International Business Final Exam Prep

What are the four basic steps in establishing an international control system?

1 - set control standard for performance. 2 - measure actual performance. 3 - compare performance against standard. 4 - respond to deviations.

What are the two definitions of dumping?

1- Dumping can occur when a firm sells its goods in a foreign market at a price below what it charges in its home market. 2- Dumping involves the firm's selling its goods below cost in the foreign market, in which case the dumping is a form of predatory pricing

What are the different types of tariffs?

1. An ad valorem tariff is assessed as a percentage of the market value of the imported good. 2. A specific tariff is assessed as a specific dollar amount per unit of weight or other standard measure. 3. A compound tariff has both an ad valorem component and a specific component.

How are prices established in the foreign-exchange market?

The price of a currency, the exchange rate, is determined by supply and demand.

Why is it useful for an importer to seek out an advance tariff classification from the US Customs Service?

The tariff code is very complex, and an importer's expected profit margin on a transaction can shrink or disappear if a customs official subjects the imported good to a higher tariff rate than the importer expected.

What is the role of international banks in the foreign-exchange market?

These banks stand ready to buy or sell the major traded currencies. They profit from the foreign-exchange market in several ways. Much of their profits come from the spread between the bid and ask prices for foreign exchange. Sometimes international banks act as speculators, betting that they can guess in which direction exchange rates are headed. Such speculation can be enormously profitable, although it is always risky. International banks are key players in the wholesale market for foreign exchange, dealing for their own accounts or on behalf of large commercial customers. They also play a key role in the retail market for foreign exchange, dealing with individual customers who want to buy or sell foreign currencies in large or small amounts.

What are Eurocurrencies?

A Eurocurrency is defined as a currency on deposit outside its country of issue.

What is the purpose of a CVD?

A countervailing duty (CVD) is an ad valorem tariff on an imported good that is imposed by the importing country to counter the impact of foreign subsidies.

What are some of the initial impacts of international activity on organization design?

A firm's initial response to international sales is often the corollary approach, whereby the firm delegates responsibility for processing such orders to individuals within an existing dept., such as finance or marketing. The next step usually is to create a separate export dept. When business grows too large for an export dept. to manage, the firm may create an international division which specializes in managing foreign operations. Once, the firm becomes a true MNC it typically stops having an international division and brings itself together into a cohesive whole as a global organization.

What is an FTZ?

A foreign trad zone is a geographic area where imported or exported goods receive preferential tariff treatment. FTZ's are used by governments worldwide to spur regional economic development.

What are the basic difference between a joint venture and other types of strategic alliances?

A joint venture is a special type of strategic alliance in which two or more firms join together to create a new business entity that is legally separate and distinct from its parents. Other strategic alliances do not create a new separate business entity.

Why might a country adopt a VER?

A voluntary export restraint (VER) is a promise by a country to limit its exports of a good to another country to a prespecified amount or percentage of the affected market. Often this is done to resolve or avoid trade conflicts with an otherwise friendly trade partner.

What are the primary advantages and disadvantages of exporting?

Advantages: relatively low financial exposure, permit gradual market entry, acquire knowledge about local market, avoid restrictions on foreign investment. Disadvantages: vulnerability to tariffs and NTBs, logistical complexities, potential conflicts with distributors.

How do the various forms of economic integration differ?

They vary in degree of integration. Starting at the low end and moving to the highest end of economic integration: Free Trade Area > Customs Union > Common Market > Economic Union > Political Union

What are three specialized entry modes for international business, and how do they work?

Contract manufacturing - outsourcing most or all of a firms manufacturing needs to other companies. Management contract - an agreement whereby one firm provides managerial assistance, technical expertise, or specialized services to a second firm for some agreed-upon time in return for monetary compensation. Turnkey project - a contract under which a firm agrees to fully design, construct, and equip a facility and then turn the project over to the purchaser when it is ready for operation.

What is exporting? Why has it increased so dramatically in recent years?

Exporting - the process of sending goods or services from one country to other countries for use or sale there. It has increased b/c of the internet. It facilitates international trade so well that many domestic companies with a website have become exporters without even planning on it. It just happened because people from other countries found their website and wanted to buy their product.

How does the WTO differ from the GATT?

First, the GATT focused on promoting trade in goods, whereas the WTO's mandate is much broader: It is responsible for trade in goods, trade in services, international intellectual property protection, and trade-related investment. Second, the WTO's enforcement powers are much stronger than those possessed by the GATT.

What are the steps in conducting a foreign market analysis?

First, they must assess alternative markets, looking at market potential, levels of competition, legal & political environment, and sociocultural influences. Second, they must evaluate costs, benefits, and risks.

What is FDI? What are its three basic forms? What are the relative advantages and disadvantages of each?

Foreign direct investment - to enter international markets through ownership and control of assets in host countries. 3 basic forms - greenfield strategy (adv: good site selection, can build up-to-date facilities, disad: takes time and patience, land may be unavailable or expensive, local/national regulations, local workforce must be trained to meet performance standards), acquisition strategy (adv: quick control over another firm's assets, no new capacity to the industry, disad: acquiring firm assumes all liabilities, substantial up front costs), and participating in a joint venture.

What are the basic characteristics of a comprehensive alliance? What form is it likely to take?

Happens when the participating firms agree to perform together multiple stages of the process by which goods or services are brought to the market: R&D, design, production, marketing, and distribution. Because of the level of integration and cooperation required, most comprehensive alliances are joint ventures.

Describe the various forms a bank's overseas operations may take.

If it is separately incorporated from the parent, it is called a subsidiary bank; if it is not separately incorporated, it is called a branch bank. Sometimes an international bank may choose to create an affiliated bank, an overseas operation in which it takes part ownership in conjunction with a local or foreign partner.

What is the Caribbean Basin Initiative? What is its goal?

In 1983 the US established the CBI to facilitate the economic development of the countries of Central America and the Caribbean Sea. It permits duty-free import into the US of a wide range of goods that originate in the Caribbean Basin countries.

What efforts have South American countries made to regionally integrate their economies?

In 1991 Argentina, Brazil, Paraguay, & Uruguay signed the Mercosur Accord, an agreement to create a customs union among themselves. A customs union has free trade area policy plus members also adopt common trade policies toward nonmember countries. The Andean Community was originally ineffective but after the creation of the Mercosur Accord the A.C. made major steps to also become a customs union in order to be competitive.

What are the potential pitfalls of strategic alliances?

Incompatibility of partners, limited access to information, conflicts over distributing earnings, loss of autonomy, changing circumstances.

What are three forms of exporting?

Indirect exporting - occurs when a firm sells its product to a domestic customer, which in turn exports the product, in either its original form or a modified form. Direct exporting - occurs through sales to customers located outside the firm's home country. Intracorporate transfers - the sale of goods by a firm in one country to an affiliated firm in another.

What is the infant industry argument?

Infant industries will not survive their early years of growth without governmental support (usually subsidies and tariffs on imports) due to the fierce competition from more mature firms overseas.

What is an export intermediary? What is its role? What are the various types of export intermediaries?

Intermediaries - third parties that specialize in facilitating imports and exports. Export Management Company - a firm that acts as its client's export department. Webb-Pomerene association - a group of US firms that operate within the same industry and that are allowed by law to coordinate their export activities without fear of violating US antitrust laws. International trading company - a firm directly engaged in importing and exporting a wide variety of goods for its own account; provides a full gamut of services.

What is international franchising? What are its advantages and disadvantages?

International franchising is a special form of licensing. A franchising agreement allows an independent entrepreneur or organization, called the franchisee, to operate a business under the name of another, called the franchisor, in return for a fee. The franchisor provides its frachisees with trademarks, operating systems, and well-known product reputations, as well as continuous support services such as advertising, training, and quality assurance programs. Advantages: franchisees can enter a business that has an established and proven product and operating system, franchisors can expand internationally with relatively low risk and cost, franchisor benefits from the specialized localized knowledge of host country franchisees. Negatives: both parties to a franchising agreement must share the revenues, more complicated than domestic franchising.

What is international licensing? What are its advantages and disadvantages?

International licensing - when a firm (licensor) leases the right to use its intellectual property to another firm (licensee) across borders. Advantages: relatively low financial risk, learning about sales potential in new market, and of course, profit opportunity. Disadvantages: limits market opportunities for both parties, licensor and licensee depend on each other to maintain product quality and to promote the products brand image, improper actions by one party can damage the other, potentially costly and tedious litigation if one of the parties doesn't adhere to agreement.

What are the major forms of NTBs?

Nontariff Barriers: Quotas, numerical export controls, product and testing standards, restricted access to distribution networks, public-sector procurement policies, local-purchase requirements, regulatory controls, currency controls, investment controls.

What are the major characteristics of offshore financial centers?

Offshore financial centers focus on offering banking and other financial services to nonresident customers. They are used because they are typically characterized by political stability, a regulatory climate that facilitates international capital transactions, excellent communications links to other major financial centers, and availability of legal, accounting, financial, and other expertise needed to package large loans.

What are some of the basic issues a firm must confront when choosing an entry mode for a new foreign market?

Ownership advantages, location advantages, internalization advantages, need for control, resource availability, and global strategy.

What are the four common types of functional alliances?

Production alliances, marketing alliances, financial alliances, research and development alliances.

What are the three basic ways of managing a strategic alliance?

Shared-Management Agreement - Both partners participate actively. Assigned Arrangement - One partner takes primary responsibility. Delegated Arrangement - Both partners delegate management to the joint venture's executives.

Why do free trade areas develop rules of origin?

So that nonmembers do not take advantage of the relationship of two countries within a free trade area. Most free trade agreements specify rules of origin which detail the conditions under which a good is classified as a member good or a nonmember good.

What is fair trade? Who benefits from it?

Sometimes called managed trade. It suggests that the national government should actively intervene to ensure that domestic firms' exports receive an equitable share of foreign markets and that imports are controlled to minimize losses of domestic jobs and market share in specific industries.

Describe the four major organizations governing the EU.

The Council of the European Union (headquartered in Brussels, Belgium) - The EU's most powerful decision-making body. The European Commission (Brussels) - acts as the EU's administrative branch, doing things like: proposing legislation to be considered by the Council, implementing the provisions of EU treaties, defending EU interests in political debates. The European Parliament (normally meets in Strasbourg, France) - Initially it had only a consultative role within EU policy making; however, it has used its budgetary powers to enlarge its influence. The European Court of Justice (sitting in Luxembourg) - interprets EU law and ensures that members follow EU regulations and policies.

What is the role of the Eximbank?

The Export-Import Bank of the United States provides financing for US exports through direct loans and loan guarantees.

What was the goal of the Treaty of Rome?

The Treaty of Rome established the European Economic Community and called for the development of a common market among the six member states.

Discuss the major types of arbitrage activities that affect the foreign-exchange market.

The arbitrage of goods across national boundaries is represented by the theory of purchasing power parity (ppp). The arbitrage of money has the greatest effect on the exchange rate. There are three types of arbitrage of money: two-point arbitrage, three-point arbitrage, and covered-interest arbitrage.

What determines the demand for any given currency in the foreign-exchange market?

The demand for any given currency changes with changes in demand for the goods and services sold within that given currency's country of issue.

Explain the different techniques that firms can use to protect themselves from future changes in exchange rates.

The forward market, currency futures, and currency options enable firms to protect themselves from unfavorable future exchange rate movements. The forward market consists of foreign-exchange transactions that are to occur sometime in the future. Currency futures are contracts that resemble a forward contract; however, unlike the forward contract, the currency future is for a standard amount on a standard deliver date. Currency options allow, but do not require, a firm to buy or sell a specified amount of a foreign currency at a specified price at any time up to a specified date.

What determines the supply of any given currency in the foreign-exchange market?

Underlying the supply is the desire of residents to purchase goods, services, and assets owned by foreigners.

What does most favored nation MFN mean?

When a country is granted most favored nation status (more accurately described as 'normal trade relations status') by another country, the receiving country is then entitled to receive the same treatment as any other country granted that status by the granting country.

Under what circumstances might a strategic alliance be undertaken by public and private partners?

When the govt. of a country controls a resource it wants developed, it may enlist the assistance of a firm that has expertise related to that resource. A firm may pursue a public-private venture if a particular country does not allow wholly owned foreign operations; if the firm cannot locate a suitable local partner, it may invite the govt. itself to participate in a JV, or the govt. may request an ownership share.

What is an R&D consortium?

a confederation of organizations that band together to research and develop new products and processes for world markets. Often supported by the government.

What factors should be considered in selecting a strategic alliance partner?

compatibility, nature of a potential partner's products or services, the relative safeness of the alliance, the learning potential of the alliance.

What is the global product design? What are its strengths and weaknesses?

assigns worldwide responsibility for specific products or product groups to separate operating divisions within a firm. Strengths: works best when the firm has diverse product lines, or when products are sold in diverse markets, helps managers to develop extreme expertise in their product, facilitates efficiencies in production because managers can choose to produce products wherever is most cost-effective. Weaknesses: may encourage expensive duplication because each product group needs its own functional area skills such as marketing, finance, and info. mgt., each product group must develop its own knowledge about the cultural, legal, and political environments of the various regional and national markets in which it operates, coordination and corporate learning across product lines becomes difficult.

What is the global functional design? What are its strengths and weaknesses?

calls for a firm to create dept. or divisions that have worldwide responsibility for the common organizational functions--finance, operations, marketing, R&D, HR. Good for firms with narrow or similar product lines. Adv: easily transfer expertise, maintain highly centralized control, focuses attention on the key functions of the firm. Disad: only practical when a firm has few or similar products, coordination between divisions can be a prob., duplication of resources.

Why is financial control so important?

it is needed in order to impress investors and in order for managers to be able to make wise decisions.

What are NAFTA's major provisions?

lowered tariff walls, reduced NTBs, increased investment opportunities

What is the global area design? What are its strengths and weaknesses?

organizes the firm's activities around specific areas or regions of the world. particularly useful for firms with a polycentric or multi-domestic corporate philosophy. Likely to be used by a firm, whose products aren't readily transferable across regions. adv: great for marketing-driven firm, allows firms to develop expertise about local markets, area managers can adapt product to meet local needs, tailored product mixes for specific areas. disad: sacrificed cost efficiencies, new innovations may spread slowly through company, duplication of resources.

What are the three levels of control in international business?

strategic, organizational, operations

What is the global matrix design? What are its strengths and weaknesses?

the result of superimposing one form of organization design on top of an existing, different form. Adv: it helps bring together the functional, area, and product expertise; organizational flexibility, promotes coordination and communication among managers. Disad: not appropriate for firm that has few products and that operates in relatively stable markets, often puts employees in the position of being accountable to more than one manager, reporting relationships can be vague.

What are the basic benefits partners are likely to gain from their strategic alliance?

they facilitate market entry, they allow the partners to share risks, they make it easier for each partner to gain new knowledge and expertise from other partners, they foster synergy and competitive advantage among the parners

What is the global customer design? What are its strengths and weaknesses?

used when a firm serves different customers or customer groups, each with specific needs calling for special expertise or attention. useful when various customer groups targeted by a firm are so diverse as to require totally distinct marketing approaches. Adv: allows firm to meet the specific needs of each customer segment. Disad: may lead to a significant duplication of resources if each customer group needs its own area and functional specialists. Coordination btwn divisions is also difficult b/c each is concerned w/ a different market.