Int Bus Chap 10

types of letter of credit

An irrevocable letter of credit allows the bank issuing the letter to modify its terms only after obtaining the approval of both exporter and importer. A revocable letter of credit can be modified by the issuing bank without obtaining approval from either the exporter or the importer. A confirmed letter of credit is guaranteed by both the exporter's bank in the country of export and the importer's bank in the country of import.

sales represenatives

(whether an individual or an organization) represents only its own company's products, not those of other companies. Sales representatives promote those products in many ways, such as by attending trade fairs and making personal visits to local retailers and wholesalers. They do not take title to the merchandise. Rather, they are hired by a company and normally are compensated with a fixed salary plus commissions based on the value of their sales.

market-potential analyses variables

*Market Size. This variable provides a snapshot of the size of a market at any point in time. It does not estimate the size of a market for a particular product but rather the size of the overall economy.Market-size data allow managers to rank countries from largest to smallest, regardless of a particular product. Market size is typically estimated from a nation's total population or the amount of energy it produces and consumes. * Market Growth Rate. This variable reflects the fact that, although the overall size of the market (economy) is important, so too is its rate of growth. It helps managers avoid markets that are large but shrinking and instead target those that are small but rapidly expanding. It is generally obtained through estimates of growth in gross domestic product (GDP) and energy consumption. *Market Intensity. This variable estimates the wealth or buying power of a market from the expenditures of both individuals and businesses. It is estimated from per capita private consumption and/or per capita gross domestic product (GDP) at purchasing power parity * Market Consumption Capacity. The purpose of this variable is to estimate spending capacity. It is often estimated from the percentage of a market's population in the middle class, thereby concentrating on the core of an economy's buying power. *Commercial Infrastructure. This factor attempts to assess channels of distribution and communication. Variables may include the number of telephones, televisions, fax machines, or personal computers per capita; the density of paved roads or number of vehicles per capita; and the population per retail outlet. An increasingly important variable for businesses relying on the Internet for sales is the number of Internet hosts per capita. But because these data become outdated quickly, care must be taken to ensure accurate information from the most current sources. * Economic Freedom. This variable attempts to estimate the extent to which free-market principles predominate. It is typically a summary of government trade policies, government involvement in business, the enforcement of property rights, and the strength of the black market. A useful resource is the annual Freedom in the World report published by Freedom House (www.freedomhouse.org). * Market Receptivity. This variable attempts to estimate market "openness." One way it can be estimated is by determining a nation's volume of international trade as a percentage of gross domestic product (GDP). If a company wants to see how receptive a market is to goods from its home country, it can ascertain the amount of per capita imports entering the market from the home country. Managers can also examine the growth (or decline) in these imports. *Country Risk. This variable attempts to estimate the total risk of doing business, including political, economic, and financial risks. Some market-potential estimation techniques include this variable in the market-receptivity variable. This factor is typically obtained from one of the many services that rate the risk of different countries, such as Political Risk Services

four types of joint ventures

1) foward intergration joint venture 2) backward integration joint venture 3_ payback joint venture 4) multstage joint venture

steps of document collection

1. Before shipping merchandise, the exporter (with its banker's assistance) draws up a draft (bill of exchange)—a document ordering the importer to pay the exporter a specified sum of money at a specified time. A sight draft requires the importer to pay when goods are delivered. A time draft extends the period of time (typically 30, 60, or 90 days) following delivery by which the importer must pay for the goods. (When inscribed "accepted" by an importer, a time draft becomes a negotiable instrument that can be traded among financial institutions.) 2. Following creation of the draft, the exporter delivers the merchandise to a transportation com- pany for shipment to the importer. The exporter then delivers to its banker a set of documents that includes the draft, a packing list of items shipped, and a bill of lading—a contract be- tween the exporter and shipper that specifies merchandise destination and shipping costs. The bill of lading is proof that the exporter has shipped the merchandise. An international ocean shipment requires an inland bill of lading to get the shipment to the exporter's border and an ocean bill of lading for water transport to the importer nation. An international air shipment requires an air way bill that covers the entire international journey. 3. After receiving appropriate documents from the exporter, the exporter's bank sends the documents to the importer's bank. After the importer fulfills the terms stated on the draft and pays its own bank, the bank issues the bill of lading (which becomes title to the merchandise) to the importer.

buypack joint venture

A buyback joint venture is formed when each partner requires the same component in its production process. It might be formed when a production facility of a certain minimum size is needed to achieve economies of scale but neither partner alone enjoys enough demand to warrant building it. However, by combining re- sources, the partners can construct a facility that serves their needs while achieving savings from economies of scale production. For instance, this was one reason behind the $500 million joint venture between Chrysler (www.chrysler.com) and BMW (www.bmw.com) to build small-car engines in Latin America. Each party benefited from the economies of scale offered by the plant's annual production capacity of 400,000 engines—a volume that neither company could absorb alone.

export management companies

A company that exports products on behalf of an indirect exporter. An EMC operates contractually,either as an agent (being paid through commissions based on the value of sales) or as a distribu- tor (taking ownership of the merchandise and earning a profit from its resale). An EMC will usually provide additional services on a retainer basis, charging set fees against funds deposited on account. Typical EMC services include gathering market information, formulating promotional strategies, performing specific promotional duties (such as attending trade fairs), researching customer credit, making shipping arrangements, and coordinating export documents. It is common for an EMC to exploit contacts predominantly in one industry (say, agricultural goods or consumer products) or in one geographic area (such as Latin America or the Middle East). Indeed, the biggest advantage of an EMC is usually a deep understanding of the cultural, political, legal, and economic conditions of the target market. Its staff works comfortably and effectively in the cultures of both the exporting and the target nation. The aver- age EMC tends to deploy a wide array of commercial and political contacts to facilitate business activities on behalf of its clients. Perhaps the only disadvantage of hiring an EMC is that the breadth and depth of its service can potentially hinder the development of the exporter's own international expertise. But an exporter and its EMC typically have such a close relationship that an exporter often considers its EMC as a virtual exporting division. When this is the case, exporters learn a great deal about the intricacies of exporting from their EMC. Then, after the EMC contract expires, it is common for a company to go it alone in exporting its products.

export trading comapnies

A company that provides services to indirect exporters in addition to activities directly related to clients' exporting activities. an ETC assists its clients by providing import, export, and countertrade services; developing and expanding distribution channels; providing storage facilities; financing trading and investment projects; and even manufacturing products. European trading nations first developed the ETC concept centuries ago. More recently, the Japanese have refined the concept, which they call sogo shosha. The Japanese ETC can range in size from small, family-run businesses to enormous conglomerates such as Mitsubishi. Japanese and South Korean ETCs have become formidable competitors because of their enormous success in gaining global market share. These Asian companies quickly came to rival the dominance of the largest U.S. multinationals, which lobbied U.S. lawmakers for assistance in challenging Asian ETCs in global markets. The result was the Export Trading Company Act passed in 1 982. Despite this effort, the ETC concept never really caught on in the United States. Operations of the typical ETC in the United States remain small and are dwarfed by those of their Asian counterparts. One reason for the lack of interest in the ETC concept in the United States relative to Asia is that governments, financial institutions, and companies have much closer working relationships in Asia. The formation of huge conglomerates that engage in activities ranging from providing financing to manufacturing to distribution is easier to accomplish there. By contrast, the regulatory environment in the United States is wary of such cozy business arrangements, and the lines between companies and industries are more clearly drawn

multistage joint venture

A multistage joint venture often results when one company produces a good or service required by another. For example, a sport- ing goods manufacturer might join with a sporting goods retailer to establish a distribution company designed to bypass inefficient local distributors in a developing country

strategic alliances

A relationship whereby two or more entities cooperate (but do not form a separate company) to achieve the strategic goals of each is called a strategic alliance. Similar to joint ventures, strategic alliances can be formed for relatively short periods or for many years, depending on the goals of the participants. Strategic alliances can be established between a company and its suppliers, its buyers, and even its competitors. In forming such alliances, sometimes each partner purchases a portion of the other's stock. In this way, each company has a direct stake in its partner's future performance. This decreases the likelihood that one partner will try to take advantage of the other.

joint venture

A separate company that is created and jointly owned by two or more independent entities to achieve a common business objective is called a joint venture. Joint ven- ture partners can be privately owned companies, government agencies, or government-owned companies. Each party may contribute anything valued by its partners, including managerial tal- ent, marketing expertise, market access, production technologies, financial capital, and superior knowledge or techniques of research and development.

step 4: commit resources

After all the meetings, negotiations, and contract signings, it is time to put the company's human, financial, and physical resources to work. First, the objectives of the export program must be clearly stated and should extend out at least three to five years. For small firms, it may be sufficient to assign one individual the responsibility for drawing up objectives and estimating resources. Yet as companies expand their activities to include more products and/or markets, many firms discover the need for an export department or division. The head of this department usually has the responsibility (and authority) to formulate, implement, and evaluate the company's export strategy.

distributors

Alternatively, a direct exporter can sell in the target market through distributors, who take ownership of the merchandise when it enters their country. As owners of the products, they accept all the risks associated with generating local sales. They sell either to retailers and wholesalers or to end users through their own channels of distribution. Typically, they earn a profit equal to the difference between the price they pay and the price they receive for the exporter's goods. Although using a distributor reduces an exporter's risk, it also weakens an exporter's control over the price buyers are charged. A distributor who charges very high prices can stunt the growth of an exporter's market share. Exporters should choose, if possible, distributors who are willing to invest in the promotion of their products and who do not sell directly competing products.

disadvantages of a joint venture

Among its disadvantages, joint venture ownership can re- sult in conflict between partners. Conflict is perhaps most common when management is shared equally—that is, when each partner supplies top managers in what is commonly known as a "50-50 joint venture." Because neither partner's managers have the final say on decisions, manage- rial paralysis can result, causing problems such as delays in responding to changing market condi- tions. Conflict can also arise from disagreements over how future investments and profits are to be shared. Parties can reduce the likelihood of conflict and indecision by establishing unequal owner- ship, whereby one partner maintains 51 percent ownership of the voting stock and has the final say on decisions. A multiparty joint venture (commonly referred to as a consortium) can also feature unequal ownership. For example, ownership of a four-party joint venture could be distributed 20-20-20-40, with the 40 percent owner having the final say on decisions. Second, loss of control over a joint venture's operations can also result when the local government is a partner in the joint venture. This situation occurs most often in industries considered culturally sensitive or important to national security, such as broadcasting, infrastruc- ture, and defense. Thus a joint venture's profitability could suffer because of local government motives based on cultural preservation or security.

disadvantages of turnkey projects

Among the disadvantages of turnkey projects is the fact that a company may be awarded a project for political reasons rather than for technological know-how. Because turnkey projects are often of high monetary value and awarded by government agencies, the process of awarding them can be highly politicized. When the selection process is not entirely open, companies with the best political connections often win contracts, usually at inflated prices—the costs of which are typically passed on to local taxpayers. Second, like management contracts, turnkey projects can create future competitors. A newly created local competitor could become a major supplier in its own domestic market and perhaps even in other markets where the supplier operates. Therefore, companies try to avoid projects in which there is danger of transferring their core competencies to others.

trade show

An exhibition at which members of an industry or group of industries showcase their latest products, study activities of rivals, and examine recent trends and opportunities. trade shows are held on a continuing basis in virtually all markets and normally attract companies from around the globe. They are typically held by national or global industry trade associations or by government agencies. An excellent source of trade shows and exhibitions worldwide is Expo Centra. the format and scope of trade shows differ from country to country. For example, because of its large domestic market, shows in the United States tend to be oriented toward business opportunities within the U.S. market. In line with U.S. culture, the atmospheretends to be fairly informal. Conversely, because of the relatively smaller market of Germany and its participation in the European Union, trade shows there tend to showcase business opportunities in markets all across Europe and tend also to be quite formal

enviornmental scanning

An ongoing process of gathering, analyzing, and dispensing information for tactical or strategic purposes.The environmental scanning process entails obtaining both factual and subjective information on the business environments in which a company is operating or considering entering. The continuous monitoring of events in other locations keeps managers aware of potential business opportunities and threats. Environmental scanning contributes to making well-informed decisions and the develop- ment of effective strategies. It also helps companies develop contingency plans for a particularly volatile environment entering selected markets and establishing operations abroad.

measuring market potential

As barriers to trade are reduced worldwide, companies are looking to increase sales in industrialized and emerging markets alike. But businesses can seldom create one marketing plan for every market in which they sell their products. Nations enjoy different levels of economic development that affect what kinds of goods are sold, the manner in which they are sold, and their inherent features. Likewise, different levels of economic development require varying approaches to researching market potential

production and shipping costs

By helping to control total costs, low-cost production and shipping can give a company an advantage. Accordingly, setting up production in a market is desirable when the total cost of pro- duction there is lower than in the home market. Low-cost local production might also encourage contractual entry through licensing or franchising. If production costs are sufficiently low, the international production site might even begin supplying other markets, including the home country. An additional potential benefit of local production might be that managers could ob- serve buyer behavior and modify products to better suit the needs of the local market. Lower production costs at home make it more appealing to export to international markets. Companies that produce goods with high shipping costs naturally prefer local production. Contractual and investment entry modes are viable options in this case. Alternatively, exporting is feasible when products have relatively lower shipping costs. Finally, because they are subject to less price competition, products for which there are fewer substitutes or those that are discre- tionary items can more easily absorb higher shipping and production costs. In this case, export- ing is a likely selection.

international monetary system

Collection of agreements and institutions that govern exchange rates.

governemnt agencies

Commerce departments and international trade agencies of most countries typically supply information about import and export regulations, quality standards, and the size of various markets. These data are normally available directly from these departments, from agencies within each nation, and from the commercial attaché in each country's embassy abroad. In fact, visiting embassies and attending their social functions while visiting a potential location are excellent ways of making contact with potential future business partners.Granted, the attractively packaged information supplied by host nations often ignores many potential hazards in a nation's commercial environment—governments typically try to present their countries in the best possible light. By the same token, such sources are prone to paint incomplete or one-sided portraits of the home market. It is important for managers to seek addi- tional sources that take a more objective view of a potential location.

export strategy: 4 stages

Companies are often drawn into exporting when customers in other countries solicit their goods. In this way, companies become aware of their products' international potential and get their first taste of international business. Yet a company should not fall into the habit of simply responding to random international requests for its products. A more logical approach is to research and analyze international opportunities and to develop a coherent export strategy. A business with such a strategy actively pursues export markets rather than sitting back and waiting for international orders to come

secondary data sources

Companies can consult a variety of sources to obtain information on a nation's business environment and markets. The particular source that managers should consult depends on the company'sindustry, the national markets it is considering, and how far along it is in its location-screening. process. The process of obtaining information that already exists within the company or that can be obtained from outside sources is called secondary market research. Managers often use information gathered from secondary research activities to broadly estimate market demand for a product or to form a general impression of a nation's business environment. Secondary data are relatively inexpensive because they have already been collected, analyzed, and summarized by another party.

internet

Companies engaged in international business are quickly realizing the wealth of secondary research information available on the Internet and the World Wide Web. These electronic resources are usually user friendly and have vast amounts of information.The Internet can be especially useful in seeking information about potential production sites. Because field trips to the most likely candidates are expensive, online information can be enormously helpful in saving both time and money.

corporate level strategies

Companies involved in more than one line of business must first formulate a corporate-level strategy. This means, in part, identifying the national markets and industries in which the company will operate. It also involves developing overall objectives for the company's different business units and specifying the role that each unit will play in reaching those objectives. The four key approaches to corporate strategy are growth, retrenchment,stability, and combination.

degree of export involvement d

Companies of all sizes engage in exporting, but not all companies become involved in exporting to the same extent. Some companies (usually entrepreneurs and small and medium-sized firms) perform few or none of the activities necessary to get their products in a market abroad. Instead, they use intermediaries that specialize in getting products from one market into another. Other companies (usually only the largest companies) perform all of their export activities themselves, with an infrastructure that bridges the gap between the two markets

industrial and trade assosiations

Companies often join associations composed of firms within their own industry or trade. In particular, companies trying to break into new markets join such associations to make contact with others in their field. The publications of these organizations keep members informed about current events and help managers to keep abreast of important issues and opportunities. Many associations publish special volumes of import and export data for domestic markets. They frequently compile directories that list each mem- ber's top executives, geographic scope, and contact information such as phone numbers and addresses. Today, many associations also maintain informative Web sites. Two interesting examples are the Web sites of the National Pasta Association (www.ilovepasta.org) and the National Onion Association (www.onions-usa.org). Sometimes industry and trade associations commission specialized studies of their industries, the results of which are then offered to their members at subsidized prices. These types of studies typically address particularly important issues or explore new opportunities for international growth.

comparability of data

Data obtained from other countries must be interpreted with great caution. Because terms such as poverty, consumption, and literacy differ greatly from one country to another, such data must be accompanied by precise definitions. The different ways in which countries measure data also affect comparability across borders. For instance, some countries state the total quantity of foreign direct investment in their nations in terms of its monetary value. Others specify it in terms of the number of investment projects implemented during the year. But a single foreign direct investment into an industrialized nation can be worth many times what several or more projects are worth in a developing nation. To gather a complete picture of a nation's investments researchers will often need to obtain both figures. Moreover, reported statistics may not distinguish between foreign direct investment (accompanied by managerial control) and portfolio investment (which is not accompanied by managerial control). Misinterpreting data because one does not know how they are compiled or measured can sabotage even the best marketing plans and production strategy.

political stablility

Every nation's business environment is affected to some degree by political risk. political risk is the likelihood that a society will undergo political changes that negatively affect local business activity. Political risk can threaten the market of an exporter, the production facilities of a manufacturer, or the ability of a company to remove prof- its from the country in which they were earned. The key element of political risk that concerns companies is unforeseen political change. Political risk tends to rise if a company cannot estimate the future political environment with a fair degree of accuracy. An event with a negative impact that is expected to occur in the future is not, in itself, bad for companies because the event can be planned for and necessary precautions taken. It is the unforeseen negative events that create political risk for companies. Managers' perceptions of a market's political risk are often affected by their memories of past political unrest in the market. Yet managers cannot let past events blind them to future opportunities. International companies must try to monitor and predict political events that threaten operations and future profits. By investigating the political environment proactively,managers can focus on political risk and develop action plans for dealing with it. But where do managers get the information to answer such questions? They may assign company personnel to gather information on the level of political risk in a country, or they may obtain it from independent agencies that specialize in providing political-risk services. The advice of country and regional specialists who are knowledgeable about the current political climate of a market can be especially helpful. Such specialists can include international bankers, political consultants, reporters, country-risk specialists, international relations scholars, political leaders, union leaders, embassy officials, and other local businesspeople currently working and living in the country in question.

managed float system

Exchange-rate system in which currencies float against one another with governments intervening to stabilize their currencies at particular target exchange rates.

doucmentary collection

Export/import financing in which a bank acts as an intermediary without accepting financial risk. This payment method is commonly used when there is an ongoing business relationship between two parties. The documentary collection process can be broken into three main stages and nine smaller steps. Documentary collection reduces the importer's risk of nonshipment because the packing list details the contents of the shipment and the bill of lading is proof that the merchandise was shipped. The exporter's risk of nonpayment is increased because, although the exporter retains title to the goods until the merchandise is accepted, the importer does not pay until all necessary documents have been received. Although importers have the option of refusing the draft (and, therefore, the merchandise), this action is unlikely. Refusing the draft—despite all terms of the agreement being fulfilled—would make the importer's bank unlikely to do business with the importer in the future.

open account

Export/import financing in which an exporter ships merchandise and later bills the importer for its value. Because some receivables may not be collected, exporters should reserve shipping on open account only for their most trusted cus- tomers. This payment method is often used when the parties are very familiar with each other or for sales between two subsidiaries within an international company. The exporter simply invoices the importer (as in many domestic transactions), stating the amount and date due.This method reduces the risk of nonshipment faced by the importer under the advance payment method. By the same token, the open account method increases the risk of nonpayment for the exporter. Thus, open account is the least favorable for exporters but the most favorable for importers.

advance payment

Export/import financing in which an importer pays an exporter for merchandise before it is shipped.This method of payment is common when two parties are unfamiliar with each other, the transaction is relatively small, or the buyer is unable to obtain credit because of a poor credit rating at banks. Payment normally takes the form of a wire transfer of money from the bank account of the importer directly to that of the exporter. Although prior payment eliminates the risk of nonpayment for exporters, it creates the complementary risk of nonshipment for importers—importers might pay for goods but never receive them. Thus advance payment is the most favorable method for exporters but the least favorable for importers.

letter of credit

Export/import financing in which the importer's bank issues a document stating that the bank will pay the exporter when the exporter fulfills the terms of the document.. A letter of credit is typically used when an importer's credit rating is questionable, when the exporter needs a letter of credit to obtain financing, and when a market's regulations require it. Before a bank issues a letter of credit, it checks on the importer's financial condition. Banks normally issue letters of credit only after an importer has deposited on account a sum equal in value to that of the imported merchandise. The bank is still required to pay the exporter, but the deposit protects the bank if the importer fails to pay for the merchan- dise. Banks will sometimes waive this requirement for their most reputable clients.After the issuance of a letter of credit, the importer's bank informs the exporter (through the exporter's bank) that a letter of credit exists and that it may now ship the merchandise. The exporter then delivers a set of documents (according to the terms of the letter) to its own bank.These documents typically include an invoice, customs forms, a packing list, and a bill of lading. The exporter's bank ensures that the documents are in order and pays the exporter. When the importer's bank is satisfied that the terms of the letter have been met, it pays the exporter's bank. At that point, the importer's bank is responsible for collecting payment from the importer. Letters of credit are popular among traders because banks assume most of the risks. The letter of credit reduces the importer's risk of nonshipment (as compared with advance payment) because the importer receives proof of shipment before making payment. Although the exporter's risk of nonpayment is slightly increased, it is a more secure form of payment for exporters because the nonpayment risk is accepted by the importer's bank when it issues pay- ment to the exporter's bank

errors with exporting

First, many businesses fail to conduct adequate market research before exporting. In fact, many companies begin exporting by responding to unsolicited requests for their products. If a company enters a market in this man- ner, it should quickly devise an export strategy to manage its export activities effectively and not strain its resources. Second, many companies fail to obtain adequate export advice. National and regional gov- ernments are often willing and able to help managers and small-business owners understand and cope with the vast amounts of paperwork required by each country's export and import laws. Naturally, more experienced exporters can be extremely helpful as well. They can help novice exporters avoid embarrassing mistakes by guiding them through unfamiliar cultural, political, and economic environments.

disadvantages of franchising

Franchising can also pose problems for both franchisers and franchisees. First, franchisers may find it cumbersome to manage a large number of franchisees in a variety of national markets. A major concern is that product quality and promotional mes- sages among franchisees will not be consistent from one market to another. One way to ensure greater control is by establishing in each market a so-called master franchisee, which is responsible for monitoring the operations of individual franchisees. Second, franchisees can experience a loss of organizational flexibility in franchising agree- ments. Franchise contracts can restrict their strategic and tactical options, and they may even be forced to promote products owned by the franchiser's other divisions. For years PepsiCo (www.pepsico.com) owned the well-known restaurant chains Pizza Hut, Taco Bell, and KFC. As part of their franchise agreements with PepsiCo, restaurant owners were required to sell only PepsiCo beverages to their customers. Many franchisees worldwide were displeased with such restrictions on their product offerings and were relieved when PepsiCo spun off the restaurant chains.

step 3: initiate meetings

Holding meetings early with potential local distributors, buyers, and others is a must. Initial contact should focus on building trust and developing a cooperative climate among all parties. The cultural differences between the parties will come into play already at this stage. Beyond building trust, successive meetings are designed to estimate the potential success of any agreement if interest is shown on both sides. At the most advanced stage, negotiations take place and details of agreements are finalized.

backward joint venture integartion

In other words, the joint venture signals a move by each company into upstream business activities—activities earlier in the value system that are normally performed by others. Such a configuration would result if two steel manufacturers formed a joint venture to mine iron ore. The companies now engage in an activity that is normally performed by mining companies.

why export

In the global economy, companies increasingly sell goods and services to wholesalers, retailers, industrial buyers, and consumers in other nations. Generally speaking, there are three main reasons why companies begin exporting: 1. Expand sales. Most large companies use exporting as a means of expanding total sales when the domestic market has become saturated. Greater sales volume allows them to spread the fixed costs of production over a greater number of manufactured products, thereby lowering the cost of producing each unit of output. In short, going international is one way to achieve economies of scale. 2. Diversify sales. Exporting permits companies to diversify their sales. In other words, they can offset slow sales in one national market (perhaps due to a recession) with increasedsales in another. Diversified sales can level off a company's cash flow, making it easier to coordinate payments to creditors with receipts from customers. 3. Gain experience. Companies often use exporting as a low-cost, low-risk way of getting started in international business. Owners and managers of small companies, which typically have little or no knowledge of how to conduct business in other cultures, use exporting to gain valuable international experience.

foward intergration joint venture

In this type of joint venture, the parties choose to invest together in downstream business activities—activities further along in the "value system" that are normally performed by others. For instance, two household appliance manufacturers opening a retail outlet in a developing country would be a joint venture characterized by forward integration. The two companies now perform activities normally performed by retailers further along in the product's journey to buyers

agents

Individuals or organizations that represent one or more indirect exporters in a target market. Agents typically receive compensation in the form of commissions on the value of sales. Because establishing a relationship with an agent is relatively easy and inexpensive, it is a fairly common approach to indirect exporting. Agents should be chosen very carefully because it can be costly and difficult to terminate an agency relationship if problems arise. Careful selection is also essential because agents often represent several indirect exporters simultaneously. Agents might focus their promotional efforts on the products of the company paying the highest commission rather than on the company with the better products.

competitor analysis

Intensely competitive markets typically put downward pressure on the prices that firms can charge their customers. In addition, intensely competitive sites for production and R&D activities often increase the costs of doing business. Naturally, lower prices and higher costs due to competitive forces must be balanced against the potential benefits offered by each market and site under consideration. At the very least, then, competitor analysis should address the following issues: Number of competitors in each market (domestic and international) Market share of each competitor Whether each competitor's product appeals to a small market segment or has mass appeal Whether each competitor focuses on high quality or low price Whether competitors tightly control channels of distribution Customer loyalty commanded by competitors Potential threat from substitute products Potential entry of new competitors into the market Competitors' control of key production inputs (such as labor, capital, and raw materials)

export/import financing

International trade poses risks for both exporters and importers. Exporters run the risk of not receiving payment after their products are delivered. Importers fear that delivery might not occur once payment is made for a shipment. Export/import financing methods designed to reduce these risks include advance payment, documentary collection, letter of credit, and open account.

investment entry modes

Investment entry modes entail direct investment in plant and equipment in a country coupled with ongoing involvement in the local operation. Entry modes in this category take a company's commitment in a market to a higher level. Let's now explore three common forms of investment entry: wholly owned subsidiaries, joint ventures, and strategic alliances.

advantages of joint venture

Joint ventures offer several important advantages to compa- nies going international. Above all, companies rely on joint ventures to reduce risk. Generally, a joint venture exposes fewer of a partner's assets to risk than would a wholly owned subsidiary— each partner risks only its own contribution. That is why a joint venture entry might be a wise choice when market entry requires a large investment or when there is significant political or social instability in the target market. Similarly, a company can use a joint venture to learn about a local business environment prior to launching a wholly owned subsidiary. In fact, many joint ventures are ultimately bought outright by one of the partners after it gains sufficient expertise in the local market. Second, companies can use joint ventures to penetrate international markets that are other- wise off-limits. Some governments either require nondomestic companies to share ownership with local companies or provide incentives for them to do so. Such requirements are most common among governments of developing countries. The goal is to improve the competitiveness of local companies by having them team up with and learn from international partner(s). Third, a company can gain access to another company's international distribution network through the use of a joint venture.inally, companies form international joint ventures for defensive reasons. Entering a joint venture with a local government or government-controlled company gives the government a di- rect stake in the venture's success. In turn, the local government will be less likely to interfere if it means that the venture's performance will suffer. This same strategy can also be used to create a more "local" image when feelings of nationalism are running strong in a target country

advantages of managment contracts

Management contracts can benefit organizations and countries. First, a firm can award a management contract to another company and thereby exploit an international business opportunity without having to place a great deal of its own physical assets at risk. Financial capital can then be reserved for other promising investment projects that would otherwise not be funded. Second, governments can award companies management contracts to operate and upgrade public utilities, particularly when a nation is short of investment financing. That is why the government of Kazakhstan contracted with a group of international companies called ABB Power Grid Consortium to manage its national electricity-grid system for 25 years. Under the terms of the contract, the consortium paid past wages owed to workers by the government and invested more than $200 million during the first three years of the agreement. The Kazakhstan government had neither the cash flow to pay the workers nor the funds to make badly needed improvements. Third, governments use management contracts to develop the skills of local workers and managers. ESB International (www.esb.ie) of Ireland signed a three-year contract not only to manage and operate a power plant in Ghana, Africa, but also to train local personnel in the skills needed to manage it at some point in the future.

economic and financial forces

Managers must carefully analyze a nation's economic policies before selecting it as a new market or site for operations. The poor fiscal and monetary policies of a nation's central bank can cause high rates of inflation, increasing budget deficits, a depreciating currency, falling productivity levels, and flagging innovation. Such consequences typ- ically lower investor confidence and force international companies to scale back or cancel proposed investments. Currency and liquidity problems pose special challenges for international companies. Volatile currency values make it difficult for firms to predict future earnings accurately in terms of the home-country currency. Wildly fluctuating currency values also make it difficult to calcu- late how much capital a company needs for a planned investment. Unpredictable changes in currency values can also make liquidating assets more difficult because the greater uncertainty will likely reduce liquidity in capital markets—especially in countries with relatively small capital markets, such as Bangladesh and Slovakia. managers can obtain information about economic and financial conditions from institutions such as the World Bank, the International Monetary Fund, and the Asian Development Bank. Other sources of information include all types of business and economic publications and the many sources of free information on the Internet

serivce organizations

Many international service organizations in fields such as banking, in- surance, management consulting, and accounting offer information to their clients on cultural, regulatory, and financial conditions in a market.

cultural difference

Marketers who conduct research in unfamiliar markets must pay atten- tion to the ways in which cultural variables influence information. Perhaps the single most important variable is language. For example, if researchers are unfamiliar with a language in the market they are investigating, they might be forced to rely on interpreters. Interpreters might unintentionally misrepresent certain comments or be unable to convey the sentiment with which statements are made. Researchers might also need to survey potential buyers through questionnaires written in the local language. To avoid any misstatement of questions or results, questionnaires must be translated into the language of the target market and the responses then translated back into the researcher's language. Written To avoid any misstatement of questions or results, questionnaires must be translated into the language of the target market and the responses then translated back into the researcher's language. Written expressions must be highly accurate so that results do not become meaningless or misleading. The potential to conduct written surveys is also affected by the illiteracy rates among the local population. A written survey is generally impossible to conduct in countries with high illiteracy rates such as Morocco (48 percent), Nigeria (31 percent), and Pakistan (50 percent).5 Researchers would probably need to choose a different information- gathering technique, such as personal interviews or observing retail purchases. Companies that have little experience in an unfamiliar market often hire local agencies to perform some or all of their market research. Local researchers know the cultural terrain. They understand which practices are acceptable and which types of questions can be asked. And they typically know whom to approach for certain types of information. Perhaps most importantly, they know how to interpret the information they gather and are likely to understand its reliability. But a company that decides to conduct its own market research must, if necessary, adapt its research techniques to the local market. Many cultural elements that are taken for granted in the home market must be reassessed in the host business environment.expressions must be highly accurate so that results do not become meaningless or misleading. The potential to conduct written surveys is also affected by the illiteracy rates among the local population. A written survey is generally impossible to con is generally impossible to con- duct in countries with high illiteracy rates such as Morocco (48 percent), Nigeria (31 percent), and Pakistan (50 percent).5 Researchers would probably need to choose a different information- gathering technique, such as personal interviews or observing retail purchases. Companies that have little experience in an unfamiliar market often hire local agencies to perform some or all of their market research. Local researchers know the cultural terrain. They understand which practices are acceptable and which types of questions can be asked. And they typically know whom to approach for certain types of information. Perhaps most importantly,they know how to interpret the information they gather and are likely to understand its reliability. But a company that decides to conduct its own market research must, if necessary, adapt its research techniques to the local market. Many cultural elements that are taken for granted in the home market must be reassessed in the host business environment.

international experiences

Most companies enter the international marketplace through exporting. As companies gain international experience, they tend to select entry modes that require deeper involvement. But this means businesses must accept greater risk in return for greater control over operations and strategy. Eventually, they may explore the advantages of licensing, franchising, management contracts, and turnkey projects. After businesses become comfortable in a particular market, joint ventures, strategic alliances, and wholly owned subsidiaries become viable options. This evolutionary path of accepting greater risk and control with experience does not hold for every company. Whereas some firms remain fixed at one point, others skip several entry modes altogether. Advances in technology and transportation are allowing more and more small companies to leapfrog several stages at once. These relationships also vary for each company depending on its product and the characteristics of home and target markets.

income elasticity

One way of forecasting market demand is determining a product's income elasticity—the sensitivity of demand for a product relative to changes in income. The income-elasticity coefficient for a product is calculated by dividing a percentage change in the quantity of a product demanded by a percentage change in income. A coefficient greater than 1.0 conveys an income-elastic product, or one for which demand increases more relative to an increase in income. These products tend to be discretionary purchases, such as computers, video games, jewelry, or expensive furniture—generally not considered essential items. A coefficient less than 1.0 conveys an income-inelastic product, or one for which demand increases less relative to an increase in income. These products are considered essential and include food, utilities, and beverages.

disadvantages of strategic alliances

Perhaps the most important disadvantage of a strategic alliance is that it can create a future local or even global competitor. For example, one partner might be using the alliance to test a market and prepare the launch of a wholly owned subsidiary. By declining to cooperate with others in the area of its core competency, a company can reduce the likelihood of creating a competitor that would threaten its main area of business. Likewise, a company can insist on contractual clauses that constrain partners from competing against it with certain products or in certain geographic regions. Companies are also careful to protect special research programs, production techniques, and marketing practices that are not committed to the alliance. Naturally, managers must weigh the potential for encouraging new competition against the benefits of international cooperation. As in the case of joint ventures, conflict can arise and eventually undermine cooperation. Alliance contracts are drawn up to cover as many contingencies as possible, but communication and cultural differences can still arise. When serious problems crop up, dissolution of the alliance may be the only option.

cross- licensing

Practice by which companies use licensing agreements to exchange intangible property with one another.

planning

Process of identifying and selecting an organization's objectives and deciding how the organization will achieve those objectives.

surveys

Research in which an interviewer asks current or potential buyers to answer written or verbal questions to obtain facts, opinions, or attitudes.The single greatest advantage of survey research is the ability to collect vast amounts of data in a single sweep. But as a rule, survey methods must be adapted to local markets. although a survey at a Web site is an easy way to gather data, it must be remembered that even in some industrialized nations users still represent mostly middle- to upper-income households. Written surveys can also be hampered by other problems. Some countries' postal services are unreliable to the point that parcels are delivered weeks or months after arriving at postoffices, or they never arrive at all because they are stolen or simply lost. Naturally, written surveys are impractical to conduct in countries with high rates of illiteracy, although this problem can perhaps be overcome by obtaining verbal responses to spoken questions.

consumer pannel

Research in which people record in personal diaries information on their attitudes, behaviors, or purchasing habits.

countertrade

Selling goods or services that are paid for, in whole or in part, with other goods or services. Although countertrade often requires an extensive network of international contacts, even smaller companies can take advantage of its benefits. Nations that have long used countertrade are found mostly in Africa, Asia, Eastern Europe, and the Middle East. A lack of adequate hard currency often forced those nations to use counter- trade to exchange oil for passenger aircraft and military equipment. Today, because of insufficient hard currency, developing and emerging markets frequently rely on countertrade to import goods. The greater involvement of firms from industrialized nations in those markets is expanding the use of countertrade. Countertrade can provide access to markets that are otherwise off-limits because of a lack of hard currency. It can also cause headaches. Much countertrade involves commodity and agricul- tural products such as oil, wheat, or corn—products whose prices on world markets tend to fluc- tuate a good deal. A problem arises when the price of a bartered product falls on world markets between the time that a deal is arranged and the time at which one party tries to sell the product. Fluctuating prices generate the same type of risk that is encountered in currency markets. Managers might be able to hedge some of this risk on commodity futures markets similar to how they hedge against currency fluctuations in currency markets

factors in entry mode

Several key factors that influence a company's international entry mode selection are the cultural environment, political and legal environments, mar- ket size, production and shipping costs, and international experience. Let's now explore each of these factors.

freight forwarder

Specialist in export-related activities such as customs clearing, tariff schedules, and shipping and insurance fees. Freight for- warders also can pack shipments for export and take responsibility for getting a shipment from the port of export to the port of import.

advantages of strategic alliances

Strategic alliances offer several important advantages to companies. First, companies use strategic alliances to share the cost of an international invest- ment project. For example, many firms are developing new products that not only integrate the latest technologies but also shorten the life spans of existing products. In turn, the shorter life span is reducing the number of years during which a company can recoup its investment. Thus many companies are cooperating to share the costs of developing new products. For example, Toshiba (www.toshiba.com) of Japan, Siemens (www.siemens.com) of Germany, and IBM (www.ibm.com) of the United States shared the $1 billion cost of developing a facility near Nagoya, Japan, to manufacture small, efficient computer memory chips. Second, companies use strategic alliances to tap into competitors' specific strengths. Some alliances formed between Internet portals and technology companies are designed to do just that. For example, an Internet portal provides access to a large, global audience through its Web site, while the technology company supplies its know-how in delivering, say, music over the Internet. Meeting the goal of the alliance—marketing music over the Web—requires the competencies of both partners. Finally, companies turn to strategic alliances for many of the same reasons that they turn to joint ventures. Some businesses use strategic alliances to gain access to a partner's channels of distribution in a target market. Other firms use them to reduce exposure to the same kinds of risks from which joint ventures provide protection.

emerging markets

The biggest emerging markets are more important today than ever. Nearly every large company engaged in international business is either already in or is considering entering the big emerging markets such as China and India. With their large consumer bases and rapid growth rates, they whet the appetite of marketers around the world. Although these markets are surely experiencing speed bumps along their paths of economic development, in the long term they cannot be ignored. Companies considering entering emerging markets often face special problems related to a lack of information. Data on market size or potential may not be available, for example, because of undeveloped methods for collecting such data in a country. But there are ways companies can assess potential in emerging markets. One way is for them to rank different locations by developing a so-called market-potential indicator for each. This method is, however, only useful to companies considering exporting. Companies considering investing in an emerging market must look at other factors

export or import?

The most common method of buying and selling goods internationally is exporting and importing. Companies often import products in order to obtain less expensive goods or those that are simply unavailable in the domestic market. Companies export products when the international market- place offers opportunities to increase sales and, in turn, profits. Companies worldwide (from both developed and developing countries) often see the United States as a great export opportunity because of the size of the market and the strong buying power of its citizens.

step 2: match need to abilities

The next step is to determine whether the company is capable of satisfying the needs of the market. Suppose a market located in a region with a warm, humid climate for much of the year displays the need for home air-conditioning equipment. If a company recognizes this need but makes only industrial-sized air-conditioning equipment, it might not be able to satisfy demand with its current product. But if the company is able to use its smallest industrial air-conditioning unit to satisfy the needs of several homes, it might have a market opportunity. If there are no other options or if consumers want their own individual units, the company will likely need to design a smaller air-conditioning unit or rule out entry into that market.

contractural entry modes

The products of some companies simply cannot be traded in open markets because they are intangible. Thus a company cannot use importing, exporting, or countertrade to exploit opportu- nities in a target market. Fortunately, there are other options for this type of company. A company can use a variety of contracts—licensing, franchising, management contracts, and turnkey projects—to market highly specialized assets and skills in markets beyond its nations' borders.

market size

The size of a potential market also influences the choice of entry mode. For example, rising incomes in a market encourage investment entry modes because investment allows a firm to prepare for expanding market demand and to increase its understanding of the target market. High domestic demand in China is attracting investment in joint ventures, strategic alliances, and wholly owned subsidiaries. On the other hand, if investors believe that a market is likely to remain relatively small, better options might include exporting or contractual entry.

disadvantages to licensing

There also are important disadvantages to using licensing. First, it can restrict a licensor's future activities. Suppose a licensee is granted the exclusive right to use an asset but fails to produce the sort of results that a licensor expected. Because the license agreement is exclusive, the licensor cannot simply begin selling directly in that particular market to meet demand itself or contract with another licensee. A good product and lucrative market, therefore, do not guarantee success for a producer entering a market through licensing. Second, licensing might reduce the global consistency of the quality and marketing of a licen- sor's product in different national markets. A licensor might find the development of a coherent global brand image an elusive goal if each of its national licensees is allowed to operate in any manner it chooses. Promoting a global image might later require considerable amounts of time and money to change the misconceptions of buyers in the various licensed markets. Third, licensing might amount to a company "lending" strategically important property to its future competitors. This is an especially dangerous situation when a company licenses assets on which its competitive advantage is based. Licensing agreements are often made for several years and perhaps even a decade or more. During this time, licensees often become highly competent at producing and marketing the licensor's product. When the agreement expires, the licensor might find that its former licensee is capable of producing and marketing a better version of its own product. Licensing contracts can (and should) restrict licensees from competing in the future with products based strictly on licensed property. But enforcement of such provisions works only for identical or nearly identical products, not when substantial improvements are made.

interantional organizations

There are excellent sources of much free and inexpensive information about product demand in particular countries. For example, the International Trade Statistics Yearbook published by the United Nations (www.un.org) lists the export and import volumes of different products for each country. It also furnishes information on the value of ex- ports and imports on an annual basis for the most recent five-year period. The International Trade Center (www.intracen.org), based in Geneva, Switzerland, also provides current import and export figures for more than 100 countries. International development agencies, such as the World Bank (www.worldbank.org), the International Monetary Fund (www.imf.org), and the Asian Development Bank (www.adb.org), also provide valuable secondary data. For example, the World Bank publishes annual data on each member nation's population and economic growth rate. Today, most secondary sources supply downloadable data through the Internet or through traditional printed versions.

advantages of licensing

There are several advantages to using licensing as an entry mode into new markets. First, licensors can use licensing to finance their international expansion. Most licensing agreements require licensees to contribute equipment and investment financing, whether by building special production facilities or by using existing excess capacity. Access to such resources can be a great advantage to a licensor who wants to expand but lacks the capital and managerial resources to do so. And because it need not spend time constructing and starting up its own new facilities, the licensor earns revenues sooner than it would otherwise. Second, licensing can be a less risky method of international expansion for a licensor than other entry modes. Whereas some markets are risky because of social or political unrest, others defy accurate market research for a variety of reasons. Licensing helps shield the licensor from the increased risk of operating its own local production facilities in markets that are unstable or hard to assess accurately. Third, licensing can help reduce the likelihood that a licensor's product will appear on the black market. The side streets of large cities in many emerging markets are dotted with tabletop vendors eager to sell bootleg versions of computer software, Hollywood films, and recordings of internationally popular musicians. Producers can, to some extent, foil bootleggers by licensing local companies to market their products at locally competitive prices. Royalties will be lower than the profits generated by sales at higher international prices, but lower profits are better than no profits at all—which is what owners get from bootleg versions of their products. Finally, licensees can benefit by using licensing as a method of upgrading existing production technologies.

types of countertrade

There are several different types of countertrade: barter, counterpur- chase, offset, switch trading, and buyback

advantages of franchisng

There are several important advantages of franchising. First, franchisers can use franchising as a low-cost, low-risk entry mode into new markets. Companies following global strategies rely on consistent products and common themes in worldwide mar- kets. Franchising allows them to maintain consistency by replicating the processes for standard- ized products in each target market. Many franchisers, however, will make small modifications in products and promotional messages when marketing specifically to local buyers. Second, franchising is an entry mode that allows for rapid geographic expansion. Firms of- ten gain a competitive advantage by being first in seizing a market opportunity. For example, Microtel Inns & Suites (www.microtelinn.com) of Atlanta, Georgia, is using franchising to fuel its international expansion. Microtel is boldly entering Argentina and Uruguay and eyeing op- portunities in Brazil and Western Europe. Rooms cost around $75 per night and target business travelers who cannot afford $200 per night.4 Finally, franchisers can benefit from the cultural knowledge and know-how of local man- agers. This helps lower the risk of business failure in unfamiliar markets and can create a competative advantage.

advantages of wholly owned subsidary

There are two main advantages to entering a market using a wholly owned subsidiary. First, managers have complete control over day-to-day operations in the target market and access to valuable technologies, processes, and other intangible properties within the subsidiary. Complete control also decreases the chance that competitors will gain access to a company's competitive advantage, which is particularly important if it is technology- based. Managers also retain complete control over the subsidiary's output and prices. Unlike licensors and franchisers, the parent company also receives all profits generated by the subsidiary. Second, a wholly owned subsidiary is a good mode of entry when a company wants to coor- dinate the activities of all its national subsidiaries. Companies using global strategies view each of their national markets as one part of an interconnected global market. Thus the ability to exer- cise complete control over a wholly owned subsidiary makes this entry mode attractive to com- panies that are pursuing global strategies.

step 1: identify a potenital market

To identify whether demand exists in a particular target market, a company should perform market research and interpret the results. Novice exporters should focus on one or only a few markets. The company could then expand into more diverse markets after it gains initial international experience in a nearby country. The would-be exporter should also seek expert advice on the regulations and general process of ex- porting and any special issues related to a selected target market.

advantages of turnkey projects

Turnkey projects provide benefits to providers and recipients. First, turnkey projects permit firms to specialize in their core competencies and to exploit opportunities that they could not undertake alone. Exxon Mobil (www.exxonmobil.com) awarded a turnkey project to PT McDermott Indonesia (www.mcdermott.com) and Toyo Engineering (www.toyo-eng.co.jp) of Japan to build a liquid natural gas plant on the Indonesian island of Sumatra. The providers are responsible for constructing an offshore production platform, laying a 100-kilometer underwater pipeline, and building an on-land liquid natural gas refinery. The $316 million project is feasible only because each company contributes unique expertise to the design, construction, and testing of the facilities. Second, turnkey projects allow governments to obtain designs for infrastructure projects from the world's leading companies. For instance, Turkey's government enlisted two separate consortiums of international firms to build four hydroelectric dams on its Coruh River. The dams combine the design and technological expertise of each company in the two consortiums. The Turkish government also awarded a turnkey project to Ericsson (www.ericsson.com) of Sweden to expand the country's mobile telecommunication system.

disadvantages of management contracts

Unfortunately, management contracts also pose two disadvantages for suppliers of expertise. First of all, although management contracts reduce the exposure of physical assets in another country, the same is not true for the supplier's personnel; political or social turmoil can threaten managers' lives. Second, suppliers of expertise may end up nurturing a formidable new competitor in the local market. After learning how to conduct certain operations, the party that had originally needed assistance may be capable of competing on its own. Firms must weigh the financial re- turns from a management contract against the potential future problems caused by a newly launched competitor.

three main difficulites of international market research

Unique conditions and circumstances, however, present certain difficulties that often force adjustments in the way research is performed in different nations. It is important for companies that are conducting market research themselves to be aware of potential obstacles so that their results are reliable. 1. Availability of data 2. Comparability of data 3. Cultural differences

turnkey projects

When one company designs, constructs, and tests a production facility for a client, the agreement. The term turnkey project is derived from the understanding that the client, who normally pays a flat fee for the project, is expected to do nothing more than simply "turn a key" to get the facility operating. The company awarded a turnkey project completely prepares the facility for its client.Similar to management contracts, turnkey projects tend to be large-scale and often involve government agencies. But unlike management contracts, turnkey projects transfer special process technologies or production-facility designs to the client. They typically involve the construction of power plants, airports, seaports, telecommunication systems, and petrochemical fa- cilities that are then turned over to the client. Under a management contract, the supplier of a service retains the asset—the managerial expertise.

ability of data

When trying to target specific population segments, marketing managers require highly detailed information. Fortunately, companies are often spared the time, money, and effort of collecting firsthand data for the simple reason that it has already been gathered. Three of these information suppliers are SymphonyIRI, Group Survey Research Group, and ACNielsen. In many emerging and developing countries, however, previously gathered quality information is hard to obtain. Even when market data are available, their reliability is questionable. For example, analysts sometimes charge the governments of certain emerging markets with trying to lure investors by overstating estimates of gross income and consumption levels. In addition to deliberate misrepresentation, tainted information can also result from improper local collection methods and analysis techniques. But research agencies in emerging and developing markets that specialize in gathering data for clients in industrialized countries are developing higher quality techniques of collection and analysis.

disadvantages of wholly owned subsidarys

Wholly owned subsidiaries also present two primary disadvantages. First, they can be expensive undertakings because companies must typically finance investments internally or raise funds in financial markets. Obtaining the neces- sary funds can be difficult for small and medium-sized companies but relatively easy for the largest companies.Second, risk exposure is high because a wholly owned subsidiary requires substantial com- pany resources. One source of risk is political or social uncertainty or outright instability in the target market. Such risks can place both physical assets and personnel in serious jeopardy. The sole owner of a wholly owned subsidiary also accepts the risk that buyers will reject the company's product. Parent companies can reduce this risk by gaining a better understanding of consumers prior to entering the target market.

franchising

a contractual entry mode in which one company (the franchiser) supplies another (the franchisee) with intangible property and other assistance over an extended period. Franchisers typically receive compensation as flat fees, royalty payments, or both. The most popular franchises are those with widely recognized brand names, such as Mercedes, McDonalds and Starbucks. Franchising differs from licensing in several ways. First, franchising gives a company greater control over the sale of its product in a target market. Franchisees must often meet strict guidelines on product quality, day-to-day management duties, and marketing promotions. Second, although licensing is fairly common in manufacturing industries, franchising is prima- rily used in service industries such as auto dealerships, entertainment, lodging, restaurants, and business services. Third, although licensing normally involves a one-time transfer of property, franchising requires ongoing assistance from the franchiser. In addition to the initial transfer of property, franchisers typically offer startup capital, management training, location advice, and advertising assistance to their franchisees. mpanies based in the United States dominate the world of international franchising. U.S.companies perfected the practice of franchising in their large, homogeneous domestic market having low barriers to interstate trade and investment. Yet franchising is growing in the European Union, with the advent of a single currency and a unified set of franchise laws. Many European managers comfortable early-retirement packages have discovered franchising to be an appealing second career. Despite projections for robust growth, European franchise managers often misunderstand the franchising concept. One example is when Holiday Inn's franchise expansion in Spain was moving more slowly than expected. According to the company's development director in Spain, Holiday Inn found that it needed to convince local managers that Holiday Inn did not want to "take control" of their hotels.2 In some eastern European countries, local managers do not under- stand why they must continue to pay royalties to brand and trademark owners. Franchise expan- sion in eastern European markets also suffers from a lack of local capital, high interest rates, high taxes, bureaucratic obstacles, restrictive laws, and corruption.

exclusive license

grants a company the exclusive rights to produce and market a property, or products made from that property, in a specific geographic region. The region can be the licensee's home country or may extend to worldwide markets.

nonexclusive license

grants a company the right to use a property but does not grant it sole access to a market. A licensor can grant several or more companies the right to use a property in the same region

field trips

importance of top managers making a personal visit to each remaining poten- tial market or site cannot be overstated. Such trips typically involve attending strings of meetings and engaging in tough negotiations. The trip represents an opportunity for managers to see firsthand what they have so far seen only on paper. It gives them an opportunity to experience the culture, observe in action the workforce that they might soon employ, or make personal contact with potential new customers and distributors. Any remaining issues tend to be thoroughly investigated during field trips so that the terms of any agreement are known precisely in the event that a particular market or site is chosen. Managers can then usually return to the chosen location to put the terms of the final agreement in writing.

industrialized market

information needed to estimate the market potential for a product in industrialized nations tends to be more readily available than in emerging markets. In fact, for the most developed markets, research agencies exist for the sole purpose of supplying market data to companies.The value of such information supplied by specialist agencies is readily apparent—these reports provide a quick overview of the size and structure of a nation's market for a product. thus companies that enter the market in industrialized countries often have a great deal of data available on that particular market. What becomes important then is the forecast for the growth or contraction of a potential market

licensing

is a contractual entry mode in which a company that owns intangible property (the licensor) grants another firm (the licensee) the right to use that property for a specified period of time. Licensors typically receive royalty payments based on a percent- age of the licensee's sales revenue generated by the licensed property. The licensors might also receive a one-time fee to cover the cost of transferring the property to the licensee. Commonly licensed intangible property includes patents, copyrights, special formulas and designs, trade- marks, and brand names. Thus licensing often involves granting companies the right to use process technologies inherent to the production of a particular good

wholly owned subsidary

is a facility entirely owned and controlled by a single parent company. Companies can establish a wholly owned subsidiary either by forming a new company and constructing entirely new facilities (such as factories, offices, and equipment) or by purchasing an existing company and internalizing its facilities. Whether an international subsidiary is purchased or newly created depends to a large extent on its proposed operations. When a parent company designs a subsidiary to manufacture the latest high-tech products, it typ- ically must build new facilities. The major drawback of creation from the ground up is the time it takes to construct new facilities, hire and train employees, and launch production. Conversely, finding an existing local company capable of performing marketing and sales will be easier because special technologies are typically not needed. By purchasing the existing marketing and sales operations of an existing firm in the target market, the parent can have the subsidiary operating relatively quickly. Buying an existing company's operations in the target market is a particularly good strategy when

offest

is an agreement that a company will offset a hard-currency sale to a nation by mak- ing a hard-currency purchase of an unspecified product from that nation in the future. It differs from a counterpurchase in that this type of agreement does not specify the type of product that must be purchased, just the amount that will be spent. Such an arrangement gives a business greater freedom in fulfilling its end of a countertrade deal.

trade mission

is an international trip by government officials and businesspeople that is organized by agencies of national or provincial governments for the purpose of exploring international business opportunities. Businesspeople who attend trade missions are typically introduced both to important business contacts and well-placed government officials. Small and medium-sized companies often find trade missions very appealing for two reasons. First, the support of government officials gives them additional clout in the target country as well as access to officials and executives whom they would otherwise have little opportunity to meet. Second, although such trips can sometimes be expensive for the smallest of businesses, they are generally worth the money because they almost always reap cost-effective rewards. Trade missions to faraway places sometimes involve visits to several countries to maximize the return for the time and money invested.

switch trading

is countertrade whereby one company sells to another its obligation to make a purchase in a given country. For example, in return for market access, a firm that wants to enter a target market might promise to buy a product for which it has no use. The company then sells this purchase obligation to a large trading company that makes the purchase itself because it has a use for the merchandise. If the trading company has no use for the merchandise, it can arrange for yet another buyer who needs the product to make the purchase

market research

is the collection and analysis of information used to assist managers in making informed decisions. We define market research here to apply to the assessment of both potential markets and sites for operations. International market research provides information on national business environments, including cultural practices, politics, regulations, and the economy. It also informs managers about a market's potential size, buyer behavior, logistics, and distribution systems. Conducting market research on new markets is helpful in designing all aspects of marketing strategy and understanding buyer preferences and attitudes. Market research also lets managers learn about aspects of local business environments such as employment levels, wage rates, and the state of the local infrastructure before committing to the new location. It supplies managers with timely and relevant market information to anticipate market shifts, changes in current regulations, and the potential entry of new competitors.

barter

is the exchange of goods or services directly for other goods or services without the use of money. It is the oldest known form of countertrade.

buyback

is the export of industrial equipment in return for products produced by that equipment. This practice usually typifies long-term relationships between the companies involved.

counterpurchase

is the sale of goods or services to a country by a company that promises to make a future purchase of a specific product from that country. This type of agreement is designed to allow the country to earn back some of the currency that it paid for the original imports.

measuring site potential

managers must carefully assess the quality of the resources that they will use locally. For many companies, the most important of these will be human resources—both labor and management. Wages are lower in. certain markets because labor is abundant, relatively less skilled (though perhaps well educated), or both. Employees may or may not be adequately trained to manufacture a given product or to perform certain R&D activities. If workers are not adequately trained, the site-selection process must consider the additional money and time needed to train them. Training local managers also requires a substantial investment of time and money. A lack of qualified local managers sometimes forces companies to send managers from the home market to the local market. This adds to costs because home-country managers must often receive significant bonuses for relocating to the local market. Companies must also assess the productivity of local labor and managers. After all, low wages tend to reflect low productivity levels of a workforce.Managers should also examine the local infrastructure, including roads, bridges, airports,seaports, and telecommunications systems, when assessing site potential. Each of these systems can have a major impact on the efficiency with which a company transports materials and prod- ucts. Of chief importance to many companies today is the state of a country's telecommunications infrastructure. Much business today is conducted through e-mail, and many businesses relay information electronically on matters such as sales orders, inventory levels, and production strategies that must be coordinated among subsidiaries in different countries. Managers, there- fore, must examine each potential site to determine how well it is prepared for contemporary communications.

intervies

must be conducted carefully if they are to yield reliable and unbiased information. Respondents in some cultures might be unwilling to answer certain questions or may intentionally give vague or misleading answers to avoid getting too personal. For example, although individuals in the United States are renowned for their willingness o divulge all sorts of information about their shopping habits and even their personal lives, this is very much the exception among other countries

focus groups

n unstructured but in-depth interview of a small group of individuals (8 to 12 people) by a moderator to learn the group's attitudes about a company or its product. Moderators guide a discussion on a topic and interfere as little as possible with the free flow of ideas. The interview is recorded for later evaluation to identify recurring or prominent themes among the participants. This type of research helps marketers to uncover negative perceptions among buyers and to design corrective marketing strategies. Because subtle differences in verbal and body language could go unnoticed, focus group interviews tend to work best when moderators are natives of the countries in which the interview is held

indirect exporting

occurs when a company sells its products to intermediaries who then resell to buyers in a target market. The choice of an intermediary depends on many factors, including the ratio of the exporter's international sales to its total sales, the company's available resources, and the growth rate of the target market. Let's take a closer look at several different types of intermediaries: agents, export management companies, and export trading companies

direct exporting

occurs when a company sells its products directly to buyers in a target market. Direct exporters operate in many industries, including aircraft (Boeing) (www.boeing.com), in- dustrial equipment (John Deere) (www.deere.com), apparel (Lands' End) (www.landsend.com), and bottled beverages (Evian) (www.evian.com). Bear in mind that "direct exporters" need not sell directly to end users. Rather, they take full responsibility for getting their goods into the tar- get market by selling directly to local buyers and not going through intermediary companies. Typically, they rely on either local sales representatives or distributors.

management contracts

one company supplies another with manage- rial expertise for a specific period of time. The supplier of expertise is normally compensated with either a lump-sum payment or a continuing fee based on sales volume. Such contracts are commonly found in the public utilities sectors of developed and emerging markets. Two types of knowledge can be transferred through management contracts—the specialized knowledge of technical managers and the business-management skills of general managers.

other forces: transportation and country image

tansport costs and country image also play important roles in the assessment of national business environments.The cost of transporting materials and finished goods affects any decision about where to locate manufacturing facilities. Some products cost very little to transport through the production and distribution process, yet others cost a great deal. Logistics refers to management of the physical flow of products from the point of origin as raw materials to end users as finished products. Logistics weds production activities to the activ- ities needed to deliver products to buyers. It includes all modes of transportation, storage, and distribution. Transport companies and cargo ports strenuously advertise their services precisely because of the high cost to businesses of inefficient logistics. country image embodies every facet of a nation's business environment, it is highly relevant to the selection of sites for production, R&D, or any other activity. For example, country image affects the location of manufacturing or assembly opera- tions because products must typically be stamped with labels identifying where they were made or assembled—such as "Made in China" or "Assembled in Brazil." Although such labels do not affect all products to the same degree, they can present important positive or negative images and boost or dampen sales. Products made in relatively developed countries tend to be evaluated more positively than products from less developed countries. This relation is due to the perception among consumers that the workforces of certain nations have superior skills in making particular products.A country's image can be positive in one product class but negative in another. note that country image can and does change over time.

cultural enviornmetn

the dimensions of culture—values, beliefs, customs, languages, religions—can differ greatly from one nation to another. In such cases, managers can be less confident in their ability to manage operations in the host country. They can be concerned about the potential not only for communication problems but also for interpersonal difficulties. As a result, managers may avoid investment entry modes in favor of exporting or a contractual mode. On the other hand, cultural similarity encourages confidence and thus the likelihood of invest- ment. Likewise, the importance of cultural differences diminishes when managers are knowl- edgeable about the culture of the target market.

entry mode

the institutional arrangement by which a firm gets its products, technolo- gies, human skills, or other resources into a market. Companies seeking entry to new markets for manufacturing and/or marketing purposes have many potential entry modes at their dis- posal. The specific mode chosen depends on many factors, including experience in a market,amount of control managers desire, and potential size of the market

primary market research

the process of collecting and analyzing original data and applying the results to current research needs. This type of information is very helpful in filling in the blanks left by secondary research. Yet it is often more expensive to obtain than secondary research data because studies must be conducted in their entirety

countertrade

when cash transactions are not possible and discuss the main export/import financing methods.

step 3: measure market or site potentioal

• Current sales, income elasticity, market potential indicator • Quality of workforce, materials, infrastructure

step 4: select the market or site

• Field trips • Competitor analysis managers normally evaluate each potential location's contribution to cash flows by undertaking a financial evaluation of a proposed investment.

department-level strategies

Achieving corporate- and business-level objectives depends on effective departmental strategies that focus on the specific activities that transform resources into products. Formulation of department-level strategies brings us back to where we began our analysis of a company's capabilities that support its strategy: to the primary and support activities that create value for customers. After managers analyze these activities, they must then develop strategies that exploit their firm's value-creating strengths.

stakeholders

All parties, ranging from suppliers and employees to stockholders and consumers, who are affected by a company's activities

smithsonian agreement

In August 1971 the U.S. government held less than one-fourth of the amount of gold needed to redeem all U.S. dollars in circulation. In late 1971 the United States and other countries reached the so-called Smithsonian Agreement to restructure and strengthen the international monetary system. The three main accomplishments of the Smithsonian Agreement were (1) to lower the value of the dollar in terms of gold to $38/oz, (2) to increase the values of other countries' currencies against the dollar, and (3) to increase to 2.25 percent from 1 percent the band within which currencies were allowed to float.

adjusting to currency swings

strong and rising currency makes a nation's exports more expensive. Here's how companies can export successfully despite a strong currency. 1) prune operations 2) adapt products 3) source abroad 4) freeze prices. A weak and falling currency makes a nation's imports more expensive. Here's how companies can adjust to a weak currency. 1) source domestically 2) grow at home 3) push exports 4) reudce expenses

chains of command

the lines of authority that run from top management to individual employees and specify internal reporting relationships. Finally, every firm needs a structure that brings together areas that require close cooperation. For example, to avoid product designs that make manufacturing more difficult and costly than necessary, most firms ensure that R&D and manufacturing remain in close contact.

inflation

the result of the supply and demand for a currency. If additional money is injected into an economy that is not producing greater output, people will have more money to spend on the same amount of products as before. As growing demand for products outstrips stagnant supply, prices will rise and devour any increase in the amount of money that consumers have to spend. Therefore, inflation erodes people's purchasing power.

four-step screening process

1. Identify basic appeal 2. Assess the national business environment 3. Measure market or site potential 4. Select the market or site

free float system

Exchange-rate system in which currencies float freely against one another, without governments intervening in currency markets.

stage 1: identify company mission and goals.

1) define the business 2) define the main objectives: Managers must also define the objectives they wish to achieve in the global marketplace. Objectives at the highest level in a company tend to be stated in the most general terms.Objectives of individual business units in an organization tend to be more specific. They are normally stated in more concrete terms and sometimes even contain numerical targets. Objectives usually become even more precise at the level of individual departments and almost always contain numerical targets of performance.

centralized vs. decentralized

1. Companies rarely centralize or decentralize all decision making. Rather, they seek an approach that will result in the greatest efficiency and effectiveness. 2. International companies may centralize decision making in certain geographic markets while decentralizing it in others. Numerous factors influence this decision, including the need for product modification and the abilities of managers at each location.

international business

companies traditionally become involved in international business by choosing to enter familiar, nearby countries. Managers feel comfortable entering nearby markets because they likely have already interacted with the people of those cultures and have at least some understanding of them. Companies in Canada, Mexico, and the United States often gain their initial international experiences in one another's markets. Likewise, businesses in Asia often seek out opportunities in one another's markets before pursuing investment opportunities outside the region.

european monetary system

In 1979, these nations created the European monetary system ( EMS). The EMS was established to stabilize exchange rates, promote trade among nations, and keep inflation low through monetary discipline. The system was phased out when the EU adopted a single currency.The mechanism that limited the fluctuations of European Union members' currencies within a specified trading range ( or target zone) was called the exchange rate mechanism ( ERM). Members were required to keep their currencies within 2.25 percent of the highest- and lowest- valued currencies.

three levels of company strategy

corporate, business and department-level strategy

national and international business enviornments

The external business environment consists of all the elements outside a company that can affect its performance, such as cultural, political, legal, and economic forces; workers' unions; consumers; and financial institutions.National differences in language, religious beliefs, customs, traditions, and climate complicate strategy formulation. Language differences can increase the cost of operations and administration. Manufacturing processes must sometimes be adapted to the supply of local workers and to local customs, traditions, and practices. Marketing activities sometimes can result in costly mistakes if they do not incorporate cultural differences. (i.e) laundry detergent in japan. Differences in political and legal systems also complicate international strategies. Legal and political processes often differ in target countries to such an extent that firms must hire outside consultants to teach them about the local system. Such knowledge is important to international companies because the approval of the host government is almost always necessary for making direct investments. Companies need to know which ministry or department has the authority to grant approval for a big business deal—a process that can become extremely cumbersome. Different national economic systems further complicate strategy formulation. Negative attitudes of local people toward the impact of direct investment can generate political unrest.Economic philosophy affects the tax rates that governments impose. the national business environment can affect the location in which a company chooses to perform an activity

Bretton Wood Agreement

was an accord among nations to create a new international monetary system based on the value of the U.S. dollar. The new system was designed to balance the strict discipline of the gold standard with the flexibility that countries needed to deal with temporary domestic monetary difficulties. The Bretton Woods Agreement also improved on the gold standard by extending the right to exchange gold for dollars only to national governments, rather than to anyone who demanded. Also built in a degree of flexibility. Finally, it established the world bank and international monetary fund.

good strategy

well- defined strategy helps a company compete effectively in increasingly competitive international markets. It serves to coordinate a company's various divisions and departments so that it reaches its company- wide goals in the most effective and efficient manner possible. A clear, appropriate strategy focuses a company on the activities that it performs best and on the industries for which it is best suited. It keeps an organization away from a future of mediocre performance or total failure. An inappropriate strategy can lead a manager to take actions that pull a company in opposite directions or take it into industries it knows little about.

stage 2: idenfity core competency and value-crating activites

• Analyze Firm's Unique Abilities • Analyze Firm's Primary Activities • Analyze Firm's Support Activities • Analyze National and International Business Environment

step 2 asses the national business enviormentm

• Language, attitudes, religious beliefs, traditions, work ethic • Government regulation, government bureaucracy,political stability countries differ significantly in their cultures, politics, laws, and economies. International managers must work to understand these differences and to incorporate their understanding into market- and site-selection decisions.

stage 3: formulate strategies

• Select Multinational or Global Strategy • Formulate Corporate-Level Strategy • Formulate Business-Level Strategy(ies) • Formulate Department-Level Strategies

government bureaucracy

A lean and smoothly operating government bureaucracy can make a market or site more attractive. Yet a bloated and cumbersome system of obtaining approvals and licenses from government agencies can make it less appealing. In many develop- ing countries, the relatively simple matter of obtaining a license to establish a retail outlet often means acquiring numerous documents from several agencies. The bureaucrats in charge of these agencies generally are little concerned with providing businesses with high-quality service.Managers must be prepared to deal with administrative delays and a maze of rules.Companies will endure a cumbersome bureaucracy if the opportunity is sufficient to offset any potential delays and expenses.

exchange rate

An exchange rate tells us how much of one currency we must pay to receive a certain amount of another. But it does not tell us whether a specific product will actually cost us more or less in a particular country (as measured in our own currency). When we travel to another country, we discover that our own currency buys more or less than it does at home. In other words, we quickly learn that exchange rates do not guarantee or stabilize the buying power of our currency.

efficent market view

A market is efficient if prices of financial instruments quickly reflect new public information made available to traders. The efficient market view thus holds that prices of financial instruments reflect all publicly available information at any given time. As applied to exchange rates, this means that forward exchange rates are accurate forecasts of future exchange rates. In an efficient currency market, forward exchange rates reflect all relevant publicly available information at any given time; they are considered the best possible predictors of exchange rates. Proponents of this view hold that there is no other publicly available in- formation that could improve the forecast of exchange rates over that provided by forward rates. To accept this view is to accept that companies do waste time and money collecting and examining information believed to affect future exchange rates. But there is always a certain amount of deviation between forward and actual exchange rates. The fact that forward exchange rates are less than perfect inspires companies to search for more accurate forecasting techniques.

low cost strategy leadership

A strategy in which a company exploits economies of scale to have the lowest cost structure of any competitor in its industry.Companies that pursue the low-cost leadership position also try to contain administrative costs and the costs of their various primary activities, including marketing, advertising, and distribution. Although cutting costs is the mantra for firms that pursue a low-cost leadership position, other important competitive factors such as product quality and customer service cannot be ignored. Factors underlying the low-cost leadership position (efficient production in large quantities) help guard against attack by competitors because of the large upfront cost of getting started. The strategy typically requires a company to have a large market share because achieving low-cost leadership tends to rely on large-scale production to contain costs. One negative aspect of the low-cost leadership strategy is low customer loyalty—all else being equal, buyers will purchase from any low-cost leader. A low-cost leadership strategy works best with mass-marketed products aimed at price-sensitive buyers. This strategy is often well suited to companies with standardized product and marketing promotions.

jammacian agreement

Agreement (1976) among IMF members to formalize the existing system of floating exchange rates as the new international monetary system. Provisions included 1)it endorsed managed float system. 2)Second, gold was no longer the primary reserve asset of the IMF. Member countries could retrieve their gold from the IMF if they so desired. 3)Third, the mission of the IMF was augmented: Rather than being the manager of a fixed exchange-rate system only, it was now a "lender of last resort" for nations with balance-of-payment difficulties. Member contributions were increased to support the newly expanded activities of the IMF.

cultural forces

Although countries display cultural similarities, they differ in language, attitudes toward business, religious beliefs, traditions, customs, and countless other ways. Some products are sold in global markets with little or no modification. These products include industrial machinery such as packaging equipment, consumer products such as toothpaste and soft drinks, and many other types of goods and services. Yet many other products must undergo extensive adaptation to suit local preferences, such as books, magazines, ready-to-eat meals, and other products. Cultural elements can influence what kinds of products are sold and how they are sold. A company must assess how the local culture in a candidate market might affect the salability of its product. Cultural elements in the business environment can also affect site-selection decisions. When substantial product modifications are needed for cultural reasons, a company might choose to establish production facilities in the target market itself. Yet serving customers' special needs in a target market must be offset against any potential loss of economies of scale due to producing in several locations rather than just one. Today companies can minimize such losses through the use of flexible manufacturing methods

argentina peso crisis

Argentina was the star of Latin America in the early and mid- 1990s. Yet by late 2001, Argentina had been in recession for nearly four years, mainly because of Brazil's devaluation of its own currency in 1999— making Brazil's exports cheaper on world markets. Meanwhile, Argentina's goods remained relatively expensive because its own currency was linked to a very strong U. S. dollar through a currency board. As a result, Argentina saw much of its export business dry up and the economy slowed significantly. By late 2001, the IMF had already promised $ 48 billion to rescue Argentina.

mexicos peso crisis

Armed rebellion in the poor Mexican state of Chiapas and the assassi-nation of a presidential candidate shook investors' faith in Mexico's financial system in 1993 and 1994. Capital flowing into Mexico was mostly in the form of stocks and bonds ( portfolio investment) rather than factories and equipment ( foreign direct investment). Portfolio invest-ment fled Mexico for the United States as the Mexican peso grew weak and U. S. interest rates rose. A lending spree by Mexican banks, coupled with weak banking regulations, also played a role in delaying the government's response to the crisis. In late 1994 the Mexican peso was de-valued, forcing a loss of purchasing power on the Mexican people. In response to the crisis, the IMF and private commercial banks in the United States stepped in with about $ 50 billion in loans to shore up the Mexican economy. Thus Mexico's peso crisis contributed to an additional boost in the level of IMF loans. Mexico repaid the loans ahead of schedule and once again has a sizable reserve of foreign exchange.

inflation ipmact on money-supply

Because of the damaging effects of inflation, governments try to manage the supply of and demand for their currencies. They do this through the use of two types of policies designed to influence a nation's money supply. Monetary policy refers to activities that directly affect a nation's interest rates or money supply. Selling government securities reduces a nation's money supply because investors pay money to the government's treasury to acquire the securities. Conversely, when the government buys its own securities on the open market, cash is infused into the economy and the money supply increases. Fiscal policy involves using taxes and government spending to influence the money supply indirectly. For example, to reduce the amount of money in the hands of consumers, governments increase taxes people are forced to pay money to the government coffers. Conversely, lowering taxes increases the amount of money in the hands of consumers. Governments can also step up their own spending activities to increase the amount of money circulating in the economy or cut government spending to reduce it.

labor accords

Between 1980 and 1985, the U.S. dollar rose dramatically against other currencies, pushing up prices of U.S. exports and adding once again to a U.S. trade deficit. The world's five largest industrialized nations known as the "G5" (Britain, France, Germany, Japan,and the United States) arrived at a solution. The Plaza Accord was a 1985 agreement among the G5 nations to act together in forcing down the value of the U.S. dollar. The Plaza Accord caused traders to sell the dollar, and its value fell. By February 1987 the industrialized nations were concerned that the value of the U.S. dollar was now in danger of falling too low. Meeting in Paris, leaders of the "G7" nations (the G5 plus Italy and Canada) drew up another agreement. The Louvre Accord was a 1987 agreement among the G7 nations that affirmed that the U.S. dollar was appropriately valued and that they would in- tervene in currency markets to maintain its current market value. Once again, currency markets responded, and the dollar stabilized.

collapse of bretton wood agreement

But in the 1960s the Bretton Woods system began to falter. The main problem was that the United States was experiencing a trade deficit (imports were exceeding exports) and a budget deficit (expenses were outstripping revenues). Governments that were holding dollars began to doubt that the U.S. government had an adequate amount of gold reserves to redeem all its paper currency held outside the country. When they began demanding gold in exchange for dollars, a large sell-off of dollars on world financial markets followed.The success of the Bretton Woods system relied on the U.S. dollar remaining a strong reserve currency. High inflation and a persistent trade deficit in the United States kept the dollar weak, however, which demonstrated a fundamental flaw in the system. The weak U.S. dollar strained the capabilities of central banks in Japan and most European countries to maintain exchange rates with the dollar. Because these nations' currencies were tied to the U.S. dollar, as the dollar continued to fall, so too did their currencies. Britain left the system in the middle of 1972 and allowed the pound to float freely against the dollar. The Swiss abandoned the system in early 1973. In January 1973 the dollar was again devalued, this time to around $42/oz of gold. But even this move was not enough. As nations began dumping their reserves of the dollar on a massive scale, currency markets were temporarily closed to prevent further selling of the dollar. When markets reopened, the values of most major currencies were floating against the U.S. dollar. The era of an international monetary system based on fixed exchange rates was over.The Bretton Woods system collapsed because of its heavy dependence on the stability of the dollar. As long as the dollar remained strong, it worked well. But when the dollar weakened, it failed to perform properly.

centeralization

Centralized decision making concentrates decision making at a high organizational level in one location, such as at headquarters. Centralized decision making helps coordinate the operations of international subsidiaries. This is important for companies that operate in multiple lines of business or in many international markets. It is also important when one subsidiary's output is another's in- put. In such situations, coordinating operations from a single, high-level vantage point is more efficient. Purchasing is often centralized if all subsidiaries use the same inputs in production. For example, a company that manufactures steel filing cabinets and desks will need a great deal of sheet steel. A central purchasing department will get a better bulk price on sheet steel than would subsidiaries negotiating their own agreements. Each subsidiary would then benefit by purchasing sheet steel from the company's central purchasing department at lower cost than it would pay in the open market. Some companies maintain strong central control over financial resources by channeling all subsidiary profits back to the parent for redistribution to subsidiaries based on their needs. This practice reduces the likelihood that certain subsidiaries will undertake investment projects when more promising projects at other locations go without funding. Other companies centrally design policies, procedures, and standards to encourage a single global organizational culture. This policy makes it more likely that all subsidiaries will enforce company rules uniformly. The policy also helps when companies transfer managers from one location to another because uniform policies can smooth transitions for managers and subordinates alike.

decentralization

Decentralized decision making disperses decisions to lower organizational levels, such as to international subsidiaries. Decentralized decision making is beneficial when fast-changing national business environments put a premium on local responsiveness. Decentralized decisions can result in products that are better suited to the needs and preferences of local buyers because subsidiary managers are in closer contact with the local business environment. Local managers are more likely to perceive environmental changes that managers at headquarters might not notice. By contrast, central managers may not perceive such changes or would likely get a sec- ondhand account of local events. Delayed response and misinterpreted events could then result in lost orders, stalled production, and weakened competitiveness. Decentralization can also help foster participative management practices. The morale of employees is likely to be higher if subsidiary managers and subordinates are involved in decision making. Subsidiary managers and workers can grow more dedicated to the organization when they are involved in decisions related to production, promotion, distribution, and pricing strategies. Decentralization also can increase personal accountability for business decisions. When local managers are rewarded (or punished) for their decisions, they are likely to invest more effort in making and executing them. Conversely, if local managers must do nothing but implement policies dictated from above, they can attribute poor performance to decisions that were ill- suited to the local environment. When managers are held accountable for decision making and implementation, they typically delve more deeply into research and consider all available options. The results are often better decisions and improved performance.

difficulties of forcasting

Despite highly sophisticated statistical techniques in the hands of well-trained analysts, forecasting is not a pure science. Few, if any, forecasts are ever completely accurate because of unexpected events that occur throughout the forecast period. Beyond the problems associated with the data used by these techniques, failings can be traced to the human element involved in forecasting. For example, people might miscalculate the importance of economic news becoming available to the market, placing too much emphasis on some elements and ignoring others

international strategy

Managers confront similar concerns whether formulating a strategy for a domestic or international company. Both types of firms must determine what products to produce, where to produce them, and where and how to market them. The biggest difference lies in complexity. Companies considering international production need to select from many potential countries, each likely having more than one possible location. Depending on its product line, a company that wants to market internationally might have an equally large number of markets to consider. Whether it is being considered as a site for operations or as a potential market, each international location has a rich mixture of cultural, political, legal, and economic traditions and processes. All these factors add to the complexity of planning and formulating strategy for international managers.

value chain analysis

Managers should also select company strategies based on what the company does that customers find valuable. This is why managers conduct a value-chain analysis—the process of dividing a company's activities into primary and support activities and identifying those that create value for customers. value-chain analysis divides a company's activities into primary activities and support activities that are central to creating customer value. Each primary and support activity is a source of strength or weakness for a company. Managers determine whether each activity enhances or detracts from customer value, and they incorporate this knowledge into the strategy-formulation process. Analysis of primary and support activities often involves finding activities in which improvements can be made with large benefits.

exchange rates influence on business

Movement in a currency's exchange rate affects the activities of both domestic and international companies. For example, exchange rates influence demand for a company's products in the global marketplace. A country with a currency that is weak (valued low relative to other curren- cies) will see a decline in the price of its exports and an increase in the price of its imports. Lower prices for the country's exports on world markets can give companies the opportunity to take market share away from companies whose products are priced high in comparison. Furthermore, a company improves profits if it sells its products in a country with a strong currency (one that is valued high relative to other currencies) while sourcing from a country with a weak currency. For example, if a company pays its workers and suppliers in a falling local currency and sells its products in a rising currency, the company benefits by generating revenue in the strong currency while paying expenses in the weak currency. For example, if a company pays its workers and suppliers in a falling local currency and sells its products in a rising currency, the company benefits by generating revenue in the strong currency while paying expenses in the weak currency. Exchange rates also affect the amount of profit a company earns from its international subsidiaries. The earnings of international subsidiaries are typically integrated into the parent company's financial statements in the home currency. Translating subsidiary earnings from a weak host country currency into a strong home currency reduces the amount of these earnings when stated in the home currency. Likewise, translating earnings into a weak home currency increases stated earnings in the home currency.

collapse of gold standard

Nations involved in the First World War needed to finance their enormous war expenses, and they did so by printing more paper currency. This certainly vi- olated the fundamental principle of the gold standard and forced nations to abandon the standard. The aggressive printing of paper currency caused rapid inflation for these nations. When the United States returned to the gold standard in 1934, it adjusted its par value from $20.67/oz of gold to $35.00/oz to reflect the lower value of the dollar that resulted from inflation. Thus the U.S. dollar had undergone devaluation. Yet Britain returned to the gold standard several years earlier at its previous level, which did not reflect the effect inflation had on its currency. Because the gold standard links currencies to one another, devaluation of one currency in terms of gold affects the exchange rates between currencies. The decision of the United States to devalue its currency and Britain's decision not to do so lowered the price of U.S. exports on world markets and increased the price of British goods imported into the United States.As countries devalued their currencies in retaliation, a period of "competitive devaluation" resulted. To improve their trade balances, nations chose arbitrary par values to which they deval- ued their currencies. People quickly lost faith in the gold standard because it was no longer an accurate indicator of a currency's true value. By 1939, the gold standard was effectively dead.

organizational sturcutre and flexibility

Organizational structure is not permanent but is often modified to suit changes both within a company and in its external environment. Because companies usually base organizational structures on strategies, changes in strategy usually require adjustments in structure. Similarly, because changes in national business environments can force changes in strategy, the same changes will influence company structure. It is especially important to monitor closely the conditions in countries characterized by rapidly shifting cultural, political, and economic environment.

inflation impact on unemployment and interest rates.

Other key factors in the inflation equation are a country's unemployment and interest rates. When unemployment rates are low, there is a shortage of labor, and employers pay higher wages to attract employees. To maintain reasonable profit margins with higher labor costs, they then usually raise the prices of their products, passing the cost of higher wages on to the consumer and causing inflation. interest rates affect inflation because they affect the cost of borrowing money. Low interest rates encourage people to take out loans to buy items such as homes and cars and to run up debt on credit cards. High interest rates prompt people to cut down on the amount of debt they carry because higher rates mean larger monthly payments on debt. Thus one way to cool off an inflationary economy is to raise interest rates. Raising the cost of debt reduces consumer spending and makes business expansion more costly.

pegged-exchange rate agreement

Pegged exchange-rate arrangements "peg" a country's currency to a more stable and widely used currency in international trade. Countries then allow the exchange rate to fluctuate within a specified margin (usually 1 percent) around a central rate. Many small countries peg their currencies to the U.S. dollar, European Union euro, the spe- cial drawing right (SDR) of the IMF, or other individual currency. Belonging to this first category are the Bahamas, El Salvador, Iran, Malaysia, Netherlands Antilles, and Saudi Arabia. Other nations peg their currencies to groups, or "baskets," of currencies. For example, Bangladesh and Burundi tie their currencies (the taka and Burundi franc, respectively) to those of their major trading partners. Other members of this second group are Botswana, Fiji, Kuwait, Latvia, Malta, and Morocco.

political and legal forces

Political and legal forces also influence the market and site location decision. Important factors include government regulation, government bureaucracy, and political stability.

russia rubble crisis

Russia had a whole host of problems throughout the 1990s— some were constant, others were intermittent. For starters, Russia was not immune to the events un-folding across Southeast Asia in the late 1990s. As investors became wary of potential prob-lems in other emerging markets worldwide, stock market values in Russia plummeted. Another problem contributing to Russia's problems was depressed oil prices. Because Russia depends on oil production for a large portion of its GDP, the low price of oil on world markets cut into the government's reserves of hard currency. Also cutting into the government's coffers was an unworkable tax collection system and a large underground economy— meaning that most taxes went uncollected.

strategy

Set of planned actions taken by managers to help a company meet its objectives.The key to developing an effective strategy, then, is to define a company's objectives ( or goals) clearly and to plan carefully how it will achieve those goals. This requires a company to undertake an analy-sis of its own capabilities and strengths to identify what it can do better than the competition. It also means that a company must carefully assess the competitive environment and the national and international business environments in which it operates.

support activities

Support activities assist companies in performing their primary activities. include business infrastructure, human resource management, technology development, and procurement (sourcing). Each of these activities provides the inputs and infrastructure required by the primary activities

international monetary fund

The Bretton Woods Agreement established the International Monetary Fund (IMF) as the agency to regulate the fixed exchange rates and enforce the rules of the international monetary system. At the time of its formation, the IMF had just 29 members—today 185 countries belong. Included among the main purposes of the IMF are: Promoting international monetary cooperation. Facilitating expansion and balanced growth of international trade. Promoting exchange stability, maintaining orderly exchange arrangements, and avoiding competitive exchange devaluation. Making the resources of the fund temporarily available to members. Shortening the duration and lessening the degree of disequilibrium in the international balance of payments of member nations.

fixed exchange rates

The Bretton Woods Agreement incorporated fixed exchange rates by tying the value of the U.S. dollar directly to gold and the value of other currencies to the value of the dollar. The par value of the U.S. dollar was fixed at $35/oz of gold. Other currencies were then given par values against the U.S. dollar instead of gold.

work teams

The formation of teams can be highly useful in improving responsiveness by cutting cost across boundaries. Work teams are assigned the tasks of coordinating their efforts to arrive at solutions and implementing corrective action. Today, international companies are turning to work teams on an unprecedented scale to increase direct contact between different operating units. Companies are even forming teams to design and implement their competitive strategies.

par value

The gold standard required a nation to fix the value (price) of its currency to an ounce of gold. The value of a currency expressed in terms of gold is called its par value. Each nation then guaranteed to convert its paper currency into gold for anyone demanding it at its par value. The calculation of each currency's par value was based on the concept of purchasing power parity. This provision made the purchasing power of gold the same everywhere and maintained the purchasing power of currencies across nation

advantages of gold standard

The gold standard was quite successful in its early years of operation. In fact, this early record of success is causing some economists and policy makers to call for its rebirth today. Three main advantages of the gold standard underlie its early success. First, the gold standard drastically reduces the risk in exchange rates because it maintains highly fixed exchange rates between currencies. Deviations that do arise are much smaller than they would be under a system of freely floating currencies. The more stable exchange rates are, the less companies are affected by actual or potential adverse changes in them. Because the gold standard significantly reduced the risk in exchange rates and, therefore, the risks and costs of trade, international trade grew rapidly following its introduction. Second, the gold standard imposes strict monetary policies on all countries that participate in the system. Recall that the gold standard requires governments to convert paper currency into gold if demanded by holders of the currency. If all holders of a nation's paper currency decided to trade it for gold, the government must have an equal amount of gold reserves to pay them. That is why a government cannot allow the volume of its paper currency to grow faster than the growth in its reserves of gold. By limiting the growth of a nation's money supply, the gold stan- dard also was effective in controlling inflation. Third, the gold standard can help correct a nation's trade imbalance

mccurency

The usefulness of the law of one price is that it helps us determine whether a currency is overvalued or undervalued. "Big Mac Index" of exchange rates. This index uses the law of one price to determine the exchange rate that should exist between the U.S. dollar and other major currencies. It employs the McDonald's Big Mac as its single product to test the law of one price. Why the Big Mac? Because each one is fairly identical in quality and content across national markets and almost entirely produced within the nation in which it is sold.Such large discrepancies between a currency's exchange rate on currency markets and the rate predicted by the Big Mac index are not surprising. For one thing, the selling price of food is affected by subsidies for agricultural products in most countries. Also, a Big Mac is not a "traded" product in the sense that one can buy Big Macs in low-priced countries and sell them in high-priced countries. Prices can also be affected because Big Macs are subject to different marketing strategies in different countries. Finally, countries impose different levels of sales tax on restaurant meals. The drawbacks of the Big Mac index reflect the fact that applying the law of one price to a single product is too simplistic a method for estimating exchange rates. Nonetheless, academic studies find that currency values tend to change in the direction suggested by the Big Mac index.

bradly plan

To prevent a meltdown of the entire financial system, international agencies stepped in with a number of temporary solutions to the crisis. Repayment schedules were revised to put off repayment further into the future. Then, in 1989, U. S. Treasury Secretary Nicholas Brady unveiled the Brady Plan. The Brady Plan called for large- scale reduction of the debt owed by poorer nations, the exchange of old loans for new low- interest loans, and the mak-ing of debt instruments ( based on these loans) that would be tradable on world financial markets. This last feature allowed a debtor country to receive a loan from an institution and then use it to buy special securities ( called " Brady Bonds") on financial markets.

world bank

To provide funding for countries' efforts toward economic development, the Bretton Woods Agreement created the World Bank—officially called the International Bank for Reconstruction and Development (IBRD). The immediate purpose of the World Bank was to finance European reconstruction following the Second World War. It later shifted its focus to the general financial needs of developing countries. The World Bank finances many types of economic development projects in Africa, South America, and Southeast Asia. The World Bank also offers funds to countries that are unable to obtain capital from commercial sources for certain projects that are considered too risky. The bank often undertakes projects to develop transportation networks, power facilities, and agricultural and educational programs.

todays exchanged rates agreements

Today's international monetary system remains in large part a managed float system, whereby most nations' currencies float against one another and governments engage in limited interven- tion to realign exchange rates. Within the larger monetary system, however, certain countries try to maintain more stable exchange rates by tying their currencies to other currencies.

screening potential market sites

Two important issues concern managers during the market- and site-screening process. First, they want to keep search costs as low as possible. Second, they want to examine every potential market and every possible location. To accomplish these two goals, managers can segment the screening of markets and sites into the following four-step process

primary activities

When analyzing primary activities, managers often look for areas in which the company can increase the value provided to its customers. For example, managers might examine production processes and discover new, more efficient manufacturing methods to reduce production costs and improve quality. Customer satisfaction might be increased by improving logistics management that shortens the time it takes to get a product to the buyer or by providing better customer service. include inbound and outbound logistics, production (goods and services), marketing and sales, and customer service. Primary activities involve the creation of the product, its marketing and delivery to buyers, and its after-sales support and service

currency board

a monetary regime that is based on an explicit com-mitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate. The government with a currency board is legally bound to hold an amount of foreign currency that is at least equal to the amount of domestic currency. Because a currency board restricts a government from issuing additional domestic currency unless it has the foreign reserves to back it, it helps cap inflation. Thus, survival of a currency board depends on wise budget policies.

government regulation

a nation's culture, history, and current events cause differences in attitudes toward trade and investment. Some governments take a strong nationalistic stance, whereas others are quite receptive to international trade and investment. A government's attitude toward trade and investment is reflected in the quantity and types of restrictions it places on imports, exports, and investment in its country. Government regulations can quickly eliminate a market or site from further consideration. First of all, they can create investment barriers to ensure domestic control of a company or industry. One way in which a government can accomplish this is by imposing investment rules on mat- ters such as business ownership—for example, forcing foreign companies into joint ventures. Governments can extend investment rules to bar international companies entirely from competing. in certain sectors of the domestic economy. The practice is usually defended as a matter of national security. Economic sectors commonly declared off-limits include television and radio broadcasting, automobile manufacturing, aircraft manufacturing, energy exploration, military equipment manufacturing, and iron and steel production. Such industries are protected either because they are culturally important, are engines for economic growth, or are essential to any potential war effort. Host governments often fear that losing control in these economic sectors means placing their fate in the hands of international companies. Second, governments can restrict international companies from freely removing profits earned in the nation. This policy can force a company to hold cash in the host country or to reinvest it in new projects there. Such policies are normally rooted in the inability of the host-country government to earn the foreign exchange needed to pay for badly needed imports. Third, governments can impose very strict environmental regulations. In most industrial countries, factories that produce industrial chemicals as their main output or as byproducts must adhere to strict pollution standards. Regulations typically demand the installation of expensive pollution-control devices and close monitoring of nearby air, water, and soil quality. While protecting the environment, such regulations also increase short-term production costs. Many developing and emerging markets have far less strict environmental regulations. Regrettably, some companies are alleged to have moved production of toxic materials to emerging markets to take advantage of lax environmental regulations and, in turn, lower production costs. Although such behavior is roundly criticized as highly unethical, it will occur less often as nations continue cooperating to formulate common environmental protection policies. Finally, governments can also require that companies divulge certain information.

retrenchment strategy

a strategy designed to reduce the scale or scope of a corporation's businesses. Corporations often cut back the scale of their operations when economic conditions worsen or competition increases. They may do so by closing factories with unused capacity and laying off workers. Corporations can also reduce the scale of their operations by laying off managers and salespeople in national markets that are not generating adequate sales revenue. Corporations reduce the scope of their activities by selling unprofitable business units or those no longer directly related to their overall aims. Weaker competitors often resort to retrenchment when national business environments grow more competitive.

multinational (multidomestic) strategy

a strategy of adapting products and their marketing strategies in each national market to suit local preferences. In other words, a multinational strategy is just what its name implies—a separate strategy for each of the multiple nations in which a company markets its products. To implement a multinational strategy, companies often establish largely independent, self-contained units (or subsidiaries) in each national market. Each subsidiary typically undertakes its own product research and development, production, and marketing. In many ways, each unit functions largely as an independent company. Multinational strategies are often appropriate for companies in industries in which buyer preferences do not converge across national borders, such as certain food products and some print media. main benefit of a multinational strategy is that it allows companies to monitor buyer preferences closely in each local market and to respond quickly and effectively to emerging buyer preferences. Companies hope that customers will perceive a tailored product as delivering greater value than do competitors' products. A multinational strategy, then, should allow a company to charge higher prices and/or gain market share. The main drawback of a multinational strategy is that companies cannot exploit scale economies in product development, manufacturing, or marketing. The multinational strategy typically increases the cost structure for international companies and forces them to charge higher prices to recover such costs. As such, a multinational strategy is usually poorly suited to industries in which price competitiveness is a key success factor. The high degree of independ- ence with which each unit operates also may reduce opportunities to share knowledge among units within a company.

global strategy

a strategy of offering the same products using the same marketing strategy in all national markets. Companies that follow a global strategy often take advantage of scale and location economies by producing entire inventories of products or components in a few optimal locations. They also tend to perform product research and development in one or a few locations and typically design promotional campaigns and advertising strategies at headquarters. So-called global products are most common in industries characterized by price competition and, therefore, pressure to contain costs. They include certain electronic components, a wide variety of industrial goods such as steel, and some consumer goods such as paper and writing instruments. The main benefit of a global strategy is cost savings due to product and marketing standardization. These cost savings can then be passed on to consumers to help the company gain market share in its market segment. A global strategy also allows managers to share lessons learned in one market with managers at other locations. The main problem with a global strategy is it can cause a company to overlook important differences in buyer preferences from one market to another. A global strategy does not allow a company to modify its products except for the most superficial features, such as the color of paint applied to a finished product or a small add-on feature. This can present a competitor with an opportunity to step in and satisfy unmet needs of local buyers, thereby creating a niche market.

technical anaylsis

a technique that uses charts of past trends in currency prices and other factors to forecast exchanges rates. Using highly statistical models and charts of past data trends, analysts examine conditions that prevailed during changes in exchange rates, and they try to estimate the timing, magnitude, and direction of future changes.

fundamental analysis

a type of forecasting Technique that uses statistical models based on fundamental economic indicators to forecast exchange rates.

mission statment

a written statement of why a company exists and what it plans to accomplish. For example, one company might set out to supply the highest level of service in a market segment-a clearly identifiable group of potential buyers. Another might strive to be the lowest-cost supplier in its segment worldwide. The mission statement often guides decisions such as which industries to enter or exit and how to compete in chosen segments.he mission statement of an international business depends on (among other things) the type of business it is in, the stakeholders it is trying most to satisfy, and that aspect of business most important to achieving its goals. Yet companies must be sensitive to the needs of its different stakeholders in different nations. A company might need to balance the needs of stockholders for financial returns in the home nation, the needs of buyers for good value in a consumer market, and the needs of the public at large where it has a production facility.

special drawling rights

an IMF asset whose value is based on a weighted "basket" of four currencies, including the U.S. dollar, European Union euro, Japanese yen, and British pound. The value of the SDR is set daily and changes with increases and declines in the values of its underlying currencies. Today there are more than 204 billion SDRs in existence worth slightly less than $300 billion (1 SDR is about $1.74). The significance of the SDR is that it is the unit of account for the IMF. Each nation is assigned a quota based on the size of its economy when it enters the IMF. Payment of this quota by each nation provides the IMF with the funds it needs to make short-term loans to members.

fundamental disequilibrium

an economic condition in which a trade deficit causes a permanent negative shift in a country's balance of payments. In this situation, a nation can devalue its currency more than 10 percent. Yet devaluation under these circumstances should accurately reflect a permanent economic change for the country in question, not temporary misalignments.

the gold standard

an international monetary system in which nations linked the value of their paper currencies to specific In the earliest days of international trade, gold was the internationally accepted currency for payment of goods and services. Using gold as a medium of exchange in international trade has several advantages. First, the limited supply of gold made it a commodity in high demand. Second, because gold is highly resistant to corrosion, it can be traded and stored for hundreds of years. Third, because it can be melted into either small coins or large bars, gold is a good medium of exchange for both small and large purchases. But gold also has its disadvantages. First, the weight of gold made transporting it expensive. Second, when a transport ship sank at sea, the gold sank to the ocean floor and was lost. Thus merchants wanted a new way to make their international payments without the need to haul large amounts of gold around the world. The solution was found in the gold standard:values of gold. Britain was the first nation to implement the gold standard in the early 1700s.

step 1: identify basic appeal

companies go international either to increase sales (and thus profits) or to access resources. • Suitability of climate, absolute bans • Access to materials, labor, financing The first step in identifying potential markets is to assess the basic demand for a product. Similarly, the first step in selecting a site for a facility to undertake production, R&D, or some other activity is to explore the availability of the resources required. first step in searching for potential markets means finding out whether there is a basic demand for a company's product. Important in determining this basic appeal is a country's climate. Companies that require particular resources to carry out local business activities must be sure they are available. Raw materials needed for manufacturing must either be found in the national market or imported. Yet imports may en- counter tariffs, quotas, or other government barriers. Managers must consider the additional costs of importing to ensure that total product cost does not rise to unacceptable levels. availability of labor is essential to production in any country. Many companies choose to relocate to countries where workers' wages are lower than they are in the home country. This practice is most common among makers of labor-intensive products—those for which labor accounts for a large portion of total cost. Companies considering local production must determine whether there is enough labor available locally for production operations. Companies that hope to secure financing in a market abroad must determine the availability and cost of local capital. If local interest rates are too high, a company might be forced to obtain financing in its home country or in other markets in which it is active. On the other hand, access to low-cost financing may provide a powerful inducement to a company that is seeking to expand international. Markets and sites that fail to meet a company's requirements for basic demand or resource availability in step 1 are removed from further consideration.

global product structure

divides worldwide operations according to a company's product areas For example, divisions in a computer company might be Internet and Communications, Software Development, and New Technologies. Each product division is then divided into domestic and international units. Each function—R&D, marketing, and so forth—is thus duplicated in both the domestic and international units of each product division. The global product structure is suitable for companies that offer diverse sets of products or services because it overcomes some coordination problems of the international division structure. Because the primary focus is on the product, activities must be coordinated among a product division's domestic and international managers so they do not conflict.

business level strategies

gers must also formulate separate business-level strategies for each business unit. Forsome companies, this means creating just one strategy. This is the case when the business-level strategy and the corporate-level strategy are one and the same because the corporation is involved in just one line of business. For other companies, this can mean creating dozens of strategies. The key to developing an effective business-level strategy is deciding on a general competi- tive strategy in the marketplace. Each business unit must decide whether to sell the lowest-priced product in an industry or to integrate special attributes into its products. A business unit can use one of three generic business-level strategies for competing in its industry—low-cost leadership, differentiation, or focus.

global teams

groups of top managers from both headquarters and international subsidiaries who meet to develop solutions to company-wide problems. Depending on the issue at hand, team members can be drawn from a single business unit or assembled from several different units. While some teams are disbanded after resolving specific issues, others move on to new problems. The performance of global teams can be impaired by matters such as large distances between team members, lengthy travel times to meetings, and the inconvenience of working across time zones. Companies can sometimes overcome these diffi- culties, although doing so can be rather costly.

how do exchange rates adjust to inflation?

important component of the concept of purchasing power parity is that exchange rates adjust to different rates of inflation in different countries. Such adjustment is necessary to maintain purchasing power parity between nations. To find the new exchange rate (Ee) at the end of the year, we use the following formula: Ee = Eb(1 + i1)/(1+ i2), where Eb is the exchange rate at the beginning of the period, i1 is the inflation rate in country 1, and i2 is the inflation rate in country. one of the difficulties facing countries with high rates of inflation. Both consumers and companies in countries experiencing rapidly increasing prices see their purchasing power eroded. Developing countries and countries in transition are those most often plagued by rapidly increasing price

inefficent market view

inefficient market view holds that prices of financial instruments do not reflect all publicly available information. Proponents of this view believe companies can search for new pieces of information to improve forecasting. But the cost of searching for further information must not outweigh the benefits of its discovery. Naturally, the inefficient market view is more compelling when the existence of private infor- mation is considered. Suppose a single currency trader holds privileged information regarding a future change in a nation's economic policy—information that she believes will affect its ex- change rate. Because the market is unaware of this information, it is not reflected in forward ex- change rates. Our trader will no doubt earn a profit by acting on her store of private information. Now that we understand the two basic views related to market efficiency, let's look at the specific methods that companies use to forecast exchange rates.

devaluation

intentionally lowering the value of nations currency.Devaluation lowers the price of a country's exports on world markets and increases the price of its imports because the value of the country's currency is now lower on world markets. Thus, a government might devalue its currency to give its domestic companies an edge over competition from other countries. But devaluation reduces the buying power of consumers in the nation. It can also allow inefficiencies to persist in domestic companies because there is now less pressure to be concerned with production costs.

revaluation

intentionally raising the value of nations currency. Revaluation has the opposite effects: it increases the price of exports and reduces the price of imports.

core competency

is a special ability of a company that competitors find extremely diffi- cult or impossible to equal. It is not a skill; individuals possess skills. For example, an architect's ability to design an office building in the Victorian style is a skill. A core competency refers to multiple skills that are coordinated to form a single technological outcome. Although skills can be learned through on-the-job training and personal experience, core competencies develop over longer periods of time and are difficult to teach.

stability strategy

is designed to guard against change. Corporations often use a stability strategy when trying to avoid either growth or retrenchment. Such corporations have typically met their stated objectives or are satisfied with what they have already accomplished. They believe that their strengths are being fully exploited and their weaknesses fully protected against. They also see the business environment as posing neither profitable opportunities nor threats. They have no interest in expanding sales, increasing profits, increasing market share, or expanding the customer base; at present, they want simply to maintain their present positions.

growth strategy

is designed to increase the scale or scope of a corporation's operations. Scale refers to the size of a corporation's activities, scope to the kinds of activities it performs. Yardsticks commonly used to measure growth include geographic coverage, number of business units, market share, sales revenue, and number of employees. Organic growth refers to a corporate strategy of relying on internally generated growth.Other methods of growth include mergers and acquisitions, joint ventures, and strategic alliances. These tactics are used when companies do not wish to invest in de- veloping certain skills internally or when other companies already do what managers are trying to achieve. Common partners in implementing these strategies include competitors, suppliers, and buyers. Corporations typically join forces with competitors to reduce competition, expand product lines, or expand geographically. A common motivation for joining forces with suppliers is to increase control over the quality, cost, and timing of inputs.

law of one price

stipulates that an identical product must have an identical price in all countries when the price is expressed in a common currency. For this principle to apply, products must be identical in quality and content in each country and be entirely produced within each country. when law of one price is violated, an arbitrage opportunity arises—that is, an opportunity to buy a product in one country and sell it in a countrywhere it has a higher value. it is the nature of arbitrage to even out excessive fluctuation by destroying its own profitability.

cross functional teams

is one composed of employees who work at similar levels in different functional departments. These teams work to develop changes in operations and are well suited to projects that require coordination across functions, such as reducing the time needed to get a product from the idea stage to the market- place. International companies also use cross-functional teams to improve quality by having employees from purchasing, manufacturing, and distribution (among other functions) work together to address specific quality issues. For the same reason, cross-functional teams can help break down barriers between departments and reorganize operations around processes rather than by functional departments.

differentiation strategy

is one in which a company designs its products to be perceived as unique by buyers throughout its industry. The perception of uniqueness can allow a company to charge a higher price and enjoy greater customer loyalty than it could as a low-cost leader. But a perception of exclusivity, or meeting the needs of a small group of buyers, tends to force a company into a lower market-share position. A company using this strategy must develop a loyal customer base to offset its smaller market share and higher costs of producing and marketing a unique product. One way products can be differentiated is by improving their reputation for quality. Other products are differentiated by distinctive brand images. Another differentiating factor is product design—the sum of the features by which a product looks and functions according to customer requirements. Special features differentiate both goods and services in the minds of consumers who value those features. Manufacturers can also combine several differentiation factors in formulating their strategies.

focus strategy

is one in which a company focuses on serving the needs of a narrowly defined market segment by being the low-cost leader, by differentiating its product, or both. Increasing competition often means more products distinguished by price or differentiated by quality, design, and so forth. In turn, a greater product range leads to the continuous refinement of market segments. Today many industries consist of large numbers of market segments and even smaller subsegments. For example, some firms try to serve the needs of one ethnic or racial group, whereas. A focus strategy often means designing products and promotions aimed at consumers who are either dissatisfied with existing choices or who want something distinctive

self-managed teams

is one in which the employees from a single department take on the responsibilities of their former supervisors. When used in production, such teams often reorganize the methods and flow of production processes. Because they are "self-managed," they reduce the need for managers to watch over their every activity. The benefits of self-managed teams typically include increased productivity, product quality, customer satisfaction, employee morale, and company loyalty. In fact, the most common self-managed teams in many manufacturing companies are quality-improvement teams, which help reduce waste in the production process and, therefore, lower costs. The global trend toward "downsizing" internal operations to make them more flexible and productive has increased the popularity of teams because they reduce the need for direct supervision. Companies around the world now employ self-managed teams in international operations. Yet research indicates that cultural differences can influence resistance to the con- cept of self-management and the practice of using teams. Among other things, experts suggest that international managers follow some basic guidelines Use selection tests to identify the employees most likely to perform well in a team environment. Adapt the self-managed work-team concept to the national culture of each subsidiary. Adapt the process of integrating self-managed work teams to the national culture of each subsidiary. Train local managers at the parent company and allow them to introduce teams at a time

organizational structure

is the way in which a company divides its activities among separate units and coordinates activities among those units. If a company's organizational structure is appropriate for its strategic plans, it will be more effective in working toward its goals

combination strategy

is to mix growth, retrenchment, and stability strategies across a corporation's business units. For example, a corporation can invest in units that show promise, retrench in those for which less exposure is desired, and stabilize others. In fact, corporate combination strategies are quite common because international corporations rarely follow identical strategies in each of their business units.

briding the gap

ompanies today find themselves bridging the gaps presented by space and culture far more often than in the past. For one thing, technological advances in communication and transportation continue to open markets around the globe. Some companies can realistically consider nearly every location on earth as either a potential market or as a site for business operations. The expansion of regional markets (such as the European Union) also causes companies to analyze opportunities farther from home. Businesses locate production facilities within regional markets because producing in one of a region's countries provides duty-free access to every consumer in the trade bloc. rapidly changing global marketplace forces companies to view business strategies from a global perspective. Businesses today formulate production, marketing, and other strategies as components of integrated plans.

fixed-exchanged rate

one in which the exchange rate for converting one currency into another is fixed by international governmental agreement. This system and the use of par values made calculating exchange rates between any two currencies a very simple matter.

international area stucutre

organizes a company's entire global operations into countries or geographic regions. The greater the number of countries in which a company operates, the greater the likelihood it will organize into regions—say, Asia, Europe, and the Americas—instead of countries. Typically, a general manager is assigned to each country or region. Under this structure, each geographic division operates as a self-contained unit, with most decision making decentralized in the hands of the country or regional managers. Each unit has its own set of departments—purchasing, produc- tion, marketing and sales, R&D, and accounting. Each also tends to handle much of its own strategic planning. Management at the parent-company headquarters makes decisions regarding overall corporate strategy and coordinates the activities of various units. The international area structure is best suited to companies that treat each national or regional market as unique. It is particularly useful when there are vast cultural, political, or economic differences between nations or regions. When they enjoy a great deal of control over activities in their own environments, general managers become experts on the unique needs of their buyers. On the other hand, because units act independently, allocated resources may overlap and cross-fertilization of knowledge from one unit to another may be less than desirable.

strategy formation

process involves both planning and strategy. Strategy formulation permits managers to step back from day- to- day activities and get a fresh perspective on the current and future direction of the company and its industry. three stage process

Purchasing Power Parity

purchasing power parity (PPP) is the relative ability of two countries' currencies to buy the same "basket" of goods in those two countries. Thus, although the law of one price holds for single products, PPP is meaningful only when applied to a basket of goods. In the context of exchange rates, the principle of purchasing power parity can be interpreted as the exchange rate between two nations' currencies that is equal to the ratio of their price levels. In other words, PPP tells us that a consumer in Thailand needs 21.67 units (not 41.45) of Thai currency to buy the same amount of products as a consumer in the United States can buy with one dollar. Economic forces, says PPP theory, will push the actual market exchange rate toward that determined by purchasing power parity. If they do not, arbitrage opportunities will arise. Purchasing power parity holds for internationally traded products that are not restricted by trade barriers and that entail few or no transportation costs. To earn a profit, arbitrageurs must be certain that the basket of goods purchased in the low-cost country would still be lower-priced in the high-cost country after adding transportation costs, tariffs, taxes, and so forth. Purchasing power parity is better at predicting long-term exchange rates (more than 10 years), but accurate forecasts of short-term rates are most beneficial to international managers. Even short-term plans must assume certain things about future economic and political conditions in different countries, including added costs, trade barriers, and investor psychology. PPP assumes no transportation costs. Because no arbitrage opportunity exists after transportation costs are added, there will be no leveling of prices between the two markets and the price discrepancy will persist. PPP also assumes no barriers to international trade. However, such barriers certainly do exist. Governments establish trade barriers for many reasons, including helping domestic companies remain competitive and preserving jobs for their citizens.inally, PPP overlooks the human aspect of exchange rates—the role of people's confidence and beliefs about a nation's economy and the value of its currency. Many countries gauge confidence in their economies by conducting a business confidence survey. The largest survey of its kind in Japan is called the tankan survey. It gauges business confidence four times each year among 10,000 companies. Investor confidence in the value of a currency plays an important role in determining its exchange rate

southeast asia currency crisis

roar of the " four tiger" economies and those of other high- growth Asian nations suddenly fell silent in the summer of 1997. For 25 years, the economies of five Southeast Asian countries— Indonesia, Malaysia, the Philippines, Singapore, and Thailand— had wowed the world with growth rates twice those of most other countries. Even though many analysts projected continued growth for the region, and even though billions of dollars in investment flooded in from the West, savvy speculators were pessimistic. On July 11, 1997, the speculators struck, selling off Thailand's baht on world currency mar-kets. The selling forced an 18 percent drop in the value of the baht before speculators moved on to the Philippines and Malaysia. By November the baht had plunged another 22 percent, and every other economy in the region was in a slump. The shock waves of Asia's crisis could be felt throughout the global economy. Suddenly, countries thought to be strong emerging market economies—" tigers" to be emu-lated by other developing countries— were in need of billions of dollars to keep their economies from crumbling. When the dust settled, Indonesia, South Korea, and Thailand all needed IMF and World Bank funding. As incentives for these countries to begin the long process of economic restructuring, IMF loan packages came with a number of strings attached. For example, the Indonesian loan package involved three long- term goals to help put the Indonesian economy on a stronger footing: ( 1) to restore the confidence of international finan-cial markets, ( 2) to restructure the domestic financial sector, and ( 3) to support domestic dereg-ulation and trade reforms.

international division structure

separates domestic from international business activities by creating a separate international division with its own manager. In turn, the international division is typically divided into units corresponding to the countries in which a company is active—say, China, Indonesia, and Thailand. Within each country, a general manager controls the manufacture and marketing of the firm's products. Each country unit typically carries out all of its own activities with its own departments such as marketing and sales, finance, and production. Because the international division structure concentrates international expertise in one division, divisional managers become specialists in a wide variety of activities such as foreign exchange, export documentation, and host government relations. By consigning international activities to a single division, a firm can reduce costs, increase efficiency, and prevent international activities from disrupting domestic operations. These are important criteria for firms new to international business and whose international operations account for a small percentage of their total business. An international division structure can, however, create two problems for companies. First, international managers must often rely on home-country managers for the financial resources and technical know-how that give the company its international competitive edge. Poor coordination between managers can hurt the performance not only of the international division but also of the entire company. Second, the general manager of the international division typically is responsible for operations in all countries. Although this policy facilitates coordination across countries, it reduces the authority of each country manager. Rivalries and poor cooperation between the general manager and country managers can be damaging to the company's overall performance.

fisher effect

specific period. We write this relation between inflation and interest rates as: Nominal Interest Rate = Real Interest Rate + Inflation Rate If money were free from all controls when transferred internationally, the real rate of inter- est should be the same in all countries. Fisher effect clarifies the relation between inflation and interest rates. Now, let's investigate the relation between exchange rates and interest rates. To illustrate this relation, we refer to the international Fisher effect—the principle that a difference in nominal interest rates supported by two countries' currencies will cause an equal but opposite change in their spot exchange rates.Because real interest rates are theoretically equal across countries, any difference in interest rates in two countries must be due to different expected rates of inflation. A country that is experiencing inflation higher than that of another country should see the value of its currency fall. If so, the exchange rate must be adjusted to reflect this change in value.

global matrix strucutre

splits the chain of command between product and area divisions. Each manager reports to two bosses—the president of the product division and the president of the geographic area. A main goal of the matrix structure is to bring together geographic area managers and product area managers in joint decision making. In fact, bringing together specialists from different parts of the organization creates a sort of team organization. The popularity of the matrix structure has grown among companies trying to increase local responsiveness, reduce costs, and coordinate worldwide operations. The matrix structure resolves some of the shortcomings of other organizational structures, especially by improving communication among divisions and increasing the efficiency of highly specialized employees. At its best, the matrix structure can increase coordination while simultaneously improving agility and local responsiveness. However, the global matrix structure suffers from two major shortcomings. First, the matrix form can be quite cumbersome. Numerous meetings are required simply to coordinate the actions of the various division heads, let alone the activities within divisions. In turn, the need for complex coordination tends to make decision making time consuming and slows the reaction time of the organization. Second, individual responsibility and accountability can become foggy in the matrix organization structure. Because responsibility is shared, managers can attribute poor performance to the actions of the other manager. Moreover, the source of problems in the matrix structure can be hard to detect and corrective action difficult to take.

stablility

stable exchange rates improve the accuracy of financial planning and make cash flow forecasts more precise.

how do interest rates effect exchange rates?

two types of interest rates: real interest rates and nominal in- terest rates. Let's say that your local bank quotes you an interest rate on a new car loan. That rate is the nominal interest rate, which consists of the real interest rate plus an additional charge for inflation. The reasoning behind this principle is simple: The lender must be compensated for the erosion of its purchasing power during the loan period caused by inflation.

predictablity

unpredictability of exchange rates increases, so too does the cost of insuring against the accompanying risk. unpredictability of exchange rates increases, so too does the cost of insuring against the accompanying risk.