Course: International Business

MBA622 2 CHr.s
Course Instructor: Hagerbigegn H. (PhD.)
Certified Business Development Advisor @ UNDP-UNCTAD
Certified Management Consultant @ Ethiopian Management Institute-EMI
General Manager and Owner of Solidarity Consulting PLC
Lecturer, Researcher, Consultant and Trainer @ OSU
Associate Trainer @ EMI
E-mail: hagerbigegn@gmail.com
Mob: 0911021484/ 0994246972
October 2024
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 Course Content
Chapter 1: An overview of International Business
Chapter 2: International business strategy
Chapter 3: The organization of international business
Chapter 4: Entry strategies and strategic alliances
Chapter 5: Global outsourcing, production and logistics
Chapter 6: International human resource management
Chapter 7: Exporting, importing, countertrade
Chapter 8: Global marketing and R&D

• Text Book : Charles W. L. Hill (2023) International Business: Competing in the Global
Marketplace. 14th Edition

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 Chapter One
An Overview of International
Business

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What is International Business (IB) ?

• International Business: All Commercial transactions that take place

between two or more countries.
• These transactions include the transfer of goods, services, technology, and
capital to other countries, and involves exports and imports.

International • Commercial transaction that crosses the

Business borders of two or more nations
• Goods and services purchased abroad
Imports
and brought into a country
• Goods and services sold abroad and sent
Exports
out of a country

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Key Players in International Business

Large companies from the wealthiest nations

Firms from emerging markets

Small and medium-sized companies

Multinational corporation (MNC)

Born global firm

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Scope of IB
• International Trade
• International Marketing
• International Finance and Investments
• Global Supply Chain Management
• Global Human Resource Management

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 Features
• Large scale operations
• Integration of economies
• Dominated by developed countries and MNCs
• Benefits to participating countries
• Keen competition
• Special role of science and technology
• International restrictions
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Factors Contributing to Fast Growth of
International Business
1. Increase in and expansion of technology.
2. Development of services that support
international business.
3. Growing consumer pressures.
4. Increased global competition.
5. Changing political situations.
6. Expanded cross-national cooperation.

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Reasons that Firms Engage in IB
• Earn foreign exchange
• Optimum utilization of resources
• Achieve its objectives
• Risk diversification
• Improve the organization's efficiency
• Get benefits from Government incentives
• Expand and diversify sales
• Increase competitive capacity
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Approaches of IB (EPRG Model)

Ethnocentric
Polycentric
Regiocentric
Geocentric
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 Ethnocentric approach
• This approach views the home country's practices,
values, and management as superior and applies
them to all international operations.
• Decisions are made at headquarters, and personnel
from the home country are often sent to manage
foreign subsidiaries.
• Example: U.S. company exporting products
worldwide without adapting them to local cultures
or preferences.

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 Polycentric approach
• This approach recognizes the differences between
countries and adapts strategies and operations to each
local market.
• Decisions are made at the subsidiary level, and local
managers are hired to understand and respond to specific
needs
• Example: Toyota has adopted a polycentric approach by
granting significant autonomy to its regional subsidiaries
to tailor products and marketing strategies to local market
conditions.

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 Regiocentric approach
• Groups countries into regions and tailors strategies to
each region.
• Balances adaptation to local markets with regional
standardization.
• Recognizes similarities and differences within regions.
• Aims to balance local responsiveness with regional
synergies.
• Decisions made at the regional level.
• Regional managers coordinate activities across countries in
their region.
• Example: A car manufacturer designing models
specifically for the European/Africa market rather than
individual countries.
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 Geocentric approach
• This approach views the world as a single market and
seeks to leverage global resources and talent to create a
standardized strategy for all markets.
• Decisions are made based on global expertise and
considerations, and personnel from any country can be
hired and assigned to positions based on their
qualifications and experience.
• Example: Unilever leverages its global talent pool, with
executives from various countries holding leadership
positions based on their skills, not nationality.

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 Problems in IB
• Political factors
• High foreign investments and high-cost
• Exchange instability
• Entry requirements
• Tariffs, quotas etc.
• Corruption and bureaucracy
• Technological policy
• Quality Management

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International Market Entry Strategies

▪ Export/Import
▪ Licensing
▪ Franchising
▪ Management Contracts
▪ Joint Ventures
▪ Foreign Direct Investments (FDI) or Portfolio
Investment
▪ Turnkey operation

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 What is Globalization?

The world is moving away from self-contained

national economies toward an interdependent,
integrated global economic system.
Globalization refers to the shift toward a more
integrated and interdependent world economy.
Globalization has several facets, including the
globalization of markets and the globalization of
production.

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 Globalization of Markets
Historically distinct and separate national markets are merging.
Convergence in buyer preferences in markets around the world
It is no longer makes sense to talk about the “German market” or the
“American market”
Instead, there is the “global market”
◦ Falling trade barriers make it easier to sell globally.
◦ Consumers’ tastes & preferences are converging on some global norm.
◦ Firms promote the trend by offering the same basic products
worldwide.
Benefits of Globalization of Markets;
◦ Reduces marketing costs
◦ Creates new market opportunities
◦ Levels uneven income streams
◦ Local buyers’ needs
◦ Global sustainability
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Globalization of Production
Firms source goods and services from locations
around the globe to capitalize on national
differences in the cost and quality of factors of
production like land, labor, and capital
Dispersal of production activities worldwide to
minimize costs or maximize quality
Benefits of Globalization of Production;
▪Access lower-cost workers
▪Access technical expertise
▪Access production inputs
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 Global Institutions
Institutions
◦ Help manage, regulate, and police the global marketplace
◦ Promote the establishment of multinational treaties to
govern the global business system
Examples include
◦ General Agreement on Tariffs and Trade (GATT)
◦ International Monetary Fund (IMF)
◦ World Bank
◦ Economic Communities
◦ World Trade Organization (WTO)
◦ European Community (EC)
◦ North American Free Trade Agreement (NAFTA)
◦ Asian Free Trade Agreement (AFTA)
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What Does Globalization Mean For Firms?
Lower barriers to trade and investment:
◦ View the world, rather than a single country
◦ Base production in the optimal location for that
activity
Technological change:
◦ Lower transportation costs - firms can separate locations
◦ Lower information processing and communication
costs - firms can create and manage production
systems
◦ Low-cost global communications networks - help to
create an electronic global marketplace
◦ Low-cost transportation - help create global markets
◦ Global communication networks and global media -
create a worldwide culture
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The Changing Demographics of the Global
Economy
There has been a change in the demographics of
the world economy in the last 30 years
Four trends are important:
1. The Changing World Output and World
Trade Picture
2. The Changing Foreign Direct Investment
Picture
3. The Changing Nature of the Multinational
Enterprise
4. The Changing World Order
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How Has Foreign Direct Investment Changed Over Time?
Percentage Share of Total FDI Stock 1980-2007

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How Has Foreign Direct Investment Changed Over Time?
FDI Inflows 1988-2008

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 What Is A Multinational Enterprise?

A multinational enterprise (MNE) is any

business that has productive activities in two
or more countries
Since the 1960s, there has been a rise in non-
U.S. multinationals, and a growth of mini-
multinationals.

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 The Changing World Order
Many former Communist nations in Europe
and Asia are now committed to democratic
politics and free market economies
◦so, there are new opportunities for
international businesses
China and Latin America are also moving
toward greater free market reforms
◦Between 1983 and 2008, FDI in China
increased from less than $2 billion to $90
billion annually
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 The Global Economy Of The 21st Century

The world is moving toward a more global economic system:

But globalization is not inevitable
◦ There are signs of a retreat from liberal economic ideology in
Russia.
Globalization brings risks
◦ The financial crisis that swept through southeast Asia in the late
1990s.
◦ The financial crisis that started in the U.S. In 2008, and moved
around the world

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Is an Interdependent Global Economy a
Good Thing?

Supporters believe that increased trade and cross-

border investment mean;
◦ Lower prices for goods and services
◦ Greater economic growth
◦ Higher consumer income, and more jobs
Critics worry that globalization will cause
◦ Job losses
◦ Environmental degradation
◦ The cultural imperialism of global media.

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How Does Globalization Affect Jobs and Income?

Critics argue that falling barriers to trade are

destroying manufacturing jobs in advanced
countries.
Supporters contend that the benefits of this trend
outweigh the costs
◦Countries will specialize in what they do most
efficiently and trade for other goods; all
countries will benefit.

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How Is Globalization Affecting The World’s Poor?
Is the gap between rich nations and poor nations is
getting wider?
Critics believe that if globalization was beneficial there
should not be a divergence between rich and poor nations.
Supporters claim that the best way for the poor nations to
improve their situation is to;
◦ Reduce barriers to trade and investment
◦ Implement economic policies based on free market
economies
◦ Receive debt forgiveness for debts incurred under
totalitarian regimes

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 How Does The Global Marketplace Affect
Managers?
Managing an international business differs from
managing a domestic business because:
◦Countries are different
◦Firms have to find ways to work within the
limits imposed by government intervention in
the international trade and investment system
◦International transactions involve converting
money into different currencies

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 Chapter Two
The Strategy of International
Business

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 The Firm as a Value Chain
Primary Activities:
◦ Those activities are creating, marketing, and delivering
the product to customers and providing support and
after-sales service.
Support Activities:
◦ Provide inputs that allow primary activities to occur.
An Efficient Infrastructure:
◦ helps create value and reduce the cost of creating
value.
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 The Role of Strategy

Strategy:
◦Actions managers take to attain the goals of
the firm.
◦Need to identify and take action that lowers
the cost of value creation and/or
differentiates the firm’s product through
superior design, quality, service, or
functionality.

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 Profiting from Global Expansion
International firms can:
◦Earn a greater return from distinctive skills or
core competencies.
◦Realize location economies by dispersing value-
creation activities to locations where they can be
performed most efficiently.
◦Realize greater experience curve economies,
which reduces the cost of value creation.

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 Location Economies Assembly

Parts
Sales

Advertising Design

Parts
Pontiac LeMans
Parts

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 Cautions
When making location decisions:
▪ Consider trade barriers and transportation
costs.
▪ Assess political and economic risks.

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 Experience Curve Economies
Learning Effects:
◦ Labor productivity increases over time as individuals learn
the most efficient ways to perform particular tasks.
Economies of Scale:
◦ Reductions in unit cost achieved by producing a large
volume of a product.
Strategic Significance:
◦ Moving down the experience curve allows a firm to reduce
its cost of creating value.

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The Experience Curve

Unit costs
Moving down the curve reduces
the cost of creating value
B

Accumulated output

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Firms Face Two Conflicting Concepts
(Pressures) Overseas

Reduce costs.
Be responsive to local needs.

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Pressures for Cost Reduction and Local
Responsiveness

High
Company
C

Cost Generally reflects

pressures the position of most
companies
Company
Low B

Low High
Figure 12.3 Pressures for local responsiveness

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 Cost Reduction
Desire to reduce costs by:
◦ Mass production
◦ Product standardization.
◦ Optimal location production.
Hard to do with commodity-type products.
◦ products serving universal needs.
Also hard where competition is in low-cost producing
locations.
Finally, international competition creates price pressures.

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 Local Responsiveness
Different consumer tastes and preferences.
Different infrastructure and practice.
Differences in distribution channels.
Government demands.

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 Strategic Choice
Four basic strategies:
1. International strategy.
2. Multidomestic/Localization strategy.
3. Global strategy
4. Transnational strategy.

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 Four Basic Strategies
High
Global Transnational
Strategy Strategy

Cost
pressures
International Multi domestic
Strategy Strategy
Low

Low High
Pressures for local responsiveness

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 International Strategy
Go where locals don’t have your skills.
Little adaptation. Products developed at home
(centralization).
Manufacturing and marketing in each location.
Makes sense where low skills, competition, and
costs exist.

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 Multi-domestic/Localization Strategy

Maximize local responsiveness.

◦Customize the product and marketing strategy to
national demands.
Skill and product transfer.
Transfer all value-creation activities, no experience
curve rewards.
Good for high local responsiveness and low cost
reduction pressures.
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 Global Strategy
Best use of the experience curve and location
economies.
This is the low-cost strategy.
Utilize product standardization.
Not good where local responsiveness demand is high.

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 Transnational Strategy
Core competencies can develop in any of the firm’s
worldwide operations.
Flow of skills and product offerings occurs
throughout the firm - not only from home firm to
foreign subsidiary (global learning).
Makes sense where there is pressure for both
cost reduction and local responsiveness.

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The Advantages and Disadvantages of the Four Strategies

Strategy Advantages Disadvantages

Global Exploit experience curve Lack of local
effects responsiveness
Exploit location Lack of
International economies local responsiveness
Transfer distinctive Inability to realize
competencies to location economies
Failure to exploit
Foreign Markets
experience curve
effects

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 ….. Four Strategies

Strategy Advantages Disadvantages

Multi-domestic Customize product offerings Inability to realize location
and marketing in accordance economies
with local responsiveness Failure to exploit
experience curve effects
Failure to transfer
distinctive competencies
to foreign markets
Transnational Exploit experience curve Difficult to implement due
effects to organizational
Exploit location economies problems
Customize product offerings
and marketing in accordance
with local responsiveness
Reap benefits of global learning

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Cost Pressures and Pressures for Local
Responsiveness Facing Caterpillar
High
Caterpillar
Tractor
Cost
pressures

Low

Low High
Pressures for local responsiveness

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 Chapter Three
The Organization of International
Business

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 Organizational Architecture
 Organizational architecture is the totality of a firm’s organization
including:
1. Organizational structure
▪ The formal division of the organization into subunits
▪ The location of decision-making responsibilities within that structure
 Centralized versus decentralized
▪ The establishment of integrating mechanisms to coordinate the activities of
subunits including cross-functional teams or pan-regional committees
2. Control systems and incentives
▪ Control systems - the metrics used to measure performance of subunits
▪ Incentives - the devices used to reward managerial behavior
3. Processes, organizational culture, and people
• Processes - how decisions are made and work is performed within the org’n
• Organizational Culture - norms and values that are shared among the
employees of an organization
• People - the employees and the strategy used to recruit, compensate, and retain
those individuals and the type of people they are in terms of their skills, values,
and orientation
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 Organizational architecture

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 To be the most profitable

▪ The elements of the organizational architecture must be

internally consistent

▪ The organizational architecture must fit the strategy

▪ The strategy and architecture must be consistent with

each other, and consistent with competitive conditions

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 Dimensions of Organizational Structure
▪ Organizational structure has three dimensions
1. Vertical differentiation: the location of decision-
making responsibilities within a structure
2. Horizontal differentiation: the formal division of
the organization into sub-units
3. Integrating mechanisms: the mechanisms for
coordinating sub-units

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 Vertical Differentiation
Vertical differentiation determines where decision-making power is
concentrated
Centralized decision-making
▪ Facilitates coordination
▪ Ensures decisions are consistent with the organization’s objectives
▪ Gives managers the means to bring about organizational change
▪ Avoids duplication of activities
Decentralized decision-making
▪ Relieves the burden of centralized decision-making
▪ Has been shown to motivate individuals
▪ Permits greater flexibility
▪ Can result in better decisions
▪ Can increase control

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 Horizontal Differentiation
Horizontal differentiation refers to how the firm divides into sub-
units
▪ Usually based on function, type of business, or geographical area
Most firms begin with no formal structure, but as they grow, split into
functions reflecting the firm’s value creation activities - functional
structure
▪ Functions are coordinated and controlled by top management
▪ Decision-making is centralized
▪ Product line diversification requires further horizontal
differentiation
Firms may switch to a product divisional structure
▪ Each division is responsible for a distinct product line
▪ Headquarters retains control of the overall strategic direction of the
firm and the financial control of each division

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Functional Structure
A Typical Functional Structure

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 Product Divisional Structure
A Typical Product Divisional Structure

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 What Happens When Firms Expand Globally?

When firms expand internationally, they often group all of

their international activities into an international division
Over time, manufacturing may shift to foreign markets
▪firms with a functional structure at home would replicate
the functional structure in the foreign market
▪firms with a divisional structure would replicate the
divisional structure in the foreign market
In either case, there is the potential for conflict and
coordination problems between domestic and foreign
operations

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International Divisional Structure
One Company’s International Divisional Structure

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 Firms that continue to expand will move to either a
1. Worldwide product divisional structure: adopted by
reasonably diversified firms
▪ Allows for the worldwide coordination of value-creation
activities of each product division
▪ Helps realize location and experience curve economies
▪ Facilitates the transfer of core competencies
▪ Does not allow for local responsiveness

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Worldwide Product Division Structure

A Worldwide Product Divisional Structure

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2. Worldwide area structure - favored by firms with
a low degree of diversification and a domestic
structure based on function
▪ Divides the world into autonomous geographic areas
▪ Decentralizes operational authority
▪ Facilitates local responsiveness
▪ Can result in a fragmentation of the organization
▪ Is consistent with a localization strategy

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Worldwide Area Structure

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The International Structural Stages Model

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 Global Matrix Structure
The global matrix structure – tries to minimize the
limitations of the worldwide area structure and the
worldwide product divisional structure
▪ Allows for differentiation along two dimensions -
product division and geographic area
▪ Has dual decision–making - product division and
geographic area have equal responsibility for operating
decisions
▪ Can be bureaucratic and slow
▪ Can result in conflict between areas and product
divisions
▪ Can result in finger-pointing between divisions when
something goes wrong.

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 A Global Matrix Structure

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 How Can Subunits Be Integrated?

Regardless of the type of structure, firms need a

mechanism to integrate subunits
▪Need for coordination is lowest in firms with a localization
strategy and highest in transnational firms
▪Coordination can be complicated by differences in subunit
orientation and goals
▪ The simplest formal integrating mechanism is direct
contact between subunit managers, followed by liaisons
▪Temporary or permanent teams composed of individuals
from each subunit is the next level of formal integration
▪The matrix structure allows for all roles to be integrated
roles

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How Can Subunits Be Integrated?
Formal Integrating Mechanisms

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 How can Subunits be Integrated?
Many firms use informal integrating mechanisms
A knowledge network – the network for
transmitting information within an organization that
is based not on informal contacts between managers
but on distributed information systems
◦a non-bureaucratic conduit for knowledge flows
◦must embrace as many managers as possible and
managers must adhere to a common set of norms
and values that override differing subunit
orientations
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 A Simple Management Network

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 Types of Control Systems
1. Personal controls: personal contact with subordinates
▪ Most widely used in small firms
2. Bureaucratic controls: a system of rules and procedures
that directs the actions of subunits.
▪ Budgets and capital spending rules
3. Output controls – setting goals for subunits to achieve
and expressing those goals in terms of objective
performance metrics
▪ Compare actual performance against targets and intervene
selectively to take corrective action
4. Cultural controls – exist when employees “buy into” the
norms and value systems of the firm.
▪ A strong culture implies less need for other forms of control
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 Incentive Systems

Incentives - devices used to reward behavior

▪ Usually closely tied to performance metrics used for
output controls
▪ Should vary depending on the employee and the nature
of the work being performed
▪ Should promote cooperation between managers in sub-
units
▪ Should reflect national differences in institutions and
culture
▪ Can have unintended consequences
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 Performance Ambiguity

Performance ambiguity exists when the causes of a

subunit’s poor performance are not clear
▪ is common when a subunit’s performance is
dependent on the performance of other subunits
▪ is lowest in firms with a localization strategy
▪ is higher in international firms
▪ is still higher in firms with a global standardization
strategy
▪ is highest in transnational firms

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Interdependence, Performance Ambiguity, and the Costs
of Control for the Four International Business Strategies

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 Processes
Processes refer to the manner in which decisions are
made and work is performed
▪many processes cut across national boundaries as
well as organizational boundaries
▪Processes can be developed anywhere within a
firm’s global operations network
▪formal and informal integrating mechanisms can
help firms leverage processes

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 Organizational Culture
Organizational culture - the values & norms that employees are encouraged to
follow
Evolves from
▪ founders and important leaders
▪ national social culture
▪ the history of the enterprise
▪ decisions that resulted in high performance
Organizational culture can be maintained through
▪ hiring and promotional practices
▪ reward strategies
▪ socialization processes
▪ communication strategies
Organizational culture tends to change very slowly
▪ Managers in companies with a “strong” culture share a relatively consistent set
of values and norms that have a clear impact on the way work is performed
A “strong” culture
▪ is not always good
▪ may not lead to high performance
▪ could be beneficial at one point, but not at another
Companies with adaptive cultures have the highest performance

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Link Between Strategy and Architecture

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1. Firms pursuing a localization strategy focus on local
responsiveness
▪ they do not have a high need for integrating
mechanisms
▪ performance ambiguity and the cost of control tend to
be low
▪ the worldwide area structure is common
2. Firms pursuing an international strategy create value by
transferring core competencies from home to foreign
subsidiaries
▪ the need for control is moderate
▪ the need for integrating mechanisms is moderate
▪ performance ambiguity is relatively low and so is the
cost of control
▪ the worldwide product division structure is common
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3. Firms pursuing a global standardization strategy focus on
the realization of location and experience curve economies
▪ headquarters maintains control over most decisions
▪ the need for integrating mechanisms is high
▪ strong organizational cultures are encouraged
▪ the worldwide product division is common
4. Firms pursuing a transnational strategy focus on
simultaneously attaining location and experience curve
economies, local responsiveness, and global learning
▪ some decisions are centralized and others are decentralized
▪ the need for coordination and cost of control is high
▪ an array of formal and informal integrating mechanisms are
used
▪ a strong culture is encouraged
▪ matrix structures are common
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How Are The Environment, Strategy, Architecture
And Performance Related?
For a firm to succeed
1. The firm’s strategy must be consistent with the
environment in which the firm operates
2. The firm’s organization architecture must be consistent
with its strategy
◦ firms need to change their architecture to reflect
changes in the environment in which they are
operating and the strategy they are pursuing

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 Implement Organizational Change
To implement organizational change
1. Unfreeze the organization through shock therapy
▪ requires taking bold actions like plant closures or dramatic structural
reorganizations
2. Move the organization to a new state through a proactive change in
architecture
▪ requires a substantial and quick change in organizational architecture
so that it matches the desired new strategic posture
3. Refreeze the organization in its new state
▪ requires that employees be socialized into the new way of doing things
Organizations can be difficult to change because of
▪ the existing distribution of power and influence
▪ the current culture
▪ managers’ preconceptions about the appropriate business model or
paradigm
▪ institutional constraints
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 Chapter Four
Entry Strategy and Strategic Alliances

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What are the Basic Decisions Firms Make When
Expanding Globally?
 Firms expanding internationally must decide
1. Which markets to enter
2. When to enter them and on what scale
3. Which entry mode to use
▪ exporting
▪ licensing or franchising to a company in the
host nation
▪ establishing a joint venture with a local
company
▪ establishing a new wholly-owned subsidiary
▪ acquiring an established enterprise

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 Factors Influences the Choice of Entry Mode
 Several factors affect the choice of entry mode including
▪ Transport costs
▪ Trade barriers
▪ Political risks
▪ Economic risks
▪ Costs
▪ Firm strategy
 The optimal mode varies by situation – what makes sense
for one company might not make sense for another

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Which Foreign Markets Should Firms Enter?

➢ The choice of foreign markets will depend

on their long-run profit potential
➢ Favorable markets
➢ are politically stable
➢ have free market systems
➢ have relatively low inflation rates
➢ have low private-sector debt

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 Which Foreign Markets Should Firms Enter?

➢ Less desirable markets

➢ are politically unstable
➢ have mixed or command economies
➢ have excessive levels of borrowing
➢ Markets are also more attractive when the product
in question is not widely available and satisfies an
unmet need

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When Should a Firm Enter a Foreign Market?
Once attractive markets are identified, the firm must
consider the timing of entry
1. Entry is early when the firm enters a foreign market before
other foreign firms
2. Entry is late when the firm enters the market after firms
have already established themselves in the market

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Why Enter a Foreign Market Early?
First-mover advantages include
▪ the ability to preempt rivals by establishing a strong
brand name
▪ the ability to build up sales volume and ride down
the experience curve ahead of rivals and gain a cost
advantage over later entrants
▪ the ability to create switching costs that tie customers
into products or services making it difficult for later
entrants to win business

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 Why Enter a Foreign Market Late?
▪ First-mover disadvantages include
▪ Pioneering costs - arise when the foreign business
system is so different from that in the home market
that the firm must devote considerable time, effort,
and expense to learning the rules of the game
❖ the costs of business failure if the firm, due to
its ignorance of the foreign environment, makes
some major mistakes
❖ the costs of promoting and establishing a
product offering, including the cost of educating
customers
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 On What Scale Should a Firm Enter Foreign Markets?

➢ After choosing which market to enter and the timing of

entry, firms need to decide on the scale of market entry
➢ firms that enter a market on a significant scale make a
strategic commitment to the market
▪ the decision has a long-term impact and is difficult
to reverse
➢ small-scale entry has the advantage of allowing a firm
to learn about a foreign market while simultaneously
limiting the firm’s exposure to that market

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 Is there a “Right” Way to Enter Foreign Markets?

➢ No, there are no “right” decisions when deciding

which markets to enter, and the timing and scale
of entry - just decisions that are associated with
different levels of risk and reward.

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 Foreign Markets Entry Strategies
 These are six different ways to enter a foreign market
1. Exporting: a common first step for many manufacturing
firms
▪ Later, firms may switch to another mode.
2. Turnkey projects: the contractor handles every detail of
the project for a foreign client, including the training of
operating personnel.
▪ At completion of the contract, the foreign client is
handed the "key" to a plant that is ready for full
operation.

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 Foreign Markets Entry Strategies
3. Licensing: a licensor grants the rights to intangible
property to the licensee for a specified time period, and
in return, receives a royalty fee from the licensee.
Patents, inventions, formulas, processes, designs,
copyrights, trademarks
4. Franchising: a specialized form of licensing in which
the franchisor not only sells intangible property to the
franchisee, but also insists that the franchisee agree to
abide by strict rules as to how it does business
Used primarily by service firms

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 Foreign Markets Entry Strategies
5. Joint ventures with a host country firm: a firm that
is jointly owned by two or more otherwise independent
firms
▪ Most joint ventures are 50–50 partnerships
6. Wholly owned subsidiary: the firm owns 100 percent
of the stock
▪ Set up a new operation
▪ Acquire an established firm

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 Exporting
➢ Exporting is attractive because
➢ it avoids the costs of establishing local manufacturing
operations
➢ it helps the firm achieve experience curve and location
economies
➢ Exporting is unattractive because
➢ there may be lower-cost manufacturing locations
➢ high transport costs and tariffs can make it
uneconomical
➢ agents in a foreign country may not act in exporter’s
best interest

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 Turnkey Arrangement
➢ Turnkey projects are attractive because
➢ they are a way of earning economic returns from the
know-how required to assemble and run a
technologically complex process
➢ they can be less risky than conventional FDI
➢ Turnkey projects are unattractive because
➢ the firm has no long-term interest in the foreign
country
➢ the firm may create a competitor
➢ if the firm's process technology is a source of
competitive advantage, then selling this technology
through a turnkey project is also selling competitive
advantage to potential and/or actual competitors

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 Licensing
 Licensing is attractive because
▪ the firm avoids development costs and risks associated
with opening a foreign market
▪ the firm avoids barriers to investment
▪ the firm can capitalize on market opportunities without
developing those applications itself
 Licensing is unattractive because
▪ the firm doesn’t have the tight control required for
realizing experience curve and location economies
▪ the firm’s ability to coordinate strategic moves across
countries is limited
▪ proprietary (or intangible) assets could be lost
to reduce this risk, use cross-licensing agreements

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 Franchising
 Franchising is attractive because
▪ it avoids the costs and risks of opening up a foreign
market
▪ firms can quickly build a global presence
 Franchising is unattractive because
▪ it inhibits the firm's ability to take profits out of one
country to support competitive attacks in another
▪ the geographic distance of the firm from its franchisees
can make it difficult to detect poor quality

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 Joint Ventures
Joint ventures are attractive because
▪ firms benefit from a local partner's knowledge of the local market,
culture, language, political systems, and business systems
▪ the costs and risks of opening a foreign market are shared
▪ they satisfy political considerations for market entry
Joint ventures are unattractive because
▪ the firm risks giving control of its technology to its partner
▪ the firm may not have the tight control to realize experience curve or
location economies
▪ shared ownership can lead to conflicts and battles for control if goals
and objectives differ or change over time

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Wholly Owned Subsidiary
➢ Wholly owned subsidiaries are attractive because
▪ they reduce the risk of losing control over core
competencies
▪ they give a firm the tight control in different
countries necessary for global strategic coordination
▪ they may be required in order to realize location
and experience curve economies
➢ Wholly owned subsidiaries are unattractive because
▪ the firm bears the full cost and risk of setting up
overseas operations

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 Advantages and Disadvantages of Entry Modes

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 How Do Core Competencies Influence Entry Mode?
➢ The optimal entry mode depends on the nature of a firm’s
core competencies
➢ When competitive advantage is based on proprietary
technological know-how
▪ avoid licensing and joint ventures unless the
technological advantage is only transitory, or can be
established as the dominant design
➢ When competitive advantage is based on management
know-how
▪ the risk of losing control over the management skills is
not high, and the benefits from getting greater use of
brand names is significant

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 How Do Pressures for Cost Reductions Influence
Entry Mode?
When pressure for cost reductions is high, firms are
more likely to pursue some combination of exporting
and wholly owned subsidiaries;
▪ Allows the firm to achieve location and scale
economies and retain some control over product
manufacturing and distribution
▪ Firms pursuing global standardization or
transnational strategies prefer wholly owned
subsidiaries

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 Which Is Better – Greenfield or Acquisition?
The choice depends on the situation confronting the firm
1. A greenfield strategy: build a subsidiary from the ground up
▪ a greenfield venture may be better when the firm needs to
transfer organizationally embedded competencies, skills,
routines, and culture.
2. An acquisition strategy: acquire an existing company
◦ acquisition may be better when there are well-established
competitors or global competitors interested in expanding
The volume of cross-border acquisitions has been rising for
the last two decades

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 Acquisition
➢ Acquisitions are attractive because
▪ they are quick to execute
▪ they enable firms to preempt their competitors
▪ they may be less risky than greenfield ventures
➢ Acquisitions can fail when
▪ the acquiring firm overpays for the acquired firm
▪ the cultures of the acquiring and acquired firm clash
▪ anticipated synergies are slow and difficult to achieve
▪ there is inadequate pre-acquisition screening
➢ To avoid these problems, firms should
▪ carefully screen the firm to be acquired
▪ move rapidly to implement an integration plan

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 Greenfield
The main advantage of a greenfield venture
is that it gives the firm a greater ability to
build the kind of subsidiary company that it
wants
But, greenfield ventures are slower to
establish
Greenfield ventures are also risky

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 Strategic Alliances
➢ Strategic alliances refer to cooperative
agreements between potential or actual
competitors
▪ range from formal joint ventures to short-
term contractual agreements
▪ the number of strategic alliances has
exploded in recent decades

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 Strategic Alliances
➢ Strategic alliances are attractive because they
▪ facilitate entry into a foreign market
▪ allow firms to share the fixed costs and risks of
developing new products or processes
▪ bring together complementary skills and assets that
neither partner could easily develop on its own
▪ help a firm establish technological standards for the
industry that will benefit the firm
➢ But, the firm needs to be careful not to give away more
than it receives

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What Makes Strategic Alliances Successful?
The success of an alliance is a function of
1. Partner selection: A good partner
▪ helps the firm achieve its strategic goals and has the capabilities
the firm lacks and that it values
▪ shares the firm’s vision for the purpose of the alliance
▪ will not exploit the alliance for its own ends
2. Alliance structure: The alliance should
▪ make it difficult to transfer technology not meant to be
transferred
▪ have contractual safeguards to guard against the risk of
opportunism by a partner
▪ allow for skills and technology swaps with equitable gains
▪ minimize the risk of opportunism by an alliance partner

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 ….Alliances Successful?

3. The manner in which the alliance is managed

Requires
▪ interpersonal relationships between managers
▪ cultural sensitivity is important
▪ learning from alliance partners
▪ knowledge must then be diffused through the
organization

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10/18/2024 OCTOBER 2024 119
 Chapter Five
Global Production, Outsourcing,
and Logistics

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 Production Issues for Firms
International firms must answer five interrelated questions
1. Where should production activities be located?
2. What should be the long-term strategic role of foreign
production sites?
3. Should the firm own foreign production activities or
outsource those activities to independent vendors?
4. How should a globally dispersed supply chain be managed,
and what is the role of Internet-based information
technology in the management of global logistics?
5. Should the firm manage global logistics itself, or should it
outsource the management to enterprises that specialize in
this activity?
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 Production, and Logistics

Production: activities involved in creating a product

Logistics: procurement and physical transmission of material
through the supply chain, from suppliers to customers
1. Lower the costs of value creation?
▪ disperse production to the most efficient locations
▪ manage the global supply chain efficiently to better match supply and
demand
2. Add value by better serving customer needs?
▪ eliminate defective products from the supply chain and the manufacturing
process

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 Quality

Most firms use the Six Sigma program - a direct

descendant of total quality management (TQM)
▪ aims to reduce defects, boost productivity,
eliminate waste, and cut costs throughout the
company
▪ in the EU, firms must meet ISO 9000 standards
before gaining access to the EU marketplace
Improved quality reduces costs

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The Relationship Between Quality and Costs

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 Production Location

➢ Firms should locate production so that

▪ production and logistics can be locally responsive
▪ production and logistics can respond quickly to shifts
in customer demand
➢ Firms should consider
1. Country factors
2. Technological factors
3. Product factors

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 Country Factors

➢ Manufacturing should be located where economic,

political, and cultural conditions are most conducive to the
performance of that activity
▪ Create a global web of activities
▪ Global concentrations of activities at certain locations
➢ Firms should consider
▪ the availability of skilled labor and supporting
industries
▪ formal and informal trade barriers
▪ expectations about future exchange rate changes
▪ transportation costs
▪ regulations affecting FDI

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 Technological Factors
Firms should consider
1. The level of fixed costs
◦ If fixed costs are high, produce in a single location or a few
locations
◦ When fixed costs are low, multiple production plants may be
possible
◦ allows firms to respond to local demands
2. The minimum efficient scale
◦ The level of output at which most plant-level scale economies are
exhausted
◦ When minimum efficient scale is high, choose centralized
production in a single location or a limited number of locations
◦ When minimum efficient scale is low, respond to local market
demands and hedge against currency risk by operating in
multiple locations
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 Technological Factors
3. The flexibility of the technology
◦ flexible manufacturing technology or lean
production
◦ reduces set up times for complex equipment
◦ increases the utilization of individual machines
◦ improves quality control
◦ allows firms to produce a wide variety of end
products at a relatively low unit cost
◦ mass customization
◦ flexible machine cells
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 What Should a Firm Do?

➢ Production should be concentrated in a few locations

when
➢ fixed costs are substantial
➢ the minimum efficient scale of production is high
➢ flexible manufacturing technologies are available
➢ Production in multiple locations makes sense when
➢ both fixed costs and the minimum efficient scale of
production are relatively low
➢ appropriate flexible manufacturing technologies are
not available

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 Product Factors
Two product factors impact location decisions
1. The product's value-to-weight ratio
▪ if the value-to-weight ratio is high, produce the
product in a single location and export to other
parts of the world
▪ if the value-to-weight ratio is low, there is greater
pressure to manufacture the product in multiple
locations across the world
2. Whether the product serves universal needs
▪ when products serve universal needs, the need for
local responsiveness falls, and concentrating
manufacturing in a central location makes sense

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Location, Strategy, and Production

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 Hidden Costs of Foreign Production Locations

There may be hidden costs associated with

foreign production
Before making the decision to locate production
in a foreign location firms must consider the
potential for
▪ high employee turnover
▪ poor workmanship
▪ poor product quality
▪ low productivity

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Strategic Role of Foreign Factories
The strategic role of foreign factories and the
strategic advantage of a particular location can
change over time
▪ factories established to take advantage of low cost
labor can evolve into facilities with advanced
design capabilities
Improvement in a facility comes from
1. Pressure to lower costs or respond to local markets
2. An increase in the availability of advanced factors
of production

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 Strategic Role of Foreign Factories

➢ Many companies now see foreign factories as globally

dispersed centers of excellence
➢ supports the development of a transnational strategy
➢ global learning - valuable knowledge can be found in
foreign subsidiaries
➢ implies that firms are less likely to switch
production to new locations simply because some
underlying variable like wage rates has changed

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 Outsource Production
Should a firm make or buy the component parts to go
into its final product?
Make-or-buy decisions are important to firms'
manufacturing strategies
▪ service firms also face make-or-buy decisions
▪ decisions involving international markets are more
complex than those involving domestic markets

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 Why Make?
Vertical integration - making component parts in-house
1. Lowers costs
▪ if a firm is more efficient at that production activity than any
other enterprise, manufacturing in-house makes sense
2. Facilitates investments in highly specialized assets
▪ internal production makes sense when substantial investments
in specialized assets are required
3. Protects proprietary technology
▪ in-house production makes sense when component parts
contain proprietary technology
4. Facilitates the scheduling of adjacent processes
▪ planning, coordination, and scheduling of adjacent processes
can be easier with in-house production

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 Why Buy?
Buying parts from independent suppliers
1. Gives the firm greater flexibility
◦ important when changes in exchange rates and trade
barriers alter the attractiveness of various supply sources
over time
2. Helps drive down the firm's cost structure
◦ avoids challenges of coordination and control of additional
subunits
◦ avoids the lack of incentive associated with internal
suppliers
◦ avoids the difficulties with setting appropriate transfer
prices
3. Helps the firm capture orders from international
customers
◦ can help firms gain orders from suppliers’ countries

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 Strategic Alliances with Suppliers
➢ Firms can capture the benefits of vertical
integration without the associated
organizational problems by forming long-term
strategic alliances with key suppliers
▪ however, these commitments may actually
limit strategic flexibility
▪ risk giving away key technological know-
how to a supplier

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 Managing the Global Supply Chain
➢ Logistics encompasses the activities necessary to get
materials to a manufacturing facility, through the
manufacturing process, and out through a distribution
system to the end user.
➢ The goal is to
▪ manage a global supply chain at the lowest
possible cost and in a way that best serves customer
needs
▪ establish a competitive advantage through superior
customer service
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 The Role of Just-In-Time Inventory
➢ Just-in-time (JIT) systems economize on inventory
holding costs by having materials arrive at a
manufacturing plant just in time to enter the
production process
➢ JIT systems
➢ generate major cost savings from reduced
warehousing and inventory holding costs
➢ can help the firm spot defective parts and take them
out of the manufacturing process
➢ But, a JIT system leaves the firm with no buffer stock
of inventory to meet unexpected demand or supply
changes
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The Role of Information Technology and the Internet
➢ Web-based information systems play a crucial role in materials
management
▪ allow firms to optimize production scheduling according to
when components are expected to arrive.
➢ Electronic Data Interchange (EDI)
▪ facilitates the tracking of inputs
▪ allows the firm to optimize its production schedule
▪ lets the firm and its suppliers communicate in real time
▪ eliminates the flow of paperwork between the firm and its
suppliers

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10/18/2024 OCTOBER 2024 142
 Chapter Six
Global Human Resource
Management

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 Introduction
Human resource management (HRM) refers
to the activities an organization
carries out to utilize its human resources effectively
These activities include:
◦ Determining the firm's human resource strategy
◦ Staffing
◦ Performance evaluation
◦ Management development
◦ Compensation
◦ Labor relations
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 Introduction
▪ HRM can help the firm reduce the costs of value
creation and add value by better serving customer needs
▪ HRM is more complex in an international
business because of differences between countries in
labor markets, culture, legal systems, economic
systems, and so on
▪ HRM must also determine when to use expatriate
managers (citizens of one country working
abroad), who should be sent on foreign
assignments, how they should be compensated, how
they should be trained, and how they should be
reoriented when they return home.

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 The Strategic Role Of International HRM
▪ Firms need to ensure there is a fit
between their human resources practices and
strategy
▪ In order to carry out a strategy effectively,
employees need the right training, an
appropriate compensation package, and a good
performance appraisal system

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The Strategic Role of International HRM

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 Staffing Policy
A firm’s staffing policy is concerned with the selection of
employees who have the skills required to perform a
particular job

A staffing policy can be a tool for developing an

promoting the firm’s corporate culture (the organization’s
norms and value system)

A strong corporate culture can help the firm implement its

strategy
10/18/2024 OCTOBER 2024 148
Types of Staffing Policy
There are three main approaches to staffing
policy within international businesses:
1. The Ethnocentric Approach
2. The Polycentric Approach
3. The Geocentric Approach

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 1. The Ethnocentric approach
The ethnocentric approach to staffing policy fills key
management positions with parent-country nationals
It makes sense for firms with an international strategy
Firms that pursue an ethnocentric policy believe that:
▪ There is a lack of qualified individuals in the host country to
fill senior management positions.
▪ It is the best way to maintain a unified corporate culture
▪ Value can be created by transferring core competencies to a
foreign operation via parent country nationals.
The ethnocentric staffing policy is no longer popular with most
firms because:
◦It limits advancement opportunities for host country nationals
◦It can lead to "cultural myopia"

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2. The polycentric staffing
The polycentric staffing policy recruits host country nationals
to manage subsidiaries in their own country, and parent country
nationals for positions at headquarters
It makes sense for firms pursuing a localization
strategy The polycentric approach:
✓ Can minimize cultural myopia
✓ May be less expensive to implement than an ethnocentric policy
There are two disadvantages to the polycentric approach:
➢ Host country nationals have limited opportunities to
gain experience outside their own country and thus cannot
progress beyond senior positions in their own subsidiaries.
➢ A gap can form between host country managers and parent
country managers

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3. The geocentric staffing policy
The geocentric staffing policy seeks the best
people, regardless of nationality for key jobs
This approach is consistent with building a strong unifying culture
and informal management network
It makes sense for firms pursuing either a global or transnational
strategy
Immigration policies of national governments may limit the ability of
a firm to pursue this policy.
The geocentric approach:
✓ Enables the firm to make the best use of its human resources
✓ Builds a cadre of international executives who feel at home
working in a number of different cultures
✓ Can be limited by immigration laws
✓ Is costly to implement

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Comparison of Staffing Approaches

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 Expatriate Managers

Expatriate failure is the premature return of an expatriate

manager to his or her home country
Between 16 and 40 percent of all American expatriates in
developed countries fail to complete their assignments, and
almost 70 percent of Americans assigned to developing
countries return home early
Each expatriate failure can cost between $250,000 and $1
million

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 Expatriate Failure Rates

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 Expatriate Managers
Research shows the main reasons for expatriate
failure multinationals in U.S are:
▪ The inability of an expatriate's spouse to adapt the
inability of the employee to adjust
▪ The manager’s inability to adjust
▪ Other family-related reasons
▪ The manager’s personal or emotional maturity
▪ The manager’s inability to cope with larger overseas
responsibilities

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 Expatriate Managers
For European firms, only one reason was found to
consistently explain expatriate failure:
▪ The inability of the manager’s spouse to adjust to a new
environment For Japanese firms, the reasons for failure are:
▪ The inability to cope with larger overseas responsibility
▪ Difficulties with the new environment
▪ Personal or emotional problems
▪ A lack of technical competence
▪ The inability of spouse to adjust

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Expatriate Managers
Firms can reduce expatriate failure through
improved selection procedures. Four dimensions that predict
expatriate success are:
1. Self-orientation - the expatriate's self-esteem, self-confidence, and
mental well-being
2. Others-orientation - the ability to interact effectively with host-
country nationals
3. Perceptual ability- the ability to understand why people of
other countries behave the way they do
4. Cultural toughness – the ability to adjust to the posting

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The Global Mindset
A global mindset may be the fundamental attribute of a
global manager
A global mindset is often acquired early in life from a
family that is bicultural, lives in foreign countries, or
learns foreign languages as a regular part of family life.

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Training and Management Development
Training focuses upon preparing the manager for a
specific job
Management development is concerned with
developing the skills of the manager over his or her
career with the firm
Historically, most firms focus more on training than
on management development

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Training For Expatriate Managers
▪ Cultural training (seeks to foster an appreciation for the host country's culture)
▪ Language training (an exclusive reliance on English diminishes an
expatriate manager's ability to interact with host country nationals), and
▪ Practical training (helps the expatriate manager and her family ease
themselves into day-to-day life in the host country) have all help reduce
expatriate failure
Yet, according to one study only about 30 percent of managers sent on one- to
five-year expatriate assignments received training before their departure

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 Repatriation of Expatriates
Preparing and developing expatriate managers
for reentry into their home country
organization is an important part of training
and development
HRM needs to develop good programs for re-
integrating expatriates back into work life within
their home country organization once their foreign
assignment is over, and for utilizing the
knowledge they acquired while abroad
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 Management Development and Strategy

Management development programs increase the overall skill levels

of managers by:
▪ Ongoing management education

▪ Rotations of managers through jobs within the

firm to give them varied experiences

Management development is often used as a strategic tool to build

a strong unifying culture and informal management network, both
of which are supportive of a transnational and global strategy
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 Performance Appraisal
Performance appraisal systems are part of the firm’s
control system Evaluating expatriates can be especially
complex
Performance appraisal problems;
Typically, both host nation managers and home office
managers evaluate the performance of expatriate managers
Both types of managers are subject to unintentional bias
Home country managers tend to rely on hard data when
evaluating expatriates, while host country managers can
be biased towards their own frame of reference
10/18/2024 OCTOBER 2024 164
 Guidelines For Performance Appraisal
To reduce bias in performance appraisal:
▪ Most expatriates believe 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 could be involved in the appraisal process to help
reduce bias
▪ When foreign on-site mangers write performance
evaluations, home office managers should be consulted
before an on-site manager completes a formal
termination evaluation
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Compensation
Firms face two key issues on compensation:
1. How to adjust compensation to reflect
differences in economic circumstances and
compensation practices
2. How to pay expatriate managers

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 National Differences In Compensation
There are substantial differences in executive compensation
across countries
In the U.S., a top HR executive made an average of $525,923 in
the 2005-2006 period, compared to $237,697 in Japan, and just
$158,146 in Taiwan
Firms have to decide whether to pay executives in different
countries according to the prevailing standards in each country, or
equalize pay on a global basis
The is an especially challenging issue in firms with geocentric
staffing policies
Many firms have recently moved toward a compensation structure
that is based on global standards

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Expatriate Pay
Most firms use the balance sheet approach to pay
This equalizes purchasing power across countries so
employees have the same living standard in their foreign
posting as at home
An expatriate’s compensation package is made up of:
1. Base salary
2. A foreign service premium
3. Various allowances
4. Tax differentials
5. Benefits
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 Expatriate Pay
Base Salary: An expatriate’s base salary is normally in the same range as the base
salary for a similar position in the home country. Base salary can be paid wither in the
home currency or in the local currency
Foreign Service Premium: A foreign service premium is extra pay the expatriate
receives for working outside his or her country of origin. It is generally offered as an
incentive to accept foreign assignments.
Allowances: Expatriate compensation package often include : hardship allowances,
housing allowances, cost-of-living allowances, education allowances.
Taxation: The expatriate may have to pay income tax to both the home country and
the host-country governments if the host country does not have a reciprocal tax
treaty with the expatriate’s home country
Benefits: Many firms provide the same level of medical and pension benefits
abroad that they received at home

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International Labor Relations
The key issue in international labor relations is
the degree to which organized labor is able to limit
the choices available to an international business
A firm's ability to pursue a transnational or
global strategy can be significantly constrained by
the actions of labor unions
HRM needs to foster harmony and minimize
conflict between the firm and organized labor
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 The Concerns of Organized Labor
The bargaining power of unions comes from their ability to threaten
to disrupt production by striking or protesting
However, organized labor is concerned that:
▪ Multinationals can counter union bargaining power by
threatening to move production to another country
▪ Multinationals will farm out only low-skilled jobs to foreign
plants making it easier to switch production locations
▪ Multinationals will import employment practices and
contractual agreements from their home countries and reduce
the influence of unions

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 The Strategy of Organized Labor
Organized labor has responded to the
increased bargaining power of multinational
corporations by:
▪ trying to set-up their own international organizations
▪ lobbying for national legislation to restrict
multinationals
▪ trying to achieve regulations of multinationals
through international organization such as the United
Nations
However, these efforts have had only limited success.
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 Approaches To Labor Relations
In the past, labor relations have usually been
decentralized to individual subsidiaries
Today, many firms are centralizing labor relations in
order to enhance the bargaining power of the
multinational vis-à-vis organized labor
Many firms are recognizing that the way in which
work is organized within a plant can be a major
source of competitive advantage
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 Chapter Seven

Exporting, Importing and

Counter-trade

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177
 Introduction
Exporting
More than 90 percent of all companies engaged in the global
marketplace export.
◦ Low commitment.
◦ Preferred by many small- and medium-sized enterprises.
Increased volume of exporting is facilitated by:
▪ Decline in trade barriers andincrease in regional
economic agreements.
▪ Advances in technology and communication. The
prospect of exporting is intimidating for some firms.

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Product readiness and company readiness to
export or import

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The Promise and Pitfalls of Exporting
Exporting
Large revenue and profit opportunities in
foreign markets for most firms.
Economies of scale.
Large firms tend to be proactive about exporting;
medium-sized and small firms are reactive.
• Unfamiliar or intimidated by foreign market
opportunities, etc.
• Initial efforts may run into problems, sours
companies on future ventures.
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Improving Export Performance
International Comparisons
◦ One big impediment to exporting is the simple lack of knowledge of
the opportunities available.
▪ Need to collect information on how different countries operate.
▪ Other countries may have more experience in trade.
❑ Ministry of International Trade and Industry (MITI) and
Sogo Shosha in Japan.
Information Sources
▪ Trade associations
▪ Government agencies
▪ Commercial banks

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Improving Export Performance
Service Providers
◦ Freight forwarders.
◦ Combinesmaller shipments into a single large
shipmentto minimize the shipping cost.
◦ Documentation, payment, and carrier selection.
◦ Export management companies.
◦ Acts as an export marketing department for client firms.
◦ Export trading companies.
◦ Provide comprehensive exporting services, including export
documentation, logistics, and transportation.

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Improving Export Performance
Service Providers
◦ Export packaging companies.
◦ Advise companies on appropriate design and materials for the
packaging of their items.
◦ Assist companies in minimizing packaging to maximize the
number of items to be shipped.
◦ Customs brokers.
◦ Offer a complete package of services essential in dealing with
potential pitfalls when a firm is exporting to many countries.
◦ Confirming houses (buying agents).
◦ Represent foreign companies that want to buy your products.

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Improving Export Performance
Service Providers
◦ Export agents, merchants and marketers.
◦ Buy products directly from the manufacturer and package and
relabel the products.
◦ Piggyback marketing.
◦ One firm distributes another firm’s products.
◦ Usually requires complementary products and the same target
market of customers.
◦ Export processing zones.
◦ Include foreign trade zones (FTZs), special economic zones,
bonded warehouses, free ports, and customs zones.

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Improving Export Performance
Export Strategy
1. Hire an EMC or at least an experienced export consultant to
identify opportunities and navigate the paperwork and regulations in
exporting.
2. Initially focus on one market or a handful of markets.
3. Enter a foreign market on a small scale to reduce the costs of
any subsequent failure.
4. Recognize the time and managerial commitment involved in
building export sales and hire additional personnel to oversee this
activity.
5. Devote attention to building strong and enduring relationships
with local distributors and/or customers.
6. Hire local personnel to help the firm establish itself in a foreign
market.
7. Be proactive about seeking export opportunities.
8. Retain the option of local production.
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Company readiness to export

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Improving Export Performance
The globalEDGE Exporting Tool
◦ Company Readiness to Export (CORE)
tool.
◦ Used to assess (1) a company's readiness
to export a product and (2) the product's
readiness to be exported.
◦ Assists firms in self-assessment of
their exporting proficiency.
◦ Evaluates both the firm’s and the
intended product’s readiness to be taken
internationally.
◦ Systematically identifies the firm’s
strengths and weaknesses within
the context of exporting.

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Export and Import Financing
Lack of Trust
◦ Firms engaged in international trade have to trust
someone:
◦ They may have never seen.
◦ Who lives in a different country.
◦ Who speaks a different language.
◦ Who abides by (or does not abide by) a different legal
system.
◦ Who could be very difficult to track down if he or she
defaults on an obligation.
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Preference of the U.S. exporter

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Preference of the French importer

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The use of a third party

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Export and Import Financing

Letter of Credit
◦States that the bank will pay a specified sum to a
beneficiary, normally the exporter, upon
presentation of specified documents.
◦Issued by a bank at the request of the importer.
◦Companies are likely to trust reputable banks.
◦The importer must pay a fee.

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 Export and Import Financing
Draft (Bill of Exchange)
◦ Normally used in international commerce to effect payment.
◦ Indicates specified amount of money to be paid at a specified time.
◦ Used to settle trade transactions.
◦ In domestic transactions, the buyer can often obtain possession of the
merchandise without signing a formal document acknowledging his or her
obligation to pay.
◦ In international transactions, payment or a formal promise to pay is
required before the buyer can obtain the merchandise.
◦ Sight draft: payable on presentation to the drawee.
◦ Time draft: promise to pay by the accepting party at some future date.
◦ When a time draft is drawn on and accepted by a bank, it is called a
banker’s acceptance.
◦ When it is drawn on and accepted by a business firm, it is called a
trade acceptance.
◦ Negotiable instruments.

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 Export and Import Financing
Bill of Lading
◦Three purposes: a receipt, a contract, and a
document of title.
◦Can also function as collateral against which
funds may be advanced to the exporter by its
local bank before or during shipment and before
final payment by the importer.

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A typical international trade transaction

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 Export Assistance
The Export-Import Bank (EXIM-Bank)
◦ Assists in the financing of U.S. exports of products and services to support
U.S. employment and market competitiveness.
◦ Supplements private capital lending with various loan and loan-guarantee
programs.
◦ Guarantees repayment of medium- and long-term loans that U.S.
commercial banks make to foreign borrowers for purchasing U.S. exports.
◦ Also lends dollars to foreign borrowers for use in purchasing U.S. exports.
Export Credit Insurance
◦ The lack of a letter of credit exposes the exporter to the risk that the foreign
importer will default on payment.
◦ The exporter can insure against this possibility by buying export credit
insurance.
◦ Provided by the Foreign Credit Insurance Association (FCIA).

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 Countertrade 1

Countertrade
◦ Trade of goods and services for other goods and services.
◦ Alternative means of structuring an international sale when
conventional means of payment are difficult, costly, or nonexistent.
◦ Barter-like agreements.
Popularity of Countertrade
◦ Popular among developing nations that lack the foreign exchange
reserves required to purchase necessary imports.
◦ World trade covered by some sort of countertrade agreement
range grew from 2 to 10 percent a decade ago to about 20 to 25
percent today.

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 Types of Countertrade
1. Barter: direct exchange of goods and/or services
between two parties without a cash transaction.
2. Counterpurchase: reciprocal buying agreement.
3. Offset: an agreement to purchase goods and services with
a specified percentage of proceeds from an original sale
in that country from any firm in the country.
4. Switch trading: the use of a specialized third-party
trading house in a countertrade arrangement.
5. Compensation or buybacks: an agreement to accept a
percentage of a plant’s output as payment for contract to
build a plant.

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Historical diffusion of countertrade
▪ Countertrade was common in the USSR in the 1960s when its
currency was nonconvertible.
▪ Countertrade grew in the 1980s as many other nations did
not have the foreign reserves required to make imports.
▪ Countertrade increased yet again during the Asian financial
crisis in 1997, as many currencies became devalued and
had severely limited buying power.
▪ One example of countertrade was when the USSR paid
Coca-Cola in vodka. Poland did the same with Coca-Cola
but paid in beer.

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 Barter
▪ Direct exchange of goods and/or services between two parties
without a cash transaction
▪ Even if it represent the simplest type of CT, it’s not very common
▪ Barter involves a single contract that covers both transaction
flows.
▪ It is primarily used for one-time-only deals in transactions with trading
partners who are not creditworthy or trustworthy

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Barter: Exemples
✓ The Malaysian government purchased 20 diesel
electric locomotives from General Electric against the
supply of about 200,000 metric tons of palm oil over a
period of 30 months. (Source: www.citeman.com)

Barter trade is becoming popular between individuals

or small business level instead at government level,
especially in the poorer economies or during the crisis

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Counterpurchase
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
Example: Pepsi Cola sold concentrates in the USSR and got paid
in Rubles, which according to the agreement with Russia, these
Rubles were spent for purchase of Russian products like Vodka and
wine

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 Offset
• One party agrees to purchase goods and services with a specified
percentage of the proceeds from the original sale.
• OFFSET is more attractive than a straight counter purchase
agreement because it gives the exporter greater flexibility to
choose the goods that it wishes to purchase.
• Offset has been popular among governments all over the world,
as they have been purchasing heavy military equipment, but
now it is gaining momentum in other sectors also
• Offset activity can be divided into two main categories direct and
indirect

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 Offset
DIRECT
When the buyer requires the seller to enter into a long-term
industrial or other co-operation and investment, but this co-
operation or investment is not related to goods supplied by
the seller.
INDIRECT
When some components of the item sold are to be
manufactured within the buyer’s country and that the
seller agrees to buy those components to use them in-
house
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 Switch Trading
• 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.

• Switch Trading not only exists between the individual companies but it
also has a role to play in clearing arrangements between the countries.

Example: The U.S. firm obtains counterpurchase credits from Poland but
sells them to a trading house at a discount since they do not want or need Polish
goods. The trading house then sells the credits to another firm for a profit.

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Compensation or Buyback
With the compensation the seller receives a part of the payment is cash
and the rest in shape of products

Under the buyback agreement, the seller supplies plant, equipment or

technology and agrees to buy goods produced with that plant, or equipment as
payment.

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Countertrade strategy

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 Countertrade 5

Pros and Cons of Countertrade

◦ Pros:
▪ 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.
▪ Can become a strategic marketing weapon.
◦ Cons:
◦ Firms would normally prefer to be paid in hard currency.
◦ May involve the exchange of unusable or poor-quality goods that
the firm cannot dispose of profitably.
◦ Countertrade is most attractive to large, diverse multinational enterprises that
can use their worldwide network of contacts to dispose of goods acquired in
countertrading.
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 Chapter Eight

Global Marketing and R&D

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 Introduction
The marketing mix (the choices the firm
offers to its targeted market) is comprised of:
▪ Product attributes
▪ Distribution strategy
▪ Communication strategy
▪ Pricing strategy

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 The Globalization of Markets and Brands
Theodore Levitt argued that world markets were becoming
increasingly similar making it unnecessary to localize the marketing
mix.
Levitt’s theory has become a lightning rod in the debate about
globalization
The current consensus is that while the world is moving towards
global markets, cultural and economic differences among nations limit
any trend toward global consumer tastes and preferences
In addition, trade barriers and differences in product and
technical standards also limit a firm's ability to sell a standardized
product to a global market
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 Market Segmentation
Market segmentation involves identifying distinct groups
of consumers whose purchasing behavior differs from others
in important ways.
Markets can be segmented by:
▪ Geography
▪ Demography
▪ Socio-cultural Factors
▪ Psychological Factors

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 Market Segmentation
Firms need to be aware of two key market segmentation
issues:
1. Thedifferences between countries in the structure of
market segments
2. The existence of segments that transcend national
borders
When segments transcend national borders, a global
strategy is possible

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 Product Attributes
A product is like a bundle of attributes
Products sell well when their attributes match
consumer needs
If consumer needs were the same everywhere, a firm
could sell the same product worldwide
But, consumer needs vary from country to country
depending on culture and the level of economic
development
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 Cultural Differences
Countries differ along a range of cultural dimensions including:
▪ Tradition
▪ Social structure
▪ Language
▪ Religion
▪ Education
While there is some cultural convergence among nations, Levitt’s
vision of global markets is still a long way off

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 Economic Development
A country’s level of economic development has
important marketing implications
Consumers in highly developed countries tend to demand
a lot of extra performance attributes
Consumers in less developed nations tend to prefer more
basic products

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 Product and Technical Standards
Levitt’s notion of global markets does not
allow for the national differences in product and
technological standards that force firms to
customize the marketing mix

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 Distribution Strategy
A firm’s distribution strategy (the means it chooses for
delivering the product to the consumer) is a critical element
of the marketing mix
How a product is delivered depends on the firm’s market
entry strategy
Firms that manufacturer the product locally can sell directly
to the consumer, to the retailer, or to the wholesaler
Firms that manufacture outside the country have the same
options plus the option of selling to an import agent
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 Distribution Strategy

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 Differences Between Countries
There are four main differences in distribution
systems:
1. Retail Concentration
2. Channel Length
3. Channel Exclusivity
4. Channel Quality

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 Differences Between Countries
1. Retail Concentration
In a concentrated retail system, a few retailers supply most of the market. In a
fragmented retail system there are many retailers, no one of which has a major
share of the market. Developed countries tend to have greater retail concentration,
while developing countries are more fragmented
2. Channel Length
Channel length refers to the number of intermediaries between the producer and
the consumer. When the producer sells directly to the consumer, the channel is
very short. When the producer sells through an import agent, a wholesaler, and a
retailer, a long channel exists
Countries with fragmented retail systems tend to have longer channels, while
countries with concentrated systems have shorter channels The Internet is helping to
shorten channel length as is the emergence of large stores like Wal-Mart and
Tesco

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Differences Between Countries
3.Channel Exclusivity
An exclusive distribution channel is one that is difficult for
outsiders to access
Japan's system is an example of a very exclusive system
4.Channel Quality
Channel quality refers to the expertise, competencies, and
skills of established retailers in a nation, and their ability to sell
and support the products of international businesses
The quality of retailers is good in most developed countries, but is
variable at best in emerging markets and less developed countries
Firms may find that they have to devote considerable resources to
upgrading channel quality
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 Choosing A Distribution Strategy
The choice of distribution strategy determines which channel the
firm will use to reach potential consumers
The optimal strategy depends on the relative costs and benefits of
each alternative
Since each intermediary in a channel adds its own markup to the
products, there is generally a critical link between channel length and
the firm's profit margin
So, when price is important, a shorter channel is better
A long channel can be beneficial because it economizes on selling
costs when the retail sector is very fragmented, and can offer access to
exclusive channels

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Communication Strategy
Communicating product attributes to prospective customers is a
critical element in the marketing mix
How a firm communicates with customers depends partly on the
choice of channel
Communication channels available to a firm include
➢ Direct Selling
➢ Sales Promotion
➢ Direct Marketing
➢ Advertising

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 Barriers To International Communication
International communication occurs whenever a firm uses
a marketing message to sell its products in another country
The effectiveness of a firm's international communication
can be jeopardized by:
1. Cultural Barriers
2. Source and Country Of Origin Effects
3. Noise Levels

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Barriers To International Communication
1. Cultural Barriers – it can be difficult to communicate messages across
cultures. A message that means one thing in one country may mean something
quite different in another
To overcome cultural barriers, firms need to develop cross-cultural literacy,
and use local input when developing marketing messages
2. Source and Country of Origin Effects
Source effects occur when the receiver of the message evaluates the message
on the basis of status or image of the sender. Firms can counter negative
source effects by deemphasizing their foreign origins
Country of origin effects refer to the extent to which the place of
manufacturing influences product evaluations
3. Noise Levels
Noise refers to the amount of other messages competing for a potential
consumer’s attention. In highly developed countries, noise is very high. In
developing countries, noise levels tend to be lower

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 Push versus Pull Strategies
Firms have to choose between two types of communication
strategies: a push strategy emphasizes personnel selling
a pull strategy emphasizes mass media
advertising The choice between the strategies
depends upon:
1. Product Type And Consumer Sophistication
2. Channel Length
3. Media Availability

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 Push versus Pull Strategies
1.Product Type and Consumer Sophistication
Firms in consumer goods industries that are trying to sell to a
large market segment usually use a pull strategy
Firms that sell industrial products typically prefer a push strategy
2.Channel Length
A pull strategy can work better with longer distribution channels
3.Media Availability
A pull strategy relies on access to advertising media
When media is not easily available, apush strategy may be more
attractive
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 Push versus Pull Strategies
In general, a push strategy is better:
▪ for industrial products and/or complex new products
▪ when distribution channels are short
▪ when few print or electronic media are available
A pull strategy is better:
▪ for consumer goods products
▪ when distribution channels are long
▪ when sufficient print and electronic media are available to carry the
marketing message

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 Global Advertising
Standardizing advertising worldwide has both pros and
cons Standardized advertising makes sense when it has
significant economic advantages, creative talent is
scarce and one large effort to develop a campaign will
be more successful than numerous smaller efforts brand
names are global

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 Global Advertising
Standardized advertising does not make
sense when: cultural differences among
nations are significant
country differences in advertising regulations block the
implementation of standardized advertising
Some firms have been trying tactics to capture the
benefits of global standardization while responding to
individual cultural and legal environments
So, some features of a campaign are standardized
while others are customized to local markets

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Pricing Strategy
International pricing is an important element in
the marketing mix There are three issues to
consider:
▪ The case for price discrimination
▪ Strategic pricing
▪ Regulations that affect pricing decisions

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 Price Discrimination
Price discrimination occurs when firms charge consumers
in different countries different prices for the same product
Firms using price discrimination hope it will boost
profits For price discrimination to work:
the firm must be able to keep national markets separate
different price elasticities of demand must exist in different
countries

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 Price Discrimination
The price elasticity of demand is a measure of the
responsiveness of demand for a product to changes in price
Whena small change in price produces a large change in demand,
demand is elastic
When a large change in price produces only a small change in
demand, demand is inelastic
Income level and competitive conditions are the two most
important determinants of a country’s elasticity of demand for a
certain product
Typically, price elasticities are greater in countries with lower
income levels and larger numbers of competitors

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 Elastic and Inelastic Demand Curves

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Strategic Pricing
Strategic pricing has three aspects:
1.Predatory Pricing
2.Multi-point Pricing
3.Experience Curve Pricing

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1. Predatory Pricing
Predatory pricing involves using the profit
gained in one market to support aggressive
pricing designed to drive competitors out in
another market
After the competitors have left, the firm will raise
prices

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2. Multi-point Pricing
Multi-point pricing refers to the fact that a firm’s pricing
strategy in one market may have an impact on a rival’s pricing
strategy in another market
Aggressive pricing in one market may elicit a competitive
response from a rival in another critical market
Formanagers,it is important to centrally monitor pricing
decisions around the world
Aggressive pricing in one market may elicit a response
from rivals in another market

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3. Experience Curve Pricing
Firms that are further along the experience curve have a
cost advantage relative to firms further up the curve
Firms pursuing an experience curve pricing strategy
price low worldwide in an attempt to build global
sales volume as rapidly as possible, even if this means
taking large losses initially
The firm believes that several years in the future, when it
has moved down the experience curve, it will be making
substantial profits and have a cost advantage over its less
aggressive competitors

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 Regulatory Influences On Prices
The use of either price discrimination or strategic pricing may be limited by
national or international regulations
A firm’s ability to set its own prices may be limited by: Antidumping
regulations and Competition policy
1. Antidumping Regulations
Dumping occurs whenever a firm sells a product for a price that is less than the
cost of producing it. Antidumping rules set a floor under export prices and limit a
firm’s ability to pursue strategic pricing
2. Competition Policy
Most industrialized nations have regulations designed to promote
competition and restrict monopoly practices
The regulations can be used to limit the prices that a firm can charge

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 Configuring The Marketing Mix
Standardization versus customization is not an
all-or-nothing concept Most firms standardize
some things and customize others
Firms should consider the costs and benefits of
standardizing and customizing each element of the
marketing mix

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New Product Development
Today, competition is as much about technological innovation as
anything else
The pace of technological change is faster than ever
Product life cycles are often very short

New innovations can make existing products obsolete, but at the same
time, open the door to a host of new opportunities
Firms today need to make product innovation a priority
This requires close links between R&D, marketing, and manufacturing

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 The Location of R&D
New product ideas come from the interactions of scientific
research, demand conditions, and competitive conditions
The rate of new product development is greater in countries
where: more money is spent on basic and applied research
and development
▪ Demand is strong
▪ Consumers are affluent
▪ Competition is intense

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Integrating R&D, Marketing, & Production
New product development has a high failure rate
To reduce the chance of failure, new product development efforts should involve
close coordination between R&D, marketing, and production
This integration will ensure that:
◦ Customer needs drive product development
◦ New products are designed for ease of manufacture
◦ Development costs are kept in check
◦ Time to market is minimized

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 Cross-Functional Teams
Cross-functional integration is facilitated by cross-functional product
development teams
Effective cross functional teams should:
◦ be led by a heavyweight project manager with status in the
organization
◦ include members from all the critical functional areas
◦ have members located together
◦ establish clear goals
◦ develop an effective conflict resolution process

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Building Global R&D Capabilities
To adequately commercialize new technologies, firms need
to integrate R&D and marketing
Commercialization of new technologies may require firms
to develop different versions for different countries
This may require R&D centers in North America, Asia, and
Europe that are closely linked by formal and informal
integrating mechanisms with marketing operations in each
country in their regions, and with the various
manufacturing facilities
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 Thank You!
246 End of the Course
10/18/2024 OCTOBER 2024 Hagerbigegn Hailemeskel, March 2020