The nominal interest rate is 3% higher in the US than in Japan...therefore the dollar should depreciate by 3% relative to the Japanese yen. $1=1164 yen
strategic internationalization
Retailer purposely considers internationalization options in expansion
forward vs. futures contracts
Similarities: •Both guarantee a fixed exchange rate. •Both specify an exchange rate in advance of the actual exchange of currency. Differences: •Forwards are bank instruments, while Futures are private contracts traded on the exchange (CME). •Sometimes future contracts are cheaper than forward contracts (the exchange rate is better).
types of currency exchange rates
Spot rates •The rate for an immediate transaction Forward rates •3 month, 6 month, 9 month, or 12 month
the pattern of FDI
The Product Life Cycle •Vernon - firms undertake FDI at particular stages in the life cycle of a product they have pioneered -Firms invest in other advanced countries when local demand in those countries grows large enough to support local production -Firms shift production to low-cost developing countries when product standardization and market saturation create price competition and cost pressures
Which of the following occurred as a result of the strong U.S. dollar from 2014 to 2016?
The price of U.S. exports rose.
value creation
The two basic strategies for creating value are 1.Differentiation 2.Low Cost
Which of the following occurred as a result of increased demand for the dollar following the 2008 great recession?
The value of the dollar rose relative to foreign currencies.
Why did foreign investors invest in U.S. Treasury Bills following the 2008-2009 global recession?
They were looking for a safe haven for their money.
theories of exchange rate determination
Three factors that have an important impact on future exchange rate movements are 1.A country's price inflation 2.A country's interest rate 3.Market psychology •To understand how prices and exchange rates are linked, we need to understand -the law of one price-if you can't justify differences in prices, they won't fold -the theory of purchasing power parity-have to compare prices in other countries Question: How do interest rates affect exchange rates? •The Fisher Effect states that a country's nominal interest rate (i) is the sum of the required real rate of interest (r ) and the expected rate of inflation over the period for which the funds are to be lent (l) -in other words, i = r + I •The International Fisher Effect suggests that for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries •The bandwagon effect expectations turn into self-fulfilling prophecies
converting currency
US $ = foreign currency / exchange rate foreign currency = US $ x Exchange rate
effect of currency conditions on international trade
When US dollar is weak (under-value) Ø Demand for US goods increases because fewer units of local currency are needed to buy a US dollar. Ø It would increase exports, reducing imports from other countries. When US dollar is strong (over-value) Ø Demand for US goods decreases. Ø It would decrease exports, increasing imports from other countries.
turnkey contracts
ability to earn returns from process technology skills in countries where FDI is restricted creation of efficient competitors lack of long-term market presence
exporting
ability to realize location and experience curve economies increased speed and flexibility of engaging target markets high transportation costs trade barriers problems with local marketing agents
joint ventures
access to local partner's knowledge shared development costs and risks politically acceptable typically no ownership restrictions lack of control over technology inability to engage in global strategic coordination inability to realize location and experience economies
risk theory
all international expansion carriers risk different ways to handle it
prioritization of international markets
analysis of market potential and feasibility: -Prioritize markets, where market entry appears feasible and competition seems favorable -Prioritize regions, franchises, potential partners in selected countries -prioritize list of targets analysis of competition and market entry strategies: -Gather and assess competitor data to benchmark competitor strategies -Assess market specific entry options -market entry strategy
ownership advantages
asset based - tangible transaction based - knowing how to do something
4 stage partner due diligence process
business - make sure your potential partners have parallel and complementary offerings, and have the skillsets, geographic scope, and customer base you need cultural - a partner that shares your outlook and has a similar communication style is much more likely to be a good fit financial - check the financial stability and creditworthiness of your partner to avoid unexpected surprises later corporate - make sure you've verified compliance and ownership status as well as any enforcement or bankruptcy issues
stages theory
companies expand in increments
oligopoly
competition in service
cultural differences
countries differ along cultural dimensions: -tradition -social structure -language -religion -education while there is some evidence that tastes and preferences are becoming more cosmopolitan the global culture that levitt proposed is still a long way off
Block Chain Technology
cryptocurrency -public ledger of who has what in their wallet from a list of transactions
barriers to international communication
cultural barriers - can make it difficult to communicate messages across cultures source and country of origin effects -source effects - occur when the receiver evaluates the message on the basis of status or image of the sender -country of origin effects - extent to which the place of manufacturing influences product evaluations noise levels - amount of other messages competing for a potential consumer's attention
international expansion models
e-commerce - you sell products directly to foreign customers who order from your website distributions - you sell your products to local distributors, who then sell directly or indirectly to local customers licensing - you license your patent, trademark, and/or copy-rights to another company who uses intellectual property to sell local strategic partnering - you work together with another company to accomplish specific goals in exchange for commissions or referral fees joint venturing - you combine forces with a local business, creating a new company by contributing resources to both greenfield - you set up a local subsidiary and hire or contract local sales and/or product specialists to serve local customers acquisition - you acquire an already-established local company to gain immediate access to that company's customers
determinants of enterprise value
enterprise valuation profitability profit growth reduce costs add value and raise prices sell more in existing markets enter new markets
channel exclusivity
exclusive distribution channel is difficult to access ex) japan
channel quality
expertise, competencies, skills of established retailers in a nation and their ability to sell and support the products of international business -quality of retailers is good in most developed countries, but variable at best in emerging markets and less developed countries -poor quality channels can impede market entry
If your household goods can be efficiently produced through economies of scale, it would be a good idea to use a(n) _______ strategy.
exporting
If your proprietary know-how of "green" processes is difficult to transfer to other firms, the most effective approach would be
exporting or foreign direct investment.
push vs pull strategies
firms must choose between a push strategy (personnel selling) and a pull (mass media ads) depends on: -product type -channel length 1) product type and consumer sophistication -consumer goods firms trying to sell to a large segment of the market tend to prefer a pull strategy -industrial products firms or markets of other complex products favor a push strategy 2) channel length -the longer the channel, the more intermediaries -can be expensive to use a direct selling to push a product through many layers of a distribution channel -a firm may try to pull its product through the channels by using mass advertising to create demand
If the firm is facing the threat of trade barriers such as high import tariffs or quotas and the firm has proprietary technology, the firm should consider
foreign direct investment
sources of credit
formal is based on credit worthiness (income, history) informal is based on social expectations about repayment
What three reasons are used to explain the retreat of the radical position by the early 1990s?
generally poor economic performance of those countries that embraced radical position collapse of communism in eastern Europe generally strong performance of the developing countries that embraced capitalism
internationalization advantage
giving away secrets licensing->franchising->joint venture->wholly owned (only one that prevents letting out secrets)
market segmentation
identifying distinct groups of customers whose purchasing behavior differs from others in important ways -global market segments are more likely to exist in industrial products than in consumer products
global expansion can help a company to generate or maintain a competitive advantage by
improving global market position: §Addresses issue of saturation in the US due to: -Slow growth in target sectors -Intense competition, hindering increase in market share §Enables first mover advantage with: -Unique technology / product not available in non US markets -Improved economic conditions and ease of doing business in non US markets strengthening brand reputation: §Increases credibility and loyalty -With US consumers, as global brands supersede US brands -With non US consumers, by bringing in global best practices §Improves overall brand perception -Through proven operational and financial strength, and sophistication -Increased reach and visibility dispersing revenue risk: §Improves assurance of value delivery -Through ensuring that overall strategic goals are met by portfolio despite suboptimal performance of one market §Plans for worst case scenarios -Some insurance against possibility of a whole market failing, provided well established local market strategies
why businesses go abroad
increased cash on hand competitive dynamics attractive global market conditions -80% of businesses agree that companies should expand internationally for long term revenue growth -67% of businesses believe that emerging markets represent the greatest opportunity for revenue growth -60% of businesses plan to step up their long term international business development planning in the next 12 months -56% of businesses agree that US companies should consider manufacturing in or sourcing from countries outside the US to lower operation costs
monopolistic competition
infinite number of buyers and suppliers product differentiated to consumers higher price to competition=
where do good ideas come from
interacting with people with different perspectives
internalization advantages
keeps company secrets
good regional groups depend on different factors of production
land labor capital entrepreneurship
If a firm's know-how, skills, and capabilities can be protected by contract, and if tight control over foreign operations is not vital to remain competitive, and there are reasons to believe that additional costs through transportation or tariffs would be high, the most effective approach would be
licensing
licensing
low development costs and risks moderate involvement and commitment lack of control over technology inability to realize location and experience curve economies inability to engage in global strategic coordination
franchising
low development costs and risks possible circumvention of important barriers, and strong sales potential lack of control over quality inability to engage in global strategic coordination
model of strategic international retail expansion (SIRE)
low risk alternative: ownership (asset or transaction based) -> results: global expansion, little learning predicted expansion pattern: Own Store Rapid Expansion Small Size Stores-Hard Discounters, Convenience Operating Experience International Orientation Tolerance for Risk Competitive Advantage-AB low risk alternative: Franchising Small Size Limited Operating Experience Limited International Orientation Low Tolerance for Risk Little Competitive Advantage locational (cultural proximity, market size, competitor's moves, geographical proximity, low cost land/labor) results: multinational expansion, much learning predicted expansion pattern: Own Store Expansion in Stages Countries with attractive locational advantages Large Size Stores-Hypermarkets Cash and Carry International Orientation Tolerance for Risk Competitive Advantage-TB low risk alternative: Licensing Large Size Stores Limited Operating Experience Limited International Orientation Low Tolerance for Risk Little Competitive Advantage
monopoly
many buyers highest price
price discrimination
maximize profit to work: -keep markets separate -different price elasticities of demand must exist in different countries price elasticity of demand - measure of responsiveness of demand w/ change to price -demand is elastic when a small change produces large in demand -inelastic when large price small demand elasticity of demand is determined by income level and competitive conditions -greater in countries with lower income and greater number of competitors
entry modes (lowest to highest control/cost/risk)
minority acquisition majority acquisition licensing franchising indirect exporting or management contract joint venture hand-on acquisition or organic expansion
micro credit versus micro financing
money money and potentially training or other types of support
choosing a distribution strategy
more perishable - longer channel small purchase - longer channel
For U.S. multinational companies, the relatively strong dollar from 2014 to 2016
negative impacts on profit
stages in multinational cooperation
no substantive change -> regional cooperation group take away trade barriers -> free trade area establish the same external barriers -> full customs union free flow of capital and labor -> common market unifying economic ideology -> political union
channel length
number of intermediaries between the producer and the consumer -short: when producer sells directly to the consumer -long: when the producer sells through an import agent, wholesaler, and a retailer fragmented retail systems tend to have longer channels
eclectic theory
ownership internationalization location
wholly owned subsidiaries
protection of technology ability to engage in global strategic coordination ability to realize location and experience economies
What are the two main functions of the foreign exchange market?
provide insurance against foreign exchange risk currency conversion
you are selling industrial goods, what is best
push
push vs pull strategies
push are common -industrial products and/or complex new products -when distribution channels are short -when few print or electronic media are available pull are common -consumer good products -long channels -sufficient print and electronic media
locational advantages
push factors - make desirable to leave country pull factors - make another country look attractive
what characteristics are directly affected in small retail stores
retail concentration
main differences between distribution systems are:
retail connection channel length channel exclusivity channel quality
retail concentration
retail system can be concentrated or fragmented C: few retailers supply most of the market F: many retailers no one has major share
no differences
sectoral development - countries that join into a group that do not have the same LLCE no inherent advantage to comparative advantage
What are two reasons the United States has been an attractive target for FDI?
stable economy large domestic markets
global advantage
standardization vs. adaptation S: makes sense when -economic advantages -creative talent is scarce, and one large effort is better than small ones does not make sense when -cultural differences -country differences in ads
perfect competition
supply and demand lowest price products are homogeneous
The U.S. dollar appreciated relative to other major trading currencies between 2014 and early 2016 primarily because
the U.S. economy had emerged from the great recession in better shape than that of any other developed nation.
International businesses use foreign exchange markets for what three reasons?
to pay a foreign company for its products or services in its country's currency to convert foreign currencies it receives from transactions into its own currency to invest spare cash for the short term in money markets
tacit knowledge
transaction based ownership advantage practice by doing
The theories of FDI try to show: (Check all that apply.)
why firms don't use exporting and licensing to enter foreign markets. why competitive firms often enter the same markets at the same time. why firms use a combination of avoiding exporting and licensing and entering the same markets as their competitors.
impact of exchange rate change
ØThe US dollar is weakening against a foreign currency when the exchange rate goes down. ØIt will cost an American buyer more than before. ØThe impact of a weaker dollar on buyers is that imported goods get more expensive.
oligopolistic market structure
•4/50+ concentration (50% or greater) •Avoid price competition, compete on service, etc. •If there is a price reduction it comes from the dominant firm
2. commercial invoice
•A commercial invoice is the actual demand for payment issued by the exporter when a sale is concluded. •It includes a description of the goods, the exporter's address, delivery address, and payment terms.
currency convertibility
•A currency is freely convertible when both residents and non-residents can purchase unlimited amounts of foreign currency with the domestic currency •A currency is externally convertible when only non-residents can convert their holdings of domestic currency into a foreign currency •A currency is nonconvertible when both residents and non-residents are prohibited from converting their holdings of domestic currency into a foreign currency
floating vs. fixed
•A floating exchange system: -Economists believe the floating exchange system is better because floating rates more naturally respond to and represent market forces. -Causes more harm during inflation •A fixed exchange system: - promotes greater stability and predictability of exchange rate movements -Brings stability to a nation's economy -China's fixed exchange system contained the Asian financial crisis of the late 90s. DIRTY FLOAT: An exchange system where the value of the currency is determined by market forces but the central bank intervenes occasionally in the foreign exchange market to maintain the value of its currency within acceptable limits relative to a major reference currency. Many Western countries resort to a dirty float from time to time
hedging - forward contracts
•A forward contract is a financial instrument to buy or sell a currency at an agreed-upon exchange rate at the initiation of the contract for future delivery and settlement. •Example: -The GAP buys jeans from a supplier in India on January 2 for INR 1 million (Indian Rupees) -As per the importing contract, the INR 1 million is payable to the supplier on April 31. -On January 2, the exchange rate (spot rate) is INR 50/$. -On January 2, the GAP enters into a forward contract with Bank of America to buy INR 1 million, for delivery on 31 April, at a forward rate of INR 50.30/$.
hedging - future contracts
•A futures contract is an agreement to buy or sell a currency in exchange for another at a pre-specified price and on a pre-specified date. •Similar to a forward contract but unlike a forward contract, a futures contract gets traded on organized exchanges (CME- Chicago Mercantile Exchange) financial instrument a bank could get you
global standardization strategy
•A global standardization strategy focuses on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies -Makes sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal -If you have a very unique offering and price is not so important
localization of strategy
•A localization strategy focuses on increasing profitability by customizing the firm's goods or services so that they provide a good match to tastes and preferences in different national markets -Makes sense when there are substantial differences across nations with regard to consumer tastes and preferences, and where cost pressures are not too intense
3. packing list
•A packing list itemizes the material in each individual package and indicates the type of package, such as a box, crate, drum, or carton. •becomes necessary for shipments that involve numerous goods.
2. fixed exchange rate system
•Also known as the pegged exchange rate system. •The value of the currency is set relative to the value of another (or the value of a basket of currencies) at a specified rate. •As the reference value rises and falls so does the currency pegged to it. •It is the opposite of the floating exchange rate system •Examples: China pegs its currency to a basket of currencies, Belize pegs the value of its currency to the U.S. dollar •To maintain the peg, governments need to intervene in currency markets to buy and sell dollars and other currencies in order to maintain the exchange rate at a fixed preset level.
ownership advantage
•Asset based •Global retailers with significant asset based ownership advantages will franchise to "colonize" a concept •Multinational retailers will find that PL works against them when they internationalize •Transaction based •Global retailers with significant transaction based ownership advantages will not franchise to protect their secrets •Multinational retailers generally have greater transaction based ownership advantages.
letter of credit
•Contract between the banks of the buyer and the seller that ensures payment from the buyer to the seller upon receiving an export shipment. •LC guarantees payment to a supplier if the supplier presents appropriate export documents to a bank in its country. -LC offers complete protection to the supplier. -Shipment of goods are guaranteed for the buyer. •LC provides advantages to both the exporter and the importers, which explains its wide use.
nature of countertrade
•Countertrade occurs in response to two primary factors: -The chronic shortage of hard currency in developing economies. -The lack of marketing expertise, adequate quality standards, and knowledge of western markets by developing-economy enterprises. Countertrade enables them to access markets that may otherwise be inaccessible, and generate hard currency.
countertrade
•Countertrade refers to an international business transaction where all or partial payments are made in kind rather than cash. •Also known as "two-way" or "reciprocal" trade, countertrade operates on the principle of "I'll buy your products, if you buy mine." •Barter is a form of countertrade. ex: •Goodyear traded tires for minerals, textiles, and agricultural products. •Coca-Cola sourced tomato paste from Turkey, oranges from Egypt, and beer from Poland in order to contribute to national exports in the countries it conducts business,. •Control Data Corporation accepted Christmas cards from the Russians in a countertrade deal.
multinational (localized) retailers
•Decentralized - some decision making is given to the store managers •Concentrate expansion within a geographic area •Change retail offering based on customer and cultural differences •Generally large sized retailers such as hypermarkets, cash and carry •Ex. Carrefour, Wal-Mart
incoterms - CIF (cost, insurance and freight-port of entry)
•Delivery takes place when goods pass the ship's rail in the port of shipment. •The seller pays for the insurance and freight necessary to bring the goods to the named port of destination. At that point the risk of loss or damage gets transferred from the seller to the buyer. •The seller arranges shipping and insurance
selection of an incoterm
•Depends on whether your company is handling its own freight and customs work. •It is recommended that you not use any term that allows the seller to buy insurance for you. •It is a good idea to handle the import details and duty payment yourself.
managing export-import transactions
•Documentation refers to the official forms and other paperwork that are required for export sales to transport goods and clear customs. •Typically documentation from the supplier (exporter) consists of the following paperwork: 1.Quotation/Pro Forma invoice 2.Commercial Invoice 3.Packing List 4.Bill of Lading 5.Export Declaration (ex dec) 6.Certificate of Origin 7.Insurance Certificate
eclectic paradigm
•Dunning's Eclectic Paradigm -Location-specific advantages - arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets -Externalities - knowledge spillovers that occur when companies in the same industry locate in the same area ownership internalization location
incoterms - EXW (point of origin)
•EXW (Point of Origin). ex works or ex factory example: EXW Shanghai •The buyer takes title when he/she picks up the goods at the supplier's factory, and is totally responsible for the shipment and duties. foreign supplier's factory, US buyer (takes goods to port), US buyer (loads on carrier), US buyer (ships), US buyer (unloads at US port, pays duty)
countries that use the dollar
•Ecuador, East Timor, El Salvador, Marshall Islands, Micronesia, Palau, Turks and Caicos, British Virgin Islands, Zimbabwe.
7. insurance certificate
•Exporters usually purchase an insurance certificate to protect the exported goods against damage, loss, pilferage (theft) and, in some cases, delay.
advantages of foreign direct advantage
•FDI will be favored over exporting when: -Transportation costs are high -Trade barriers are high •FDI will be favored over licensing when: -The firm wants control over its technological know-how -The firm wants control over its operations and business strategy -The firm's capabilities are not amenable to licensing
the firm as a value chain
•Firms are essentially value chains composed of a series of distinct value creation activities, including production, marketing, materials management, R&D, human resources, information systems, and the firm infrastructure •Value creation activities can be categorized as: 1.Primary activities 2.Support activities 1. Primary Activities •Involves creating the product, marketing and delivering the product to buyers, and providing support and after-sale service to the buyers of the product 2. Support Activities •Provides the inputs that allow the primary activities of production and marketing to occur
timing of entry
•Firms entering a market early can gain first mover advantages including choice of location, less competition etc. •Second mover advantages = learning from others •First mover disadvantages - the disadvantages associated with entering a foreign market before other international businesses •These may result in pioneering costs (costs that an early entrant has to bear that a later entrant can avoid) such as -the costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes -the costs of promoting and establishing a product offering, including the cost of educating the customers
implications for managers
•Firms must understand the influence of exchange rates on the profitability of trade and investment deals •This exchange rate risk can be divided into 1.Transaction exposure-money made or lost from transaction 2.Translation exposure-preset measurement of past changes 3.Economic exposure-where you operate (need to spread out where you do businesses) Question: How can firms minimize translation and transaction exposure? •Firms can -Buy forward -Use swaps -Lead and Lag payables and receivables - paying suppliers and collecting payment from customers early or late depending on expected exchange rate movements Question: How can a firm reduce economic exposure? •To reduce economic exposure firms need to distribute productive assets to various locations so the firm's long-term financial well-being is not severely affected by changes in exchange rates •This requires that the firm's assets are not overly concentrated in countries where likely rises in currency values will lead to damaging increases in the foreign prices of the goods and services they produce
location economies
•Firms should locate value creation activities where economic, political, and cultural conditions are most conducive to the performance of that activity •Firms that successfully do this can realize location economies - the economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be •Locating value creation activities in optimal locations -Can lower the costs of value creation -Can enable a firm to differentiate its product offering from those of competitors •Multinationals that take advantage of location economies create a global web of value creation activities •Under this strategy, different stages of the value chain are dispersed to those locations around the globe where perceived value is maximized or where the costs of value creation are minimized -Introducing transportation costs and trade barriers complicates this picture -Political risks must be assessed when making location decisions
choosing a strategy
•Focus on two basic strategies to compete in the international environment 1. Global standardization 2. Localization (multinational) ● Although the book discusses four strategies I only want you to focus on these two.
foreign direct investment (FDI)
•Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to produce or market in a foreign country -A firm engaged in FDI is a multinational enterprise •There are two forms of FDI: 1.A greenfield investment - the establishment of a wholly new operation in a foreign country 2.Acquisition or merging with an existing firm in the foreign country
only two are strategic
•Global •Multinational Other Two - Acquisition and Pure Franchising are opportunistic - not looking at international expansion as a strategy
effects of NAFTA
•Hard to quantify, since there are so many factors that come into play simultaneously. •But, trade between partners grew 220% •Canada and Mexico are U.S. first and third largest trading partners. •How did NAFTA effect Mexico? -Real wages have gone down, income inequality has risen, and immigration to US has continued to increase. -But, NAFTA buoyed the Mexican economy. Without it, wages and poverty levels could have been worse as the country struggled to recover from a severe financial crisis in 1994. -Also labor productivity has increased 50% over the period, although it may not be due to NAFTA alone.
managing currency exchange risk
•Hedging -Hedging refers to using financial instruments to reduce or eliminate exposure to currency risk. -It protects firms from adverse currency rate fluctuations by locking in a guaranteed exchange rate position. -Banks offer hedging to companies through 3 financial instruments: 1.Forward Contract 2.Futures Contract 3.Currency Options pay more for hedging but lock in guarantee
handling risk-resource vs. agency theory
•If resource based they would not franchise if they have adequate capital •Or would acquire franchised property once they have adequate capital - better to make people managers and watch from a distance
drawbacks of multinational markets
•Increased Competition •Looks Like a Single Market, but its not •Inflation •Additional Layer of Government Complexity
euro requirements 5 economic requirements
•Inflation-must not exceed the 3 best nations by more than 1.5% •Public-sector budget deficit not exceed 3% of GDP •Long-term interest rates-not exceed those of the 3 nations with the best inflation performance by 2% •Exchange rate has to be kept in normal bands of the European Exchange Rate Mechanism (ERM) for the previous 2 years
consignment sales
•It allows the importer to defer payment until the goods are actually sold. •This approach places all the burden on the exporter (seller). Therefore, it is the most favorable term to the importer (buyer). •If the exporter wants entry into a specific market, consignment may be the only method of gaining acceptance. •However, due to its burdensome characteristics, it is not widely used. In case the goods are not sold, returning them will be costly and time consuming.
benefits of multinational markets
•Large Mass Market •Improved Channels of Distribution, Advertising and Transportation •Increased Trade with Member Nations •Lower Internal Tariff Barriers
some industries
•Like retailing do not have an export alternative (soft service) Retail Internationalization is a quest for growth, or to colonize a concept. colonizing is laying claim to an idea
enlargement of the EU
•Many countries, particularly from Eastern Europe, have applied for membership -Ten countries joined in 2004 expanding the EU to 25 states, with population of 450 million people, and a single continental economy with a GDP of €11 trillion -In 2007, Bulgaria and Romania joined bringing membership to 27 countries -Turkey has also applied for membership, but it is not clear whether it will be accepted -19 countries use the euro
the form of FDI
•Most cross-border investment involves mergers and acquisitions rather than greenfield investments •Acquisitions are attractive because: -They are quicker to execute than greenfield investments -It is easier and less risky for a firm to acquire desired assets than build them from the ground up -Firms believe they can increase the efficiency of an acquired unit by transferring capital, technology, or management skills
pressures for cost reductions
•Pressures for cost reductions are greatest -In industries producing commodity type products that fill universal needs - needs that exist when the tastes and preferences of consumers in different nations are similar if not identical -When major competitors are based in low cost locations -Where there is persistent excess capacity -Where consumers are powerful and face low switching costs •To respond to these pressures, firms need to lower the costs of value creation
pressures for local responsiveness
•Pressures for local responsiveness arise from 1.Differences in consumer tastes and preferences 2.Differences in traditional practices and infrastructure 3.Differences in distribution channels 4.Host government demands •Firms facing these pressures need to differentiate their products and marketing strategy in each country
incoterms (international commerce terms)
•Refers to a system of universal, standard terms of sale and delivery, developed by the International Chamber of Commerce. •Commonly used in international sales contracts to eliminate disputes between the buyer and supplier over cost of freight and insurance in exports and imports. • Incoterms specify how the buyer and the seller share the cost of freight and insurance, and at which point the buyer takes title to the goods.
importing
•Refers to the buying of products and services from foreign sources and bringing them into the home market. -Also known as Global Sourcing, Global procurement or Global Purchasing Examples of importing: •In the United States Wal-Mart, Target and Home Depot are the biggest importers of foreign products. •Retailers secure a substantial portion of their merchandise from foreign suppliers.
drafts and types of drafts
•Similar to a check, the draft is a financial instrument that instructs a bank to pay a specific amount of a specific currency to the bearer on demand or at a future date. •For both letters of credit and drafts, the buyer must make payment upon presentation of documents that convey title to the purchased goods. •Letters of credit and drafts can be paid immediately or at a later date. •Drafts that are paid upon presentation are called sight drafts. Drafts that are to be paid at a later date, often after the buyer receives the goods, are called time drafts or date drafts.
global retailers
•Standard retail format •Centralized management - company can determine where they want to go •Often vertically integrated backwards - producing private label to sell (raw goods) •Extensive use of private label •Generally small-medium size •Ex. Aldi, Zara, Mango, H&M
establishment of the euro
•The Maastricht Treaty (1991) committed EU members to adopt a single currency, the euro -The euro is used by 17 of the 27 member states -Created the euro zone, the second largest currency zone in the world after that of the U.S. Dollar -Countries that participate have agreed to give up control of their monetary policy -Britain, Denmark and Sweden have opted out of the euro zone giving up the right to use monetary tools when using the euro?
bill of lading
•The bill of lading is the basic contract between exporter (Foreign supplier) and shipper (shipping company). •It authorizes a shipping company to transport the goods to the buyer's destination. •It also serves as the importer's receipt and proof of title for purchase of the goods. •Clear Bill of Lading means that the shipment is fine •Foul Bill of Lading means that the shipment was damaged, or inaccurate.
certification of origin
•The certificate of origin is the "birth certificate" of the goods being shipped and indicates the country where the product originates.
exchange rate forecasting
•The efficient market school argues that forward exchange rates are the best predictors of future spot exchange rates -investing in forecasting services would be a waste of money •The inefficient market school argues that companies should invest in forecasting services -forward rates are not the best predictor of future spot rates
experience effects
•The experience curve - the systematic reductions in production costs that have been observed to occur over the life of a product -A product's production costs decline by some quantity about each time cumulative output doubles •Learning effects - cost savings that come from learning by doing -Labor productivity increases when individuals learn the most efficient ways to perform particular tasks and management learns how to manage the new operation more efficiently •Economies of scale - the reductions in unit cost achieved by producing a large volume of a product •Sources include -The ability to spread fixed costs over a large volume -The ability of large firms to employ increasingly specialized equipment or personnel •Serving a global market from a single location is consistent with moving down the experience curve and establishing a low-cost position
1. quotation/pro forma invoice
•The exporter initially issues a quotation or a pro forma invoice upon request by potential buyers. •The quotation is structured as a standard form (hence pro "forma" invoice), and informs the potential buyer about the price and description of the foreign exporter's product or service.
open accounts
•The exporter simply bills the buyer, who is expected to pay under agreed terms at some future time. •The buyer pays the exporter at some future time following receipt of the goods. •Open accounts are risky to exporters. exporters use this approach only with buyers of long standing or with excellent creditworthiness.
incoterms - F.A.S. (free alongside ship)
•The foreign seller quotes a price for the goods, including the cost of delivery of the goods to the port alongside a vessel designated by the buyer. •The seller handles the cost of unloading. The buyer takes possession at the dock at the port of export (Shanghai for eg.). Loading, ocean transportation and insurance are the buyer's responsibility.
risks in countertrade
•The goods that the customer offers may be inferior in quality. •It is very difficult to put a market value on goods the customer offers because these goods are typically commodities or low-quality manufactured products. •Countertrade deals are inefficient because both parties tend to pad prices. •Reciprocal trade amounts to highly complex, cumbersome, and time-consuming transactions. •Countertrade rules imposed by governments make them highly bureaucratic.
cash in advance
•The most favorable term to the exporter (seller) because it relieves the exporter of all risk and allows for immediate use of the money. •From the buyer's standpoint, cash in advance is risky and may cause cash flow problems. •The buyer may hesitate to pay cash in advance for fear the exporter will not follow through with shipment, particularly if the buyer does not know the exporter well. •This method is not widely used except for smaller, first-time transactions or situations in which the exporter has reason to doubt the importer's ability to pay. •Cash in advance is unpopular with importers and tends to discourage sales.
incoterms - F.O.B. (free on board named port of shipment)
•The seller pays for the transportation of the goods to the port of shipment (Shanghai), and the cost of loading the goods on to the cargo ship. •The buyer pays for all costs beyond that point (including unloading). Responsibility for the goods lies with the seller until the goods pass the ship's rail. Once loaded on to the ship, the buyer assumes risk. Buyer arranges the shipping
5. export declaration
•The shipper's export declaration (sometimes called "ex-dec") lists: - the contact information of the exporter and the buyer (or importer) -The full description, declared value, and destination of the products being shipped. •Customs officials and port authorities use the ex-dec to determine the content of shipments, to control exports and to compile statistics for which goods are entering or leaving the country.
functions of the FX market
•The spot exchange rate - the rate at which a foreign exchange dealer converts one currency into another currency on a particular day •A forward exchange rate - the exchange rate governing a transaction in which two parties agree to exchange currency and execute the deal at some specific date in the future •A currency swap - the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
leveraging products and competencies
•To increase growth, a firm can sell products or services developed at home in foreign markets •Success depends on the type of goods and services, and the firm's core competencies (skills within the firm that competitors cannot easily match or imitate) •Core competencies -Enable the firm to reduce the costs of value creation -Create perceived value so that premium pricing is possible
1. the floating exchange rate system
•Used by most advanced economies •Under this system, governments refrain from intervention •Each nation's currency floats independently according to market forces •Exchange rates are determined by forces of demand and supply •Examples: US Dollar, Euro, Japanese Yen, British Pound, Canadian Dollar
using someone else's
•Zimbabwe is a special case. It abandoned its own currency in 2009 and currently has eight official currencies as legal tender: the US dollar, South African rand, Botswana pula, British pound sterling, Australian dollar, Chinese yuan, Indian rupee, and Japanese yen.
