Financial Risk Unit 3 International Business

Methods of Payment

- Cash in Advance - Open Account - Letter of Credit

Letter of Credit

- a contract between the banks of the buyer and the seller, largely risk-free/ establishes an instant trust

Transnational Strategy

- a coordinated approach to internationalize in which the firm strives to be more responsive to local needs while retaining sufficient central control of operation - firm seeks to combine the major advantages of multidomestic and global strategies, while minimizing their disadvantages - standardize where feasible, and adapt when appropriate

International Collaborative Venture

- a cross-border business alliance in which partnering firms pool their resources and share costs and risk of a venture

Joint Venture

- a form of collaboration between two or more firms to create a jointly-owned enterprise

Offshoring

- a natural extension of global sourcing, it refers to the relocation of a business process or entire manufacturing facility to a foreign country - MNEs shift production of goods or processes to foreign countries to enhance their competitive advantages - common in the service sector, including banking, software writing, legal services, and customer service activities

ICV (international collaborative venture)

- a partnership between two or more firms - includes equity joint ventures and non-equity, project-based ventures -sometimes called partnerships or strategic alliances -collaboration helps overcome the often substantial risk and high costs of international business. It makes possible the achievements of projects that exceed the capabilities of the individual firm

Counter trade

- an international business transaction in which all or partial payments are made in kind rather than cash - similar to bartering - used when conventional means of payment are difficult, costly or nonexistent ex) Coca-Cola received tomato paste from Turkey, oranges from Egypt, and beer from Poland in exchange for Coke

Success Factors in Collaborative Ventures

- be aware of cultural differences -pursue common goals -pay attention to planning and management of the venture -safeguard core competencies -adjust to shifting environmental circumstances

Global Matrix Structure

- blends the geographic area, product, and functional structures to leverage the benefits of a purely global strategy while the firm remains responsive to local needs

Sources of Export Financing

- commercial banks - distribution channel intermediaries -buyers - suppliers - government assistance programs ex) Export-Import Banks, Small Business Administration

Disadvantages of Exporting

- compared to FDI, exporting offers fewer opportinites to learn about customers, competitors, and other aspects of foreign market - firms must acquire and dedicate new capabilities in international sales contracts and transactions, international financing methods, and logistics and documentation, all of which can strain organizational resources - expose the firm to tariffs and other trade barriers as well as fluctuating exchange rates

Benefits to Global Sourcing

- cost efficiency, due to lower wages abroad, leading to improve profitability - Ability to Achieve Strategic Goals - faster corporate growth - access to qualified personnel - improved productivity and service, especially when a task is outsourced to a firm specialized in that task - business process redesign - increased speed to market -access to new markets -technological flexibility

Open Account

- easy for exporter/ simply bills buyer- who is expected to pay at some point in the future as agreed upon - risky unless there is a strong relationship between exporter and buyer

Project-based Joint Venture

- has a narrow scope and limited timetable. No new legal entity is created. Typically, partners collaborate on joint development of new technologies, products, or share other expertise with each other. Such cooperation helps them catch up with technology development

Global Strategy

- headquarters seeks substantial control over all country operations - products, marketing, and company practices are relatively standardized - management views the world as one large market place

Advantages of Exporting

- increase sale volume- improve market share - generate better profit margins - increase economies of scale - diversify customer base - stabilize sales fluctuations - minimize the cost of foreign market entry - minimize risk - maximize flexibility - leverage the capabilities of foreign distributors and other business partners located abroad

Risks in Global Sourcing

- lower-than-expected cost savings - environmental factors, such as exchange rate fluctuations, trade barriers, and labor strikes - weak legal environment, which can afford protection of intellectual property - inadequate or low-skilled workers - overreliance on suppliers - risk of creating competitors - erosion of morale and commitment among home-country employees, due to outsourcing jobs

Functional Structure

- management of international operations is organized by functional activity ex) oil companies--> tend to organize their worldwide operations along with two major functional lines- production and marketing of petroleum products

Motives for FDI

- market-seeking motives - resource-or asset seeking motives - efficiency-seeking motives

Global Sourcing

- procurement of products or services from the suppliers located abroad for consumption in the home country or a third country - also called global outsourcing, global procurement or global purchasing- it amounts to importing

Efficiency- seeking motives

- reduce sourcing and production costs - locate production near customers - take advantage of government incentives - avoid trade barriers

Incoterms (International Commerce Terms)

- system of universal standard terms of scale and delivery - commonly used in international scales contracts and price lists to specify how the buyer and the seller share the cost of freight and insurance, and at which point the buyer taxes title to the goods

Global Sourcing Drivers

- technological advances in communications, especially the Internet and international telephony - falling costs of international business - entrepreneurship and rapid economic transformation in emerging market countries

Nature of Foreign Direct Investment

- the most advanced, expensive, complex, and riskiest entry strategy, involving the establishment of manufacturing plants, marketing subsidiaries, or other facilities abroad - undertaken by firms form both the advanced economies and emerging markets -target countries are both advanced economies and emerging markets

Exporting- entrance strategy

- usually the firm's first foreign entry strategy (popular with SMEs) - low risk, low cost, and flexible - trade, trade deficits, trade surpluses and others are referring to exporting - most exports involve merchandise

Leading Destinations for FDI

-Advanced economies in Europe (especially Britain), Japan, and North America, are popular FDI destinations, mainly as attractive markets. -In recent years, emerging markets and developing economies have gained appeal as FDI destinations. ex) firms target China, Mexico, Eastern-Euro to do low cost manufacturing and to easily access huge adjoining regional markets

World Bank

-Also recognized as the International Bank for Reconstruction and Development, was formed in 1944. -It aims to reduce poverty and is active in various development projects to bring water, electricity, and transportation infrastructure to poor countries. -Headquartered in Washington, D.C. -World Bank

Types of Collaborative Ventures

-Consortium -Cross-licensing agreement

International Monetary Fund

-Developed in 1944 -189 countries -Headquartered in Washington, D.C. -IMF

Key Participants and Relationships in the Global Monetary and Financial Systems

-Firm Level: the firm -National Infrastructure Level: commercial banks & national stock exchanges and bond markets -National Government Level: central banks - International Organization Level: international monetary fund & bank for international settlements & world bank - bank for international settlement --> central banks--> commercial banks--> the firm - national stock exchanges and bond markets--> the firm

Multi- Domestic Strategy

-The firm develops subsidiaries or affiliates in each of its foreign markets, and appoints local managers to operate independently and be locally responsive - products and services are adapted to suit the needs and wants of buyers in each country - country managers are often nationals of the host country, and generally don't share knowledge and experience with managers in other countries

Resource- or Asset seeking motives

-access raw materials -gain access to knowledge/ other assets -access technological and managerial know-how available in key market

Cash in Advance

-best for the seller -risky for the buyer/ unpopular and generally discourages sales

Home Replication Strategy

-firm views international strategy as separate from, and secondary to, its domestic business - expansion abroad is an opportunity to generate incremental sales for domestic product line - products are designed for domestic customers

Market-seeking motives

-gain access to new markets/ opportunities -follow key customers -compete with key rivals in their own market

Equity Joint Venture

-normally formed when no one party has all the assets needed to exploit an opportunity. Typically, the local partner contributes a factory, market navigation know-how, connections, or low-costs labor

Consortium

-project-based, usually non-equity venture with multiple partners fulfilling a large-scale project ex) commercial aircraft manufacturing

Cross-licensing agreement

-type of a project-based, non-equity venture where partners agree to access licensed technology developed by the other, on preferential terms ex) telecommunications industry- new technological developments

# of currencies across the world

180

Strategy

A planned set of actions that managers take to make best use of the firm's resources and core competences, to gain a competitive advantage - Strategy carried out in two or more countries

Which of the following is a characteristic of project-based, non-equity ventures? A) a broad scope of product development B) a specific agenda and timeframe C) long-term sharing of resources D) formation of a new legal entity

B) a specific agenda and timeframe

Which of the following would exert pressure on a firm to become locally responsive? A) the need to monitor and respond to global competitors B) the need to cater to local customer needs C) the desire to capitalize on converging consumer trends D) the desire to provide uniform service to consumers

B) the need to cater to local customer needs

Firms that emphasize global integration make and sell ________. A) unique products that follow a multilocal strategy B) an excessive variety of complex products C) products that require minimal adaptation D) products designed specifically for local markets

C) products that require minimal adaptation

__________ gives headquarters considerable authority and control over the firm's activities worldwide.

Centralized

Depreciating

Currency risk also arises if you expect payment from a customer whose currency is depreciating against your own.

Which of the following must be considered in selecting foreign direct investment locations? A) rate of inflation B) tax rates C) stability of currency D) all of the above

D) all of the above

__________ means that substantial autonomy and decision making authority are delegated to the firm's subsidiaries around the world.

Decentralized

National Stock Exchanges & Bond Markets

Facilities for trading securities and bonds

A ________ is the firm's integrated network of sourcing, production, and distribution, organized on a worldwide scale and located in countries where competitive advantage can be maximized. A) demand chain B) buying center C) global supply chain D) decision making unit

Global supply chain

Government Action

Governments intervene to influence the value of their own currencies ex)the Chinese government regularly intervenes in the foreign exchange market to keep the renminbi undervalued, to help ensure exports.

Pressure for Global Integration/ Local Responsiveness

Home Replication--> GI: weak/ LR: weak Multi-Domestic--> GI: weak/ LR: strong Global--> GI: strong/ LR: weak Transnational--> GI: strong/ LR: weak

Appreciating

If you buy from a supplier whose currency is appreciating against yours, you may need to pay a larger amount of your currency to complete the purchase.

The Firm

International transactions require firms to deal with huge sums of foreign exchange

Commercial Banks

Lend money to finance business activity, play a key role in nations' money supplies, and exchange foreign currencies.

Are most currencies convertible?

No- most currencies are not convertible

Financial/ Currency Risk

Potential harm that arises from changes in the price of one currency relative to another -Currency exposure -Asset valuation -Foreign taxation -Inflationary and transfer pricing

Central Banks

Regulate money supply, issue currency, manage exchange rates, control national reserves

FDI (Foreign Direct Investment)

Strategy in which the firms establishes a physical presence abroad by acquiring productive assets as capital, technology, labor, land, plants and equipment

Bank for International Settlements

Supervises Central Bank monetary policy and other activities

T/F: As an entry strategy exporting is very flexible; the exporter can enter and withdraw from markets fairly easily with minimal risk and expense?

True

T/F: Services are exported as well.

True

Hard Currencies

Universally accepted and preferred in international transactions ex) dollar, yen, pound, euro

Inflation

___refers to increases in the prices of goods and services; thus, money buys less than before

Examples of Currencies Japanese__ Chinese__ Turkish__ Mexican__ Australian__ Saudi__ Russian__ Indian__

__yen __yuan renminbi __lira __peso __dollar __riyal __ruble __rupee

Currency

a currency is a form of money and a unit of exchange

Export Department

a unit within the firm charged with managing the firms export operations- associated with home replication strategy

Which of the following is an example of a global industry? A) automobiles B) beverages C) publishing D) retailing

a) automobiles

Foreign Exchange

all forms of internationally traded monies including foreign currencies, bank deposits, checks, and electronic transfers

International Division

all international activities are centralized within one division in the firm, separate from domestic units -increased focus on international business

Global Industry

an industry in which competition is on a regional or worldwide scale - global competition ex) lawn mowers- John Deer

Multi- Domestic Industry

an industry in which competition takes place on a country-by-country basis -local competition

Horizontal Integration

arrangement whereby the firm owns, or seeks to own, the activities involved in a single stage of its value chain

Which of the following is an example of a multidomestic industry? A) chemicals B) telecommunications C) fashion D) aerospace

c) fashion

Indirect Exporting

contracting with an intermediary in the firm's home country to perform all exporting functions, often an Export Management Company or a Trading Company. Common among firms new to exporting.

Direct Exporting

contracting with intermediaries in the foreign market to perform export functions, such as distributors or agents. They perform downstream value-chain activities in the target market.

That is, investors expect to be compensated for inflation- induced ____ in the value of their money

decline

Acquisition

direct investment or purchase an existing company or facility

The more diverse the firm's global supply chain, the lesser the cost of logistics.

false

________ is the tendency of investors to mimic each others' actions.

herding

The greater the demand for a currency, the ______ its price.

higher

The lower the supply of a currency, the _________ its price.

higher

4 strategies for responsiveness framework

home replication strategy multi- domestic strategy global strategy transitional strategy

Local Responsiveness

is managing the firm's value-chain activities and addressing diverse opportunities and risks on a country-by-country basis

Economic Growth

is the increase in value of the goods and services produced by an economy - measured as the annual increase in real GDP -driven by entrepreneurship and innovation

The greater the supply of a currency, the ________ its price.

lower

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

lower

Geographic Area Structure

management and control are decentralized to individual and geographic regions, whose managers are responsible for operations within their region

Product Structure

management of international operations is organized by major product line - product division responsible for producing and marketing a specific group of products worldwide - firm develops expertise with specific products on a global basis, ensuring scale economies and knowledge sharing among units worldwide for a given product line

Export Documentation

official forms and other paperwork required to transport exported goods and clear customs ex) quotation, commercial invoice, insurance certificate and more

Interest rates and inflation are ______ related; high inflation forces banks to pay high interest

positively

Market Psychology

refers to investor behavior such as herding behavior or momentum trading

Merger

special type of acquisition in which two firms join to form a new, larger company

Global Integration

the coordination of firms' value-chain activities across multiple markets to take advantage of similarities between countries

Greenfield Investment

the firm invests to build a new manufacturing, marketing, or administrative facility, as opposed to acquiring existing facilities

Vertical Integration

the firm owns, or seeks to own multiple stages of a value chain for producing, selling and delivering a product

Foreign Exchange Market

the global marketplace for buying and selling national currencies

Exchange Rates

the prices the firm charges can be quoted in the firm's currency or in the currency of each foreign customer - either the exchange occurs date of transaction or agree to use a specific exchange rate

Organizational Structure

the reporting relationships inside the firm, "the boxes and lines" that specify the linkages among people, functions, and processes, allowing the firms to carry out its operations

Exporting

the strategy of producing products or services in one country (often producers home country) and selling and distributing them to customers located in other countries

Service exporting examples

travel, education, banking, insurance, entertainment, information - Overall, most services are provided to foreign customers via entry strategies other than exporting, especially FDI ex) retailers

T/F: FDI is the most advanced and complex foreign market entry strategy.

true

Alternative Organizational Arrangements

•Export Department •International Division •Geographic Area Structure •Product Structure •Functional Structure •Global Matrix Structure