This Review Sheet Is Intended to *Supplement* Your Reading of the Hill Text and to Guide
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THIS REVIEW SHEET IS INTENDED TO *SUPPLEMENT* YOUR READING OF THE HILL TEXT AND TO GUIDE YOU THROUGH THE READING. IT IS NOT INTENDED TO REPLACE YOUR READING OF THE TEXT, AND QUESTIONS ON THE EXAM MAY COME FROM PARTS OF THE TEXTBOOK THAT THIS REVIEW SHEET DOES NOT COVER. PLEASE ALSO ALLOW FOR POSSIBLE MISTAKES IN THIS REVIEW SHEET. I WELCOME ANY SUGGESTIONS FOR CLARIFICATIONS.
Chapter 15: Exporting, Importing, and Countertrade
I. What is the chapter about?
The previous chapter (chapter 14) presented exporting as just one of a range of strategic options for profiting from international markets. This chapter looks more at the nuts and bolts of how to export.
II. What are the advantages and “pitfalls” of exporting
a. Advantages
i. Access to a much larger market; economies of scale
b. Disadvantages/ and reasons why firms are not proactive in exporting:
i. Ignorance about the opportunities; intimidation with regard to the complexities and mechanics of exporting
ii. Poor market analysis; poor understanding of competitive conditions in the foreign market, a 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
III. Where can a company interested in exporting obtain information?
a. Federal level
i. U.S. Department of Commerce; Small Business Administration
b. State level/municipal level
i. Many states/cities have active trade commission
c. Private organizations
d. Export management companies
IV. After deciding to export, what are some strategies a company may follow? a. Use EMCs (export management companies)
b. Initially, focus on one market or a handful of markets. Why?
c. Enter the market on a small scale to reduce the costs of any subsequent failures
d. Recognize the time and managerial commitment involved in building export sales and should hire additional personnel to oversee this activity
e. Devote a lot of attention to building strong and enduring relationships with local distributors and/or customers.
f. Hire local personnel
g. Be proactive about seeking export opportunities
h. Retain the option of local production
V. So, you decide to export. What are some financing options available to your firm?
a. Basically, if you are a small U.S firm selling to a small firm in Estonia, you have a conflict of interest.
b. The U.S. firm does not know if the Estonian firm will pay.
c. The Estonian firm does not know if the U.S. firm will provide the goods as promised.
d. So: The US firm would like to get paid first; but the Estonian firm would like to receive and inspect the good firm.
e. So understand that the Letter of Credit/Draft/Bill of Lading are a trio of documents to solve this conflict of interest. Know what they are!!
f. In a nutshell, using these three documents, the firms transfer the risk of nonpayment/non-performance of the contract to two intermediary banks.
g. This is grossly simplified: But this is how the trio of documents help resolve the conflict of interest between seller and buyer:
i. First, the importer (buyer) asks for a letter of credit from a bank that it is familiar with
ii. Then, the buyer’s bank sends this letter of credit to the seller’s bank.
iii. The seller’s bank tells that the buyer has a letter of credit.
iv. The US exporter then ships the good and gets a bill of lading from the common carrier. v. The US exporter (seller) then presents this bill of lading and a draft to its bank.
vi. The US exporter’s bank then pays the seller upon presentation of the bill of lading and the draft.
vii. The importer (buyer) hasn’t paid a dime yet. It receives the good, inspects it, and agrees to pay its bank.
viii. Finally, the buyer’s bank pays the seller’s bank.
ix. Note that in the transaction above, the buyer gets to inspect the goods first before paying, and the seller gets paid right after shipping. The risk of nonpayment/nonperformance of the contract is transferred to the banks!
VI. What kind of export assistance can an exporter receive?
a. Export-Import Bank (Eximbank)
i. It is part of the U.S. government, and provides financing that will facilitate exports and the exchange of commodities between the US and other countries.
b. Export credit insurance
i. Sometimes, an exporter who insists on a letter of credit may lose an order to one who does not require a letter of credit.
ii. The lack of letter of credit exposes the exporter to the risk that the foreign importer will not pay.
iii. The FICA (Foreign Credit Insurance Association) provides commercial institutions insurance against commercial and political risks.
VII. Countertrade:
a. Know what it is; this is not the most important section of chapter 15. No questions covered this part in the spring, but you can never be too cautious, so do read this part.
Chapter 16: Global Production, Outsourcing, and Logistics
I. What is this chapter about?
This chapter focuses on two of major activities—production and materials management and attempts to clarify how when they are performed internationally, to lower the costs of value creation and add value by better serving customer needs. The choice of an optimal manufacturing location must consider country factors, technological factors, and product factors. II. What are some of the factors a firm that engages in global production must consider? (Where should you locate your foreign production facilities?) (Should you centralize or disperse your foreign production facilities?)
a. Country factors
i. Differences in relative factor costs (look at country specific factors discussed previously)
ii. Political economy
iii. Culture
iv. Location externalities
v. Movement in exchange rates
b. Technological factors
i. Is this a technology that incurs a high fixed cost when setting it up?
1. If so, may be more efficient to concentrate production in one or few places
2. accommodate demands for local responsiveness
ii. Is there a minimum efficient scale of output necessary to star production?
1. If so, may be more efficient to concentrate production in one or very few places
2. If not … you can produce in several locations
iii. Does the exporter have flexible manufacturing technologies?
1. If so, a firm can manufacture products customized to various national markets at a single factory sited at the optimal location
c. Product factors
i. Does the product have a high value to weight ratio?
1. If so, you can, if you want to, locate production at one/few sites and ship the product across the globe
ii. Does the product serve a universal need?
1. If so, you can produce at one/or very few optimal sites d. In summary: Where to locate production facilities?
i. Look at p. 565. The text lists factors that would lead a company to “concentrate” production, and factors that would make it more favorable for a company to “decentralize” production
e. Strategic role of foreign factories
i. Know that the trend is moving away from just considering foreign production sites as “low-cost” factories. The new model looks at foreign production sites as globally dispersed centers of excellence.
III. Once you have decided where to locate your production facilities abroad, and decided whether you should centralize or decentralize your production facilities, should you actually produce yourself in a foreign country, or should you just buy from another company already making the product? In other words, this is a make-or-buy question.
a. What are some of the advantages of “making” (i.e., producing your own goods)
i. Lowering costs; facilitating specialized investments; protecting proprietary product technology; improving scheduling
b. What are the advantages of “buying”?
i. Strategic flexibility (see the Dell case); lower costs; offsets
c. Note that “buying” will lead to lower costs if you are NOT the most efficient producer of that product; whereas “making” will lower your cost if you ARE the most efficient producer of that product
d. Note that “making” or “buying” both have pros and cons, and involves a trade-off.
IV. Now that you have global production facilities, how do you manage your global supply chain?
a. JIT – know the advantages and disadvantages of a just-in-time delivery system
b. Know how information technology and the internet affected global supply chain management.
Chapter 17: Global Marketing and R&D I. What is this chapter about? The focus of this chapter is on how marketing and R&D can be performed so they will reduce the costs of value creation and add value by better serving customer needs.
II. There has been a trend towards the standardization of markets and brands across national boundaries
a. One has only point to McDonald’s on the Champs Elysees and in the Ginza district in Tokyo to support this claim
b. But cultural differences remain: McArabia at McDonald’s in the Middle East, Teriyaki burgers in Asia; and Spam and Eggs in Hawaii
c. In short, while there is a growing “global” marketplace, globally standardized markets seem a long way off in many industries
III. If we do not have a globally, standardized market, we have the phenomenon called “market segmentation”
a. Market segmentation refers to identifying distinct groups of consumers whose purchasing behavior differs from others in different ways
b. As a manager in an international business, you need to consider two main issues with regard to market segmentation: the differences between countries in the structure of market segments (see the management focus on p. 587: African-Brazilian markets have different market segments than those in the United States) and the existence of segments that transcend national borders (for example, evidence suggests that there is a global youth culture in the sense that the youth in as many as 26 different countries have similar cultural attitudes and purchasing behavior).
c. What does this mean for the manager?
IV. An important factor when you consider different market segments is the “product attributes” of the product you wish to market
a. A product can be viewed as a bundle of attributes: a car can be considered, for example, a bundle that includes power, design, quality, performance, fuel consumption, and comfort.
b. Consumers may have different requirements in terms of these product attributes in different “market segments”
V. So, we need to consider how the following factors affect the different needs and requirements of different market segments with regard to the product attributes
a. Cultural differences i. For example, Firto-Lay does not have a cheese taste in China. The Chinese generally do not like the taste of cheese because it has never been part of the traditional cuisine.
b. Economic differences
i. There is less need for luxury items in poorer countries, for example
c. Product and technical standards
i. Different countries may have different technical standards. TV signals are broadcast in NTSC in the U.S., or PAL/SECAM in Europe. (So a TV made for the US market cannot receive signal in Europe!)
VI. After considering the different product attributes necessary for different market segments, we next look at how a firm will distribute its products abroad
a. How is your firm’s distribution strategy depending on the following factors? There are differences between countries based on:
i. Retail concentration
1. In a concentrated market, few retailers supply most of the market
2. In a fragmented market, there are many retailers
ii. Channel length
1. Channel length refers to the number of intermediaries between the producer and the consumer. The more intermediaries, the “longer” the channel.
iii. Channel exclusivity
1. An exclusive channel is one that is difficult for outsiders to access.
iv. Channel quality
1. Channel quality refers to the expertise, competencies and skills of established retailers, and their ability to sell and support the products of international businesses.
b. So how do you choose a distribution strategy?
i. Should the firm sell directly to the consumer or should it go through retailers?
ii. This depends on the relative costs and benefits of each alternative. iii. The cost depends on the four factors listed above
iv. For example, the longer the channel length, the higher the final price of the good (b/c of the all the added markups). If price is an important issue, all things equal, a shorter channel length is desirable.
v. But the benefits of using a longer channel may outweigh the cost. Longer channels, for example, may be cheaper when you have a fragmented retail market.
VII. Besides choosing your market segment, considering your product attributes, and deciding upon your distribution strategy, you also have to consider what kind of “message” (i.e., communication strategy) you want to put out for your product
a. There are important barriers to international communication, based on the factors below:
i. Cultural barriers
1. Jessica Simpson may be a good spokesperson for a pizza in the U.S. and some Western European countries, but may offend consumers in some Asian countries
ii. Source and country of origin effects
1. “Made in Japan” may have a different impact on consumer perception than “Made in China”, for example
iii. Noise level
1. this refers to how many competing messages there are to vie for the consumers’ attention. In a country like the U.S., noise is extremely high.
b. In terms of communication strategy, there are two primary strategies:
i. Push strategy
1. This strategy emphasizes personal selling rather than mass media advertising.
ii. Pull strategy
1. This strategy emphasizes mass media advertising
iii. Which to use, push or pull?
1. This depends on the following factors: a. Product type and consumer sophistication
i. Pull if favored if you are trying to reach a large segment of the population
ii. Push is favored when you are selling industrial or other complex products (you need to spend more time explaining the product, etc)
b. Channel length
i. Using a push strategy through a long channel can be very expensive
ii. But sometimes, push may still be necessary with long channel lengths because the pull strategy is not efficient when the population has low literacy levels (and therefore mass media advertising is not possible).
c. Mass Media Available
i. This is self-evident. If you don’t have mass media, it is hard to use the pull strategy
d. In sum:
i. Push strategies are good when:
1. you have industrial or complex products
2. the market has short distribution channels
3. Mass media is less available
ii. Pull strategies are good when:
1. You have consumer goods
2. the market has long distribution channels
3. Mass media is available
c. There are pros and cons to standardizing advertising across national boundaries. Please refer to p. 598 -600
VIII. A firm also has to consider its pricing strategy. These are some pricing strategies that a firm may pursue: a. Price discrimination
i. This means you charge the consumer whatever the market will bear.
ii. Two conditions are necessary for price discrimination:
1. You must be able to segment the market (keep markets separate)
2. Consumers must have different price elasticities (i.e., consumers in different segments are willing to pay different prices for the same product)
b. Strategic pricing
i. Predatory pricing
1. This means you sell your products cheaper than your competitors, make them leave the market, and then raise prices
ii. Multipoint pricing
1. This occurs when a firm’s pricing strategy in one market may have an impact on its rivals’ pricing strategy in another market
iii. Experience curve pricing
1. This occurs when a firm sells it products cheaper than their cost hoping to build up volume and then take advantage of the fact that in the future, economies of scale or experience curve learning will lower the cost of the product
c. Regulatory influences on prices
i. Please note that countries may have laws (antitrust law, antidumping regulations) that limit what kind of prices you can charge for your product
IX. R&D:
a. This appeared to be less important in the spring term, but please do read the remainder of the chapter
Chapter 18: Global Human Resource Management
I. What is this chapter about? a. Human resource management (HRM) is a key to a firm’s success. HRM refers to those activities undertaken by an organization to effectively apply its human resources. These activities include human resource strategy, staffing, performance evaluation, management development, compensation and labor relations
II. International HRM is important: Research suggests that a strong fit between human resources practices and strategy is required for high profitability. Note that the strategy (localization, global standardization, transnational or international) that the firm is pursuing may have an impact on the STAFFING policy that the firm should undertake. These are the three main staffing policies:
a. Ethnocentric approach
i. All key management positions filled by parent-company nationals.
b. Poliycentric approach
i. Host-country management positions filled by host country nationals, but parent company management positions are filled by parent company nationals
c. Geocentric approach
i. The best people for key jobs regardless of their country of origin.
d. What are the advantages and disadvantages of the staffing approaches above? See table 18.1 on page 623.
III. The ethnocentric and geocentric approaches make extensive use of “expatriate managers” (citizens of a different country than the country in which they are working)
a. Evidence shows there are rather high “expatriate failure rates”.
b. Expatriate selection is one way a firm can lower expatriate failure rates.
IV. In addition, you should provide training for expatriate managers in the form of:
a. Cultural training
b. Language training
c. Practical training
V. Realize that an expatriate manager returning to his/her home country may experience “reverse cultural shock” and the company should take this into consideration
VI. When using a “management development program” to increase the overall skill levels of management through a mix of ongoing management education and rotations of managers through a number of jobs, you need a way to “assess” how the managers are doing. However, there are problems with performance appraisals:
a. Host-nation managers may be biased by their own cultural frame of reference when evaluating expatriate managers.
b. Home country managers may be biased by distance and by their own lack of experience working abroad
c. So there are guidelines for performance appraisal
i. More weight given to onsite manager’s appraisal (esp. valid if the onsite manager is of the same nationality as the manager being evaluated)
ii. Former expatriates who served in the same location can help with the appraisals.
VII. When you hire expatriates, how do you pay them? This problem is acute when you use the geocentric approach. (There are complications regarding compensation with the ethnocentric approach, too) (For the polycentric approach, since you only hire locals at foreign subsidiaries, it is possible pay them the prevailing local rate).
a. Should you pay them what they would earn at home?
i. But this could be expensive if you are a US company and need to pay your US nationals much higher salaries than, say, Cambodian nationals in your Cambodian subsidiary.
b. Should you pay them the prevailing prices on the local market?
i. But this could be a problem because then you would have a very hard time attracting talented US or European nationals to work in Cambodia, if you pay them the Cambodian rate.
c. What are some ways expatriates are paid? What are some of the adjustments?
i. Base salary; foreign service premium; allowances; taxation adjustments; benefits
Chapter 20: Financial Management in the International Business
I. What is this chapter about? a. This chapter deals with financial management in international business. It illustrates and explains how investment decisions, financing decisions, and money management decisions are complicated by different currencies, different tax regimes, different levels of political and economic risk, and so on. Financial managers must account for all of these factors when deciding which activities to finance, how best to finance those activities, how best to manage the firm’s financial resources, and how best to protect the firm from political and economic risks, including foreign exchange risk
II. When a firm decides to INVEST in activities in a given country, it must consider several variables:
a. Capital budgeting
i. Capital budgeting quantifies the benefits, costs, and risks of an investment
ii. There are many complex issues involved in capital budgeting, such as:
1. a distinction needs to be made between cash flows to the project and cash flows to the parent company.
a. A project may not be able to remit all its cash flows to the parent company for several reasons: host country may block repatriation of the cash flows; project cash flows may be taxed at an unfavorable rate; or the host government may require a certain percentage of the cash flows generated from the project be reinvested in the host nation.
b. However, do note that there is a worldwide move toward greater acceptance of free market economics
2. political and economic risks (including foreign exchange risks) can significantly change the value of a foreign investment
a. Political forces may cause drastic changes in a country’s business environment that hurt the profit/other goals of a business enterprise
b. Economic mismanagement (in a foreign country) may hurt the profit and other goals of a business. Traditionally, the biggest economic mismanagement has been inflation (governments expand the money supply too much in a misguided effort to stimulate the economy)
3. the connection between cash flows to the parent and the source of financing (where do you get the money from) must be recognized III. Once a firm decides to invest in a particular activity in a particular country (or region), the next question is to ask: “where do we get the money to do the investment?” Here we discuss the financing decisions of a company
a. How does the global capital market affect a company’s financing decisions?
i. Know the difference between an equity loan (which is an ownership in the business: Stocks are the primary form of equity) and a debt loan (debts are repaid at a predetermined portion of the loan amount, and do not represent ownership in the business).
ii. The existence of a global capital market can be advantageous to a business:
1. It lowers the cost of capital because there are more willing players in the market to provide equity or loan
2. Know the trend in the growth of the global capital market
b. Where can a company get it financing?
i. Although it may be cheaper to finance your operations in the global capital market (e.g., a US firm making an investment in Denmark may finance the investment by borrowing through the London-based Eurobond market), realize that some host countries restrict this option.
ii. Sometimes you must also consider that the local currency may fluctuate wildly against the currency you borrowed in the global capital market
IV. What is the objective when you have a global chain of business, and you must manage your global cash/money accounts? The efficiency objective. How do you minimize cash balances and reduce transaction costs?
a. Minimizing cash balances
i. You need to hold cash balances to deal with short-term needs such as accounts and notes payable during that period and unexpected demands on cash.
ii. But you should minimize the cash you have on hand so as not to “waste” money just letting it sit there.
b. Reducing transaction costs
i. You want to minimize the need to pay a fee every time you need to convert from one currency to another
V. You also want to minimize the tax implications of transferring money from one subsidiary to another or to the parent, or vice versa a. Here are several ways to reduce your tax liability when transferring money:
i. Take advantage of a tax credit
ii. Take advantage of a tax treaty
iii. Use the deferral principle
iv. Or use tax havens
VI. What are some ways you can transfer money between subsidiaries or to the parent company, or vice versa, while attaining efficiencies and reducing taxes? Firms can use one or more (bundling, if more than one) of the following techniques. Each method of transferal has its pros and cons.
a. Dividend remittances
i. This is when a subsidiary remits a dividend (a portion of the profits the subsidiary earned) to the parent company
ii. You need to consider factors such as tax regulations, foreign exchange risk, age of subsidiary, and extent of local equity participation.
b. Royalty payments and fees
i. A parent company can also receive payments from the subsidiary in the form of remuneration for the subsidiary’s use of the parent’s technology, patents, and trade names.
ii. Royalty and fees have advantages over dividends, particularly when the corporate rate is higher in the host country than in the parent’s home country
iii. See Hill for additional factors
c. Transfer prices
i. One way to transfer money from a subsidiary to a parent is to set the transfer price of the goods and services that are transferred between entities.
ii. See p. 681 to see the benefits and problems with manipulating these transfer prices.
d. Fronting loans
i. You can also move money between subsidiary and parent by considering the cash flow a “loan”. See p. 682 for some benefits and costs of doing so. VII. Here are two money management techniques that firms can use to manage their global cash resources efficiently:
a. Centralized deposits
i. Instead of having a separate cash deposits in all the markets you are active in, you can centralize the cash deposit in one location. The “pooled’ resources mean you need to keep a smaller cash balance because the sum of the variances of each individual market cash deposit is LARGER than the variance of the pooled cash account. (Those who have taken statistics know that a large sample generally has smaller variances than the sum of the variances of the individual subsamples from that large sample)
b. Multilateral netting
i. This just means that you consolidate the number of transactions when you have multiple subsidiaries that “owe” each other money
ii. If you four subsidiaries that each other each other a sum of money, by not netting, you have 12 transactions to make
iii. By netting, you can, for example, reduce the number of transactions to 3. See p. 686 of the Hill text. Fewer transactions mean less transaction costs!