Introduction to International

Business

Final ReviewApril 27, 2007

Sanny Liao/Brian Chen

Exam Format Exactly the same as the midterm Non-cumulative. Covers chapters 12, 14,

15, 16, 17, 18, and 20 Exam Format

Part A: 22 Multiple choice questions Part B: Answer 2 of 3 questions from Hill text Part C: Answer 1 of 2 questions from articles Part D: Answer 1 of 2 questions from the

cases

Chapter 12 The Strategy of International Business --Overview

Focus shift from the environment actions managers can

take to compete more effectively as an international business

This chapter looks at how firms can increase their profitability by expanding their operations in foreign markets the different strategies that firms pursue when

competing internationally and the various factors that affect a firm’s

choice of strategy.

Chapter 12 Review Strategy and the Firm

Strategy – set of action managers can take to attain the goal of the firm – in most case, it is to maximize profitability

Value Creation – a way to increase profitability

Strategic position - firms should be explicit about it choice between value creation, and configure its internal operation to support their choice.

Operations: The Firm as a Value Chain Global Expansion, Profitability and Profit Growth

Expanding the Market: Leveraging Products and Core Competencies Location Economies

– performing a value creation activity in the optimal location for that activity Experience Effects

– systematic reduction of costs over the life of a product through learning effects and economies of scale *2 main types of competitive pressure - cost pressures and pressures for local

responsiveness *Choosing a Strategy

Global Standardization Strategy High cost pressures, low customization pressures

Localization Strategy Low cost pressures, high customization pressures

Transnational Strategy High cost pressures, high customization pressures

International Strategy Low cost pressures, low customization pressures

Chapter 14 – Entry Strategy and Strategic Alliances Key concept: first mover advantage, first

mover disadvantage, core competencies Firms must consider 3 basic decision when

it wants to expand into foreign markets Which foreign market? When to enter (1st mover advantages and

disadvantages) Scale of entry and subsequent strategic

commitment

Chapter 14 – Modes of Entry 5 modes of entry (know the benefits and costs, p494)

Exporting Turnkey projects Licensing Franchising Joint ventures

When should a firm choose greenfield or acquisition ventures? Strategic Alliances

Cooperative agreements between potential or actual competitors

Advantages: Facilitate entry into market Share fixed costs Bring together skills and assets that neither company has or can develop Establish industry technology standards

Disadvantages: Competitors get low cost route to technology and markets

Chapter 15 Exporting, Importing and Countertrade - Overview

This chapter discusses how exporting is carried out

Exporting is not just for large enterprises. This chapter covers the problems that small and large exporting firms face and how they address these problems.

Chapter 15 Review Exporting can be very profitable, but firms are often slow to

recognize these opportunities, are ignorant about the market that they are going into, and the procedures to export, etc.

Solution: Improving Export Performance

Information Sources (DOC: ITA/ USFCSA, SBA, state/city agencies, commercial banks)

Export Management Companies (EMC) Choosing exporting strategies carefullly

Export and Import Financing Lack of Trust/ Letter of Credit Draft/ Bill of Lading Know the Typical International Trade Transaction

Export Assistance Export–Import Bank/ Export Credit Insurance

Chapter 16 – Global Production, Outsourcing, and Logistics Overview: this chapter discusses factors

that firms should consider in determining the optimal way to manage production internationally

4 Main topics: Where should production be located at? The evolving strategic role of foreign factories Benefits and costs of outsourcing How to manage a global supply chain

efficiently?

Chapter 16 – Review Factors that firms should consider in determining where to locate

production Country factors (economic, political, and cultural differences, trade

barriers, location externalities, exchange rates) Technological factors (high/low fixed costs, minimum efficient scale,

feasibility of flexible manufacturing and mass customization) Product factors (value to weight ratio, universality)

Evolving role of foreign factories Upward migration from provider of cheap labor to research centers,

economic development of developing countries Outsourcing dilemma – essentially a make-or-buy decision

Also evolved over time When to make? When to buy?

Things to recognize when managing a global supply chain We like “just-in-time” systems because it reduces inventory holding

costs and has the potential to help firms improve product quality BUT “JIT” leaves firms with no buffer stock of inventory Information technology can aid the functioning of “JIT”

Chapter 17 Global Marketing and R&D – Overview Focus:

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.

Standardization or not? By mass-producing a standardized output, the firm can

realize substantial unit cost reductions from experience curve and other scale economies.

But ignoring country differences in consumer tastes and preferences can lead to failure.

Thus, an international business’s marketing function needs to determine when product standardization is appropriate and when it is not, and to adjust the marketing strategy accordingly.

Chapter 17 Review The Globalization of Markets and Brands

But differences persist… Market Segmentation

Groups of consumers who purchasing behavior differs from others Product Attributes

Cultural Differences Fish cakes in Great Britain, Coq au vin in France

Economic Development Top of the line four-wheel-drive SUVs in the US only

Product and Technical Standards TV signals – NTSC in US and some Asian countries, PAL/SECAM in Europe

Distribution Strategy Differences between Countries

Retail concentration; channel length; channel exclusivity; channel quality Choosing a Distribution Strategy

Depends on the factors above Communication Strategy

Barriers to International Communication Benetton Ads with varying success in different countries

Push versus Pull Strategies What are they? When is one preferable over the other?

Pricing Strategy Price Discrimination

What are the necessary conditions? Strategic Pricing / Regulatory Influences on Prices

What are the different pricing strategies? What influence does regulation have on prices?

Chapter 18 – Global Human Resource Management Overview: this chapter discusses how firms

can most effectively manage its human resource internationally

Firms must customize its HR strategies to fit its firm-wide international strategies

Chapter 18 – Review Firms should first decide on its international strategy:

Global Standardization Strategy Localization Strategy Transnational Strategy International Strategy

Firms should then decide its international human resource management strategy according to a benefit and cost analysis (p623, table 18.1)

Ethnocentric Polycentric Geocentric

There is a high attrition rate about expatriates, why in Japan, why in the U.S.?

Ways to mitigate the attrition of expatriates Selection & training

Why is performance appraisal in foreign locations tough? What are the components of expatriate pay?

Chapter 20 – Financial Management in the International Business Involves a set of 3 questions

Investment decisions – what activities to finance

Financing decisions – how to finance Money management decisions – how to

manage the firm’s financial resources most efficiently

Investment Decisions Evaluate the expected profitability of

investments to the parent company through capital budgeting Quantify the benefits, costs and risks of an

investment We care about cash flow to the parent company more

than the to the project itself Investment in Iraq

Adjust for political risks Investment in Argentina (has a history of currency

devaluation) Adjust for economic risks

Financing Decisions Firms who need money to invest can

obtain capital through 2 main ways Debt issue – cost is interest rate Equity issue – cost is dividend and expected

capital gain The cost of capital is lower if a firm can raise

money internationally (especially true for firms in developing countries, but is limited by government regulations and exchange rate uncertainties)

The debt/equity mix vary across countries

Global Money Management: The Efficiency Objective Def: Money Management decisions

Attempt to manage the firm’s global cash resources most efficiently through minimizing cash balances and reducing transaction costs.

Cash balances is necessary for firm operations but offer very little return. Transferring capital from one location to anther involves transaction costs

Def: Transaction Costs are costs of exchange, including commissions and transfer fees.

Firms can use centralized depositories and multilateral netting to more efficiently manage the global cash resources

Centralized depository – more efficient for firms to hold all their cash in one centralized depository than to hold them in many different locations

Multilateral netting – pay the net difference in cash flow among various locations, rather than making multiple payments

The Tax Objective Tax credit – allows an entity to reduce the

taxes paid to the home government by the amount of taxes paid to the foreign government

Tax treaty – an agreement between two countries where the income is earned

Deferral principle – parent companies are not taxed on foreign soruce income until they actually receive a divident

Managing the Differences in Tax Rates Across Countries International businesses can transfer funds from

one location to another via unbundling many techniques Dividend remittances Royalty payments and fees – remuneration paid to the

owners of technology, patents, or trade names for use – are often tax-deductible locally

Transfer prices – the price at which goods and services are transferred between entities within the firm (can be used to reduce tax liabilities, reduce exposure to currency devaluations, reduce import duties when an ad valorem tariff is in force)

Fronting loans – loan between a parent and it subsidiary channeled through a financial intermediary (again can be used to reduce tax liabilities)

Suggestion on how to study for material in the book Concentrate on the material covered in

these slide and mini-summaries after each section (not at the end of the chapter) provided in the book for a general idea

Articles to Focus On Wireless Wonder The Future of Fast Fashion With Profits Elusive, Wal-Mart to Exit

Germany Wal-Mart to Enter India in Venture Western Firms Find Hiring, Retention in

China Surprisingly Tough

Cases to Focus On Diebold Megahertz Communications Competitive Advantage at Dell, Inc. Molex

Good Luck!