International business - T323WSB

Self-note

Chapter 1: Globalization
Business environments:
○ External environment
○ Internal environment

The external environment deals with issues and structures outside the company.
The internal environment deals with issues and structures inside the company.

Internal environment: Organizational structure, mission and goals, business philosophy, employees
External environment:
Micro: Suppliers of input, customers, competitors, marketing intermediaries, publics
Macro: Economic, political-legal, technological

Micro means small

Macro means big

Globalization: the shift towards an integrated and interdependent world economy.

Globalization increases GDP Growth for most countries involved in trade.

Globalization of markets: the merging of many distinct and seperate nation markets into one huge
global marketplace.
-> Customers’ tastes and preferences are beginning to converge on some global norm. However,
differences still exist among nations in some aspects such as tastes and preferences, cultural value,
distribution channels, business systems, legal regulations.

Markets for consumer goods still vary countries to countries.

Markets for industrial goods and materials serve universal needs -> Global marketplace

Globalization of production: sourcing goods and services from locations around the world to take
advantage in national differences in costs and factors of production (land, labor, energy, capital).
Purposes of globalization of prodcution:
○ Lower the cost structure
○ Improve the quality and functionality of product offering

Global institutions:
○ manage, regulate and police the global marketplace
○ promote the establishment of multinational treaties

World Bank: promotes economic development via low-interest loans for infrastructure projects

International Monetary Fund:

○ maintains order in the international monetary system
○ lender of last resort for countries in crisis

The UN
○ Maintains international peace and security
○ Develops friendly relations among nations
○ Cooperates in solving international problems and in promoting respect for human rights

G20 (Group of Twenty)

Is established to deal with the 2008-2009 global finance crisis.
What is driving globalization?
1. Declining barriers to the free flow of goods, services, and capital
2. Technological change
○ microprocessors and telecommunications -> make it easy to communicate and control
○ Internet: information backbone of the global economy -> more access to information
○ transportation technology -> reduce transportation costs

Lower barriers to trade and investment mean firms can:

○ view the world as their market
○ base production in the optimal location for that activity
However, globalization makes competitions more intense than ever before.

Technological change means

○ lower transportation costs
○ low cost information processing and communication
○ global communication networks and global media

Globalization brings risks -> financial crisis

Managing an international business differs from managing a domestic business because

○ countries are different
○ problems in the international business are more complex than those in the domestic business
○ firms have to deal with limitations imposed by government intervention in trade
○ international transactions involve converting money into different currencies

Chapter 2: National Differences in Political, Economic, and Legal Systems

Political system, legal system and economic system affect each other.
Political systems
Individualism -> Democratic
Collectivism -> Totalitarianism

Individualism: emphasizes individual freedom and rights rather than society. It values independence,
personal achievements.
Collectivism: emphasizes the mutual benefits and goals of the community over individual goals. It
values interdependence, social harmony, and social responsibility.

Democratic: a form of government in which the power is decentralized to citizens. Officials are
elected by votes from citizens.
Citizens control the government through elections.
Example:
Direct democracy: Switzerland
Representative democracy: UK, Germany, France, USA.

Totalitarianism: a form of government in which one person or one political party holds all the power
and controls everything. In other words, the power is centralized to one person or one party.
Citizens cannot influence the government and have no power.
Example: North Korea, Syria.

Economic systems
○ Market economy: Resources and goods/services are decided by supply and demand.
○ Command economy (Planned economy): Government decides resources and output of
production.
○ Mixed economy: Market economy + Command economy
○ Definition of mixed economy: Some sectors of economy belong to private ownership, and some
sectors of economy are controlled and planned by government. Normally, sectors that are
important to national sovereignty are state-ownership such as defence, energy.

Legal systems
Civil law: Detailed set of laws organized into codes
Common law: Emphasize on precedent (case law)
Theocratic Law: Laws based on religious teachings

Property rights: the rights to own and use the assets or resources.
Strong property rights: USA
Weak property rights: North Korea, Venezuela.

Property rights can be violated through

○ Private action: theft, piracy, blackmail
○ Public action (legally): excessive taxation or (illegally): bribes, blackmail.
-> High levels of corruption reduce FDI, level of international trade, economic growth rate.

Foreign Corrupt Practices Act makes it illegal for U.S. companies to bribe foreign government
officials.

Intellectual property: property that is the product of intellectual activity.

To protect intellectual property, firms can use
○ patents
○ copyrights
○ trademarks
To avoid being violated intellectual property, firms can
○ stay away from countries which lack intellectual property laws
○ bring the case to the court
○ lobby governments for international property rights enforcement

Chapter 3: Differences in economic development

Shadow economy: the part of econmy that is not recorded or measured by official statistics.
-> Avoid paying tax
Normally, the activities and transactions under shadow economy are illegal

GDP (Gross Domestic GNP (Gross National GNI (Gross National Income)
Product) Product)
The total value of all final The total value of all final The total income earned by
goods and services goods and services the residents of a country,
produced in a country produced by residents of a regardless of where it is
country, regardless of where earned
they are produced
Domestic Includes domestic
production and income from
abroad

Human Development Index (HDI): a measure of the quality of human life

HDI takes life expectancy at birth, education levlel, standard of living (GNP per capita) into
consideration

Innovation and Entrepreneurship are the engines of growth

Innovation and Entrepreneurship require
○ strong property rights
○ a market economy

Innovation includes new products, new processes, new organizations, new management
practices, and new strategies.
-> The process of creating something new
An entrepreneur is someone who starts their own business.
Entrepreneurship is the act of starting and running your own business.

Overall attractiveness of a country is determined by

1. Benefits
○ Size of economy
○ Economic growth
2. Costs
○ Corruption
○ Lack of infrastructure
○ Legal cots (Tax, tariff, etc)
3. Risks

Chapter 4: Differences in Culture

Culture is a system of value and norm that is shared among a group of people
-> In other words, culture is shared values, beliefs,and principles.
Society: a group of people who have the common set of values and norms

Culture evolves over time.

Globalization also brings cultural change.

Cross-cultural literacy: an understanding of how culturual differences among nations affect

the way in which business is practiced.

Determinants of culture include

○ religion
○ political and economic philosophies
○ education
○ language (spoken and unspoken)
○ social structure

Cultural imperialism: the practice of imposing the cultural values of a dominant culture on
other cultures through busniess operations.
-> Risk of Globalization

Social mobility refers to the movement of individuals, families, or groups between different
social classes or positions within a society.
Class consciousness: people are aware of the background or social position

Hofstede’s cultural dimensions

○ Power distance: How much power does a leader have?
○ Individualism vs. collectivism: Do people focus on themselves or the group?
○ Masculinity vs. femininity (nuturing relationships): How important is success?
○ Uncertainty avoidance: How comfortable are people with change?
○ Long-term orientation: Do people plan for the future?
○ Indulgence vs. restraint (People in these cultures are more likely to be disciplined, self-
controlled, and conform to social norms): How much do people enjoy life?
How do managers deal with cultural differences?
develop cross-cultural literacy by
○ hiring local citizens
○ aware of enthocentrism - a belief that home country is the best.

Chapter 5: Ethics in International business

Ethics are accepted principles of right and wrong that govern
the conduct (behavior) of one person -> actions of an organization

Most common ethical issues in business:

○ employment practices
○ human rights
○ environmental pollution
○ corruption
○ moral obligations of multinational companies

Social responsibility: Managers should consider the social consequences of economic

actions when making business decisions.

Factors contributing to unethical behaviors:

○ Personal ethics
○ decision-making process
-> organization culture that does not emphasize business culture encourages unethical
behavior
○ Organization culture
○ Unrealistic performance expectations
○ Leadership: Set examples that others follow
○ Societal culture: Companies in cultures that value individualism and uncertainty
avoidance are more likely to focus on ethical behavior than companies in cultures that
value toughness (masculinity) and power differences.

Cultural relativism: Companies should adjust their ethical standards to match the cultural
norms of the countries they operate in.
“when in Rome, do as the Romans do”
Friedman doctrine: The sole social responsibility of a firm is to maximize profits.
Righteous moralist: home country standards of ethics should be followed foreign countries.
Naive immoralist: If a manager sees that firms from other nations are not following host
country standards of ethics, that manager should not follow, too.

Always think of the effect on stakeholders when making decisions.

Stakeholders: People who are affected by the business or affect the business.

1. Internal stakeholders: People who work for or who own the business
Example: employees, board of directors, stockholder

2. External stakeholders: individuals or groups outside of an organization who are affected

by its decisions and outcomes.
Example: customers, suppliers, labor unions, government, community
Chapter 6: International Trade Theory
Mercantilism: Countries should export more than it imports
Encourage export and discourage import -> To create trade surplus
View trade as a zero-sum game (one party wins and the other will lose)

Absolute advantage refers to a country's ability to produce a good or service more

efficiently than any other country.

Free trade is a policy that allows goods and services to be traded between countries without
government intervention, such as tariffs or quotas.

The benefits of free trade include:

○ Increased productivity and economic growth
○ Lower prices for consumers
○ Greater choice for consumers
○ Improved international relations

The invisible hand: individuals, when pursuing their own self-interest, are led by an
"invisible hand" to promote the well-being of society as a whole.

The theory of comparative advantage states that countries should specialize in producing
the goods and services that they can produce at a lower opportunity cost than other
countries. Opportunity cost is the value of the next best alternative that is forgone when a
decision is made.

The Heckscher-Ohlin (H-O) model: explains how countries' different factor endowments,
such as capital, labor, and natural resources, influence their trade patterns. It suggests that
countries will export goods that use their abundant factors intensively and import goods
that use their scarce factors intensively.

Factor endowments: refer to the resources a country possesses that can be used for
production. These factors include:
○ Land: The natural resources and land area available for production.
○ Labor: The skills, education, and experience of the workforce.
○ Capital: The physical assets, such as machinery and buildings, used for production.
○ Entrepreneurship: The ability to organize and manage resources for production

Porter's Diamond Model of National Competitive Advantage is a framework that helps to

explain why certain industries thrive in particular nation.

Four key factors that contribute to a nation's competitive advantage:

○ Factor endowments
○ Demand conditions
○ Related and supporting industries
○ Firm strategy, structure and rivalry
-> more comprehensive compared to H-O model

Product-life cycle theory:

When a product matures, it will change the sales location and production location.
Example: As a product matures, companies may shift sales and production to international
markets to maximize profitability.
Diminishing return: occurs when more resources are needed to produce each additional
unit.
Economies of scale: costs per unit decrease when more units are produced.
Tariff is a tax that is imposed on goods when they are imported from another country.
Import quota is a limit on the quantity of a good that can be imported from another
country.

Trade theory is not perfect because

○ Only 2 countries in the analysis
○ Do not consider transportation costs
○ Do not consider process of resources and exchange rates

Chapter 8: Foreign Direct Investemnt

FDI: When a firm directly invests in facilities to produce or market a good or service in a
foreign country.
Other definition: FDI is the establishment of business operations at foreign countries.
Inflow of FDI: the flow of FDI into a country
It happens when a country receives investment from foreign countries
Outflow of FDI: the flow of FDI out of a country
It happens when a country invests in other foreign countries

Trend in FDI: FDI increasingly flows into developing countries.

FDI can take 2 forms

○ Merger and Acquisition
○ Greenfield investment

Limitations of licensing
○ Firms may give away valuable techonological know-how to a potential foreign competitor,
○ Licensing does not give tight control over marketing, production and strategy.
○ Skills like management, selling products, and marketing are often hard to teach or give away to
someone else.

Radical: FDI is bad. Exploits countries, destroys jobs, hurts everything.

Free-Market: FDI is good. Brings money, tech, jobs. Let it flow freely, everyone wins!
Pragmatic Nationalist: FDI is good and bad at the same time.
FDI should be allowed only if the benefits outweigh the costs

Home country: The country where the company making the investment is headquartered.
This is the country from which the capital starts to flow.

Host country: The country where the company making the investment establishes its
operations or assets. This is the country into which the capital flows.

Benefits of FDI to host country

○ Resources transfer effects: FDI bring capital, technology and management resources
○ Employment effect: FDI can bring more jobs
○ Balance of payments effects: Foreign investment can also help a country increase its
exports and reduce its imports.This can lead to a trade surplus.
○ Effects on competition and economic growth: When foreign companies compete with
local companies, it can drive down prices and improve the quality of products and
services.
Foreign companies can also bring new technologies and ideas to a country, which can help
boost productivity and innovation.

Cost of FDI to host country

○ Adverse effects of FDI on competition within the host nation: MNEs may have more
economic power than host-country competitors
○ Adverse effects on the balance of payments: Foreign subsidiaries may import a
substantial number of its inputs from abroad. -> Trade deficit.
○ Perceived loss of national sovereignty and autonomy

Benefits of FDI to home country

○ Employment effect
○ Market access: Learn valuable skills from foreign markets

Cost of FDI to home country

Outward FDI can hurt a country's balance of payments in a few ways:

○ Sending money to invest in a foreign country can reduce the money available at home.
○ Companies may start making goods and services abroad instead of exporting them
from home.
○ Companies may build factories in foreign countries to take advantage of lower labor
costs.

Job losses: FDI can lead to job losses in the home country if companies relocate production
to foreign countries with lower labor costs. This is known as "offshoring" or "outsourcing."

Government policy can encourage or restrict FDI.

Chapter 10: The Foreign Exchange market

Foreign Exchange Market (FOREX) is a market for converting currency of one country into
currency of another.

Currency speculation: the act of buying or selling a currency with the hope that exchange
rate will change and investors gain profit from taking advantage of differences in exchange
rate.

When two parties agree to exchange currency and carry out the deal immediately, the
transaction is reffered to as a spot exchange.
Spot exchange rate: the rate at which a foreign exchange dealer converts one currency into
another currency on a particular day.
Forward exchange rate: The two parties agree to exchange currencies and carry out the
transaction at a specific date in the future
-> insure against foreign exchange risks

Currency swap:a financial transaction that involves the simultaneous purchase and sale of a
given amount of foreign exchange (ngoại hối) for two different value dates. This means that
the parties involved in the swap agree to exchange currencies at two different points in time.

Abitrage: the process of buying currency low and selling it high.

Three factors impact future exchange rate movements

1. A country’s price inflation
2. A country’s interest rate
3. Market psychology

Law of one price: identical products sold in different countries must sell for the same price
when their price is expressed in terms of the same currency.

Bandwagon effect: a psychological phenomenon in which people adopt certain behaviors,

styles, or attitudes simply because others are doing so

Minimize Exchange Rate Risk

○ buy forward
○ use swaps
○ lead and lag payables and receivables

Lead strategy - attempt to collect foreign currency receivables early when a foreign currency
is expected to depreciate and pay foreign currency payables before they are due when a
currency is expected to appreciate

Lag strategy - delay collection of foreign currency receivables if that currency is expected to
appreciate and delay payables if the currency is expected to depreciate

Chapter 13: Strategy of International Business

Strategy is actions that managers take to achieve organizational goals.

Firms need to purse the strategies that increase profitablity and profit growth.

To increase profitablity and profit growth, firms can

○ lower costs
○ add more value
○ sell more in existing markets
○ expand markets

Profits can be increased by using

○ differentiation strategy: adding value to a product to make it stand out from other
products so that customers are willing to pay for it.
○ low-cost strategy: a strategy focuses on minimizing costs for production.

Firm’s operations are like a value chain

Value chain: a series of value-creation activities.

Value creation activities are classified as

1. Primary activties
○ Research & Development
○ Production
○ Marketing and sales
○ Customer service
2. Supporting activities
○ Information systems
○ Infrastructure and logistics
○ Human resources management

Core competencies: skills within the firm that competitors find it difficult to copy or imitate.

How can firms increase profits through international expansion?

1. Expand markets
2. Realize location economies
Location economies: the economic benefits that arise from performing value-creation
activities in the optimal locations around the world.
-> lower the costs, differentiate product offering
3. Leverage skills

Experience effects:
The experience curve shows how businesses become more efficient and reduce costs as
they produce more products or services.
To get down the experience curve quickly, firms can use a single plant to serve global
markets.

Learning effects are costs savings that come from learning by doing.
Economies of scale: As companies produce more of a product or service, their average cost per unit
decreases.

How to leverage subsidiary skills?

Managers should
○ recognise that valuable skills can be applied anywhere and come from anywhere within
the firm’s global network
○ create a system that encourges employees to acquire new skills
○ help transfer the skills within the firm

Two competitive pressure:

1. Pressure for cost reduction
-> force firms to lower unit costs
2. Presure for local responsiveness
-> require firms to tailor product offering to meet local demands

Pressures for cost reduction are greatest in

markets for commodities such as oil, wheat
markets for industrial goods and materials
-> markets/ industries offer products that fill universal needs

Pressures for local responsiveness come from

○ differences in tastes and preferences
○ differences in traditional practices and infrastructure
○ differences in distribution channels
○ host government demands

4 strategies

1. International strategy
Firms take products firstly produced for home market and then sell them to international
market without changing much to adapt the host-country demands.

2. Localization strategy
Localization is tailoring products or services to suit the cultural preferences and needs of
different markets.

3. Global standardization strategy

Global standardization reduces costs and increases profits by taking advantage of cost
reductions from economies of scale, learning effects, and location economies.

4. Transnational strategy
Transnational - tries to achieve low costs through location economies,economies of scale,
and learning effects and simultaneously differentiate product offerings across markets.

In the long-term,

International strategy is not possible to survive in the competition.

-> shift to global standardization strategy or transnational strategy

Due to intense competitions, firms are forced to lower the costs -> Localization strategy is
not viable
-> shift to transnational strategy

Chapter 15: Entry Strategy and Strategic Alliances

If firms want to expand internationally, they will have to decide

○ Which markets to enter?
○ When to enter and on what scale?
○ Which entry mode to use? (licensing, franchising, joint venture, wholly-owned
subsidiary)

Factors affect the choice of entry mode:

○ transport cost
○ trade barriers
○ political risks
○ economic risks
○ costs
○ firm strategy

Favorable markets
○ are politically stable
○ have free market system
○ have low inflation rates
○ have low private sector debt

Timing of entry:
The firm entrers the foreign market before other foreign firms -> Early entry
The firm enters the foregin market after other foreign firms have already established in the
market -> Late entry

First-mover advantages:
○ Be the first to enter market and build brand loyalty.
○ Get cheaper costs with high production volume.
○ Create switching costs

First-mover disadvantages:
Pioneering costs: costs arise from the differences of foreign markets -> Firms have to devote
time, money, effort to learn and research the market.
Later entrants can avoid pioneering costs.

After choosing the market to enter and the timing of entry, firms need to decide on the scale
of market entry
Strategic commitment: the decision has long-term impact and is difficult to reverse

Advantages of small-scale entry:

○ firms can learn more about foreign markets
○ simultaneously limiting the firm’s exposure to that market

Entry mode Definition Advantages Disadvantages Example

Exporting the process of - Quick and -High transport Boeing
producing goods flexible cost exporting
or services in one - Less risk - High tariff airplanes from
country and then - Achieve - Firms cannot the United
selling them to experience control the States
customers in curve, location agent.
another country. economies
- Avoid the cost
of operating
business in
foreign
countries
Turnkey contractor will be - Less risky than - No long-term Construction of
projects responsible for conventional interest in a new factory
everything and FDI foreign countries
give the key to - Firms do not - Give away
client when the need to put a of technological
project is done. effort know-how
 -> May sell
competitive
advantage and
create potential
competitors
Licensing Licensor grants the Avoid barriers - Do not have Spotify, Netflix,
right to use to investment tight control on Apple TV,
intangible Avoid licensor. Disney+ (Allow
property to development - intangible users to use
licensee for a costs and risks assets can be their services)
specific period of related to lost.
time, and in opening a
return, receives business in a
loyalty fee from foreign market.
licensee.
Franchising - A special form of - Avoid the costs - Lack of control McDonald’s
licensing and risks of over quality KFC
- Franchisor allows opening up - Inability to Starbucks
franchisee to use foreign markets. engage in a Pizza Hut
intangible property - Quickly build a global strategic Mixue
and set some strict global presence cooperation
rules about how
business should be
operated for
franchisee.
-> Used by many
service firm
Joint venture A business - Access to local - Conflicts of Suntory and
partnership partner’s interest PepsiCo in
between two knowledge - Lack of control Vietnam market
companies or - Share costs over technology.
more from and risks
different countries.
Wholly- The firm owns - protection of - high costs and Honda Vietnam
owned 100% of the stock. technology risks Intel Vietnam
subsidiary - Give firm a - need more Samsung
tight control human and non- Electronics
- reduce the human reosurces Vietnam
risks of losing -> more effort
competencies and money for
the firm
Intangible property: includes intellectual property (Trademark, goodwill, copyright, brand
name, patent, formula, inventions, processes)

Best entry mode depends on the firm’s core competencies

A firm’s competitive advantage is
technological know-how: Avoid licensing and joint venture unless technological advantage is
temporary or common
management know-how: risk of losing control over management skills is not high

When pressure for cost reduction is high, the firm is likely to use exporting and wholly-
owned subisdiary because this helps firm to achieve location economies, experience
effects, and maintain full control over manufacturing and distribution.

firms purse global standardization and transnational strategies prefer wholly-onwed

subsidiaries.

Greenfield investment: Build everything from the beginning.

-> Take time, effort -> More risky
Greater ability to build the kind of subsidiary company wants

Merger & Acquisition -> Quick to execute, can cause conflicts with the acquired company
(differences in company culture, mission, vision)
Less risky compared to Greenfield investment.

How to alleviate the risks of conflicting with partners in strategic alliances?

○ increase interpersonal relationships between managers -> hang out
○ develop cross-cultural literacy
○ carefull screen the information of partners

Chapter 19: Global HRM

HRM: activities an organization carries out to utlize human resources effectively.
HRM activties include:
○ determine human resources strategy
○ staffing
○ performance evaluation
○ management development
○ compensation
○ labor realtions

Expatriate managers: citizens of one country working aboard.

Staffing policy: selection of employees who meet the requirements to perform job
successfully.
Corporate culture: the organization’s norms and value system.

3 approaches to staffing policy

1. Ethnocentric approach: Send home-country employees to take over management
positions at host country.
2. Polycentric approach: Recruit host-country people to manage the foreign subisidiary
because local people know best about their market.
3. Geocentric approach: Seek for the best people around the world regardless of
nationalities, age, gender

Ethocentric approach:
Choose this because of a lack of qualified people to take over management positions at host
country.
To maintain corporate culture
-> Suitable for international strategy
However, it can lead to ‘culture myopia’

Culture myopia: the failure to recognize the differences across cultures.

Polycentric approach:
-> Suitable for localization strategy
Minimize ‘culture myopia’
However, it can create a gap between host-country managers and home-country managers.
Geocentric approach:
-> Suitable for global or transnational strategy
It can make the best use of human resources
However, it can be limited by immigration laws and it is costly to implement
A global mindset is often acquired early in life from
○  a family that is bicultural
○  living in foreign countries
○  learning foreign languages as a regular part of family life

Expatriate failure: refers to situations where an expatriate assignment doesn't meet

expectations.
○ early return
○ underperformance
○ poor fit

Traning can reduce expatriate failure:

Cultural training: Learn the culture of one country before moving to -> Avoid culture shock
Language training
Practical training: helps managers become familiar with day-to-day life in host country.

How should expatriate managers be evaluated?

both host-nation managers and homeoffice managers evaluate the performance of
expatriate managers
However, home-country managers rely only on hard data
host-country managers can be biased

To reduce bias in performance appraisal

○ more weight should be given to an on-site manager's appraisal than to an off-site
manager's appraisal
○ a former expatriate who has served in the same location should be involved in the
process
○ Home-office managers should be consulted before an on-site manager completes a
formal termination evaluation
-> 360 degree appraisal feedback: a method of gathering performance feedback from an
employee's supervisors, peers, colleagues, and even sometimes their subordinates.
However, it is costly and time-consuming

How should expatriate managers be paid?

Balance sheet approach: Makes sure expat manager lives as comfortably in host country as
they did back home, by adjusting salary and benefits to cover cost of living differences.
Add a financial incentive to take the position

A compensation package:
○ Base salary
○ Foreign service premium (Extra pay)
○ Various allowances (housing, cost-of-living, education)
○ Tax differentials
○ Fringe benefits (medical and pension benefits)

Labor unions can limit a firm's ability to pursue a transnational or global strategy.
-> HRM needs to foster harmony and minimize conflict between management and
organized labor