Endtest

Advantages of Regional Integration: (1) EXPAND MARKET SIZE: regional integration increases the scale of the marketplace for firms inside the bloc (2)ACHIEVE SCALE ECONOMIES AND ENHANCED PRODUCTIVITY: expansion of market size gives members the possibility to increase the scale of operations in both production and marketing; greater concentration and increased efficiency; firms enjoy benefits through increased access to factors of production; more efficient usage of resources leads to lower prices for consumers (3) ATTRACT DIRECT INVESTMENT FROM OUTSIDE THE BLOC: foreign firms prefer to invest in countries that are part of an economic bloc because factories they build there enjoy preferential treatment for exports to all member countries (4) ACQUIRE STRONGER DEFENSIVE AND POLITICAL POSTURE: aim is to strengthen member countries relative to other nations and world regions; helps countries to gain bargaining and political power in world affairs Success Factors for Regional Integration: (1) ECONOMIC SIMILARITY: Significant wage rate differences mean that workers in low-wage countries will migrate to high-wage countries Economic instability in one member country can quickly spread and harm the economies of other members (2) POLITICAL SIMILARITY: countries should show willingness to surrender national autonomy for the larger goals of the proposed union (3) SIMILARITY OF CULTURE AND LANGUAGE: provides the basis for mutual understanding and cooperation (4) GEOGRAPHIC PROXIMITY facilitates transportation of products or factors of production; neighbor countries tend to share culture and language (5) SAME ECONOMIC INTERESTS

Advantages of Regional Integration Success Factors for Regional Integration

CORPORATE SOCIAL RESPONSIBILITY - implies a proactive approach to ethical behavior - seeking not only to maximize profits, but also to benefit society and the environment. - Core CSR values include: ° Avoiding human rights abuses ° Upholding the right to join or form labor unions ° Eliminating child labor ° Avoiding workplace discrimination ° Protecting the environment ° Guarding against corruption - CSR is about business giving back to society. - Failure to adopt CSR behaviors can have adverse, even ruinous consequences. The value of CSR - helps the firm recruit and retain high-quality employees - Improves employee perceptions of the firm (enhances their loyalty and focus on company goals) - can help the firm differentiate itself in the marketplace and enhance its brand - a factor in cutting the cost of doing business (e.g. minimize packaging, recycling, economic energy usage, reduce waste) - Helps the firm avoid increased taxation, regulation or other legal actions by local governments - Consumers, other stakeholders and the media increasingly look to companies to be socially and environmentally responsible - many consumers tend to choose products made by firms with strong CSR. - NGOs are undertaking international CSR initiatives often in conjunction with MNEs.

CSR

Characteristics of FDI - FDI is an equity or ownership form of foreign market entry and is most associated with large MNEs that have extensive presences around the world - firms that specialize in products usually establish manufacturing plants - firms that offer services usually establish agency relationships and retail facilities KEY FEATURES OF FDI - FDI represents substantial resource commitment: far more challenging on the firm's resources and capabilities than any other entry strategy - FDI implies local presence and operations: management chooses to establish direct contact with costumers, intermediaries, facilitators and the government; often MNEs networks of operations become so extensive that its nationality is not always clear - Firms invest in countries that provide specific comparative advantages - FDI entails substantial risk and uncertainty: makes firm vulnerable to country risk and intervention by the local government - Direct investors must deal more intensively with specific social and cultural variables in the host market CORPORATE SOCIAL RESPONSIBILITY AND FDI - MNEs increasingly strive to behave in socially responsible ways in host countries (invest in local communities, establish global standards of fair treatment for workers) SERVICE FIRMS AND FDI - Companies in the services sector must offer their services where they are consumed - requires establishing either a permanent presence through FDI or a temporary relocation of the service company personnel - Many services e.g. banks, consulting, insurance, legal work, advertising etc. are best provided at the costumer's location: FDI is vital for them LEADING DESTINATIONS FOR FDI - advanced economies have long been popular destinations for FDI (because of strong economy, density of knowledge workers, superior infrastructure) - in recent years, emerging markets are also gaining appeal (rapid growth rate, low labor costs, well-educated workforce) e.g. India, China FACTORS TO CONSIDER IN CHOSSING FDI LOCATIONS - market factors - political and governmental factors - legal and regulatory factors - economic factors - profit retention factors (tax) - infrastructural factors - human resource factors Types of FDI (1) BY FORM - Greenfield Investment: the investing firm buys an empty plot of land and builds a production plant, marketing subsidiary or other facility for its own use - Acquisition: purchase of an existing company or facility MNEs favor acquisition over Greenfield investment (gain access to accumulated assets); host-country government want MNEs to undertake Greenfield investment (creates new jobs, production capacity, know-how...) - Merger: two companies join to form a new, larger firm; more common between companies of the same size positive outcomes: economies of scale, cost savings, broader range of products/services, greater market power... (2) BY NATURE OF OWNERSHIP - Equity Participation: firm is pursuing partial ownership in an existing firm - Wholly Owned direct Investment: the investor assumes 100% ownership of the business; complete managerial control over its operations - Equity Joint Venture: partnership in which a separate firm is created through pooling of assets by two or more parent firms; joint ownership of the new legal entity; joint venture with a local partner is sometimes the only entry strategy available when governments of a host country want to protect their important industries by prohibiting 100% foreign ownership in local firms BY LEVEL OF INTEGRATION - Vertical Integration: the firm owns (or seeks to own) multiple stages of a value chain for producing, selling and delivering a product/service ° Forward Vertical Integration: firm develops the capacity to sell its outputs by investing in downstream value-chain facilities e.g. marketing, sales ° backward Vertical Integration: firm acquires the capacity to provide inputs for its foreign or domestic production by investing in upstream facilities e.g. factories, assembly plants, refining operations - Horizontal Integration: the firm owns (or seeks to own) the activities performed in a single stage of its value chain; a firm may acquire another firm engaged in an identical value-chain activity to achieve economies of scale, expand its product line, or eliminate a competitor

Characteristics of FDI Types of FDI

(1) Culture and the Services Sector: - cultural differences can create problems for service firms and lead to mishaps in the exchange process - the greater the cultural distance, the more likely are cognitive and communication gaps - differences in language and national character have the same effects as trade barriers - to overcome these challenges, service firms need to understand cultures and languages of countries where they Donnerstag business (2) Technology, the Internet and Culture: - Death of Distance: refers to the demise of boundaries that once separated people due to the integrating effects of communications, information and transportation technologies - cultures are homogenizing due to the increased contact among people around the world - technology also provides the means to promote individual cultures (big boost from the rise of cinema and television) (3) Globalization's effect on culture: are cultures converging? - CONTRA: ° globalization is harmful to local cultures and their artistic expressions and sensibilities °it replaces them with a homogeneous (often "Americanized") culture - PRO: ° globalization permits the free flow of cultural ideas, beliefs and values. ° it increases the choices available to local people by making their countries culturally richer

Contemporary Issues in Culture

Aspects of Corss-Border Contractual Relationships - governed by a contract that provides the firm with a moderate level of control over the foreign partner - Typically include the exchange of intellectual property and services - Firms can pursue them independently or together with other foreign market entry strategies - provide dynamic, flexible choice (some firms use contractual agreements to make their initial entry in foreign markets, as conditions improve they switch to more advanced strategies) - reduce local perceptions of the firm as a foreign enterprise - Generate a consistent level of earnings from foreign operators (contractual relationships are less susceptible to volatility and risk) Types of Intellectual Property - Patent: provides the inventor the right to prevent others from using or selling an invention for a fixed period - Trademark: distinctive design, symbol, logo, word etc. placed on a product label; identifies a product or service as coming from a common source and having a certain level of quality - Copyright: protect original works of authorship, giving the creator the exclusive right to reproduce the work, display and perform it publicly and authorize others to perform these activities - Industrial Design: appearance or features of a product, intended to improve the product's aesthetics and usability as well as its production efficiency, performance and marketability - Trade Secret: confidential know-how or information that has commercial value - Collective Mark: logo belonging to an organization whose members use it to identify themselves and associate their products with a level of quality, geographical origin or other positive characteristics (DIN) Intellectual Property Rights: legal claims that protect the proprietary assets of firms and individuals from unauthorized use by other parties; provide inventors with a monopoly advantage for a specified period of time

Contractual Entry Strategies (Licensing, Franchising and others)

Corporate Governance: - system of procedures and processes by which corporations are managed, directed and controlled; - provides the means through which firms undertake ethical behaviors, CSR and sustainability; 5 standards that managers can use to examine ethical dilemmas: (1) UTILITARIAN APPROACH: the best ethical action is the one that provides the most good or does the least harm (2) RIGHTS APPROACH: - the action that best protects and respects the moral rights of everyone involved is chosen - humans are entitled to certain moral rights e.g. right to live life as one desires, be free from harm, pursue happiness... (3) FAIRNESS APPROACH: - everyone should be treated equally and fairly - workers should be paid a fair wage that provides a decent standard of living (4) COMMON GOOD APPROACH: - actions should be based on the welfare of the entire community or nation - which action contributes the most to the quality of life of all affected people - respect and compassion for all should be the basis for decision making (5) VIRTUE APPROACH: - ethical actions should be consistent with certain ideal virtues (truth, courage, compassion, generosity, tolerance, love integrity and prudence) These 5 approaches occasionally conflict; not everyone agrees on which standard to use in all situations. Many ethical dilemmas are complex too complex for the proposed approaches. - Management should scan the country and potential partners for the possibility of ethical abuses. - Once management possesses awareness of potential ethical abuse, the next step is to systematically explore the ethical aspects of each decision the firm may make regarding its current and potential activities. -In helping identify ethical problems, the firm should develop a "code of ethics": a formal statement that describes what management expects of employees

Corporate Governance and its Implications for Managers

(1) High Culture: - cultural makeup that is visible - e.g. Drama, Classical music, Literature... (2) Folk Culture: - cultural makeup we are aware of - e.g. humor, religion, cooking, etiquette, dress (3) Deep Culture: - cultural makeup we are unaware of - e.g. gender roles, greeting rituals, family relationships, right vs. wrong, concepts of beauty

Dimensions of Culture

(1) Integration and interdependence of national economies: multi country operations of firms (internationalize value chains) integrate economies, governments lower barriers, harmonization of monetary and fiscal policy (regional integration blocs, supranational institutions), e.g. WTO, World Bank (2) Rise of regional economic blocs: groups of countries within which trade and investment flows are facilitated (reduced barriers to trade & investment), e.g. EU, NAFTA (3) Growth of global investment and financial flows: international transaction companies buy/sell arge amounts of national currencies, free movement of capital fosters economic activity & interconnectedness, information and communication networks facilitate financial transactions (4) Convergence of consumer lifestyles and preferences: consumers spend time & money in increasingly similar ways, brands have gained a global following, products are standardized, promotes loss of unique traditions and values (5) Globalization of production: firms are forced to reduce production & marketing costs; leads to economies of scale, standardization, benefit from low labour cost countries (6) Globalization of services: banking, retailing etc. are expanding abroad, firms increasingly outsource processes, many people go abroad to take advantage of low cost services, e.g. medicine

Dimensions of Globalization

(1) Worldwide reduction of barriers to trade and investment: facilitated by organizations such as WTO (2) Market liberalization and adoption of free markets: parts of the world become freer to international trade and investment, access to cost-effective locations, privatization of prior state owned enterprises (3) Industrialization, economic development and modernization: emerging markets move from low-value adding producers to competitive producers and exporters of premium products, economic development enhances living standards, adoption of modern technologies; facilitates spread of ideas, products and services (4) Integration of world financial markets: firms can raise capital, borrow funds, engage in foreign currency transactions, financial services firms follow their customers abroad (5) Advances in technology: information, communication, manufacturing, transportation are made easier, cheaper and easier to access

Drivers of Globalization

Low Context Cultures - elaborate verbal explanations - great emphasis on spoken word - northern Europe, North America (long tradition of rhetoric) - communication is direct, straightforward - using specific, legalistic contracts to conclude agreements vs. High Context Cultures - emphasize nonverbal messages and view communication as a means to promote harmonious relationships - it' essential to be polite, respectful and to not offend or embarrass others - showing impatience, frustration, irritation and anger is considered rude and offensive - people are sensitive to the context in which sth is said and to body language - trust is very important

E.T. Hall's Interpretation of Culture

Ethical Dilemmas and Drawbacks of Regional Integration (1) TRADE DIVERSION: in the short run regional integration gives rise to both trade creation and trade diversion; more trade is occurring within the bloc than with countries outside (economic blocs may become "economic fortresses") (2) REDUCED GLOBAL FREE TRADE: in more advanced stages regional integration can give rise to two opposing tendencies a) A country that reduces barriers is moving toward free trade b) An economic bloc that imposes external trade barriers is moving away from worldwide free trade (3) LOSS OF NATIONAL IDENTITY: increased cross-border contact within an economic bloc has an homogenizing effect (4) SACRIFICE OF AUTONOMY: later stages of regional integration require member countries to establish a central authority to manage the bloc's affairs; each member country must sacrifice some of its autonomy, members risk losing some of their national sovereignty; (5) TRANSFER OF POWER TO ADVANTAGED FIRMS: economic power is concentrated in the hands of few more advantaged firms; development of a regional marketplace attracts new competitors from other bloc countries or from outside the bloc into formerly protected national markets; regional integration encourages mergers and acquisitions within the bloc leading to the creation of large rivals that may dominate smaller firms; (6) FAILURE OF SMALL OR WEAK FIRMS: as trade and investment barriers decline, protections are eliminated that shielded smaller firms from foreign competitors (7) CORPORATE RESTRUCTURING AND JOB LOSS: many firms must restructure to meet the competitive challenges posed in the new, enlarged marketplace; this may lead to worker layoffs or reassignments to distant locations Management Implications of Regional Integration (1) INTERNATIONALIZATION BY FIRMS INSIDE THE ECONOMIC BLOC: regional integration pressures or encourages firms to internationalize into neighboring countries within the bloc (2) RATIONALIZATION OF OPERATIONS: firms begin to view the bloc as a unified whole; managers develop strategies and value-chain activities suited to the region as a whole (3) MERGERS AND ACQUISITIONS (4) REGIONAL PRODUCTS AND MARKETING STRATEGY: economics bloc facilitate the standardization of products and streamlining of marketing activities because in more advanced blocs the member countries tend to harmonize product standards and commercial regulations (5) INTERNATIONALIZATION BY FIRMS FROM OUTSIDE THE BLOC: foreign firms enter economic blocs most effectively by establishing a physical presence there via FDI; the outsider gains access to the entire bloc and the advantages enjoyed by local firms

Ethical Dilemmas and Drawbacks of Regional Integration Management Implications of Regional Integration

ETHICS: moral principles and values that govern the behavior of people, firms and governments regarding right or wrong CORRUPTION abuse of power to achieve illegitimate personal gain Corruption and paying bribes are common in many countries (particularly in those which lack transparent business systems) GREASE PAYMENTS: - small inducements intended to expedite decisions and transactions or otherwise gain favors - in many countries such payments are legal and acceptable CORRUPTION PERCEPTIONS INDEX: - countries with the highest score have the lowest level of corruption - low level: Canada, Denmark, Finland - high level: African Nations, Russia, Iraq, Afghanistan CSR: - Corporate Social Responsibility - operating a business in a manner that meets ethical, legal and commercial expectations of all stakeholders - e.g. customers, shareholders, employees, communities... SUSTAINABILITY meeting humanity's needs without harming future generations

Ethics and Corruption CSR and Sustainability

Companies are faced with ethical challenges in a range of international activities: - Global sourcing: raises public debate about protecting the environment and ensuring human rights e.g. sweatshops, pollution... - deceptive marketing practices and advertising: selling to induce people to buy their products - defective or harmful products or packaging: e.g. countless cell phones, computers etc. are discarded every year, not because they are broken but because better versions become available - end up in landfills - Internet access: e.g. drugs offered online are often fake and may harm users; such firms are often beyond the reach of authorities - Illicit use of intellectual property: it may be stolen or copied illegally; counterfeiting = assets produced without compensating the inventors; e.g. Microsoft software, Louis Vuitton, Rolex... Intellectual property: ideas or works created by individuals or firms include discoveries, inventions, artistic, musical and literary works, words, phrases, symbols and designs... Intellectual property rights: - Trademarks = distinctive signs and indicators that firms use to identify their products and services - Copyrights = grant protection to the creators of art, music, books, software, movies... - Patents = represent the exclusive right to manufacture, use and sell products or processes

Ethics in International Business

(1) INTERNATIONALIZATION PROCESS OF THE FIRM - Domestic Focus: firm acquires business in the home market; management is unable / unwilling to get started in IB - Pre-Export Stage: firm receives unsolicited product orders from abroad - Experimental Involvement Stage: firm initiates limited international activity by exporting; managers view IB more favorable - Active Involvement Stage: systematic exploration of international options; commitment of managerial time & resources to achieve international success - Committed Involvement Stage: genuine interest & commitment to making IB a key part of the firm's profit- making; firm targets multiple foreign markets especially through FDI (2) BORN GLOBALS AND INTERNATIONAL ENTREPRENEURSHIP - IB has long been the domain of large, resource-rich MNEs - earlier theories tended to focus on them - Born globals internationalize early in their evolution despite scarcity of resources - growing intensity of international competition, integration of world economies, advances in communication and transportation technologies (reduce cost of expanding abroad) make it easier than ever before - Born global phenomenon has given rise to "international entrepreneurship" - early internationalizing firms will become the norm in IB

FIRM-LEVEL THEORIES Why and how do firms internationalize?

(1) Logistics Service Provider: - transportation specialist that arranges for physical distribution & storage of products on behalf of focal firms - they control information between the point of origin and the point of consumption (2) Common Carrier: - companies that own the transportation equipment used to transport goods around the world - CONSOLIDATOR: shipping company that combines the cargo of multiple exporting firms into shipping containers for international shipment (3) Freight Forwarder: - arranges shipments for the focal firm to a foreign entry port and even to the buyers location in the target market - experts on transportation methods and documentation for international trade - experts for export rules and regulations of home and foreign country (4) Customs Broker: - arranges clearance of products through customs (5) Commercial Bank: - make exchange of foreign currencies possible and provide financing to buyers and sellers who usually require credit to finance transactions - banking is one of the most multinational business sectors - developing countries: governments provide financing at favorable rates even to foreign firms to finance the construction of infrastructure projects (incoming investment results in new jobs, technology transfer and foreign exchange) (6) International Trade Lawyers: - are used to help navigate in international legal environments - know about clients industry, laws and regulations in target nation - familiar with import licenses, trade barriers, intellectual property concerns and government restrictions - firms need them to negotiate contracts for sales and distribution of goods/services (7) Insurance Company: - provide coverage against commercial and political risks (8) International Business Consultants; - advise internationalizing firms on doing business abroad - analyze existing business problems tax accountants: advise companies on minimizing tax obligations (9) Market Research Firms: - possess or gain access to information on markets, competitors and methods of international business

Facilitators in IB

- Many new opportunities for firms - new risks, more intense rivalry - More demanding buyers who have more information about the world market - Firms are focused to organize their value-chain activity on a global scale

Firm Level Consequences

(1) MNEs: - large company with substantial resources, that performs business activity through a network of subsidiaries and affiliates located in multiple countries. - often derive much of their total sales profits form cross-border operations - leading MNEs are listed on the Fortune Global 500 (e.g. Nestlé, Sony, Ford, Nokia) - sometimes MNEs operate in the service sector (e.g. airlines, retailers, construction companies); - retailers are usually classified as intermediaries but large ones as IKEA or Walmart are considered focal firms themselves (2) SMEs: - smaller businesses with limited financial and human resources - majority of companies active in IB - more flexible, can respond quicker to business opportunities (less bureaucratic, more entrepreneurial) - foreign market entry through exporting (not enough resources for FDI) - leverage services of intermediaries and facilitators to succeed abroad - target specialized products to market niches -EASTERN EUROPE: development is driven by the rise of fast growing MNEs, many of them operate in intellectual, knowledge-intensive industries (e.g. software, consulting) (3) Born Globals: - undertake early and substantial internationalization (usually within 3 years), export to 20 or more countries - some grow large enough to become MNEs - offer leading-edge products with strong potential to generate international sales - leverage internet & communication technologies to facilitate early and efficient international operations - INTERNATIONAL ENTREPRENEURSHIP: innovative, smaller firms pursue business opportunities everywhere, regardless of borders

Focal Firms in International Business

4-step framework: (1) Recognize an ethical problem: Recognition can be difficult because certain aspects of the situation may be outside your knowledge or experience - rely on your instincts! (2) Get the facts: determine the nature and dimensions of the situation (3) Evaluate alternative courses of action: Review any proposed action to ensure it is legal; evaluate each proposed action to assess its consistency with accepted ethical standards; assess the consequences of each action for all parties affected by it (4) Implement and evaluate your decision: How effective was your decision? If you had to do it again, would you do anything differently? Ethical behavior and CSR must become a key part of manager's day-to-day pursuits: business executives should balance their obligation to shareholders (generating high returns) with contributions to the broader public good (providing good jobs, supporting social causes etc.) Various resources are available to assist managers: - OECD: anti bribery agreement - United nations: global compact (policy platform and practical framework for companies committed to sustainability and responsible business practices) DEEP, WIDE & LOCAL - Deep = institutionalizing appropriate behavior into the firm's culture so it becomes part of strategy - Wide = continuous effort to understand how CSR and sustainability affect every aspect of the firm's operations worldwide - Local = firm examines its global operations to identify and improve specific local issues Before partnering with another firm: - Investigate its workplace and operating methods - Hold it to appropriate ethical conduct - Monitor its activities to ensure compliance with accepted methods -> this is costly and takes time

Framework for making ethical decisions

- e.g. Mc Donalds, Subway, FedEx, Benetton, Body Shop, Yves Rocher... Most typical arrangement is BUSINESS FORMAT FRANCHISING - The franchisor transfers to the franchisee a total business method as well as the use of its name and products, patents or trademarks - he provides the franchisee with training, ongoing support, incentive programs and the right to participate in cooperative marketing programs; - In return the franchisee pays some type of compensation - he may be required to purchase certain equipment from the franchisor to ensure standardized products and consistent quality - ongoing relationship that lasts many years - more stable, long-term entry strategy - The franchisor tightly controls the business system to ensure consistent standards - completely standardized business activities may be difficult to replicate across diverse markets, differences in resources, key ingredients, worker qualifications and space may necessitate changes to the franchise formula - challenge: strike the right balance, adapting the format to respond to local markets without affecting the overall image of the franchise MASTER FRANCHISE: - an independent company is licensed to establish, develop and manage the entire franchising network in its market - has the right to subfranchise to other independent businesses - assumes the role of the local franchisor - provides the firm with an exclusive, large, predefined territory and substantial economies of scale based on operating numerous sales outlets simultaneously. ADVANTAGES & DISADVANTAGES OF FRANCHISING -> Franchisor Perspective: + Low-risk, low-cost entry strategy + No need to invest substantial resources + firm can leverage the franchisee's knowledge to efficiently navigate in the local market - Need to maintain control over multiple outlets worldwide - Franchisees may take advantage of the agreement and become competitors - Franchisor's image may suffer if the franchisee is not upholding the standards - Need to monitor and evaluate performance of franchisees - provide ongoing assistance - Difficult to become familiar with foreign laws and regulations: laws may favor the franchisee which sometimes makes it hard for the franchisor to maintain control -> Franchisee Perspective: + Gain a well-known, recognizable brand name + Acquire training and know-how (SMEs often lack these resources) + Become part of an established international network - Initial investments or royalty payments may be substantial - Franchisor holds much power - Franchisee is required to purchase supplies, equipment and products from the franchisor only

Franchising as an Entry Strategy

Best way to ensure foreign partners comply with contractual provisions and produce successful outcomes: Ensure their satisfaction with the relationship. INFRINGEMENT of intellectual property: the unauthorized use, publication or reproduction of products/services protected by patent, copyright, trademark etc. production and distribution of counterfeit goods; Counterfeiting and piracy erode the firm's competitive advantage and brand equity: it is particularly troublesome in emerging markets and developing countries where intellectual property laws are usually weak or poorly enforced; SMEs are particularly vulnerable because they lack the resources to prosecute violators In advanced economies intellectual property is usually protected within established legal systems and methods of recourse. The WTO created the Agreement on Trade Related Aspects of Intellectual Property Rights: international treaty that lays out remedies, dispute-resolution procedures, and enforcements to protect intellectual property KEY STRATEGIES TO FIGHT AGAINST INTELLECTUAL PROPERTY VIOLATION - Understanding local intellectual property laws and enforcement procedures - Register patents, trademarks, trade secrets and copyrights with the government in each country where the firm does business - Ensure that intellectual property is used as intended in licensing and franchising - Pursue criminal prosecution against those who infringe on protected assets - Monitor franchisee, distribution and marketing channels for any asset infringements - Include in contracts that partners report infringements if discovered - Guard trade secrets carefully - Use special technology to minimize counterfeiting e.g. electronic signatures, holograms - Continuously update technologies and products: being able to stay ahead of counterfeiters because they cannot imitate fast enough

Guidelines for Protecting Intellectual Property

(1) Individualism vs. Collectivism: - whether a person functions primarily as an individual or as a part of a group - individualistic society: ° ties among people are loose ° people focus in their own self-interest ° competition for resources is the norm (those who compete best are rewarded) ° e.g. Australia, Canada, UK, US - collectivist society: ° ties among people are important ° business is conducted as a group, others views are strongly considered ° conformity and compromise help maintain group harmony ° e.g. China, South Korea (2) Power Distance: - describes how a society deals with inequalities in power - In companies, the degree of centralization of authority and autocratic leadership determines power distance - Low Power Distance: ° gaps between the powerful and the weak are minimal °e.g. Denmark, Sweden, US - High Power Distance: ° allow inequalities to grow over time (3) Uncertainty Avoidance: - the extent to which people can tolerate risk and uncertainty - High Uncertainty Avoidance ° create institutions that minimize risk and ensure financial security ° companies emphasize stable careers and produce many rules ° managers are slow making decisions as they investigate several options ° e.g. Belgium, France and Japan - Low Uncertainty Avoidance: ° societies socialize their members to become accustomed to uncertainty ° managers are comfortable taking risk, take decisions quickly ° people tend to tolerate behavior and opinions different from their own because they do not feel threatened by them ° e.g. India, Ireland, US, Jamaica (4) Masculinity vs. Femininity - society's orientation based on traditional male and female values - Masculine Cultures: ° value competitiveness, ambition and accumulation of wealth ° focused on career and earning money, people care little for others ° e.g. Australia, Japan, US ° in business masculinity manifests as self-confidence, proactiveness and leadership - Female Cultures: ° emphasize nurturing roles, interdependence among people ° caring for less fortunate people ° welfare systems are highly developed and education is subsidized °e.g. Scandinavia (5) Long-Term vs. Short-Term Orientation: - the degree to which people and organizations defer gratification to achieve long-term success - Long Term: ° people take the long view to planning and living ° best illustrated by Asian values (Confucius) - Short Term: ° emphasized by US and most Western Countries

Hofstede's Research on National Culture

(1) Foreign Distributor: - takes title to the goods, distributes them in a national market/territory, often performs marketing functions - essentially independent wholesalers (buy goods form exporters at a discount and resell them the target market after adding a profit margin) - may carry a variety of noncompeting complementary products - provides a stable, committed presence in the target market - has substantial knowledge of the exporter's products and of the target market (2) Agent: - handles orders to buy/sell products/services in IB for a commission - does not take title to the goods - compensated by commission (percentage of the price of the product sold) - brings buyers and sellers together - operates under contract for a definite period of time - especially important in markets made up of many small, widely dispersed buyers and sellers (3) Manufacturer's Representative - represents & sells the exporters goods/services in a designated country - act as contracted sales personnel with broad powers and autonomy - handles various noncompetitive, complementary products/services - does not take title to the goods - does not maintain physical facilities, marketing or customer support capabilities (must be handled by the exporter) (4) Retailer: - buys goods from the exporter and resells them in the target market - last link between distributors and end users - dealing directly with retailers is efficient because it results in a much shorter distribution channel and reduced channel costs

Intermediaries in the Foreign Market

(1) Wholesaler Importer: - brings in products from foreign countries for sale in the home market - re-export or use them in the manufacture of finished products (2) Retailer: - import many of the products they sell - most of their offerings are sourced from abroad (especially from low-labour cost countries) (3) Trading Company: - engages in import and export of commodities/products/services - assumes the international marketing function on behalf of producers - large trading companies operate much like agents: coordinate sales of many products worldwide - high-volume, low-margin resellers - 5/10 largest trading companies are based in Japan: "SOGO SHOSHA" - in US, they have a relatively low impact on the volume of export activity (4) Export Management Company: - acts as an export agent on behalf of a client company - in return for commission, finds customers, negotiates terms of sale and arranges for international shipping - much smaller than trading companies - some EMCs habe well-established networks of foreign distributors (allows exported products immediate access to foreign markets) - often visit the producers facilities to learn about products and develop foreign market strategies - manufacture runs risk of losing control over his products marketed abroad

Intermediaries in the Home Country

International Collaborative Ventures - partnerships between two or more firms that help companies overcome together the risks and costs involved in achieving international projects alone that might exceed the capabilities of any one firm - groups of firms sometimes form partnerships to accomplish large-scale goals such as developing new technologies or completing major projects - collaboration is typically focused on R&D, manufacturing or marketing Two Basic Types - Equity Joint Ventures: foreign partner contributes capital, technology, management expertise etc., local partner contributes the use of its factory or other facilities, knowledge of the local language and culture, market navigation know-how, useful connections to the government, lower-cost production factors etc.; allows the foreign firm to access key market knowledge, gain immediate access to a distribution system/customers, attain greater control over local operations - Project-Based, non Equity Ventures: partners create a project within a relatively narrow scope and a well-defined timetable without creating a new legal entity; reduces the enormous fixed costs of R&D, especially in knowledge and technology intensive industries DIFFERENCES BETWEEN THE TWO TYPES 1. project based collaborations create no legal entity (activity within the scope of a contract) 2. project-based non equity ventures are based on a well defined timetable and end date 3. project based collaboration concerns only a single project 4. parent companies Donnerstag not seek ownership of an ongoing enterprise ADVANTAGES / DISADVANTAGES OF THE TYPES Equity joint Venture + control over future directions + facilitated transfer of knowledge + common goals - complex management - difficult to terminate Project based, non-equity Venture + easy to set up / terminate + simple management + taking advantage of partners strengths - conflicts harder to resolve - division of costs and benefits may disturb relationship OTHER TYPES - Consortium: project-based, non-equity venture initiated by multiple partners to fulfill a large-scale project work is allocated to the members on the same basis as profits popular for innovation in industries where the costs of developing and marketing a new product are very high often several firms pool their resources to bid on a major project no legal entity is created - if one party withdraws the consortium can continue - Cross-Licencing Agreement: project-based, non-equity venture whose partners each agree to access licensed intellectual property developed by the other on preferential terms e.g. share patented knowledge on software cross-distribution agreement: each partner has the right to distribute products/services produced by the other on preferential terms

International Collaborative Ventures

- has both verbal and nonverbal characteristics - sometimes it's difficult to find words to convey the same meaning in a different language - linguistic barriers complicate straightforward communication - advertising themes lose their original meaning in translation or convex unfavorable interpretations - business jargon unique to a culture can impede communications

Language as a Key Dimension of Culture

- Licensor: provides a combination of intellectual property and supporting products - Licensee: pays a fixed amount immediately and an ongoing royalty (typically 2-5%) of gross sales; fixed amount covers the licensor's initial costs of transferring the licensed assets to the licensee (including consultation, training, engineering or adaptation) - licensing contracts usually run 5-7 years and are renewable - exclusive agreements: the licensee is not permitted to share the licensed asset with any other company with a certain territory TRADEMARK AND COPYRIGHT LICENSING - Trademark Licensing: grants a firm the right to use another firm's proprietary names, characters or logos for a specified period of time in exchange for a royalty; (e.g. Disney, Harry Potter...) In the US and other countries firms acquire rights to trademarks through first use and continuous usage - in other countries rights to trademarks are acquired through registration with government authorities - Copyright Licensing: gives the owner the exclusive right to reproduce the work, distribute copies or perform or display the work publicly; concerning protection during the creator's life + 50 years is typical; many countries offer little or no copyright protection KNOW-HOW LICENSING - a contract in which the firm provides technological or management knowledge about how to design, manufacture or deliver a product/service to a licensee in exchange for a royalty. - Cross-licensing: in some industries, inventions and other intellectual property are acquired in reciprocal licensing agreements between firms in the same or similar industries - common in industries with rapid technological advances that often build on each other (reduces the cost of innovation by avoiding duplication of research) - In other industries firms may license technology and know-how from competitors to compensate for insufficient knowledge, fill gaps in their product line-ups, enter new businesses or save time and money ADVANTAGES OF LICENSING + does not require capital investment or a physical presence of the licensor in the foreign market + licensee gains access to a key technology at much lower costs and in less time + Appropriate for entering markets that pose substantial country risk + Useful when trade barriers reduce the viability of exporting/ when governments restrict ownership of local operations (FDI) + Useful for testing and learning something about the target market + Useful to preemptively enter a market before competitors DISADVANTAGES OF LICENSING - Profits tend to be lower than those from exporting or FDI - Does not guarantee a basis for future expansion - weak licensing partner will provide only modest royalties - Limited control over how the licensor's asset is used - Risk of creating a future competitor licensee may exploit the licensor's intellectual property by creating products based on the knowledge gained in the relationship

Licensing as an Entry Strategy

Understand Potential Risks - will we grow dependent on our partner? - will the corporate interest be threatened? - will managing the venture place a burden on our corporate resources? - potential partners may be current / potential competitor and will likely gain important competitive advantage through the relationship Pursue a systematic Process for Partnering - going alone vs. collaboration - decide on the type of partner - screen and qualify candidates - determine the nature of legal relationship - negotiate an agreement - build trust, empathy and reciprocity - establish criteria for measuring performance - Monitor and measure performance/make plans about long-term goals Ensure success with collaborative ventures - about 50% of all CV fail within the first 5 years of operation - recognize cultural differences - pursue common goals - pay attention to planning & management - safeguard core competencies - adjust to shifting environmental circumstances

Managing Collaborative Ventures

(1) Metaphor: - refers to a distinctive tradition or institution strongly associated with a particular society - e.g. American Football: being a team player, having a strong leader who moves an organization aggressively; Japanese Garden: tranquility (2) Stereotype: - generalizations about a group of people that may or may not be factual, often overlooking real, deeper differences - e.g. Manana Syndrome: refers to the stereotype that Latin Americans tend to procrastinate, to a latin american it means an indefinite future (business promises may be made but not kept, who knows what the future will bring?) - stereotypes of US citizens: argumentative and aggressive (relative to reserved and humble Japanese) - individualistic lovers of personal freedom (relative to Chinese who are group orientated) (3) Idiom: - expression whose symbolic meaning is different from its literal meaning - you cannot understand them by knowing only what the individual words mean - e.g. Japan: The nail that sticks out gets hammered down = group conformity is important

Metaphors, Stereotypes, Idioms

MULTIDOMESTIC INDUSTRIES: - competition takes place on a country-by-country basis - the firm must adapt its offerings to suit the culture, laws, income level and other characteristics - each country tends to have a unique set of competitors GLOBAL INDUSTRIES: - competition takes place on a regional or worldwide basis - firms tailor their products to needs and tastes of customers on a regional or global scale - there are a handful of major players that compete head-on in multiple markets - you have to deal with the same rivals around the world (e.g. Apple & Samsung)

Multidomestic vs. Global Industries

(1) MONOPOLISTIC ADVANTAGE THEORY - one or more resources/capabilities a company possesses, that few other firms have and that it leverages to generate profits and other returns - Firms which use FDI must own or control certain resources and capabilities not easily available to competitors; give them a degree of monopoly power over local firms in foreign markets - The monopolistic advantage should be specific to the MNE itself - most important monopolistic advantages: superior knowledge and intangible skills - 2 conditions should be present for a firm to prefer targeting a foreign market rather than its home market: a) Returns obtainable in the foreign market superior to those available in the home market b) Returns obtainable in the foreign market superior to those earned by its domestic competitors in its industry in the foreign market (2) INTERNALIZATION THEORY - process by which firms acquire and retain one or more value-chain activities inside the firm - Helps minimize the disadvantages of dealing with external partners for performing value-chain activities - The firm has greater control over its foreign operations - The firm replaces business activities performed by independent suppliers in external markets with business activities it performs itself - Firms want to control proprietary knowledge critical to the development, production and sale of their products/services (3) DUNNING'S ECLECTIC PARADIGM - three conditions that determine whether a company will internationalize using FDI: - OWNERSHIP-SPECIFIC ADVANTAGES: ° e.g. knowledge, skills, capabilities, key relationships ° represent the firm's competitive advantages - should be specific to the MNE that possesses them and not readily transferable to other firms - The more valuable the firm's ownership-specific advantages are, the more likely it will internationalize via FDI - LOCATION SPECIFIC ADVANTAGES: ° Comparative advantages available in individual foreign countries ° e.g. natural resources, skilled labor, low-cost labor and inexpensive capital - INTERNATIONALIZATION ADVANTAGES: ° Benefits that the firm derives from internalizing foreign-based manufacturing, distribution or other stages in its value chain - e.g. ability to control how the firm's products are produced or marketed, ability to prevent unintended dissemination (Verbreitung) of the firm's proprietary knowledge, ability to reduce buyer uncertainty - When profitable, the firm will transfer its ownership-specific advantages across national borders within its own organization - not using independent, foreign entities - FDI decision depends on what is the better option: internalization vs. using external partners

NATIONAL-LEVEL THEORIES How can internationalizing Firms gain and sustain Competitive Advantage? FDI-BASED EXPLANATIONS

(1) INTERNATIONAL COLLABORATIVE VENTURES - Form of cooperation between two or more firms - 2 major types: a) Equity-based joint venture (results in the formation of a new legal entity) b) Non-equity-based strategic alliance (partners temporarily work on projects related to R&D, design, manufacturing etc.) - Collaborating firms pool resources and capabilities and generate synergy, share risks - Collaboration allows the partners to carry out activities that each might be unable to perform on its own - ICV are important in the case of government restrictions - gives a company access to foreign partners' know how, capital, distribution channels, marketing assets etc. (2) NETWORKS AND RELATIONAL ASSETS - Represent the economically beneficial long-term relationships the firm undertakes with other business entities (e.g. manufacturers, distributors, suppliers, retailers, consultants, banks, governments etc.) - Japanese KEIRETSU (=complex groupings of firms with interlinked ownership and trading relationships) are their predecessors - Network theory proposed to compensate the inability of traditional theories to account for much that goes on in business markets; in networks buyers and sellers become bound to one another through ongoing exchanges and linkages of products, services, finance, technology and know-how; interaction among partners results in stable relationships -> creates value and competitive advantage; in IB strategic relationships reduce uncertainty and transaction costs In today's economy firms have shed away from making permanent, direct investments in host countries; they opt for more flexible collaborative ventures or other relationships with independent business partners abroad

NATIONAL-LEVEL THEORIES How can internationalizing Firms gain and sustain Competitive Advantage? NON-FDI-BASED EXPLANATIONS

(1) COMPETITIVE ADVANTAGE OF NATIONS - depends on the collective competitive advantages of the nation's firms - Over time this relationship is reciprocal: competitive advantages of the nation tend to drive the development of new firms and industries with these same competitive advantages - competitive advantages and technological advances grow out of innovation - Innovation results primarily from R&D - Most top European, Japanese and US firms spend half or more of their total R&D in countries other than where they are headquartered - Innovation also promotes productivity; the more productive a firm, the more efficiently it uses its resources (2) MICHAEL PORTER'S DIAMOND MODEL - competitive advantage at both company and national levels originates from the presence and quality of four major elements in the country - FIRM STRATEGY, STRUCTURE AND RIVALRY: the nature of domestic rivalry and conditions in a nation that determine how firms are created, organized and managed; Competitive rivalry puts firms under continual pressure to innovate and improve; Firms compete not only for market share, but also for human talent, technical leadership and superior product quality - FACTOR CONDITIONS: the nation's position in factors of production (labour, land, capital, technology...); each nation has a relative abundance of certain factors, this helps determine the nature of its national competitive advantage - DEMAND CONDITIONS: the nature of home-market demand; strengt and sophistication of buyer demand facilitates the advantage of competitive advantage; highly demanding customers pressure firms to faster innovation & better products - RELATED & SUPPORTING INDUSTRIES: presence of clusters of suppliers, competitors and complementary firms in a particular industry; operating with related and supporting firms provides advantages through information & knowledge synergies, economies of scale, access to inputs - INDUSTRIAL CLUSTER: concentration of businesses, suppliers and supporting firms in the same industry at a particular geographic location, characterized by a critical mass of human talent, capital, or other factors - most important sources of national advantage: knowledge & skills; determine where MNEs will locate economic activity; future national wealth might go to countries who invest the most in R&D, education & infrastructure (3) NATIONAL INDUSTRIAL POLICY - encourages economic development (often in collaboration with the private sector) to develop/support high value-adding industries - National competitive advantage does not derive entirely from the abundance of natural resources - Countries can successfully create new advantages and develop factor conditions - Any country, regardless its initial circumstances, can attain economic prosperity - Historically, nations favored more traditional industries (automobiles, ship building) - Today nations increasingly favor high value adding, knowledge-intensive industries (IT, biotechnology, medical technology, financial services); these industries provide substantial revenues to the nation and lead to the development of supplier and support companies that enhance national prosperity

NATIONAL-LEVEL THEORIES How can nations enhance their competitive advantage? CONTEMPORARY THEORIES

- trade allows countries to use their national resources more efficiently through specialization - without trade, most nations would be unable to feed, clothe and house their citizens at current levels

NATIONAL-LEVEL THEORIES Why do Nations trade?

(1) MERCANTILISM - national prosperity results from a positive balance of trade, achieved by maximizing exports and minimizing/impeding imports - nations attempt to run a trade surplus (more export than import) - tends to harm the interests of firms, especially those that import raw materials and parts used in the production of finished products - harms the interests of consumers: restricted imports reduces the choice of products they can buy (product shortages lead to higher prices) FREE TRADE - absence of restrictions to the flow of goods and services - a generally superior approach, should produce the following outcome: - broader variety of products available - imported products tend to be cheaper - Lower-cost imports help reduce the expenses of firms, thus raising profits -> higher living standards - Unrestricted international trade increases the prosperity of poor countries (2) ABSOLUTE ADVANTAGE PRINCIPLE - a country benefits by producing products in which it has an absolute advantage (that it can produce using fewer resources than another country) = specialization - Criticism of mercantilism (Adam Smith): it robs individuals of the ability to trade freely and to benefit from voluntary exchanges; by trying to minimize imports, a country wastes much of its national resources in the production of goods it is not suited to produce efficiently; reduces wealth of the nation while enriching a limited number of individuals and interest groups (3) COMPARATIVE ADVANTAGE PRINCIPLE - the reason why it can be beneficial for two countries to trade even though one of them may have absolute advantage in the production of all products - not the absolute cost of production matters, but rather the relative efficiency with which the two countries can produce the goods - it can be beneficial for two countries to trade without barriers, as long as one is relatively more efficient at producing goods/services needed by the other - Foundation & justification of international trade - The ratio of production costs between two countries matters - Another way to understand it is to consider opportunity costs (=value of foregone alternative activity) - comparative advantage view is optimistic: it implies that a nation need not be the first-, second-, or even third-best producer of a particular products to benefit from international trade - adherents of the comparative advantage principle focused on the importance of inherited or natural resource advantages - nevertheless countries can also create or acquire comparative advantages

NATIONAL-LEVEL THEORIES Why do Nations trade? CLASSICAL THEORIES

(4) FACTOR PROPORTIONS THEORY - in addition to differences in the efficiency of production, differences in the quantity of factors of production held by countries also determine international trade - 2 premises: ° products differ in the types and quantities of factors needed for their production ° countries differ in the type and quantity of production factors they posses - Conclusion: ° countries should export products that intensively use sufficient factors and import goods that intensively use scarce factors ° this leads to a per-unit-cost advantage LEONTIEF PARADOX - contradicts the factor proportions theory - revealed that the US often exported labor-intensive goods and imported more capital-intensive goods - as the US originally had a higher quantity of the factor capital, this contradicts the factors proportions theory - suggests that international trade is complex and cannot be fully explained by a single theory (5) INTERNATIONAL PRODUCT LIFE CYCLE THEORY - each product and its manufacturing technologies go through three stages of evolution: - INTRODUCTION: new products typically originates in advanced economies; such countries possess abundant capital and R&D capabilities; they also have abundant high-income consumers who are willing to try new products which are often expensive; the new product is produced in the home country - it enjoys a temporary monopoly - MATURITY: the product's inventors mass-produce it and seek to export it to other advanced economies; the manufacturing becomes more routine and foreign firms begin producing alternative versions; the inventor's monopoly power ends; competition intensifies and export orders come from lower-income countries - STANDARDIZATION: knowledge about the production is widespread and manufacturing has become straightforward; mass production is the dominant activity; cheaper inputs and low-cost labor are used; production shifts to low-income countries; eventually the country that invented the product becomes an importer -> National advantages don't last forever, they shift away and are dynamic (6) NEW TRADE THEORY - increasing returns to scale, especially economies of scale, are important for superior international performance in industries, that succeed best as their production volume increases (e.g. industries with high fixed costs) - trade was growing fastest among industrialized countries with similar factors of production, in new industries there appeared to be no clear comparative advantage - If a nation specializes in the production of such goods, productivity increases and unit costs fall, providing significant benefits to the local economy - Many markets are small, domestic producers cannot achieve economies of scale - Firms can solve this problem by exporting, access to a much larger global marketplace - Allows the nation to specialize in a smaller number of industries in which it may not necessarily hold factor or comparative advantages - Trade is beneficial even for countries that produce only a limited variety of products

NATIONAL-LEVEL THEORIES Why do Nations trade? CLASSICAL THEORIES

- absolute and comparative advantage provide the rationale for international trade, but fail to account for factors that make trade complex including: ° many traded products are characterized by strong branding and differentiated features ° International transportation is often costly ° Government restrictions (tariffs, import barriers etc) can hamper international trade ° services such as banking cannot be traded in the usual sense and must be internationalized via FDI ° Modern IT and the Internet facilitate global trade in many services at low cost

NATIONAL-LEVEL THEORIES Why do Nations trade? CLASSICAL THEORIES Limitations of early trade theories

employees are socialized into three cultures: (1) national culture (2) professional culture (3) corporate culture Most companies have a distinctive set of norms, values and modes of behavior that distinguish them from other firms such differences are often as distinctive as national culture so that two firms from the same country can have vastly different organizational cultures

National, Professional and Corporate Culture

(1) Symbolic Productions: - symbol: letters, figures, colors... that communicate a meaning - businesses use symbols such as trademarks, logos, brands (2) Material productions and creative Expressions of Culture: - material productions: ° artifacts, objects, technological systems that people use to cope with their environment °most important: that supply energy, transportation, communication - creative expressions of culture: ° arts, folklore, music, dane, theater, cuisine

Objective Dimension of Culture

- some focal firms use the internet to sell directly to customers - companies can sell cheaper and faster using the internet - this benefits SMEs in particular (lack of substantial resources needed to undertake international operations)

Online Intermediaries

Organizational Structure - describes the reporting relationships inside the firms - specifies the links between people, functions and processes - central issue: how much decision-making responsibility should the firm retain at headquarters -> centralized approach: headquarters have considerable authority and control over the firm's activities worldwide; (global integration firms) -> decentralized approach: substantial autonomy and decision-making authority are delegated to the firm's subsidiaries around the world; (local responsiveness firms) - depends on the firm's products, size of its markets, it's competitors and size/importance of each foreign venture - it's neither beneficial nor possible for firms to centralize all of its operations - "Think globally and act appropriately!" Planning shared by managers of headquarters and subsidiaries is vital to the design of effective strategies: - highly centralized, top down decision making: ignores subsidiary managers' knowledge of the host market - highly centralized, bottom up decision making: ignores the knowledge of headquarter managers and fails to integrate strategies across countries Organizational Structures for International Operations - general rule: structure follows strategy - structure is a tool that facilities the implementation of a strategy and the firms vision - structure tend to evolve over time from easy to complex 6 major types of Structures for International Operations: (1) EXPORT DEPARTMENT - unit charged with managing export operations - associated with home replication strategy - exporting is the first entry strategy for manufacturing firms - until exports sales reach a substantial proportion of total sales, the firm will channel exports through an outside intermediary e.g. a foreign distributor (2) INTERNATIONAL DIVISION STRUCTURE - unit within the firm dedicated to managing its international operations - accompanied by a significant shift in resource allocation and an increased focus on IB - usually a vice president of international operations is appointed who reports to the CEO - division managers oversee the development and maintenance of relationships with foreign suppliers, distributors, and other value chain partners - over time, the division undertakes more advanced internationalization options e.g. licensing, small-scale FDI... (3) GEOGRAPHIC AREA STRUCTURE (DEZENTRALIZED) - management and control are highly decentralized to the level of individual geographic regions - local managers are responsible for operations within their regions - products are relatively standardized and marketed across entire regions or groups of countries - usually associated with multi domestic strategy - firms that use this structure are often in mature industries with narrow product lines e.g. food, automotive, cosmetics, beverages etc. - geographic area units manufacture and market locally appropriate goods within their own areas - products are adapted (4) PRODUCT STRUCTURE (CENTRALIZED) - firm organizes its international operations by major product line - each product division is responsible for producing and marketing a specific group of products worldwide - each unit operates as a stand-alone profit center with substantial autonomy - goal is to achieve a high degree of worldwide coordination within each product category - facilitates economies of scale, sharing of technology and know- how among the firm's operations - associated with a global strategy (5) FUNCTIONAL STRUCTURE (CENTRALIZED) - management of the firm's international operations is organized by functional activities e.g. production, marketing etc. (6) GLOBAL MATRIX STRUCTURE - combination of the geographic area, product and functional structures - aims to obtain advantages of each while minimizing their disadvantages - to make it work, headquarters management should simultaneously: ° Coordinate and control international operations ° Respond to needs in individual countries ° Maximize interorganizational learning and knowledge sharing - is associated with transnational strategy - responsibility for each product is shared by each product unit and the particular geographic areas - dual reporting system: an employee reports to two managers (local subsidiary manager & corporate product division manager)

Organizational Structure Organizational Structures for International Operations

(1) TURNKEY CONTRACTING - an arrangement in which the firm or a consortium of firms plans, finances, organizes, manages and implements all phases of a project abroad and then hands it over to a foreign customer after training local workers - In a typical turnkey contract a contractor builds a major facility, puts it into operation, and then hands it over to the project sponsor. - The most popular projects include extensions and upgrades to metro systems such as bridges, road-and railways, airports, harbors, hospitals etc. - Financed largely from public budgets (governments) (2) BUILD-OPERATE-TRANSFER ARRANGEMENTS - A firm or consortium of firms contracts to build a major facility abroad, operates it for a specified period and then transfers ownership to the project sponsor - variation of turnkey contracting - the difference is that the builder first operates the project for a number of years - During the operation the firm can charge user fees, tolls and rentals to recover its investment and generate profits - Typical projects include highways, airports, mass transit systems and telecommunications networks (3) MANAGEMENT CONTRACTS - A contractor supplies managerial know-how to operate a hotel, hospital, airport or other facility in exchange for compensation - The management company generates revenues without having to make capital outlay - Management contracts can help foreign governments with infrastructure projects when the country lacks local personnel with adequate skills and knowledge on how to run them - A major disadvantage is that this arrangement involves training foreign firms that may become future competitors (4) LEASING - A focal firm (lessor) rents out machinery or equipment to corporate or government clients abroad (lessee) often for several years. - The lessor retains ownership of the property throughout the lease period and receives regular payments from the lessee. - Advantage for the lessee: reduce costs of using needed machinery and equipment - Advantage for the lessor: gain quick access to target markets, while putting assets to use earning profits - International leasing benefits developing economies that may lack the financial resources to purchase needed equipment (5) INTERNATIONALIZATION BY PROFESSIONAL SERVICE FIRMS - Include accounting, advertising, market research, consulting, engineering, IT etc. - Some firms simply follow their key clients abroad. - Professional service firms face three unique challenges when going abroad: ° Professional qualifications that allow firms to practice f.e. law or medicine in the home country are rarely recognized by other countries ° Professionals who work abroad for a long time must obtain employment visas in the host countries ° Professional services often require intensive interaction with the local public which necessitates language and cultural knowledge - Typically professional service firms use a mix of direct investment and contractual strategies

Other Contractual Entry Strategies

(1) Acquire factual and interpretive knowledge about the other culture and try to speak the language - political and economic background - knowledge about values, attitudes, lifestyles (2) Avoid Cultural Bias - problems arise when managers make ethnocentric assumptions - SELF-REFERENCE CRITERION: unconsciously assuming one's own culture in other countries, viewing own culture as the norm - CRITICAL INCIDENT ANALYSIS (CIA): method used to analyze awkward situations in cross-cultural activities (3) Develop Cross-Cultural Skills 4 key personality traits: - tolerance for ambiguity (tolerate uncertainty and apparent lack of clarity in the thinking and actions of others) - perceptiveness (ability to closely observe and appreciate information in the speech & behavior of others) - valuing personal relationships (more important than achieving one-time goals or winning arguments) - flexibility and adaptability (showing grace under pressure) cultural intelligence: a person's capability to function effectively in situations characterized by cultural diversity

Overcoming cross-cultural risk: managerial guidelines

- growing economic interdependence that results when two or more countries within a geographic region form an alliance aimed at reducing barriers to trade and investment. - regional economic integration blocs: reducing tariffs and restriction of cross-border flows LEVELS OF REGIONAL INTEGRATION (1) FREE TRADE AREA: - simplest & most common - member countries agree to gradually eliminate barriers to trade - each member country maintains an independent international trade policy with countries outside the bloc - emphasizes the pursuit of comparative advantage for a group of countries rather than for individual states - e.g. NAFTA (2) CUSTOMS UNION: - member states harmonize their external trade policies and adopt common tariff and nontariff barriers on imports from nonmember countries - members must agree on the level and on how to distribute earnings from the tariff among them - e.g. MERCOSUR (3) COMMON MARKET: - trade barriers are reduced or removed - common external barriers are established - products, services and factors of production are allowed to move freely among the member countries - require substantial cooperation on labor and economic policies - benefits to individual members vary: skilled labor may move to countries where wages are higher - e.g. EU (4) ECONOMIC UNION: - member countries enjoy all the advantages of earlier stages AND strive to have common fiscal and monetary policies - standardized monetary policy requires establishing fixed exchange rates and free convertibility of currencies among member states - elimination of border controls, harmonization of product and labeling standards and establishment of region-wide policies for energy, agriculture and social services - requires its members to standardize laws and regulations regarding competition, mergers and other corporate behaviors - member countries harmonize procedures for licensing of professionals e.g. doctor, lawyer etc (5) POLITICAL UNION: remains an ideal - not yet achieved LEADING ECONOMIC BLOCS - European Union - European Free Trade Association (EFTA) - North American Free Trade Agreement (NAFTA) - El Mercado Comun del Sur (MERCOSUR) - The Caribbean Community (CAROM) - Comunidad Andina de Naciones (CAN) - Association of Southeast Asian Nations (ASEAN) - Asia Pacific Economic Cooperation (APEC) - Australia and New Zealand Closer Economic Relations Agreement (CER) - Gulf Cooperation Council (GCC)

Regional Economic Integration Levels of Regional Integration

Drivers of Retailer internationalization: - saturation of home markets - deregulation of international investment - lower costs abroad - emerging markets show pent-up demand, fast economic growth, growing middle class Retailers choose between FDI and franchising: - larger, more experienced retailers use FDI (own their stores, maintain direct control) - smaller retailers rely on franchising - Franchising facilitates rapid internationalization but also affords the firm less control Challenges of International Retailing (1) Culture and Language (2) strong loyalty to indigenous retailers (3) legal and regulatory barriers (4) need of development of local sources International Retailing Success Factors - advanced research and planning - establishment of efficient logistics and purchasing networks - entrepreneurial, creative approach to foreign markets - adjust business model to suit local conditions

Retailers in Foreign Markets

SOCIALIZATION: - process of learning rules and behavioral patterns appropriate to one's society - cultural learning to acquire cultural understandings and orientations shared by a particular society - we adapt our behavior unconsciously ACCULTURATION: - process of adjusting and adapting to a culture other than one's own - commonly experienced by people who live in other countries for extended periods

Socialization and Acculturation

(1) Rapid spread of monetary & financial crises: due to ongoing integration of world economies, living standards are severely affected, jobs are lost, developing economies rely heavily on exports to / FDI from advanced economies (2) Loss of national sovereignty: MNE activities can be a threat to national sovereignty, social structures and political systems (3) Offshoring & flight of jobs: Transfer of jobs to low-labour cost countries; offshoring=relocation of value chain activity to cost-effective locations abroad (4) Effect on the poor: MNEs pay low wages, exploit workers, employ child labour and sweatshops; low paid job better than no job?; advanced economies help developing economies by making their markets more accessible (5) Effect on the natural environment: manufacturing and economic activity results in pollution, habitat destruction and damage of the ozone layer, environmental harm tends to decrease on the long run (living standards rise, people focus more on their environment) (6) Effect on national culture: consumer preferences are homogenizing, advertising focuses on Western trends (EU, US), global media has a huge effect on local culture shifting it towards a universal norm; religious differences as strong as ever, people insist on their national identity

Societal Consequences of Globalization

Stages of Economic Development of Countries (1) ADVANCED ECONOMIES: - high per-capita income - highly competitive industries - well-developed commercial infrastructure - Examples: Australia, Canada, Japan, New Zealand, most European countries - mature state of industrial development: evolved from manufacturing economies into service-based economies - about 3⁄4 of world trade in services - democratic, multiparty systems of government - huge purchasing power - few restrictions on international trade/investment - host the world's largest MNEs (2) DEVELOPING ECONOMIES: - low-income countries - limited industrialization - stagnant economies - Examples: Bangladesh, Nicaragua, most countries in Africa - low income and high birth rates tends to maintain poverty - high infant mortality, malnutrition, short life expectancy, illiteracy, poor education systems - lack of adequate health care - government policies discourage entrepreneurship, trade and investment (bureaucracy and red tape) - can give rise to revolution, terrorism or war (3) EMERGING MARKETS: - former developing economies - achieved substantial industrialization and modernization - rapid economic growth since the 1980s; - Examples: Brazil, Russia, India, China (BRIC) - rapidly improving living standards - growing middle class - attractiveness as destinations for exports, FDI and sourcing is increasing - attract investments from Western Europe by offering low-cost labor - have the potential to become emerging markets in the near future - economic prosperity often varies (urban areas and rural areas) - TRANSITION ECONOMIES: emerging markets that have evolved from centrally planned to liberalized markets (China, Russia); attract substantial direct investment from abroad - much faster growth than advanced economies - advantages: low-cost labor, knowledge workers, government support, low-cost capital, powerful highly networked conglomerates What makes Emerging Markets attractive for IB (1) EMERGING MARKETS AS TARGET MARKETS: - growing middle class in these markets implies rising demand for many consumer products - in some product categories demand is growing fastest in emerging markets - pharmaceutical companies increased their emphasis on developing and marketing drugs in these markets - governments and state enterprises are major targets for sales of infrastructure related products/services (2) (2) EMERGING MARKETS AS MANUFACTURING BASES: - home to low-wage, high-quality labor for manufacturing and assembly operations - Some of them have large reserves of raw materials and natural resources (3) EMERGING MARKETS AS SOURCING DESTINATIONS: - Many MNEs have established call centers in Eastern Europe, India and the Philippines - Firms in the IT industry benefit from their ability to outsource certain technological functions to knowledge workers in India - Investments from abroad benefit emerging markets as they lead to new jobs, transfer of technology and know-how, linkages to the global marketplace etc.

Stages of Economic Development of Countries What makes Emerging Markets attractive for IB

(1) HOME REPLICATION STRATEGY: (pressures for both integration and responsiveness are weak) - viewing international business as separate from and secondary to its domestic business - expanding abroad is viewed as an opportunity to generate additional sales for domestic product lines - designing products with domestic customers in mindestens - pursuing IB to extend product life cycles and replicate home-market success - only target markets similar to the home market - pursued usually by smaller firms (management has little experience & limited resources) - this strategy is only an initial than a long-term internationalization strategy (2) MULTIDOMESTIC STRATEGY: (pressure for responsiveness is strong - for integration weak) - developing subsidiaries or affiliates in foreign markets - delegating much autonomy to managers in foreign units, allowing them to operate independently and pursue local responsiveness - headquarters recognize and emphasize differences between national markets; - subsidiaries vary product and management practices by country - products/services are carefully adapted to the host country characteristics - advantages: minimal pressure on headquarters staff because local operations are managed by country managers - disadvantages: country managers tend to develop local plans, limited information sharing reduces possibility of developing knowledge-based competitive advantage (3) GLOBAL STRATEGY: (pressures for integration are strong - for responsiveness weak) - headquarter seeks substantial control over its country operations in order to minimize redundancy and achieve maximum efficiency - managers are responsible for the firm's global operations - extreme: "why not make the same thing, the same way, everywhere?" - activities e.g. R&D, manufacturing are centralized at headquarters - management tends to view the world as one large marketplace - advantages: increased opportunities because of cross-national learning, economies of scale, improved quality of products, global brand recognition - disadvantages: communication must be ongoing between headquarters and subsidiaries, may result in loss of responsiveness and flexibility in local markets (4) TRANSNATIONAL STRATEGY: (4) TRANSNATIONAL STRATEGY (pressures for both integration and responsiveness are strong) - firm strives to be responsive to local needs while retaining sufficient central control of operations - combines the advantages of multidomestic and global strategies - "standardize where possible - adapt where appropriate" - exploit economies of scale (sourcing from few global suppliers - concentrate manufacturing in few locations) - organize production, marketing and other value chain activities on a global scale - optimize local responsiveness and flexibility - facilitate global learning and knowledge transfer - deal with competitors on a global basis

Strategies based on the Integration-Responsiveness Framework

Strategies for Emerging Markets (1) CUSTOMIZE OFFERINGS TO UNIQUE EMERGING MARKET NEEDS: - build good relationships with the communities (to better understand local conditions and to earn customer respect and loyalty) (2) PARTNER WITH FAMILY CONGLOMERATES: - often possess extensive distribution channels throughout their home countries - deep understanding of local markets and customers (3) TARGET GOVERNMENTS IN EMERGING MARKETS: Governments and state-owned enterprises are an important customer group for three reasons: - Governments buy enormous quantities of products - State enterprises in areas like railways, airlines, banking, oil, steel etc. buy goods and services from foreign companies - The public sector influences the procurement activities of various private or semi- private corporations - governments are attracted by deals that create local jobs, employ local resources, reduce import dependence and provide other country-level advantages; (4) SKILLFULLY CHALLENGE EMERGING MARKET COMPETITORS: advanced-economy firms can counter in different ways: - Managers must conduct research to develop understanding of the new challengers; analyze the advantages of the emergent firms; - Acquire new capabilities that improve the firm's competitive advantages - Leveraging low-cost labor and skilled workforce - Partner with family conglomerates on critical value-chain activities CSR in Emerging Markets and Developing Economies (1) FOSTER ECONOMIC DEVELOPMENT WITH PROFITABLE PROJECTS (2) MICROFINANCE TO FACILITATE ENTREPRENEURSHIP -> Special Case of Africa

Strategies for Emerging Markets CSR in Emerging Markets and Developing Economies

Strategy: a planned set of actions that managers employ to make best use of firm's resources and core competencies to gain competitive advantage 3 Strategic Objectives: (1) EFFICIENCY: the firm must build efficient international value chains = lowering the cost of the firm's operations and activities on a global scale (2) FLEXIBILITY: firms must develop worldwide flexibility to accommodate diverse country-specific risks and opportunities = diversity and volatility of the international environment are especially challenging (3) LEARNING: the firm must create the ability to learn from operation in international environments and exploit this learning on a worldwide basis = by operating in many countries, MNEs can acquire new technical and managerial know-how, new product ideas, improved R&D capabilities, partnering skills etc. Characteristics of Global Firms (1) VISIONARY LEADERSHIP - quality of senior management that provides superior strategic guidance for managing efficiency, flexibility and learning; - how do leaders differ from managers? managers are focused on directing the firm's day-to-day operations, leaders hold a long-term perspective on challenges and opportunities that confront the firm, they are skilled at motivating people and at setting the tone for how the firm will pursue its goals and objectives (2) TRONG ORGANIZATIONAL CULTURE: - pattern of shared values, behavioral norms, systems, policies and procedures that employees learn and adopt - management seeks to build a global organizational culture (3) SUPERIOR ORGANIZATIONAL PROCESSES: - managerial routines, behaviors and mechanisms that allow the firm to function as intended - MNEs attempt to achieve global coordination and integration by implementing common processes or globalizing mechanisms GLOBAL TEAMS: - internationally distributed groups of employees charges with specific problem-solving - interact via in-person meetings or video conferences - strategic global teams: identify / implement initiatives that enhance the long term direction of the firm - Operational global teams: focus on efficient and effective operation of the business across the whole network

Strategy in IB

(1) Values and Attitudes: - Values: ° a person's judgments about what is good or bad, acceptable or unacceptable, important or unimportant ° values in North America, Northern Europe and Japan include hard work, punctuality and the acquisition of wealth - Attitudes: ° often unconsciously held, may not have a rational basis ° PREJUDICES: rigidly held attitudes usually unfavorable, aimed at a particular group of people (2) Deal vs. Relationship Orientation - Deal Orientated: ° managers focus on task at hand and prefer getting down to business ° may even avoid small talk ° e.g. Australia, Northern Europe, North America - Relationship Orientated: ° managers put more value on affiliations with people ° important to build trust and get to know the other business party ° relationships are more important than the deal ° e.g. China, Japan, Latin America (3) Manners and Customs - ways of behaving and conducting oneself in public and business situations - egalitarian, informal cultures vs. cultures (people are equal and cooperative) vs. more formal countries (status, hierarchy, respect) - Customs: eating habits, work hours, holidays, drinking, toasting, appropriate behavior, gift giving (4) Perceptions of Time - Past Oriented: ° plans should be evaluated in terms of their fit with traditions, customs, wisdom ° e.g. Europeans - Present Oriented: ° monochronic orientation: focused on schedules, punctuality, time as a resource, focus on the clock, short term perspective ° polychronic orientation: people do many things at once, easily distracted, plans are changed often, value on relationships - Future Orientated: ° how will the firm perform a decade from now ° e.g. large Japanese firms offering lifetime employment, invest heavily in training (5) Perceptions of Space (6) Religion

Subjective Dimension of Culture

Global Integration: - coordination of the firm's value-chain activities across multiple countries to achieve worldwide efficiency, synergy and cross-fertilization to take advantage of similarities between countries - Firms that emphasize this global integration make and sell products/services that are relatively standardized to meet converging customer needs and tastes worldwide - Such firms compete on a regional or worldwide basis - primary goal is to maximize efficiency of their value-chain activities Local Responsiveness: - managing the firm's value-chain activities by adjusting the firms practices to suit distinctive needs and conditions in each country - meet the specific needs of customers in individual markets - adapt to local customer requirements, language, culture, regulation, local distribution structure etc. Pressures for Global Integration: - cost reduction through economies of scale - profit of converging consumer trends and universal needs - provide uniform service to global customers - conduct global sourcing of raw materials, components, energy and labour - monitor and respond to global competitors - take advantage of media that reaches buyers in multiple markets Pressures for Local Responsiveness: - legerege natural endowments available to the firm - target local customer needs - accomodate differences in distribution channels - respond to local competition - adjust to cultural differences - meet host government requirements and regulations (attain the status of a local firm)

The Integration-Responsiveness Framework Global Integration & Pressures for GI Local Responsiveness & Pressures for LR

(1) Developing products and services: - cultural differences necessitate adapting marketing activities to suit the specific needs of target markets - example: Burger King introduced all-beef hamburgers to consumers in China, added several chicken dishes to their menu (2) Organizational Structure: - decentralized organizational structure: delegating authority to country managers - autocratic structures: power is concentrated at regional or corporate headquarters (3) Teamwork: - cooperating with partners and host-country nationals to achieve common goals is critical to business success - Problems may arise if foreign and domestic nationals don't get along (4) Pay-for-Performance System: - in some countries merit is not the primary basis for promoting employees - example: in China and Japan a person's age is the most important factor (5) Lifetime Employment: - workers in some asian countries work for the same company their whole life (paternalistic relationship) - western managers struggle to motivate employees who expect to have the same job their whole life regardless of the quality of their work (6) Union-Management Relationships: - european firms have evolved a business culture in which workers enjoy a relatively equal status with managers - this approach can reduce flexibility of company operations (if union representatives resist change) (7) Attitude toward Ambiguity: - some bosses give exact and detailed instructions - others give ambiguous and incomplete information

The Role of Culture in IB

- Appropriate behavior in one culture may be viewed as unethical behavior elsewhere -Ethical standards change over time e.g. slavery is no longer tolerated but some MNEs tolerate working conditions that come close to it RELATIVISM: - belief that ethical truths are not absolute but differ from group to group - e.g. a company adhering to the position that bribery is wrong may nevertheless pay bribes in countries where it is acceptable - passive acceptance of values, behaviors and practices that prevail in each country NORMATIVISM: - belief that ethical behavioral standards are universal - firms and individuals should seek to uphold them consistently around the world - Most firms apply a combination of these two abroad. (balance between corporate values and local standards) - in countries with questionable ethical norms it is best to maintain ethical standards superior to what is required by local laws and values (creates goodwill and sustains the firm's image) ETHICAL DILEMMA: predicament (=prekäre, verzwickte Lage) with major conflicts among different interests; there is a set of solutions that are equally justifiable and equally imperfect; the choice of one may automatically negate the others

The Value of ethical Behavior

The true Potential of Emerging Markets A) PER-CAPITA INCOME AS AN INDICATOR OF MARKET POTENTIAL - per capita GDP converted at market exchange rates paints an inaccurate picture of market potential (overlooks the substantial price differences between advanced economies and emerging markets) - Answer = using per capita GDP figures adjusted for price differences - PURCHASING POWER PARITY: reflects the amount of goods that consumers can buy in their home country, using their own currency and consistent with their own standard of livings; the concept suggests that, in the long run, exchange rates should move toward levels that would equalize the prices of an identical basket of goods and services in any two countries caution in relying on adjusted GDP figures for 4 reasons: (1) Official data do not account for the existence of an informal economy: in developing economies the informal economy is often as large as the formal one but countries lack sophisticated taxation systems for detecting and reporting its operation (2) The great majority of the population is on the low end of the income scale (3) Household income is substantially larger than per-capita income because of multiple wage earners within individual households (4) Governments may underreport national income so they can qualify for low- interest loans and grants from international aid agencies and development banks B) MIDDLE CLASS AS AN INDICATOR OF MARKET POTENTIAL - middle class has economic independence; works in businesses, education, government and hourly jobs; consumes many discretionary items - make up the largest proportion of households in advanced economies - in emerging markets the size and growth rate of the middle class is a signal of a dynamic market economy Risks and Challenges of Emerging Markets (1) POLITICAL INSTABILITY (2) WEAK INTELLECTUAL PROPERTY PROTECTION (3) BUREAUCRACY, RED TAPE AND LACK OF TRANSPARENCY (4) POOR PHYSICAL INFRASTRUCTURE (5) PARTNER AVAILABILITY AND QUALIFICATIONS (6) DOMINANCE OF FAMILY CONGLOMERATES

The true Potential of Emerging Markets Risks and Challenges of Emerging Markets

Comparative Advantage: - Country Specific Advantage - superior features of a country that provide unique benefits in global competition - typically derive from either natural endowments or deliberate (bewusst) national policies - inherited resources (labor, climate, arable land, petroleum reserves) - entrepreneurial orientation - availability of venture capital and innovative capacity Competitive Advantage: - Firm Specific Advantage - organizational assets and competencies - e.g. specific knowledge, capabilities, innovativeness, superior strategies - difficult for competitors to imitate, thus help firms to enter and succeed in foreign markets

Theories of international Trade and Investment

NATIONAL LEVEL THEORIES - Why do Nations trade? -> Classical Theories (1) Mercantilism (2) Absolute Advantage Principle (3) Comparative Advantage Principle (4) Factor Proportions Theory (5) International Product Life Cycle Theory (6) New Trade Theory - How can Nations enhance their Competitive Advantage? -> Contemporary Theories (1) Competitive Advantage of Nations (2) Michael Porter's Diamond Model (3) National Industrial Policy FIRM LEVEL THEORIES - Why and how do Firms internationalize? (1) Internationalization Process of the Firm (2) Born Globals & International Entrepreneurship - How can internationalizing Firms gain and sustain Competitive Advantage? -> FDI-Based Explanations (1) Monopolistic Advantage Theory (2) Internationalization Theory (3) Dunning's Eclectic Paradigm -> Non-FDI-Based Explanations (1) International Collaborative Ventures (2) Networks and Relational Assets

Theories of international trade and investment

Trends in FDI and Collaborative Ventures - companies from both advanced economies and emerging markets are active in FDI - destination / recipient countries of FDI are both advanced and emerging markets - companies employ MULTIPLE strategies for entering foreign markets (e.g. acquisitions, collaborative ventures etc.) - companies from all types of industries are active in FDI and collaborative ventures - direct investment by foreign companies raises patriotic sentiments among citizens Motives for FDI and Collaborative Ventures (1) MARKET-SEEKING MOTIVES - Managers may seek new market opportunities as a result of either unfavorable development in their home market (PUSH) or attractive opportunities abroad (PULL) - 3 primary market-seeking motivations: ° gaining access to new market opportunities (existence of a market motivates many firms to produce offerings at/near customer locations) ° follow key customers ° compete with key rivals in their own markets (2) RESOURCE- OR ASSET SEEKING MOTIVES - Firms want to acquire production factors that are more abundant or less costly in foreign markets: ° Raw Materials needed in extractive or agricultural industries (little choice but to go where the raw materials are located) ° Knowledge or other assets (by establishing a local presence the firm is better positioned to deepen its understanding of a foreign market) ° technological and managerial know-how (can be beneficial for the firm to establish a presence in a key industrial cluster) (3) EFFICIENCY-SEEKING MOTIVES - In expanding abroad many firms seek to create economies of scale and economies of scope - reducing business costs by employing the same corporate assets across a large number of products and markets - MNEs usually concentrate production in only a few locations as a way to increase the efficiency of manufacturing - disseminate best practices in production and other activities to all their foreign subsidiaries to increase efficiency worldwide - four major efficiency-seeking motives: ° Reduce sourcing and production costs by assessing inexpensive labour and other cheap inputs to the production process ° locate production near customers ° take advantage of government incentives ° avoid trade barriers

Trends in FDI and Collaborative Ventures Motives for FDI and Collaborative Ventures

situation or event in which a cultural misunderstanding puts some human value at stake managers must design products & packaging with culture in mind (even regarding symbolic colors and symbols of the target cultures)

cross cultural risk

- using our own culture as the standard for judging other cultures; entails the belief that one's own race/religion/ethnicity is superior to others; - POLYCENTRIC ORIENTATION: host-country mind set; the manager develops a strong affinity with the country in which he conducts business - GEOCENTRIC ORIENTATION: global mind set; the manager understands a business or market without regard to country boundaries, is open to and aware of other cultures self-reference criterion: assuming your own culture in other countries

ethnocentric orientation

- governments recently have developed new laws aiming at protecting the environment - during global financial crisis, governments moved to stimulate national economies, in some cases important companies were nationalized (to save them from ruin) - governments participate in IB by investing in other economies: sovereign wealth funds: °state-owned investment funds that undertake systematic global investment activities to generate income or achieve policy objectives ° some funds exceed the GDP of national economies in which they invest ° critics charge that SWF affect their investment targets even to the point of endangering national interests -> some governments passed legislation to restrict inward SWF investment

governments in IB

(1) Focal Firms: initiators of IB, conceives, designs and produces intended for worldwide consumption, primarily MNEs and SMEs (2) Distribution Channel Intermediaries specialist firm that provides various logistics, marketing services for focal firms, either in the firms home country or abroad (3) Facilitators: has special expertise in banking, legal advice, customs clearance or related support services, e.g. logistics service providers, freight forwarders, banks... found both home and abroad (4) Governments: active in IB as suppliers, buyers, regulators; governments in advanced economies have significant ownership of companies in telecom, banking, natural resources; global financial crisis had governments step up their involvement as regulators

organizational Participants in IB

1830 to late 1800s: growth of railroads, ocean transport, large firms, cross border trade, invention of telegraph and telephone 1900 to 1930: rise of electricity & steel production, colonization of countries in Asia, Africa, Middle East, emergence of early MNEs from Europe & North America 1948 to 1970: pent-up demand after WW II, industrialized countries had to reduce international trade barriers, formation of GATT & Marhsall Plan, trade liberalization & growing MNE activity (subsidiaries) 1980s to present: development internet, technological advances, made it possible for SMEs to operate worldwide, growth of emerging markets, rise in FDI

phases of globalization

(1) ECONOMIC INTERESTS: - the firm's economic impact on the localities where it does business - effects on job creation, wages, tax flows, disadvantaged communities, public works and other areas where it can contribute positively to local interests (2) SOCIAL INTERESTS - firms with a strong social interest aim to optimize work conditions and diversity in hiring - avoids using sweatshops, child labor etc.; - firms provide safe work environments, health insurance, retirement benefits and educational opportunities (3) ENVIRONMENTAL INTERESTS - the firm's contribution to preserving environmental quality - firms maximize the use of recycled or renewable raw materials and environmentally friendly energy, minimize pollution, reduce waste - "green purchasing policy" source inputs that support environmental interests Example: GAP withdrew a line of children's wear from its clothing stores worldwide following charges that some of its Indian subcontractors were using child labor; Sustainable practices pay off in various ways: - strong promotion of the firm's image - ability to hire and retain superior employees - cost savings due to efficient production - better relations with foreign governments

the Role of Sustainability in International Operations

complete business system of a focal firm, comprising all activities it performs focal firm may retain core activities (production, design) within the firm and delegates other activities (distribution, customer services) to independent contractors. in exporting firms, much of the value chain is concentrated in the home country. in highly international firms, a variety of value chain activities may be performed in foreign countries. MNEs reach for locating each value chain activity in the country with the most favorable combination of cost, quality, logistical considerations etc.

value chain (activities)