Global Business Revision

Centralised (concentrated) vs. decentralised production

(PRINT BLUE TABLE) Should production be concentrated in a centralised location (to serve the world's market) or decentralised in various regional/national locations (that are closer to major markets)? Conditions suitable for concentrated (centralised) manufacturing [Decentralise if the opposite applies] * Costs of manufacturing are responsive to country environment (one location best) * Trade barriers are low * Exchange rates among currencies that impact on your business are stable * Production technology * has high fixed costs * has high minimum efficient scale * exists in flexible manufacturing format * Product value-to-weight ratio is high * Product serves universal needs - minor difference in customer needs, consumer preferences

What other actions can international businesses take to ensure that ethical issues are being considered in business decisions?

* Company should favour hiring and promoting people with a well-grounded sense of personal ethics * Build an organisation culture that values ethical behaviour and making sure that decisions made are consistent with set standards * Put decision-making processes in place that require people to consider the ethical dimension of business decisions * Hire ethics officers to be responsible for training all employees to be ethically aware and to follow the company's code of ethics * Develop moral courage that enables managers to walk away from a decision that may be profitable but unethical

Economic endowments

* Influential to a firm's preliminary assessment of a potential target country (natural and created features) 1. Size of economy * Level of national income and production * Population 2. Geography * Natural resources and features may affect level and patterns of market demand and production (eg. climate, topography, distance, etc.) * Physical location may be a help or hindrance 3. People * Population size, growth and distribution (e.g. age, gender, location) may indicate potential market size * Income, education and occupational distribution *Quality of human capital (e.g. educated and skilled labour force) may make a country attractive for FDI 4. Infrastructure and Institutions *Created infrastructure assets (e.g. transport, energy and communications systems) that facilitate businesses *Institutional components (e.g. financial laws, accounting standards, etc.) that promote the functioning and effectiveness of the business sector 5. Productivity and competitiveness *Productivity: Ratio of output produced to the factors of production (labour and capital inputs) used *Competitiveness: Quality of a nation or a business that allows it to maintain an economic advantage in the marketplace

Environmental Factors Facilitating Globalisation ***

* Liberalisation - Reduction in the barriers to trade and foreign investment (cooperation among nations: GATT, WTO and regional trade agreements) *Political environment - Changing ideologies, privatisation and the emerging market economies *Rising disposable incomes - Economic development and demand for greater variety of products *Technological change - Transportation, communication, information processing and the Internet Virtual organisation - Virtual workforce (global outsourcing)

Strategies to manage political risk

* MNC can negotiate long-term commitments from the host government * Lobbying politicians and officials of host governments (through ethical and legal procedures) * Seek home government support to exert pressures through diplomatic channels * Choose an appropriate entry mode (e.g. joint venture rather than wholly-owned subsidiary) * Integrate with local market through social responsibility * Increase bargaining power

Born Global Firm-based theories **

* Many firms in the recent decades are internationalising rapidly, many doing so soon or not long after they are founded * No consensus among researchers as to what constitutes a 'born global firm' or INV... some explanations include... o a firm that is international since inception, coordinating activities across multiple countries (O&M, 1994) o a firm achieving minimum 25% sales revenue through international operations within 3 years of foundation (C&K, 1997) * Mostly high-tech firms, usually founded and driven by internationally-oriented and experienced entrepreneurs * Why rapid internationalisation? - To act fast on opportunities so as to obtain valuable resources and to serve global markets (shorter product life cycles often seen in high-tech industries) * Mode of entry - greater reliance and preference for exporting

Globalisation of Markets

* Many historically distinct and separate national markets merging into one huge global marketplace *Tastes and preferences of consumers in different nations are beginning to converge *Today's firm operates in an environment that offers more opportunities, but is also more complex and competitive than

Benefits of Free Trade Area

* Trade creation * Increasing trade and specialisation * Easier foreign market access for Australian exports * Reduced (or removal of) tariff will have positive impact on price and competitiveness of Australian exports into these foreign markets * Australian business that rely on imports from these countries as inputs (or for resale purpose) will benefit from reduced import tariff * Consumers will have more choices at cheaper prices

Types of foreign exchange risk for IB

* Transaction risk: The extent to which income from individual transactions is affected by fluctuations in foreign exchange values - consequence of unexpected changes in pre-existing cash flows in the near future. *Translation risk (Accounting): The extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange values - Translation is not a physical conversion but a change in monetary expression. *Economic risk (Operations): The extent to which a firm's future international earning power is affected by changes in exchange rates - consequence of unexpected changes in expected future cash flows.

Global institutions supporting the IB environment***

* UN: Committed to preserving peace through international cooperation and collective security * World Bank: Established to promote economic development; provides low interest loans to poor nations * IMF: Established to maintain order in the international monetary system; often the lender of last resort to nation-states whose economies are in turmoil and whose currencies are losing value * GATT/WTO: GATT was an international treaty committed to lowering barriers to trade (it was succeeded by WTO in 1995, which is responsible for policing the world trading system) *AIIB: Recently established to support the building of infrastructure in the Asia Pacific region

Globalisation***

* refers to the shift towards a more integrated and interdependent world economy. *describes the way countries and people of the world interact and integrate, making international trade easier. Economic globalization is how countries are coming together as one big global economy, making international trade easier.

Licensing/franchising ***

* the granting of 'intellectual property rights (IPR)' from one party to another for a specified period in exchange for a royalty fee - brand name, business process or format, patented design and trademark Licensing: Licensor allows licensee to use its technology or design for manufacturing *Similar to franchising *Fewer "maintenance" costs than franchising Franchising: *Franchisor allows franchisee to adopt its entire business process or format *Low financial risk *Relatively low development costs ADVANTAGES • Low risk and low commitment of resources • Quick cash flow, quick market access • Governments are less concerned • Less cultural/local obstacles to ownership DISADVANTAGES • Limited control over licensee/franchisee operations •Licensee/franchisee may become competitors in the future (or could exploit the licensor/franchisor) * Lack of direct control over quality * Successful international franchising requires considerable start-up and ongoing presence overseas (cost) * Is likely to impede, make global coordination costlier than ownership *Growth may be slower depending on franchisee's intentions *Sharing of profit "pie" *Possible loss of know-how to potential competitor

Wholly Owned Subsidiary

Firm establishes a subsidiary in a foreign market and owns 100% of the shares BENEFITS *Enables global strategic coordination *Protects technology *Realizes (potentially) location and experience economies DISADVANTAGES: * High costs and risks * Requires overseas management skills *May be slower to implement

Exporting

* the sale of products produced in one country to residents of another country *Indirect exporting: selling to a foreign market through a domestic (home country) *Direct exporting: selling to a foreign market either through the firm's own dependent unit or through a foreign (host country) organisation *Intra-corporate transfer: sales made by a business to an affiliated firm located in the host country organisation BENEFITS for the country: *Important element in stimulating the economy *Achieve growth with export lead development * Achieve a positive trade balance on goods & services *Creates jobs and promotes innovation *Ability to realize experience curve economies BENEFITS for the Firm: *Opportunities for growth *Additional profits *Market development *Simplest and most flexible method to enter foreign markets *Ability to realize experience curve DISADVANATGES * Transport costs *Trade barriers *Motivation of local agents a challenge

Economies of Scale (New Trade theory)

* unit cost reductions associated with a large scale of output advantages *small market = small demand = lower production volume at higher costs = less variety and more expensive products for consumers *With trade, individual national markets are combined into larger world markets *trade = market expansion = economies of scale and specialisation = more variety and cheaper products for consumers

Technological advancements in logistics***

*Electronic data interchange now allows real time taking of orders and the spread of just-in-time (JIT) practices, and other technological advancements * Use of radio frequency identification (RFID) have improved efficiency in tracking (e.g. movement of a tagged unit through a dock will capture load identification and asset information much quicker than normal barcode technology) * EPC network principle provides visibility for supply chain participants (eg. the ability to exchange information with any other organisation in a standard format is a beneficial tool) * Using new technology to support distribution and delivery * outcome: greater efficiency

Analysing economies ***

*Gross National Income (GNI): the sum of a country's gross domestic product (GDP) plus net income (positive or negative) from abroad. It represents the value produced by a country's economy in a given year, regardless of whether the source of the value created is domestic production or receipts from overseas. *GNI per capita: Sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad. *GDP: monetary measure of the market value of all the final goods and services produced in a period of time, often annually or quarterly. *GDP per capita:Real GDP divided by Population. This is the "average" output of the economy per person measured in a base year prices. This ratio is often used as a measure of standard of living in comparisons over time of one country, or between different countries when measured in the same currency. *Purchasing power parity (PPP) : is an economic theory that compares different countries' currencies through a "basket of goods" approach. According to this concept, two currencies are in equilibrium or at par when a basket of goods (taking into account the exchange rate) is priced the same in both countries. *Consumer Price Index (CPI): measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them *Human Development Index (HDI): a summary measure of average achievement in key dimensions of human development: a long and healthy life, being knowledgeable and have a decent standard of living *Balance of Payments (BOP): reflects all payments and obligations to foreigners vs. all payments and obligations received from foreigners. It's a record of all financial flows in and out of a country.

How to assess and forecast political risks***

*Macro Political Risk Analysis: Reviews major political decisions and circumstances that are likely to affect all enterprises in the country and not just the MNC. *Micro political risk analysis: Directed toward government policies and actions that influence selected sectors of the economy or specific foreign businesses in the country Detailed analysis of the political situation in the country concerned * An analysis of the MNC's own product and operations in order to determine the kinds of political risk likely to be encountered in particular areas * The sources of the above risks should be identified and evaluated * A projection should be made into the future possibility of political risks in terms of probabilities and time horizons

Classical country-based trade theories***

*Mercantilism: A country should maximise exports while minimising imports (to conserve national wealth) *Absolute Advantage: A country should export goods it can more efficiently produce and trade them for imports that can be more efficiently produced by other countries *Comparative Advantage: Trade should still occur even if a country can efficiently produce everything (a country should produce and export only those goods that it is 'relatively' more efficient at producing) Relative Factor Endowment: Countries would have a comparative advantage when they produce products that rely intensively on their abundant resources (e.g. land, labour and capital)

Inward FDI

*inward investment involves an external or foreign entity either investing in or purchasing the goods of a local economy. HOST COUNTRY PERSPECTIVE -Benefits *Resource transfers o e.g. capital, technology and management skills * Employment effects o e.g. job creation and spill-over benefits *Balance of payments effects o e.g. positive capital inflow; import replacement and export promotion * Competition and economic growth o e.g. competition drives growth and innovation -Costs *Balance of payments effects o e.g. profits repatriation (outflow) * Competition and economic growth o e.g. local firms may be driven out of competition *National sovereignty and autonomy o e.g. potential loss of economic independence and losing control of strategic industries to foreigners GOVERNMENT INTERVENTION IN FDI -To attract inward FDI *Offer incentives to foreign firm to set up FDI o Tax exemption and benefits o Creation of export processing zone (EPZ) where concessions are given -To restrict *Ownership restraints * Performance requirements * Other restrictions and control

Globalisation of Production

*tendency among many firms to source goods and services from different locations around the globe to take advantage of national differences in the cost and quality of factors of production *Firms can thus compete more effectively and efficiently against their rivals *Improvements to technology and systems which have made firms better able to repsond to international customer demands

First Mover Advantages (New Trade theory)

*the economic and strategic advantages that accrue to many entrants into an industry *In industries where only a small number of firms are likely to be successful and profitable, an early entrant can gain a scale-based cost advantage that later entrants will not be able to match

U-models Firm-based theories **

1) Uppsala 'Stages' Model of Internationalisation *Internationalisation occurs sequentially through stages... firms start exporting before utilising higher risk foreign market entry modes (e.g. FDI) no export --> export via representatives --> overseas sales subsidiary --> overseas production LOOK AT DIAGRAM 2) Uppsala 'Internationalisation Process' Model * Firms take a gradual and incremental approach to internationalisation * Rationale: Firms gradually build up their 'experiential' knowledge to manage risk and enter foreign markets with successively greater 'psychic distance'

Stages of economic integration***

1. Free Trade Area (NAFTA, CER): *Remove barriers to trade from members but retain independence on trading policies with non- members *Problem: trade deflection (e.g. non-member firm first exports to member nation with lower tariff for re- export to member nation with higher tariff. Members may specify 'rules of origin' to prevent this 2. Custom Union (e.g. Andean Community) * Remove barriers on members' trade and impose a common external barrier *Issues: trade creation (+) and trade diversion (-) *Trade creation (+) - reallocation from higher-cost to lower-cost producers within trading bloc * Trade diversion (-) - shifting from lower-cost external producers to higher-cost internal producers *(eg. before the UK joined the EU, it imported Lamb meat from New Zealand - afterwards due to 'common' market tariffs on external produce, they switched to French lamb - so trade was diverted from NZ) 3. Common Market *Customs Union plus elimination of barriers that inhibit movement of factors of production (labour and capital) among members *EU was a common market until late-1990s *Issues: differences in regulations, fiscal, monetary, industry and social policies may distort flow of products, people and money 4. European Union (aim of "Single Market" Europe 1992, Maastricht Treaty 1994, Lisbon Treaty 2009) *Common market features plus coordination of domestic economic policy Features: * coordinate monetary and fiscal policy, e.g. tax rates and structures; * common currency (the Euro) (fixed exchange rates) = monetary union; * establish supranational institutions whose decisions are binding on all members 5. Political Union * Become part of a single unified nation-state with common currency and nation-wide economic and social policies and institutions

IB expansion strategies***

1. Global (Standardisation) Strategy * The firm views the world as a single marketplace and its primary goal is to create standardised goods and services that will address the need of customers worldwide * Pursuing a low-cost strategy on a global scale by reaping the cost reductions that come from economies of scale, learning effects and location economies * Since the global corporation must coordinate its worldwide production and marketing strategies, it usually concentrates power and decision-making responsibility at a central headquarters location * Still need to adjust for some differences (e.g. language) 2. International Strategy * The firm uses its core competencies or firm-specific advantages developed at home as main competitive weapons in the foreign markets (where indigenous competitors lack such competencies) * International strategy and the global strategy share an important similarity, a firm conducts business the same way anywhere in the world o main difference is that international strategy follows the domestic approach while global strategy tries to figure out the best way to serve all of its customers in the global market 3. Multidomestic (Localisation) Strategy Firm increases profitability by customising goods and services so that they provide a good match to the tastes and preferences in different national markets o Suitable when cost pressures are not too intense o Added value associated with local customisation may support higher prices while creating local demand * The firm views itself as a collection of relatively independent operating subsidiaries, each of which focuses on a specific domestic market 4. Transnational Strategy * The firm attempts to simultaneously achieve low costs advantages while also differentiating its products across global markets to account for local differences o Suitable when a firm faces both strong cost pressures and strong local responsiveness pressures * Combines the benefits of global scale efficiencies with the benefits of local responsiveness o Building an organisation capable of supporting and implementing a transnational strategy is notably complex and challenging

Levels of economic development ***

1. Less- Developed Countries * Inadequate Infrastructure *Low Literacy *Limited Technology *Rural Based 2. Middle-Income Countries * Developing Infrastructure *Improving Education *Improving Technology *Diversified Economy 3. Developed Countries * Developed Infrastructure * High Literacy * Modern Technology * Industrialised, service economy

Instruments of intervention***

1. Tariffs *Taxes usually levied on imports * Specific tariff: fixed charge for each unit of good imported ($3 per barrel of oil) * Ad valorem tariff: a % of imported good's value (15 percent tax) Who gains: *Government (through revenue) * Domestic producers (at least in the short run) *Employees of protected industries keep their jobs Who loses: Consumers who pay higher prices *The economy which remains inefficient *Employees of protected industries who don't develop new skills 2. Subsidies: *Government payments to domestic producers *Various forms, such as... cash grants, low-interest loans, tax breaks, government equity participation in domestic firms, government orders, etc. Subsidies are aimed at lowering costs to help... * ... compete against cheaper imports * ... gain export markets * ... increase domestic employment * ... local producers achieve first-mover advantage in emerging industries Problems... * Governments needs to tax society to pay for subsidies * Artificial lowering of costs and prices (does not encourage competitiveness) * Subsidised firms may become reliant on government 3. Import Quotas: * Government specifies how much of what product can be imported from which countries * May allow some to help meet domestic demand, but does not open domestic firms up to full competition

PRODUCT Managing the global marketing mix

1.0 PRODUCT STRATEGY What and how should we sell abroad? Alternatives (Standardised vs. Adapted Product):- 1.) Sell the product internationally as it is 2.) Modify the product for different countries or regions 3.) Design new products for foreign markets 4.) Incorporate all differences into one product and introduce it globally

Importance of following ethical standards and exercising social responsibility

Employment Practices *What standards should be applied? o Home nation's? o Host nation's? o Other standards? *Should the MNC adapt its policies? Standardize? *Hiring practices, labour relations, diversity issues, employment conditions are some specific issues that require careful thought *Ethical obligations of MNCs are not clear-cut (issue of 'ethical dilemma') * International Labour Standards: Repressive Regimes *What is the responsibility of MNCs when operating in markets with different standards of human rights? * Is it ethical for MNCs to operate in countries with repressive regimes? o Is inward investment an agent for change (e.g. MNCs may create in these host nations the conditions required for positive economic/social progress)? o Is there a 'limit' beyond which inward investment would not be justified? o Also, what if competitors are already investing in these countries? Environmental Policies * Locally mandated environmental standards may be inferior to those an MNC knows it can achieve (although it may be legal, should the MNC intentionally harm/pollute the environment?) * Importance of pursuing 'sustainable' strategies o MNCs can make good profits without harming the environment o MNCs can adopt business practices do not result in a 'tragedy of the commons' (ie., overuse and degradation of resources held in common by all but owned by no one) Corruption *Government officials may ask for bribes to "get things done" o Is a manager who agrees to this a 'corrupt manager'? o Should a business ever accede to bribery demands? *Businesses should take note of... o Foreign Corrupt Practices Act(USA)1977 o Convention on Combating Bribery of Foreign Officials in International Business Transactions (OECD) 1999: obliges member states and other signatories to make the bribery of foreign public officials a criminal offence o Commonwealth Criminal Code ACT 1995 in 1999 (Criminal Code Amendment (Bribery of Foreign Public Officials) * There is a difference between a 'bribe' (illegal) and 'speed money/grease payment' (legal) Bribery * Bribery is strictly illegal and unethical (and should therefore be avoided) *Bribery is universally shameful. ...In no country do bribe takers speak publicly of their bribes, nor do bribe givers announce the bribes they pay. No newspaper lists them. No one advertises that he can arrange a bribe. No one is honoured precisely because he is a big briber or bribee. ...Not merely the criminal law - for the transaction could have happened long ago and prosecution be barred by time - but an innate fear of being considered disgusting restrains briber and bribee from parading their exchange. Corporate social responsibility * The idea that business people should consider the social consequences of economic actions and give preference to outcomes with positive social and economic consequences when making business decisions * Power is morally neutral o How it is used is what matters * MNCs have power over a host country o e.g. they can move production away Corporate governance * The way in which boards oversee the running of a company by its managers, and accountability of board members to shareholders and company * Poor corporate governance weakens a company's potential (and may pave way for financial difficulties or even fraud) * Well-governed companies usually outperform others and may attract additional investors

Standardisation vs localisation/adaptation considerations

FACTORS ENCOURAGING STANDARDISATION: *Economies of scale in production *Economies in product R&D and marketing * Economic integration * Global competition * No significant impact from differences in culture, economic development, and product and tech standards FACTORS ENCOURAGING ADAPTATION * Differing use conditions * Government and regulatory influences * Differing consumer behaviour patterns * Local competition * True to the marketing concept

Instruments of intervention*** PT 2

4. Voluntary Export Restraint (VER) * A quota imposed by the exporting country officially or unofficially - usually imposed at the request of the importing country (e.g. US and Japan's autos). 5. Local Content Requirements: * Requirement that some specific fraction of a good be produced domestically Most often used by developing countries: * Achieve technology transfer, skills transfer *Shift manufacturing base to a higher technological level Administrative Policies: *Bureaucratic rules/regulations that make it difficult for imports to enter a country * Also referred to as 'Red tape' *These regulations are enacted through... o lengthy customs procedures o damaging customs inspection practices o health and safety rules and assessments o special product approval requirements o Example: Japan and tulips (Japanese customs inspectors cut each bulb down the middle) * Problem: Such policies hurt consumers by denying them access to potentially superior foreign products 7. Anti-Dumping Policies *Dumping: selling goods in an overseas markets... o Below their production costs or o Below "fair market value" in the country of origin * A method foreign firms may use to rid themselves of excess production * May be 'predatory' (dumping firm may flood the market with cheap products in order to reduce the competition, then prices will rise) * Anti-dumping policies will punish producers engaged in dumping practices to protect competitive domestic producers o Countervailing duties may be imposed on foreign 'dumpers'

Turnkey project & strategic alliance ***

A firm (contractor) sets up an operating plant for a foreign client and hands over 'key' when plant is fully operational A cooperative agreement between potential or actual competitors * e.g. Short-term collaboration on research, new product development, etc. BENEFITS: *Gives access to local partner's knowledge * Allows sharing of development costs and risks *May be more politically acceptable than 100% foreign ownership *Allows foreign parent do deploy resources across more national markets at once DISADVANTAGES: *May be more difficult to manage than international joint ventures

Economic systems ***

An economic system is the set of arrangements by which the society determines: 1. What shall be produced 2. How it shall be produced 3. How the resulting personal income and claims to goods and services shall be distributed (and redistributed) among households. 1. Market Economy This type of economy emphasises private ownership and free market activity In a market economy firms use resources and produce products, while individuals own resources and consume products As long as firms and individuals are free to make decisions, the interplay of supply and demand should ensure a proper allocation of resources o The market economy is used by all major industrialised countries However, large corporations, trade unions and governments may potentially limit the freedom of the market (when entering a market, a MNC needs to assess the impact of these factors) 2. Command (Centrally Planned) Economy This type of economy is one in which the allocative and distributive functions of the market are assumed by government In its most extreme form, the government determines centrally what is to be produced, the levels of production, the employment of resources and the distribution of output o Resources are allocated 'for the good of society' o The government owns most, if not all, businesses o The assumption is that the government is a better judge of how resources should be allocated than is the market Problems? Inefficiency (especially in state-owned enterprises) due to lack of incentives for cost- control and profitability 3. Mixed economy This includes some elements of each o Certain sectors of the economy are left to private ownership and free market mechanisms while other sectors have significant state ownership and government planning (eg. state-owned banks, public utilities, etc.) o There must be no restrictions on either supply or demand o No monopolistic sellers or buyers Examples: Australia, New Zealand, Great Britain, France and Sweden were mixed economies with significant state ownership but extensive privatisation since the 1980s has reduced the extent of state ownership of businesses in all these nations

Political systems, ideologies, collectivism vs individualism, totalitarianism vs democracy ***

An important part of the political environment is the dominant ideology: *The systematic and integrated body of constructs, theories and aims that constitute a socio-political program * In general, MNCs (multinational corporations) will be more comfortable operating in a political environment similar to that of their home country The Western ideological traditions that guide political systems include: SOCIALISM: * Emphasis: common good (society > individual) *Equal outcome (social equality) LIBERALISM: * Emphasis: individual rationality (individual reason + liberty) * Equal opportunity CONSERVATISM: * Emphasis: support for tradition, country, authority, duty and hierarchy *Individual security and identity requires social order and stability Political systems can also be compared according to the dimensions: COLLECTIVISM: *Needs of the society generally viewed as more important than individual freedom *Collective goals > individual goals INDIVIDUALISM: *Individuals should have freedom in his/her economic and political pursuits * Interests of the individual > interests of the state The two extremes of the political spectrum: TOTALITARIANISM: *Single party, individual or group monopolises political power and neither recognises nor permits opposition *Various forms exist ('communist', 'theocratic', tribal' and 'right-wing' totalitarianism) DEMOCRACY: *Allows for the involvement of citizens in the decision making process * Modern democratic states are 'representative democracies' (citizens elect government representatives)

PROMOTION (COMMUNICATION) STRATEGY Managing the Marketing Mix

Barriers to international communication: * Cultural barriers - may result in difficulty in communicating messages across cultures * Source and country of origin effects - may result in biasness that could either be negative or positive towards a company and its products * Noise levels - tend to reduce the effectiveness of communication (e.g. noise is high in more developed countries due to greater amount of messages competing for consumer attention) Push versus pull strategies: * 'Push' - emphasises personal selling VS 'Pull' - depends on mass media advertising * Strategy choice could be influenced by: o Product type and customer sophistication (e.g. industrial products favour 'push' strategy) o Channel length (e.g. long channels make 'push' strategy expensive) o Media availability ('pull' strategy requires access to advertising media and may not suit developing countries) Standardised advertising is an option if: * There are significant economic advantages *Creative talent is scarce and one large effort to develop a campaign will be more successful than numerous smaller efforts *Brand name is already global Standardised advertising is not an option if: *Cultural differences among nations are significant *Country-specific differences in advertising regulations may block the implementation of standardised advertising

Pros and cons of economic integration

Benefits: Economic case for integration: *Free trade → specialisation of production, competition which stimulates enterprise and innovation, FDI, economic growth, etc. Political case for integration: * Linking countries to creating dependency * More incentives for cooperation and less potential for conflict Problems: Impediments to integration * Comprehensive integration is neither easy to achieve nor easy to sustain; may generate winners and losers in the arrangement (although a nation may benefit, groups within a nation may be affected) (e.g. progress on Australia-Japan FTA was slow at a point due to Japanese government's reluctance to reduce assistance given to the agricultural sector) * Concerns over national sovereignty: (e.g. Britain's refusal to sign on to the Euro as public opinion opposed relinquishing control to the EU) Trade creation or trade diversion? *A regional free trade agreement will only make the world better off if the amount of trade it creates exceeds the amount it diverts

New Trade Theory

Considers both country and firm-related issues in explaining trade *Trade can increase the variety of goods available to consumers and decrease the average cost of these goods through 'economies of scale' *For industries where the global market may only support a limited number of firms, those with first-mover advantage will create barriers to entry for other firms

Business ethics and why international firms should be concerned with ethical issues

Employment practices * MNCs' focus on location advantage and low-cost manufacturing often leads to issues concerning their adherence to ethical standards *Examples... child labour, unsafe and/or poor working condition, etc. Human rights Should businesses deal with regimes that abuse human rights? Do you think MNCs that do so are simply facilitating the existence of such repressive regimes? *Examples... South Africa (during apartheid period), Myanmar, North Korea, etc. Environmental policy *Host nations may have inferior environmental regulations that benefit MNCs, giving them an advantage they may not receive at home under stricter regulatory requirements *But, what if their actions may impact negatively on a host nation's environment (examples... pollution, depletion of natural resources, environmental disaster, etc.)? Bribery and corruption *There is no shortage of examples on corporations (as well as individuals) being disgraced for engaging in bribery and corruptive practices... *Example... AWB paid over AU$291mil kickbacks to secure 90% of the Iraqi wheat market

Importance of managing cultural diversity for international business***

Cultural diversity: there is no one best way of managing, marketing or doing business. * Global brands but not global people - motives differ *Cultures are different: not better or worse. Levels of understanding * Awareness (self and others), understanding and competency * Requires time and effort (e.g. language and training) The practical outcomes of cultural understanding and competency... * Cost savings *Access to quality staff *Marketing advantage * Different problem solving approaches * Effective management control *Risk management Cultural understanding assists in... * Cross cultural negotiations * Understanding psychic distance * Understanding and taking advantage of country of origin effect and product image *Ethical behaviour "Think global, act local?" * E.g Making an app in several languages to increase usability o Consistent universal message + localised content *Taking advantage of 'country of origin' Failing to see cultural differences... *Self-reference criterion ... The unconscious reference to one's own cultural values. *Ethnocentric behaviour ... Behaving in the belief in the superiority of one's own culture or ethnic group. * Stereotyping ... Having fixed ideas of what a particular type of person is like and seeing them as an example of a general type International businesses that are ill-informed about the practices of another culture are unlikely to succeed in that culture.

Country factors, manufacturing technological factors and product factors influencing production location

Decision: Where to locate production activities to best minimise costs and improve quality? -This relates to 'L' in Dunning's OLI paradigm (Week 7) o Dunning's Eclectic Theory: FDI decision is influenced by 'location advantage'... (i) Country Factors * Favourable economic, political and cultural conditions and relative factor costs * Natural and created endowments * Presence of appropriately skilled labour and supporting industries * Expected movements in exchange rate * Proximity to customers (ii) Manufacturing Technological Factors * Is there high/low fixed costs in setting up a production plant? o e.g. higher fixed costs in setting up production tends to result in the use of fewer production plants (expensive) * How high/low is the 'minimum efficient scale' (MES)? o e.g. higher MES means more production is needed to achieve economies of scale, this encourage concentrated manufacturing * Flexible manufacturing and mass customisation o flexible manufacturing (lean production) technology improves scheduling, manufacturing and quality control at all stages o e.g. when flexible manufacturing technologies are available, a firm can manufacture products customised to various national markets at a single optimal location (iii) Product Features * Product has high/low value-to-weight ratio? o This influences transportation and distribution costs o e.g. electronic components, pharmaceuticals, etc. (high value but don't weigh much... easily shipped around the world); bulk chemicals, paint products, construction bricks, etc. (low value but heavy... expensive to transport) * Does the product serve universal needs? o Products that serve universal needs (few natural differences in consumer taste and preference; low local responsiveness requirement) can be manufactured at a centralized, optimal location

Motives for government intervention in trade

Despite commitment to free trade in principle, most governments tend to intervene in international trade (through regulations and restrictions) to protect the interests of politically important groups and the well-being of local citizens. Common criticisms of government intervention: *Seen as a "beggar-thy-neighbour" policy (boosting national income at the expense of other countries) * Potentially leading to retaliation by trading partners and trade wars * Government captured by powerful groups with vested interest Political motives: * Protection of domestic jobs and industries o e.g. Australian tariffs on foreign cars (as high as 50% back in the 1980s) * National security (key industries, security encryption) o e.g. Huawei barred from NBN rollout (CEO an ex-army officer) * Retaliation against actions of other trading partners o e.g. US threatened China with imposition of 100% tariff on Chinese goods if China did not start enforcing intellectual property laws * Protection of consumer welfare and safety o e.g. EU's ban on hormone-treated beef o e.g. Australia's biosecurity (quarantine) regulations * Maintain cultural distinctiveness o e.g. broadcasting content - local TV channels may have foreign content restriction * Foreign relations policy o e.g. giving preferential treatment to a trading partner o e.g. 'punishment' (Australia's sanction on Russia during the 2014 Ukraine crisis) * Protecting social and environmental welfare o e.g. regulations to protect workers' human rights, work conditions, etc. o e.g. regulations to control carbon emissions and global warming * Government revenue o e.g. tariff (tax) = government revenue Economic motives: * Infant industry argument o High protective barriers used to support and encourage a growing manufacturing industry o Argument in favour: many developing economies have a potential comparative advantage in manufacturing, however new industries cannot compete with existing ones in developed countries e.g. post-war success of South Korea's shipbuilding industry o Criticisms: Protection fosters inefficiency and dependence; government "picking winners"; rent- seeking; opportunity cost of government funds; etc. e.g. failure of Indonesia's car industry and Brazil's computing industry Strategic trade policy o In industries where the world may profitably support only a few competitors, government intervention may allow local firms to gain first mover-advantages (or overcome first-mover advantages of foreign firms: Example: Airbus had less than 5% market share in mid-1970s, but grew to 45% by 2010 through subsidies from the governments of Great Britain, France, Germany and Spain Criticisms: * Governments are not always good at picking winners * May lead to dependency on governments if subsidised firms cannot compete in the global markets * Potential costs to taxpayers

Dunning's Eclectic Paradigm

Dunning's Eclectic Paradigm (a.k.a. O-L-I Paradigm) features multiple theories coming together Argues that FDI is preferred when three conditions exist: o Ownership advantages: firm owns a valuable asset to provide an international competitive advantage (e.g. technology, trademark, political connections, etc.) o Location advantages: specific to the location where the (O) advantages can be complemented, created, acquired or exploited o Internalisation advantages: high transaction costs, so firm chooses to internalise and control its (O) advantages

Cultural dimensions***

Hofstede's Cultural Dimensions: Geert Hofstede isolated some dimensions that he argued summarised different cultures: *Power distance: how a society deals with the fact that people are unequal in their physical and intellectual capabilities. *Individualism versus collectivism: the relationship between the individual and their fellows. * Uncertainty avoidance: the extent to which different cultures socialise their members into accepting ambiguous situations and tolerating ambiguity. * Masculinity versus femininity: the relationship between gender and work roles. * Short-term versus long-term orientation: how a society adheres to values about time, persistence, ordering by status, protection of face, respect for tradition and reciprocation of gifts. Horizontal vs. Vertical Individualism Researchers such as Harry Triandis suggested that individualistic societies can be subdivided: *Horizontal individualism: Horizontally individualistic countries include Australia and the Scandinavian countries such as Sweden and Denmark where the emphasis is on independence of action and equality with others. *Vertical individualism:Most wealthy Western countries such as the United States and United Kingdom tend to be vertically individualistic countries where independence of action and standing out from others is emphasised. Iceberg Model: *If the culture of a society was the iceberg, Hall reasoned, than there are some aspects visible, above the water, but there is a larger portion hidden beneath the surface. What does that mean? The external, or conscious, part of culture is what we can see and is the tip of the iceberg and includes behaviors and some beliefs. The internal, or subconscious, part of culture is below the surface of a society and includes some beliefs and the values and thought patterns that underlie behavior. Cultural Context: Low Context (e.g Germany, Scandinavia, Australia) * Communicate explicitly and more overtly via the content of the message. *Preferences: ...explicit communication, written agreements, cost-benefit criteria, porous insider- outsider boundaries, individualistic, "What's the agenda for the meeting?" High context (e.g. Japan, China, Arab countries) *Communicate as much by the context as the content - non-verbals, implicit rules. *Preferences: ...interpersonal relations, long-lasting relationships, verbal agreements, face-saving criteria, distinguishable insider-outsider demarcations, "Who will be at the meeting?" REFER TO TABLE in week 4

Globalisation Debate: Prosperity or Impoverishment? ***

Impact of trade liberalisation and FDI barrier removal on: * Jobs and incomes - Do jobs move from wealthy, advanced economies in search of lower wage rates? *On labour policies and the environment - Do manufacturing facilities move to developing countries with weaker labour laws and environmental protection? *On national sovereignty - WTO, UN, EU: supplanting national governments? (Brexit)

Foreign Direct Investment

Investment made by a foreign company in the economy of another country Combination of IJV and WOS

Product Life Cycle theory: Firm-based theories ***

LOOK AT DIAGRAM as products mature both the location of sales and the optimal production location will change affecting the flow and direction of trade

Logistics and supply chain activities***

Logistics encompasses the management of activities across a supply chain: *Sourcing (selecting best suppliers according to price, quality, service and delivery time) * Making (producing goods and services in a cost-efficient way) * Delivering (fulfilling customers' demands cost-effectively & reliably) * Returning (handling returns from customers and to suppliers in a way that minimises waste) *A supply chain encompasses all activities associated with the flow and transaction of goods from the raw material stage (extraction), through to the end user, as well as the associated information flows. * The supply chain...also referred to as the logistics network, "consists of suppliers, manufacturing centres, warehouses, distribution centres, and retail outlets, as well as raw materials, work-in-process inventory, and finished products that flow between the facilities."

PLACE (DISTRIBUTION) STRATEGY Managing the global marketing mix

Look at diagram Differences between countries: * Retail Concentration (concentrated or fragmented?) oConcentrated - a few retailers supply most of the market (e.g. Australia and USA) o Fragmented - many retailers but none has a major share of the market (e.g. Japan) *Channel Length (long or short?) oRefers to the number of intermediaries between the producer and the consumer: o Long - more intermediaries (typical in a fragmented system) o Short - less intermediaries *Channel Exclusivity: o Exclusive distribution channel is one that is difficult for outsiders to access (e.g. traditionally strong and long-term arrangements between manufacturers, wholesalers and retailers in Japan) Channel Quality o The expertise, competencies and skills of established retailers in a nation, and their ability to sell and support the products of international businesses o The quality of retailers is good in most developed countries, but is variable at best in emerging markets and less developed countries (business may need either to provide extensive support or its establish own channel)

Foreign exchange risk management strategies

Managing Transaction Risk * Hedging with financial instruments - forward and swaps *Leading (pay/collect early) and lagging (pay/collect late) strategies in relation to accounts payable and accounts receivable o Accelerate payments from weak currency to strong currency; delay collections from strong currency to weak currency o 'Leading' - collect or send payment earlier (foreign currency receivables should be collected earlier if that currency is expected to depreciate; payment of foreign currency payables should be sent earlier if that currency is expected to appreciate) o 'Lagging' - collect or send payment later (collection of foreign currency receivables should be delayed if that currency is expected to appreciate; payment of foreign currency payables should be delayed if that currency is expected to depreciate) * Currency diversification - a portfolio of currencies o Having receipts, payments, assets and liabilities denominated in many different currencies Managing Economic Risk * Hedging with financial instruments o As with transactions risk - to protect the net present value of the firm from changes in future operating cash flows, e.g., long term forward contracts, leads and lags with debt payments - accelerate or delay payments * Hedging through production choices (more strategic and long-term) o Outsource input production in the same currency as used in exports - i.e., offsetting accounts receivable against accounts payables in the same currency - benefit of outsourcing flexibility o Adjust production levels according to a location's XR risk and exposure - XR risk management benefit of multiple locations worldwide versus advantages of concentration of production o Relocation of production and/or sources of supply

Types of political risks and their potential impact on IB

Political risk is the likelihood that political forces and events will cause drastic changes in a country's business environment that adversely affect the profit and other goals of a business enterprise. 1) Operational risk: The risk that government policies, regulations and administrative procedures will directly constrain local business operations A host government may permit foreign investment conditional on certain requirements being met - e.g. employing a number of local employees, sourcing local resources and products, requirements to manufacture for certain export markets only, price controls, financing restrictions, etc. 2) Transfer risk: Arises from policies and actions that restrict the movement of funds, products and personnel across international borders E.g. restriction on repatriation of profits and outflow of capital, limits on number of expatriate employees, etc. 3) Ownership-control risk: The risk that government actions will require a counterproductive change to the preferred ownership or governance structure of a business E.g. at the extreme - expropriation of firm's assets, requirement to transfer ownership to local firm/government, etc. or, less extreme - requirement for some local ownership/management participation

Porter's Diamond

Porter identified four attributes that promote or impede the creation of competitive advantage. Four attributes of a nation shape the environment in which firms compete (these may promote or impede creation of competitive advantage: * Factor endowments: a nation's factors of production (may be natural or created) * Demand conditions: nature of home demand (eg. strong demand may drive growth, quality improvement and innovation) * Relating & supporting industries: presence (or absence) of supplier industries and related industries that are internationally competitive * Firm strategy, structure & rivalry: conditions governing how firms are created, organised and managed, plus extent of domestic rivalry LOOK AT DIAGRAM ON LAST PAGE

PRICING STRATEGY Managing the Marketing Mix

Price discrimination: * Exists whenever consumers in different countries are charged different prices for a same product (eg. lower prices in competitive markets, higher prices where firm has monopoly) * Assists in profits maximisation o May only work when markets can be kept separate and where competition level is low o A business can charge a higher price in a country where demand is inelastic (large price change results only in a small change in demand) Strategic pricing: * Predatory pricing (pricing below fair market value to drive weaker competitors out of market - dumping?) * Multipoint pricing (refers to the impact of a firm's pricing strategy on a competitor's response in another market) * Experience curve pricing (aggressive pricing to build sales volume rapidly to assist a firm in realising experience curve economies and cost advantage) Note: A firm's pricing strategy may be limited by regulatory restrictions (e.g. antidumping regulations, competition policy, etc.)

Free trade vs protectionism ***

Protectionism: *Emphasises the importance of government intervention in international trade and investment *Why? To protect national interest by restricting the inflow and influence of foreign goods and businesses Free Trade: *Emphasises the absence of barriers to the free flow of goods and services between countries *Why? Trade promotes efficiency, competition and creates economic growth and national wealth *Theoretically, free trade brings economic gains by cutting tariffs and other trade barriers (Adam Smith; David Ricardo; etc.) o Static benefits: IB and consumers can locate or source production in countries where products can be produced most efficiently o Dynamic benefits: Encourages investment, enhances cooperation, contributes to productivity improvements and higher GDP growth

Globalisation of production

Refers to the sourcing of goods and services from locations around the globe * Takes advantage of national differences in cost and quality of factors of production (e.g. labour, technology, land and capital) * Includes outsourcing and offshoring activities * Benefits for businesses? o Helps to lower overall cost structure o Improves quality and functionality of products o Can compete more effectively and efficiently *With a shift towards globalisation of production, firms increasingly source goods and services from various locations to take advantage of national differences in cost and quality of various factors of production

Reverse logistics***

Reverse logistics has always existed and been a challenge for business o e.g. dealing with overstock from retailers, warranty returns, repairs and mistaken orders o Traditionally relates to only a small proportion of items sold o Research shows that managing reverse logistics is often 4 to 5 times more expensive than forward logistics due to tedious activities such as assessing, repairing and disposing items. * The European Waste Electrical and Electronic Equipment (WEEE) Directive came into effect in 2005 (revised in 2011) o Manufacturers of electrical and electronic equipment sold in Europe are be responsible for the end- of-life disposal of their products - these products cannot simply be dumped as landfill o An added complexity - digital cameras, mobile phones, computers and computer accessories have a short life cycle * Reverse logistics and recycling activities are usually outsourced to 3rd-party logistics services providers

Hedging

Spot exchange rates: * Continually fluctuating * Can be a problem if there is a time lag in payment or receipt Forward exchange rates: * Two parties agree today to exchange currencies at a particular rate, on a specified future date * Can be used for hedging (insuring) against currency movement Forex swaps (using forward exchange): * An agreement to exchange currencies on a future date coupled with a reversal of the exchange at a later date at agreed rates

Joint Venture***

The establishment of a firm that is jointly owned by two or more independent firms * One (or more) firms is (are) non-resident in the host market *Ownership % may vary from majority foreign owned, to 50%-50% owned, to minority owned by the foreign firm REASONS FOR IJV • Quicker market access • Government regulatory requirements • Risk/cost sharing • Access partner's knowledge and resources *Gives access to local partner's knowledge * Allows sharing of development costs and risks *May be more politically acceptable than 100% foreign ownership *Allows foreign parent do deploy resources across more national markets at once POTENTIAL PROBLEMS • Limited or restricted control • Disagreements and relationship difficulties • Loss of flexibility and confidentiality •Loss of control over technology and managerial know-how • May impede global coordination •May make realization of location and experience economies more difficult • Sharing of profit "pie"

Definition and elements of culture***

The sum total of accumulated learned values, attitudes, norms and beliefs that comprise the collective or shared meanings of a community in its material and non-material ways of life. Culture is portrayed in artefacts, institutions and behaviours - reflect and impact on norms and values... 1. Material culture * ...technology, material goods, logistics, urbanisation. *Economic (material) and technology: why, what and how material things are made - products acceptable in one country are not acceptable in another because of different levels of development. 2. Social structure *...institutions, strata, mobility, kinship, family, group. * Stratification based on wealth, education, birth and social mobility - the role and status of the individual in society and how they relate to others e.g. the positions of men and women in society; class systems; caste systems; strength of family ties e.g. extended family. 3. Attitudes * ...promptness, value of work, education, prestige. 4. Religion * ...beliefs, superstitions, morality. * Very sensitive element - belief systems, value systems, superstitions and power structures - Feng shui; walking under a ladder 5. Aesthetics * ...beauty, taste, colour. * Arts, music, dance, meanings of symbols and colours; symbolic meanings and packaging. e.g. swastika 6. Language * ...verbal, non-verbal, space. Numbers. * Verbal and non-verbal Time and space - effective communication - dictionary v. idiomatic meanings - offensive and ridiculous translation * Importance of language capabilities: gathering and evaluating information; more ready acceptance by foreigners; ease of management control; shades of meaning and blunders.

Sourcing and acquisition of resources: vertical integration (make) vs. outsourcing (buy)

Vertical Integration (make): *The firm controls a number of the stages along the production chain (e.g. manufacturing its own parts and components) "Make" advantages... * Lower in-house costs due to expertise and experience * Avoiding the need to rely on suppliers for specialised assets which may leave the firm vulnerable * Know-how protection * Greater control over important activities in the production chain Outsourcing (Buy) *Purchasing from another firm tasks related to production and service activities * "Buy" advantages... * Strategic flexibility (ease of switching orders between suppliers) * Lower costs (large MNCs may have the additional advantage in being able to negotiate lower prices for placing a larger order) * More supplier options to choose from (and possibility of accessing new technologies through innovative parts producers) * Outsourcing to foreign suppliers may help capture orders from suppliers' country

Innovation-Related Models: Firm-based theories **

View DIAGRAM I-Models research encompasses a number of studies... * I-Models view exporting as an 'innovation' for the firm o The internationalisation process is a series of innovations for the firm o The focus of these models is primarily on the export development process of small- to medium-sized enterprises (SMEs)

Countertrade***

What happens if a country's inflation is out of control, or its currency is not convertible? Countertrade: the trade of goods and services for other goods and services Barter is one form... other methods include: * buyback (e.g. a business builds a plant for a client and takes a percentage of the plant's output as payment) * counterpurchase (e.g. a business purchases goods back from a company it has sold to) * offset (e.g. a business agrees to purchase goods or services in the future from the country to which a sale was made)