MGT 302 Chapter exam 4

Explain the implications of the rise of international accounting standards

-International Accounting Standards Board (IASB). To issue a new standard, 75 percent of the 16 members of the board must agree. It can be difficult to get three-quarters agreement, particularly since members come from different cultures and legal systems. -Another hindrance to the development of international accounting standards is that compliance is voluntary; the IASB has no power to enforce its standards. -least noticeable in the United States because most of the standards issued by the IASB have been consistent with opinions already articulated by the U.S. Financial Accounting Standards Board (FASB). -EU has mandated harmonization of the accounting principles of its member countries.

national differences in accounting standards

-resulted in a general lack of comparability in countries' financial reports. -Due to the lack of comparability, a firm may have to explain to investors why its financial position looks very different on financial reports that are based on different accounting practices. -example British Airways. -an international business may find it difficult to assess the financial positions of important foreign customers, suppliers, and competitors.

how accounting systems affect control systems within the multinational enterprise.

-the annual budget is the main instrument by which headquarters controls foreign subsidiaries. Throughout the year, headquarters compares a subsidiary's performance against the financial goals incorporated in its budget, intervening selectively in its operations when shortfalls occur. -Most international businesses require all budgets and performance data within the firm to be expressed in the corporate currency. This enhances comparability, but it distorts the control process if the relevant exchange rates change between the time a foreign subsidiary's budget is set and the time its performance is evaluated. According to the Lessard-Lorange model, the best way to deal with this problem is to use a projected spot exchange rate to translate both budget figures and performance figures into the corporate currency.

Capital budgeting is in practice a very complex and imperfect process. Among the factors complicating the process for an international business are these:

1. A distinction must be made between cash flows to the project and cash flows to the parent company. 2. Political and economic risks, including foreign exchange risk, can significantly change the value of a foreign investment. 3. The connection between cash flows to the parent and the source of financing must be recognized.

The four main differences between distribution systems worldwide are:

1. Retail concentration 2. Channel length 3. Channel exclusivity, and 4. Channel quality.

Centers for International Business Education and Research (CIBERs)

17 centers that assist with exporting needs. The CIBER network links the human resource and technological needs of the U.S. business community with the international education, language training, and research capacities of universities across the country. It serves as regional and national resources to businesspeople, students, and teachers at all levels.

_______ percent of international trade involves transactions between the different national subsidiaries of transnational corporations.

40%; Different countries have different tax regimes. Many nations follow the worldwide principle that they have the right to tax income earned outside their boundaries by entities based in their country.

exporters account for only a tiny percentage of U.S. firms, less than _____ percent of firms with fewer than 500 employees, according to the Small Business Administration

5%

transfer fee

A bank charge for moving cash from one location to another.

internal forward rate

A company-generated forecast of future spot rates.

tax haven

A country with exceptionally low, or even no, income taxes.

Exclusive Distribution Channel:

A distribution channel that outsiders find difficult to access

Pull Strategy

A marketing strategy emphasizing mass media advertising as opposed to personal selling.

Push Strategy

A marketing strategy emphasizing personal selling rather than mass media advertising.

Price Elasticity of Demand

A measure of how responsive demand for a product is to changes in price.

Private Organizations and Multinationals

A number of private organizations such as Commercial banks and major accounting firms are also beginning to provide more assistance to would-be exporters. Large multinationals that have been successful in the global arena are typically willing to discuss opportunities overseas with the owners or managers of small firms.

Concentrated Retail System:

A retail system in which a few retailers supply most of the market.

Fragmented Retail System:

A retail system in which there are many retailers, no one of which has a major share of the market

Intermarket Segment

A segment of customers that spans multiple countries, transcending national borders.

Elastic

A small change in price produces a large change in demand.

Country of Origin Effects

A subset of source effects, or the extent to which the place of manufacturing influences product evaluations.

multilateral netting

A technique used to reduce the number of transactions between subsidiaries of the firm, thereby reducing the total transaction costs arising from foreign exchange dealings and transfer fees.

Experience Curve Pricing

Aggressive pricing designed to increase volume and help the firm realize experience curve economies.

tax treaty

Agreement between two countries specifying what items of income will be taxed by the authorities of the country where the income is earned.

tax credit

Allows a firm to reduce the taxes paid to the home government by the amount of taxes paid to the foreign government.

Discuss the different financing options available to the foreign subsidiary of a multinational enterprise

Borrowing from the global capital market may be restricted by host-government regulations or demands. In such cases, the discount rate used in capital budgeting must be revised upward to reflect this. The firm may want to consider local debt financing for investments in countries where the local currency is expected to depreciate

Discuss how operating in different nations impacts investment decisions within the multinational enterprise.

Capital budgeting is the technique financial managers use to try to quantify the benefits, costs, and risks of an investment. This enables top managers to compare, in a reasonably objective fashion, different investment alternatives within and across countries so they can make informed choices about where the firm should invest its scarce financial resources. -political and economical risks

Marketing Mix

Choices about product attributes, distribution strategy, communication strategy, and pricing strategy that a firm offers its targeted markets. Choices about product attributes, distribution strategy, communication strategy, and pricing strategy that a firm offers its targeted markets.

Source Effects

Effects that occur when the receiver of the message (i.e., a potential consumer) evaluates the message on the basis of status or image of the sender.

In _____ —one of the world's most successful exporting nations—trade associations, government agencies, and commercial banks gather information, helping small firms identify export opportunities.

Germany

Market Segmentation

Identifying groups of consumers whose purchasing behavior differs from other groups in important ways. Managers in an international business need to be aware of two main issues relating to segmentation: the extent to which there are differences between countries in the structure of market segments and the existence of segments that transcend national borders (i.e., intermarket segments)

sogo shosha

Japan's great trading houses. The sogo shosha have offices all over the world, and they proactively, continuously seek export opportunities for their affiliated companies large and small

Three key documents for financing international trade:

Letter of credit, draft, bill of landing

money management

Managing a firm's global cash resources efficiently.

For the firms who have already tried exporting:

Many of them run into significant problems when first trying to do business abroad, and this sours them on future exporting ventures

Trade Commissions

Nearly every U.S. state, country regions, and many large cities maintain active trade commissions whose purpose is to promote exports. Most of these provide business counseling, information gathering, technical assistance, and financing.

Multipoint Pricing

Occurs when a pricing strategy in one market may have an impact on a rival's pricing strategy in another market.

deferral principle

Parent companies are not taxed on the income of a foreign subsidiary until they actually receive a dividend from that subsidiary.

Common pitfalls that face first-time exporters:

Poor market analysis, Poor understanding of competitive conditions in the foreign market, Failure to customize the product offering to the needs of foreign customers, Lack of an effective distribution program, Poorly executed promotional campaign, Problems securing financing, Underestimation of the time and expertise needed to cultivate business in foreign countries, Underestimation of the amount of management resources that have to be dedicated to an exporting activity, Many foreign customers require face-to-face negotiations on their home turf which means that an exporter may have to spend months learning about a country's trade regulations, business practices, and more before a deal can be closed.

Predatory Pricing

Reducing prices below fair market value as a competitive weapon to drive weaker competitors out of the market ("fair" being cost plus some reasonable profit margin).

auditing standards

Rules for performing an audit.

accounting standards

Rules for preparing financial statements.

bilateral netting

Settlement in which the amount one subsidiary owes another can be canceled by the debt the second subsidiary owes the first.

transaction costs

The costs of exchange.

Channel Quality:

The expertise, competencies, and skills of established retailers in a nation, and their ability to sell and support the products of international businesses.

Channel Length:

The number of intermediaries that a product has to go through before it reaches the final consumer.

Noise

The number of other messages competing for a potential consumer's attention

International Market Research

The systematic collection, recording, analysis, and interpretation of data to provide knowledge that is useful for decision making in a global company.

Countertrade

The trade of goods and services for other goods and services. It denotes a range of barter-like agreements; its principle is to trade goods and services for other goods and services when they cannot be traded for money. An example of countertrade is: •Saudi Arabia agreed to buy ten 747 jets from Boeing with payment in crude oil, discounted at 10 percent below posted world oil prices.

the probability of exporting successfully can be increased dramatically by taking a handful of simple strategic steps

True

Inelastic

When a large change in price produces only a small change in demand.

The U.S. Department of Commerce

Within that department are two organizations dedicated to providing businesses with intelligence and assistance for attacking foreign markets: U.S. and Foreign Commercial Service and International Trade Administration (ITA) -This is the "Official Government Resource to Small and Medium-Sized Companies" in their exporting quest. The Department of Commerce also organizes trade events that help potential exporters make foreign contacts and explore export opportunities. It also has a matchmaker program, in which department representatives accompany groups of U.S. businesspeople abroad to meet with qualified agents, distributors, and customers.

tax credit

allows an entity to reduce the taxes paid to the home government by the amount of taxes paid to the foreign government

Transaction costs

are the cost of exchange. Every time a firm changes cash from one currency into another currency it must bear a transaction cost—the commission fee it pays to foreign exchange dealers for performing the transaction

Reasons why firms are not proactive in seeking exporting opportunities

are unfamiliar with foreign market opportunities, intimidated by the complexities and mechanics of exporting to countries where business practices, language, culture, legal systems, and currency are very different from the home market.

tax treaty

between two countries is an agreement specifying which items of income will be taxed by the authorities of the country where the income is earned. For example, a tax treaty between the United States and Germany may specify that a U.S. firm need not pay tax in Germany on any earnings from its German subsidiary that are remitted to the United States in the form of dividends

Reason 3:

by holding cash at a centralized depository, the firm may be able to invest its cash reserves more efficiently. It can reduce the total size of the cash pool that it needs to hold in highly liquid accounts, thereby freeing cash for investment in higher-interest-bearing (less liquid) accounts or in tangible assets.

Reason 1:

by pooling cash reserves centrally, the firm can deposit larger amounts. Cash balances are typically deposited in liquid accounts, such as overnight money market accounts. Because interest rates on such deposits normally increase with the size of the deposit, by pooling cash centrally, the firm should be able to earn a higher interest rate than it would if each subsidiary managed its own cash balances.

In general, firms prefer to hold cash balances at a ____________ depository for three reasons.

centralized

A critical element in the marketing mix is _____________ strategy, which defines the process the firm will use in communicating the attributes of its product to prospective customers.

communication

Barriers to international communication include..

cultural differences, source effects, and noise levels.

Understand the basic techniques for global money management.

dividend remittances, royalty payments and fees, transfer prices, and fronting loans. Dividend remittances are the most common method used for transferring funds across borders, but royalty payments and fees have certain tax advantages over dividend remittances.

Foreign Commercial Service (FCS) and International Trade Administration (ITA)

governmental agencies that provide the potential exporter with a "best prospects" list, which gives the names and addresses of potential distributors in foreign markets along with businesses they are in, the products they handle, and their contact person.

The Small Business Administration (SBA)

governmental association that can help potential exporters. Among the SBA's no-fee services are SBDC, SCORE, and ELAN. The Small Business Development Centers (SBDCs) around the country provide a full range of export assistance to business, particularly small companies new to exporting.

The ________ the discount rate, the higher the projected net cash flows must be for an investment to have a positive net present value.

higher

Political and economic risks can be incorporated into the capital budgeting process by using ...

higher discount rate to evaluate risky projects or by forecasting lower cash flows for such projects.

Why export?

increase the revenue and profit base of a company, achieve economies of scale, thereby lowering its unit costs, Firms that do not export often lose out on significant opportunities for growth and cost reduction

Draft (bill of exchange)

instrument normally used in international commerce to effect payment. A draft is simply an order written by an exporter instructing an importer, or an importer's agent, to pay a specified amount of money at a specified time. Drafts fall into two categories: •Sight draft is payable on presentation to the drawee. •Time draft allows for a delay in payment—normally 30, 60, 90, or 120 days.

Transfer prices can introduce significant distortions ...

into the control process and thus must be considered when setting budgets and evaluating a subsidiary's performance. International businesses often manipulate transfer prices to minimize their worldwide tax liability, minimize import duties, and avoid government restrictions on capital flows.

Fronting loans

involves channeling funds from a parent company to a foreign subsidiary through a third party, normally an international bank. Fronting loans can circumvent host-government restrictions on the remittance of funds and provide certain tax advantages

New-product development

is a high-risk, potentially high-return activity. To build a competency in new-product development, an international business must do two things: disperse R&D activities to those countries where new products are being pioneered, and integrate R&D with marketing and manufacturing.

2. Counterpurchase

is a reciprocal buying agreement. It occurs when a firm agrees to purchase a certain amount of materials back from a country to which a sale is made.

A distribution strategy decision..

is an attempt to define the optimal channel for delivering a product to the consumer. In the global supply chain, the marketing channel is a part of the downstream (also called outbound) portion of the supply chain

The bill of lading

is issued to the exporter by the common carrier transporting the merchandise. It serves three purposes: it is a receipt, a contract, and a document of title

3. Offset

is similar to a counterpurchase insofar as one party agrees to purchase goods and services with a specified percentage of the proceeds from the original sale. The difference is that this party can fulfill the obligation with any firm in the country to which the sale is being made.

1. Barter

is the direct exchange of goods and/or services between two parties without a cash transaction.

Given these drawbacks, countertrade is most attractive to....

large, diverse multinational enterprises that can use their worldwide network of contacts to dispose of goods acquired in countertrading. The masters of countertrade are Japan's giant trading firms, the sogo shosha, which use their vast networks of affiliated companies to profitably dispose of goods acquired through countertrade agreements.

The cost of capital is____________ in the global capital market than in domestic markets. Consequently, other things being equal, firms prefer to finance their investments by ___________ from the global capital market.

lower, borrowing

The manipulation of transfer prices may be used by firms to move funds out of a country to...

minimize tax liabilities, hedge against foreign exchange risk, circumvent government restrictions on capital flows, and reduce tariff payments

5. Buyback

occurs when a firm builds a plant in a country—or supplies technology, equipment, training, or other services to the country—and agrees to take a certain percentage of the plant's output as partial payment for the contract.

Export management companies (EMC)

offer services to companies that have not previously exported products. EMCs offer a full menu of services to handle all aspects of exporting, similar to having an internal exporting department within your own firm.

Lessard and Lorange

point out three exchange rates that can be used to translate foreign currencies into the corporate currency in setting budgets and in the subsequent tracking of performance:

4. Switch trading

refers to the use of a specialized third-party trading house in a countertrade arrangement. Switch trading occurs when a third-party trading house buys the firm's counterpurchase credits and sells them to another firm that can better use them.

deferral principle

specifies that parent companies are not taxed on foreign source income until they actually receive a dividend

Letter of credit

states that the bank will pay a specified sum of money to a beneficiary, normally the exporter, on presentation of particular, specified documents. The great advantage of this system is that both the French importer and the U.S. exporter are likely to trust reputable banks, even if they do not trust each other.

tax havens

such as the Bahamas and Bermuda to minimize their tax liability. Many U.S. multinationals maintain large tax balances in foreign tax havens because they do not want to pay U.S. corporate taxes when those earnings are repatriated to the U.S.

Reason 2:

the centralized depository is located in a major financial center (e.g., London, New York, or Tokyo), it should have access to information about good short-term investment opportunities that the typical foreign subsidiary would lack.

Strategic Pricing

the concept containing the three aspects: predatory pricing, multipoint pricing, and experience curve pricing.

The projected rate

the spot exchange rate forecast for the end of the budget period (i.e., the forward rate).

The ending rate

the spot exchange rate when the budget and performance are being compared.

The initial rate

the spot exchange rate when the budget is adopted.

Both Germany and Japan have long made their living as trading nations, whereas until recently the United States has been a relatively self-contained continental economy in which international trade played a minor role. This is changing; both imports and exports now play a greater role in the U.S. economy than they did 20 years ago.

true

The Japanese Ministry of International Trade and Industry (MITI) provides a similar function in Japan and is always on the lookout for export opportunities

true

Unlike their German and Japanese competitors, many U.S. firms are relatively blind when they seek export opportunities; they are information-disadvantaged.

true

Firms use a third party to palliate to the problem of lack of trust between the exporter and the importer (in this case the third party is the bank)

ture

The principal objectives of global money management

utilize the firm's cash resources in the most efficient manner and to minimize the firm's global tax liabilities.

Price discrimination exists

when consumers in different countries are charged different prices for the same product. Price discrimination can help a firm maximize its profits. For price discrimination to be effective, the national markets must be separate and their price elasticities of demand must differ.

Pros of Countertrade:

•Countertrade can give a firm a way to finance an export deal when other means are not available. •A countertrade agreement may be required by the government of a country to which a firm is exporting goods or services.

Drawbacks of Countertrade:

•Other things being equal, firms would normally prefer to be paid in hard currency. Countertrade contracts may involve the exchange of unusable or poor-quality goods that the firm cannot dispose of profitably. •Even if the goods it receives are of high quality, the firm still needs to dispose of them profitably. This can be expensive and time-consuming.