International Business

11e

By Charles W.L. Hill

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 Chapter 1

Globalization

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 What Is Globalization?
 Globalization - the shift toward a more
integrated and interdependent world
economy
 The world is moving away from self-
contained national economies toward an
interdependent, integrated global
economic system

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 What Is The
Globalization of Markets?
 Historically distinct and separate national
markets are merging
 It 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 and preferences are converging on
some global norm
 firms promote the trend by offering the same basic
products worldwide
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 What Is The
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, energy, and capital
 Companies can
 lower their overall cost structure
 improve the quality or functionality of their
product offering

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 Why Do We Need
Global Institutions?
 Global institutions
 help manage, regulate, and police the global
marketplace
 promote the establishment of multinational
treaties to govern the global business system

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 Why Do We Need
Global Institutions?
 Examples include
 the General Agreement on Tariffs and Trade
(GATT)
 the World Trade Organization (WTO)
 the International Monetary Fund (IMF)
 the World Bank
 the United Nations (UN)
 the G20

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 What Is Driving
Globalization?
 Declining barriers to the free flow of goods,
services, and capital
 average tariffs are now at just 4%
 more favorable environment for FDI
 global stock of FDI was $20.4 trillion in 2011
 facilitates global production
 Technological change
 microprocessors and telecommunications
 Internet: information backbone of the global
economy
 transportation technology
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 What Does Globalization
Mean For Firms?
 Lower barriers to trade and investment
mean firms can
 view the world, rather than a single country,
as their market
 base production in the optimal location for that
activity
 But, firms may also find their home
markets under attack by foreign firms

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 What Does Globalization
Mean For Firms?
 Technological change means
 lower transportation costs
 help create global markets and allow firms to
disperse production to economical, geographically
separate locations
 low cost information processing and communication
 firms can create and manage globally dispersed
production
 low cost global communications networks
 help create an electronic global marketplace
 global communication networks and global media
 create a worldwide culture and a global consumer
product market

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The Changing Demographics
Of The Global Economy
 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?
FDI Inflows 1980-2013

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 What Is A
Multinational Enterprise?
 Multinational enterprise (MNE) - any
business that has productive activities in
two or more countries
 Since the 1960s
 the number of non-U.S. multinationals has
risen
 the number of mini-multinationals has
risen

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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
 creates new opportunities for international
businesses
 but, there are signs of growing unrest and totalitarian
tendencies in some countries
 China and Latin America are also moving toward
greater free market reforms
 between 1983 and 2010, FDI in China increased from
less than $2 billion to $100 billion annually
 but, China also has many new strong companies that
could threaten Western firms

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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—and
all countries will benefit

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 How Does Globalization Affect Labor
Policies And The Environment?
 Critics argue that firms avoid the cost of
adhering to labor and environmental regulations
by moving production to countries where such
regulations do not exist, or are not enforced
 Supporters claim that tougher environmental
and labor standards are associated with
economic progress
 as countries get richer from free trade, they
implement tougher environmental and
labor regulations

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 How Is Globalization
Affecting The World’s Poor?
 Is the gap between rich nations and poor nations
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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 International Business
11e

By Charles W.L. Hill

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Chapter 2

National Differences in
Political, Economic, and
Legal Systems

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 What Is A Political Economy?
 Political economy of a nation - how the
political, economic, and legal systems of a
country are interdependent
 they interact and influence each other
 they affect the level of economic well-being in
the nation

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 What Is A Political System?
 Political system - the system of
government in a nation
 Assessed according to
 the degree to which the country emphasizes
collectivism as opposed to individualism
 the degree to which the country is democratic
or totalitarian

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 What Is Collectivism?
 Collectivism stresses the primacy of
collective goals over individual
goals
 can be traced to the Greek philosopher, Plato
(427-347 BC)
 Today, collectivism is equated with
socialists (Karl Marx 1818-1883)
 advocate state ownership of the basic means
of production, distribution, and exchange
 manage to benefit society as a whole, rather
than individual capitalists
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 How Does Modern-Day
Socialism Look?
 In the early 20th century, socialism split into
1. Communism – socialism can only be
achieved through violent revolution and
totalitarian dictatorship
 in retreat worldwide by mid-1990s
2. Social democrats – socialism is achieved
through democratic means
 retreating as many countries move toward free
market economies
 state-owned enterprises have been privatized

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 What Is Individualism?
 Individualism refers to philosophy that an
individual should have freedom in his own
economic and political pursuits
 can be traced to Greek philosopher, Aristotle (384-
322 BC)
 individual diversity and private ownership are
desirable
 individual economic and political freedoms are the
ground rules on which a society should be based
 implies democratic political systems and free
market
economies

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 What Is Democracy?
 Democracy (dân chủ) - a political system in
which government is by the people,
exercised either directly or through elected
representatives
 usually associated with individualism
 pure democracy is based on the belief that citizens
should be directly involved in decision making
 most modern democratic states practice
representative democracy where citizens periodically
elect individuals to represent them

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 What Is Totalitarianism?
 Totalitarianism - form of government in
which one person or political party
exercises absolute control over all
spheres of human life and prohibits
opposing political parties

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 What Is An Economic System?
 There are three types of economic
systems
1. Market economies - all productive
activities are privately owned
and production is determined by
the interaction of supply and
demand
 government encourages free and fair
competition between private producers

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 What Is An Economic System?

2. Command economies (kinh tế chỉ huy) -

government plans the goods and services that
a country produces, the quantity that is
produced, and the prices as which they are
sold
 all businesses are state-owned, and
governments allocate resources for “the
good of society”
 because there is little incentive to control
costs and be efficient, command economies
tend to stagnate
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 What Is An Economic System?

3. Mixed economies (kinh tế hỗn hợp) -

certain sectors of the economy are left
to private ownership and free market
mechanisms while other sectors
(electricity, water,...) have significant
state ownership and government
planning
 governments tend to own firms that are
considered important to national security

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 What Is A Legal System?
 Legal system (hệ thống pháp luật) - the rules
that regulate behavior along with the
processes by which the laws are enforced and
through which redress for grievances is
obtained
 the system in a country is
influenced by the prevailing political system
 Legal systems are important for business
because they
 define how business transactions are
executed
 identify the rights and obligations of parties involved
in business transactions
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 What Are The Different
Legal Systems?
 There are three types of legal systems
1. Common law (thường luật, thông
luật, luật chung) - based on
tradition, precedent, and custom
2. Civic law (luật dân sự) - based on
detailed set of laws organized into
codes
3. Theocratic law (luật thần giáo, chủ yếu ở
những quốc gia theo đạo Hồi) - law is
based on religious teachings

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How Are Contracts Enforced In
Different Legal Systems?
 Contract - document that specifies the conditions
under which an exchange is to occur and details
the rights and obligations of the parties involved
 Contract law (luật hợp đồng) is the body of
law that governs contract enforcement
 under a common law system, contracts tend to
be
very detailed with all contingencies spelled out
 under a civil law system, contracts tend to be much
shorter and less specific because many issues are
already covered in the civil code

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 How Are Property Rights And
Corruption Related?
 Property rights - the legal rights over
the use to which a resource is put and
over the use made of any income that
may be derived from that resource

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 How Are Property Rights And
Corruption Related?
 Property rights can be violated through
1. Private action – theft, piracy, blackmail
2. Public action - legally - ex.
excessive taxation or illegally -
ex. bribes or blackmailing
 high levels of corruption reduce foreign direct
investment, the level of international trade, and
the economic growth rate in a country

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 Which Countries Are Most
Corrupt?
Rankings of Corruption by Country
2014

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 How Can Intellectual
Property Be Protected?
 Intellectual property - property that is the product of
intellectual activity
 Can be protected using
1. Patents – exclusive rights for a defined period to the
manufacture, use, or sale of that invention
2. Copyrights – the exclusive legal rights of authors,
composers, playwrights, artists, and publishers
to publish and disperse their work as they see fit
3. Trademarks – design and names by which
merchants or manufacturers designate and
differentiate their products

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 International Business
11e

By Charles W.L. Hill

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 3

National
Differences in
Economic
Development
 What Determines A Country’s
Level Of Economic
Development?
 Gross national income (GNI) per person
measures the total annual income
received by residents of a nation
 Japan, Sweden, Switzerland, and the U.S.
have high GNI
 China and India have low GNI
 GNI can be misleading because it does
not consider differences in the cost of
living
 need to adjust GNI figures using purchasing
power parity (PPP)

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 How Do Countries
Compare On GNI?
Economic Data for Select Countries

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 What Determines A Country’s
Level Of Economic
Development?
 Official figures can also be misleading
because they do not account for
black economy transactions
 In addition, GNI and PPP data are static
and do not consider economic growth
rates
 So, while China and India are currently
categorized as being poor they are growing
more rapidly than many developed nations
and are expected to become among the
largest economies in the world

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 How Do Countries
Compare On Growth Rates?
Average Annual Growth Rate in GDP, 2004--2013

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 What Determines A Country’s
Level Of Economic
Development?
 Nobel-prize winner Amartya Sen argues
economic development should be seen as a
process of expanding the real freedoms
that people experience
 the removal of major impediments to freedom like
poverty, tyranny, and neglect of public facilities
 the presence of basic health care and basic
education
 Amartya Sen also claims that economic
progress requires the democratization of
political communities to give citizens a voice

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 What Determines A Country’s
Level Of Economic
Development?
 The United Nations used Sen’s ideas to
develop the Human Development
Index (HDI) which is based on
 life expectancy at birth
 educational attainment
 whether average incomes are sufficient to
meet the basic needs of life in a country

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 How Do Countries Compare on
Economic Development?
Human Development Index, 2013

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 How Does Political
Economy Influence
 Innovation and entrepreneurship are the engines
Economic Progress?
of long-run economic growth
 innovation includes new products, new processes,
new organizations, new management practices, and
new strategies
 entrepreneurs commercialize innovative new products
and processes
 Innovation and entrepreneurship help increase
economic activity by creating new markets
and products that did not previously exist
 innovation in production and business processes
result in more productive labor and capital further
boosting economic growth rates

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 How Does Political
Economy Influence
Economic Progress?
Innovation and entrepreneurship require a
market economy
 there is little incentive to develop new innovations in
planned economies because the state owns all
means production and therefore, the gains
 There is a strong relationship between economic
freedom and economic growth
 the six countries with the highest ratings of economic
freedom from 1975 to 1995 were also among the
highest for economic growth
 Hong Kong, Switzerland, Singapore, the United
States, Canada, and Germany

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 How Does Political
Economy Influence
Economic
Innovation andProgress?
entrepreneurship require
strong property rights
 without strong property rights, individuals and
businesses risk having their innovations and
potential profits stolen
 Economist Hernando de Soto claims that
inadequate property protection in many
developing nations limits economic growth

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 How Does Political
Economy Influence
Economic Progress?
Democratic regimes are probably more
conducive to long-term economic growth than
dictatorships, even the benevolent kind
 property rights are only secure in well-functioning,
mature democracies
 Subsequent economic growth leads to the
establishment of democratic regimes
 South Korea
 Taiwan

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 How Does Geography
Influence Economic
Development?
 Countries with favorable geography are more
likely to engage in trade, and so, be more open
to market-based economic systems, and the
economic growth they promote
 Jeffrey Sachs studied economic growth rates
between 1965 and 1990 and found that
 landlocked countries grew more slowly than
coastal
economies
 being totally landlocked reduced a country’s growth
rate by 0.7% per year
 tropical countries grew more slowly than countries
in
temperate zones
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How Does Education
Influence Economic
Development?
 Countries that invest in education have
higher growth rates because the workforce
is more productive
 countries in Southeast Asia have offset their
geographical disadvantages by investing in
education
 Indonesia, Malaysia, and Singapore

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 How Is The Political
Economy Changing?
 Since the late 1980s, two trends have emerged
1. Democratic revolution (late 1980s and early
1990s)
 democratically elected governments replaced
totalitarian regimes
 more committed to free market capitalism
2. A move away from centrally planned and
mixed economies
 more countries have shifted toward the market-
based model

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 How Is The Political
Economy Changing?
 Trend 1: Democracy has spread over the last
two decades
 many totalitarian regimes failed to deliver
economic
progress to the vast bulk of their populations
 new information and communication technologies
have broken down the ability of the state to control
access to uncensored information
 economic advances of the last 25 years have led to
increasingly prosperous middle and working classes
who have pushed for democratic reforms

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 How Free Are
Countries Politically?
Freedom in the World in
2015

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 How Is The Political
Economy Changing?
 Author Francis Fukuyama argues that the new
world order will be characterized by democratic
regimes and free market capitalism
 But, political scientist Samuel Huntington
argues that while many societies are
modernizing they are not becoming more
Western
 predicts a world split into different
civilizations
 these civilizations will be in conflict with
each
other
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 How Is The Political
Economy Changing?
 Trend 2: The spread of market-based
systems
 more countries have moved away from
centrally planned and mixed economies
toward the market-based model
 Command and mixed economies failed
to deliver the sustained economic growth
achieved in market-based countries

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 How Free Are
Countries Economically?
Distribution of Economic Freedom,
2015

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 What Is The Nature Of
Economic Transformation?
 The shift toward a market-based system
involves
 deregulation – removing legal restrictions to
the free play of markets, the establishment of
private enterprises, and the manner in which
private enterprises operate
 privatization - transfers the ownership of state
property into the hands of private investors
 the creation of a legal system to safeguard
property rights

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 What Does The Changing
Economy Mean For
Managers?
 Markets that were formerly off-limits to Western
business are now open
 firms need to explore opportunities in these markets
 Despite being underdeveloped and poor, some
markets have huge potential
 China -1.3 billion people
 India – 1.2 billion people
 Latin America – 600 million potential consumers

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 What Does The Changing
Economy Mean For
Managers?
 However, the potential risks are large
 will democracy thrive especially in difficult
economic times?
 will totalitarian regimes return?
 will a multi-polar world of different civilizations
emerge?
 will China’s financial system be stable?

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 What Are The Implications Of Political
Economy Differences For
Managers?
 Countries with democratic regimes, market
based economic policies, and strong property
rights protection are more likely to have higher
sustained rates of economic growth
 these markets are more attractive to international
businesses
 the benefits, costs, and risks of doing business in a
country are a function of the country’s political,
economic, and legal systems

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 What Are The Implications Of Political
Economy Differences For
Managers?
 The benefits of doing business in a country are a
function of
 the market’s size
 the purchasing power of its consumers
 their likely future wealth
 By identifying and investing early in potential
future economic stars, firms may be able to gain
first mover advantages (advantages that
accrue to early entrants into a market) and
establish loyalty and experience in a country
 China

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 What Are The Implications Of Political
Economy Differences For
Managers?
 The costs of doing business in a country
are a function of its
 political system
 is it necessary to pay bribes to get market
access?
 economic level
 are the necessary supporting business and
infrastructure in place?
 legal system
 it can be more costly to do business in countries
with dramatically different product, workplace, and
pollution standards, or where there is poor legal
protection for property rights
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 What Are The Implications Of Political
Economy Differences For
Managers?
 The risks of doing business in a country are a
function of
 Political risk - the likelihood that political forces will
cause drastic changes in a country's business
environment that adversely affects the profit and
other goals of a business enterprise
 Economic risk - the likelihood that economic
mismanagement will cause drastic changes in a
country's business environment that adversely
affects the profit and other goals of a business
enterprise
 Legal risk - the likelihood that a trading partner will
opportunistically break a contract or expropriate
property rights

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 How Can Managers Determine
A Market’s Overall
Attractiveness?
The overall attractiveness of a country as a
potential market and/or investment site for an
international business depends on balancing the
benefits, costs, and risks associated with doing
business in that country
 Other things being equal, the benefit-cost-risk
trade-off is likely to be most favorable in
politically stable developed and developing
nations that have free market systems and no
dramatic upsurge in either inflation rates or
private sector debt

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 How Can Managers Determine
A Market’s Overall
Attractiveness? Country Attractiveness

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Before investing in a foreign location, a firm must take three
things into consideration: the costs, benefits, and risks
(political, economic, or legal) associated with entering into a
business venture there.

Imagine you are the manager of a foreign company

considering an investment in your home town. What would
be some of the expected costs, benefits, or risks of starting
a new business where you live? How high would you rate
your location on its overall attractiveness to investors?
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 International Business
11e

By Charles W.L. Hill

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Chapter 4

Differences
in
Culture
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 What Is Culture?
 Culture - a system of values and norms that are
shared among a group of people and that
when taken together constitute a design for
living
where
 values are abstract ideas about what a group believes
to be good, right, and desirable
 norms are the social rules and guidelines that
prescribe appropriate behavior in particular situations
 Society - a group of people who share a
common set of values and norms
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 What Are Values And Norms?
 Values provide the context within which a
society’s norms are established and
justified and form the bedrock of a culture
 Norms include
 folkways - the routine conventions of
everyday life
 mores - norms that are seen as central to the
functioning of a society and to its social life

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 What Determines Culture?
 The values and norms of a culture evolve
over time
 Determinants include
 religion
 political and economic philosophies
 education
 language
 social structure

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 What Determines Culture?

Determinants of Culture

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 How Do Religious And
Ethical Systems Differ?
 Religion - a system of shared beliefs and
rituals that are concerned with the realm of the
sacred
 Four religions dominate society
1. Christianity
2. Islam
3. Hinduism
4. Buddhism
5. Confucianism is also important in influencing
behavior and culture in many parts of Asia

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 How Do Religious And
Ethical Systems Differ?
 Ethical systems - a set of moral
principles, or values, that are used to
guide and shape behavior
 Religion and ethics are often closely
intertwined
 Example: Christian or Islamic ethics

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 What Is The Role
Of Language In Culture?
 Language - the spoken and unspoken
(nonverbal communication such as
facial expressions, personal space, and
hand gestures ) means of
communication
 countries with more than one language often
have more than one culture
 Canada, Belgium, Spain

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 What Is The Role
Of Language In Culture?
 Language is one of the defining characteristics
of culture
 Chinese is the mother tongue of the largest number of
people
 English is the most widely spoken language in the
world
 English is also becoming the language of international
business
 but, knowledge of the local language is still beneficial,
and in some cases, critical for business success
 failing to understand the nonverbal cues of another
culture can lead to communication failure

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 What Is The Role
Of Education In Culture?
 Formal education is the medium through which
individuals learn many of the language,
conceptual, and mathematical skills that are
indispensable in a modern society
 important in determining a nation’s competitive
advantage
 Japan’s postwar success can be linked to
its
excellent education system
 general education levels can be a good index for the
kinds of products that might sell in a country
 Example: impact of literacy rates

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 How Does Culture
Impact The Workplace?
 Hofstede’s dimensions of culture:

1. Power distance - how a society deals with

the fact that people are unequal in physical
and intellectual capabilities
2. Uncertainty avoidance - the relationship
between the individual and his or her fellows
3. Individualism versus collectivism - the extent
to which different cultures socialize their
members into accepting ambiguous
situations and tolerating ambiguity
4. Masculinity versus femininity - the
relationship between gender and work roles
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 Does Culture
Change?
 Culture evolves over time
 changes in value systems can be slow and
painful for a society
 Social turmoil - an inevitable outcome of
cultural change
 as countries become economically stronger,
cultural change is particularly common
 economic progress encourages a shift from
collectivism to individualism
 globalization also brings cultural
change
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What Do Cultural Differences
Mean For Managers?
1. It is important to develop cross-cultural literacy
 companies that are ill informed about the
practices of another culture are unlikely to
succeed in that culture
 To avoid being ill-informed
 consider hiring local citizens
 transfer executives to
foreign locations on a
regular basis
 Managers must also guard against
ethnocentrism
 a belief in the superiority of one's own
culture
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What Do Cultural Differences
Mean For Managers?
2. There is a connection between culture
and national competitive advantage
 suggests which countries are likely to
produce the most viable competitors
 has implications for the choice of countries
in which to locate production facilities and
do business

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 International Business
11e

By Charles W.L. Hill

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 Chapter 5

Ethics, Corporate Social

Responsibility,
and Sustainability

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 What Is Ethics?
 Ethics - accepted principles of right or wrong that
govern
 the conduct of a person
 the members of a profession
 the actions of an organization
 Business ethics - accepted principles of right or
wrong governing the conduct of business people
 Ethical strategy - a strategy, or course of action,
that does not violate these accepted principles

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 Which Ethical Issues Are Most
Relevant To International
Firms?
 The most common ethical issues in
business involve
1. employment practices
2. human rights
3. environmental pollution
4. corruption
5. moral obligations of multinational
companies

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 How Are Ethics Relevant To
Employment Practices?
 Suppose work conditions in a host nation
are clearly inferior to those in the
multinational’s home nation
 Which standards should apply?
 home country standards
 host country standards
 something in between

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 How Are Ethics Relevant To
Employment Practices?
 Firms should
 establish minimal acceptable standards that
safeguard the basic rights and dignity of
employees
 audit foreign subsidiaries and subcontractors
regularly to ensure they are meeting the
standards
 take corrective action as necessary

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 How Are Ethics Relevant To
Human Rights?
 Basic human rights are taken for granted
in developed countries
 freedom of association
 freedom of speech
 freedom of assembly
 freedom of movement
 Question: What are the responsibilities of
firms in countries where basic human
rights are not respected?

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 How Are Ethics Relevant To
Human Rights?
 Question: Is it ethical for companies to do
business with countries with repressive
regimes?
 Myanmar
 Nigeria
 Question: Does multinational investment actually
help bring change to these countries and
ultimately improve the rights of citizens?
 China

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 How Are Ethics Relevant To
Environmental Pollution?
 Some parts of the environment are a public good that no
one owns, but anyone can despoil
 What happens when environmental regulations in host
nations are far inferior to those in the home nation?
 Is it permissible for multinationals to pollute in
developing countries simply because there are no
regulations against it?
 legal versus ethical behavior
 The tragedy of the commons occurs when a resource
held in common by all, but owned by no one, is overused
by individuals, resulting in its degradation

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 How Are Ethics Relevant To
Corruption?
 The U.S. Foreign Corrupt Practices Act outlawed
the practice of paying bribes to foreign
government officials in order to gain business
 amended to allow for facilitating payments
 The Convention on Combating Bribery of
Foreign Public Officials in International Business
Transactions was adopted by the Organization
for Economic Cooperation and Development
(OECD)
 obliges member states to make the bribery of
foreign public officials a criminal offense

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 How Are Ethics Relevant To
Corruption?
 But, is it permissible for multinationals to
pay government officials facilitating
payments if doing so creates local income
and jobs?
 is it ok to do a little evil in order to do a greater
good?
 does grease money actually improve
efficiency and help growth?

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 How Are Ethics Relevant To
Moral Obligations?
 Social responsibility refers to the idea that
managers should consider the social
consequences of economic actions when
making business decisions
 there should be a presumption in favor of
decisions that have both good economic and
good social consequences
 it is the right way for a business to behave

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 How Are Ethics Relevant To
Moral Obligations?
 Advocates argue that businesses need to
recognize their noblesse oblige -
honorable and benevolent behavior that is
the responsibility of successful
companies
 give something back to the societies that have
made their success possible
 But, are multinationals morally required to
use their power to enhance local
welfare?
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Mini-Case
Imagine that a visiting American executive finds that a foreign
subsidiary in a poor nation has hired a 12-year-old girl to work
on a factory floor. Appalled
to find that the subsidiary is using child labor in direct violation
of the
company’s own ethical code, the American instructs the local
manager
to replace the child with an adult. The local manager dutifully
complies. The girl, an orphan, who is the only breadwinner for
herself and her six-year-old brother, is unable to find another
job, so in desperation she turns to prostitution. Two years later,
she dies of AIDS.

Had the visiting American understood the gravity of the girl’s

situation, would he still have requested her replacement?
Perhaps not!
Would it have been better, therefore, to stick with the status
quo and
 What Are Ethical Dilemmas?
 Ethical dilemmas - situations in which none of
the available alternatives seems ethically
acceptable
 real-world decisions are complex, difficult to frame,
and involve consequences that are difficult to quantify
 the ethical obligations of an MNE toward employment
conditions, human rights, corruption, environmental
pollution, and the use of power are not always clear
cut
 the right course of action is not always clear

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 Why Do Managers Behave
Unethically?
 Several factors contribute to unethical behavior
including
1. Personal ethics - the generally
accepted principles of right and wrong
governing the conduct of individuals
 expatriates may face pressure to violate their
personal ethics because they are away from their
ordinary social context and supporting culture
 managers fail to question whether a decision or
action is ethical, and instead rely on economic
analysis when making decisions

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 Why Do Managers Behave
Unethically?
2. Decision-making processes - the values and
norms that are shared among employees of an
organization
 organization culture that does not
emphasize business culture encourages
unethical behavior
3. Organization culture - organization culture can
legitimize unethical behavior or reinforce the
need for ethical behavior
4. Unrealistic performance expectations -
encourage managers to cut corners or act in
an unethical manner

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 Why Do Managers Behave
Unethically?
5. Leadership - helps establish the culture of an
organization, and set the examples that others
follow
 when leaders act unethically, subordinates may act
unethically, too
6. Societal culture – firms headquartered in
cultures where individualism and uncertainty
avoidance are strong are more likely to stress
ethical behavior than firms headquartered in
cultures where masculinity and power distance
rank high

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 Why Do Managers Behave
Unethically?
Determinants of Ethical Behavior

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 What Are The Philosophical
Approaches To Ethics?
 There are several different approaches to
business ethics
 Straw men approaches deny the value of
business ethics or apply the concept in an
unsatisfactory way
 Other approaches are favored by moral
philosophers and are the basis for current
models of ethical behavior

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 What Are The Straw Men
Approaches To Business
Ethics?
There are four common straw men approaches
1. Friedman doctrine - the only social
responsibility of business is to increase
profits, so long as the company stays within
the rules of law
2. Cultural relativism - ethics are culturally
determined and firms should adopt the
ethics of the cultures in which they operate
 “when in Rome, do as the Romans do”

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 What Are The Straw Men
Approaches To Business
3.Ethics?
Righteous moralist - a multinational’s home
country standards of ethics should be followed
in foreign countries
4. Naïve immoralist - if a manager of a
multinational sees that firms from other nations
are not following ethical norms in a host
nation, that manager should not either
 All approaches offer inappropriate guidelines
for ethical decision making

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 What Are Utilitarian And
Kantian Approaches To
 Ethics?
Utilitarian ethics - (David Hume, Jeremy
Bentham, John Stuart Mill) - the moral worth of
actions or practices is determined by their
consequences
 actions are desirable if they lead to the best possible
balance of good consequences over bad
consequences
 but, it is difficult to measure the benefits, costs, and
risks of an action
 the approach fails to consider justice

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 What Are Utilitarian And
Kantian Approaches To
Ethics?
Kantian ethics - (Immanuel Kant) - people
should be treated as ends and never
purely as means to the ends of others
 people have dignity and need to be
respected
 people are not machines

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 What Are Rights Theories?
 Rights theories - human beings have
fundamental rights and privileges which
transcend national boundaries and cultures
 establish a minimum level of morally
acceptable
behavior
 the Universal Declaration of Human Rights - basic
principles that should always be adhered to
irrespective of the culture in which one is doing
business
 Moral theorists argue that fundamental human
rights form the basis for the moral compass that
managers should navigate by when making
decisions which have an ethical component
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 What Are Justice Theories?
 Justice theories focus on the attainment of a just
distribution of economic goods and services
 a just distribution is one that is considered fair and
equitable
 John Rawls argued that all economic goods and
services should be distributed equally except
when an unequal distribution would work to
everyone’s advantage
 impartiality is guaranteed by the veil of ignorance -
everyone is imagined to be ignorant of all his or her
particular characteristics

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The job market of the 21st century is often referred to as the “gig
economy.” Employers such as Uber, Amazon, Airbnb, and others are
increasingly relying on short-term freelance employees who work on a
piecemeal basis.

Proponents of the gig economy suggest it offers workers the freedom

to work where and when they want, while employers can reduce
labor costs by avoiding health insurance and payroll taxes. Others
suggest that businesses are simply taking advantage of a tough
economy to cut benefits and offer lower wages to people desperate
for work.

If you were the head of a large corporation, would you consider it

ethical to profit from the gig economy?
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 How Can Managers Make
Ethical Decisions?
1. Hire and promote people with a well-
grounded sense of personal ethics
 refrain from promoting individuals who have
acted unethically
 try to hire only people with strong ethics
 prospective employees should find out as
much as they can about the ethical climate in
an organization prior to taking a position

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 How Can Managers Make
Ethical Decisions?
2. Build an organizational culture that places a
high value on ethical behavior
 articulate values that place a strong
emphasis on ethical behavior
 emphasize the importance of a code of
ethics - formal statement of the ethical
priorities a business adheres to
 implement a system of incentives and
rewards that recognize people who engage
in ethical behavior and sanction those who
do not

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 How Can Managers Make
Ethical Decisions?
3. Make sure that leaders within the
business articulate the rhetoric of ethical
behavior and act in a manner that is
consistent with that rhetoric
 give life and meaning to words
 make sure that leaders emphasize the
importance of ethics verbally and through
their actions

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 How Can Managers Make
Ethical Decisions?
4. Put decision-making processes in place that
require people to consider the ethical
dimensions of business decisions
 Ask whether
 decisions fall within the accepted values of
standards that typically apply in the
organizational environment
 decisions can be communicated to all
stakeholders affected by it
 if colleagues would approve of
decisions

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 How Can Managers Make
Ethical Decisions?
 Managers can also use a five-step process to
think through ethical problems:
Step1: Identify which stakeholders (the individuals
or groups who have an interest, stake, or
claim in the actions and overall
performance of a company) a decision
would affect and in what ways
 internal stakeholders are people who work for or who
own the business such as employees, the board of
directors, and stockholders
 external stakeholders are the individuals or groups who
have some claim on a firm such as customers,
suppliers, and unions

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 How Can Managers Make
Ethical Decisions?
Step 2: Determine whether a proposed decision
would violate the fundamental rights of any
stakeholders
Step 3: Establish moral intent - place moral
concerns ahead of other concerns in
cases where either the fundamental rights
of stakeholders or key moral principles
have been violated

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 How Can Managers Make
Ethical Decisions?
Step 4: Engage in ethical behavior
Step 5: Audit decisions and review them to
make sure that they are
consistent with ethical principles
 this step is often overlooked even
though it is critical to finding out
whether a decision process is working

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 What Is An Ethics Officer?
 Many firms now have ethics officers to
ensure
 all employees are trained in ethics
 ethics is considered in the decision-making
process
 the company’s code of conduct is followed

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 How Can Managers Make
Ethical Decisions?
5. Develop moral courage
 enables managers to walk away from a decision
that is profitable, but unethical
 gives an employee the strength to say no to a
superior who instructs her to pursue actions that are
unethical
 gives employees the integrity to go public to the
media and blow the whistle on persistent unethical
behavior in a company

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 How Can Managers Make
Ethical Decisions?
 In the end, there are clearly things that an
international business should do, and
there are things that an international
business should not do
 But, it is important to remember that not all
ethical dilemmas have a clean and
obvious solution
 in these situations, firms must rely on the
decision-making ability of its managers

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 International Business
11e

By Charles W.L. Hill

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 Chapter 6

International
Trade
Theory
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 Why Is Free Trade
Beneficial?
Free trade - a situation where a
government does not attempt to influence
through quotas or duties what its citizens
can buy from another country or what they
can produce and sell to another country
 Trade theory shows why it is beneficial for
a country to engage in international trade
even for products it is able to produce for
itself

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 Why Is Free Trade
Beneficial?
International trade allows a country
 to specialize in the manufacture and export of
products and services that it can produce
efficiently
 to import products and services that can be
produced more efficiently in other
countries
 Limits on imports may be beneficial to
producers, but not beneficial for consumers

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 Why Do Certain
Patterns Of Trade
Exist?
 Some patterns of trade are fairly easy to
explain
 It is obvious why Saudi Arabia
exports oil, Ghana exports cocoa, and
Brazil exports coffee
 But, why does Switzerland export
chemicals, pharmaceuticals, watches, and
jewelry?
 Why does Japan export automobiles,
consumer electronics, and machine tools?
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 What Role Does
Government Have In
Trade?
 The mercantilist philosophy makes a crude case
for government involvement in promoting
exports and limiting imports
 Smith, Ricardo, and Heckscher-Ohlin promote
unrestricted free trade
 New trade theory and Porter’s theory of national
competitive advantage justify limited and
selective government intervention to support the
development of certain export-oriented
industries

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 What Is
Mercantilism?
 Mercantilism (mid-16 century) suggests th

that it is in a country’s best interest to

maintain a trade surplus—to export more
than it imports
 Advocates government intervention to
achieve a surplus in the balance of trade
 Mercantilism views trade as a zero-sum
game—one in which a gain by one country
results in a loss by another

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 What Is Smith’s
Theory Of Absolute
Advantage?
 Adam Smith (1776) argued that a country
has an absolute advantage in the
production of a product when it is more
efficient than any other country in
producing it
 Countries should specialize in the production
of goods for which they have an absolute
advantage and then trade these goods for
goods produced by other countries

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 How Does The Theory
Of Absolute Advantage
Work?Ghana and South
 Assume that two countries,
Korea, both have 200 units of resources that
could either be used to produce rice or
cocoa
 In Ghana, it takes 10 units of resources to
produce one ton of cocoa and 20 units of
resources to produce one ton of rice
 Ghana could produce 20 tons of cocoa and no rice,
10 tons of rice and no cocoa, or some combination of
rice and cocoa between the two extremes

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 How Does The Theory
Of Absolute Advantage
 In South Korea Work?
it takes 40 units of
resources to produce one ton of cocoa
and 10 resources to produce one ton of
rice
 South Korea could produce 5 tons of cocoa
and no rice, 20 tons of rice and no cocoa, or
some combination in between

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 How Does The Theory
Of Absolute Advantage
 Without trade Work?
 Ghana would produce 10 tons of cocoa and 5
tons of rice
 South Korea would produce 10 tons of rice
and 2.5 tons of cocoa
 With specialization and trade
 Ghana would produce 20 tons of cocoa
 South Korea would produce 20 tons of rice
 Ghana could trade 6 tons of cocoa to South
Korea for 6 tons of rice

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 How Does The Theory
Of Absolute Advantage
 After trade

Work?
Ghana would have 14 tons of cocoa left and 6
tons of rice
 South Korea would have 14 tons of rice left
and 6 tons of cocoa
 If each country specializes in the
production of the good in which it has an
absolute advantage and trades for the
other, both countries gain
 trade is a positive sum game

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 How Does The Theory
Of Absolute Advantage
Work?
Absolute Advantage and the Gains from
Trade

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 What Is Ricardo’s Theory
Of Comparative
Advantage?
 David Ricardo asked what happens when one
country has an absolute advantage in the
production of all goods
 The theory of comparative advantage (1817)—
countries should specialize in the production of
those goods they produce most efficiently and
buy goods that they produce less efficiently from
other countries
 even if this means buying goods from other
countries that they could produce more
efficiently at home

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 How Does The Theory Of
Comparative Advantage Work?
 Assume Ghana is more efficient in the
production of both cocoa and rice
 In Ghana, it takes 10 resources to produce
one ton of cocoa, and 13 1/2 resources to
produce one ton of rice
 So, Ghana could produce 20 tons of cocoa
and no rice, 15 tons of rice and no cocoa,
or some combination of the two

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 How Does The Theory Of
Comparative Advantage Work?
 In South Korea, it takes 40 resources to
produce one ton of cocoa and 20
resources to produce one ton of rice
 So, South Korea could produce 5 tons of
cocoa and no rice, 10 tons of rice and
no cocoa, or some combination of the
two

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 How Does The Theory Of
Comparative Advantage Work?
 With trade
 Ghana could export 4 tons of cocoa to South
Korea in exchange for 4 tons of rice
 Ghana will still have 11 tons of cocoa, and 4
additional tons of rice
 South Korea still has 6 tons of rice and 4 tons
of cocoa
 if each country specializes in the production of
the good in which it has a comparative
advantage and trades for the other, both
countries gain
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 How Does The Theory Of
Comparative Advantage Work?
 Comparative advantage theory provides a
strong rationale for encouraging free
trade
 total output is higher
 both countries benefit
 Trade is a positive sum game

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 How Does The Theory Of
Comparative Advantage Work?
Comparative Advantage and the Gains from Trade

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 Is Unrestricted Free Trade
Always Beneficial?
 Unrestricted free trade is beneficial, but the gains may
not be as great as the simple model of comparative
advantage would suggest
 immobile resources
 diminishing returns
 dynamic effects and economic growth
 the Samuelson critique
 But, opening a country to trade could increase
 a country's stock of resources as increased supplies
become available from abroad
 the efficiency of resource utilization and so free up resources
for other uses
 economic growth

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 Could A Rich Country Be
Worse Off With Free Trade?
 Paul Samuelson - the dynamic gains from trade
may not always be beneficial
 Free trade may ultimately result in lower
wages in the rich country
 The ability to offshore services jobs that were
traditionally not internationally mobile may have
the effect of a mass inward migration into the
United States, where wages would then fall
 But, protectionist measures could create a
more harmful situation than free trade

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 What Is The
Heckscher-Ohlin
 EliTheory?
Heckscher (1919) and Bertil Ohlin
(1933) - comparative advantage arises
from differences in national factor
endowments
 the extent to which a country is endowed with
resources like land, labor, and capital
 The more abundant a factor, the lower its
cost

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 What Is The
Heckscher-Ohlin
Theory?
 The pattern of trade is determined by
factor endowments
 Heckscher and Ohlin predict that countries
will
 export goods that make intensive use of
locally abundant factors
 import goods that make intensive use of
factors that are locally scarce

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 Does The Heckscher-Ohlin
Theory Hold?
 Wassily Leontief (1953) theorized that since the
U.S. was relatively abundant in capital compared
to other nations, the U.S. would be an exporter
of capital intensive goods and an importer of
labor-intensive goods
 However, he found that U.S. exports were
less capital intensive than U.S. imports
 Since this result was at variance with the
predictions of trade theory, it became known as
the Leontief Paradox

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 What Is The
Product Life-Cycle
Theory?
 The product life-cycle theory - as products
mature both the location of sales and the
optimal production location will change
affecting the flow and direction of trade
 proposed by Ray Vernon in the mid-1960s
 At this time most of the world’s new products were
developed by U.S. firms and sold first in the U.S.

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 What Is The
Product Life-Cycle
Theory?
 According to the product life-cycle theory
 The size and wealth of the U.S. market gave U.S.
firms a strong incentive to develop new products
 Initially, the product would be produced and sold in
the U.S.
 As demand grew in other developed countries,
U.S.
firms would begin to export
 Demand for the new product would grow in other
advanced countries over time making it worthwhile for
foreign producers to begin producing for their home
markets
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 What Is The
Product Life-Cycle
 U.S. firms might set up production facilities
Theory?
in advanced countries with growing
demand, limiting exports from the U.S.
 As the market in the U.S. and other
advanced nations matured, the product
would become more standardized,
and price would be the main
competitive weapon

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 What Is The
Product Life-Cycle
 Producers based in advanced countries where
Theory?
labor costs were lower than the United States
might now be able to export to the United States
 If cost pressures were intense, developing
countries would acquire a production advantage
over advanced countries
 Production became concentrated in lower-cost
foreign locations, and the U.S. became an
importer of the product

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 Does The Product Life-
Cycle Theory Hold?
 The product life-cycle theory accurately explains
what has happened for products like
photocopiers and a number of other high
technology products developed in the United
States in the 1960s and 1970s
 Mature industries leave the U.S. for low cost
assembly locations

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 Does The Product Life
Cycle Theory Hold?
 But, the globalization and integration of the world economy has made this theory

less valid today

 the theory is ethnocentric
 production today is dispersed globally
 products today are introduced in multiple
markets simultaneously

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 What Is New Trade
 Theory?
New trade theory suggests that the ability of
firms to gain economies of scale (unit cost
reductions associated with a large scale of
output) can have important implications for
international trade
 Countries may specialize in the production and
export of particular products because in
certain industries, the world market can only
support a limited number of firms
 new trade theory emerged in the 1980s
 Paul Krugman won the Nobel prize for his
work in 2008

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 What Is New Trade
Theory?
1. Through its impact on economies of scale, trade
can increase the variety of goods available to
consumers and decrease the average cost of
those goods
 without trade, nations might not be able to produce
those products where economies of scale are
important
 with trade, markets are large enough to support
the
production necessary to achieve economies of
scale
 so, trade is mutually beneficial because it allows for
the specialization of production, the realization of
scale economies, and the production of a greater
variety of products at lower prices
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 What Is New Trade
Theory?
2. In those industries when output required to
attain economies of scale represents a
significant proportion of total world demand,
the global market may only be able to support
a small number of enterprises
 first-mover advantages - the economic and
strategic advantages that accrue to early
entrants into an industry
 economies of scale
 first movers can gain a scale based cost
advantage that later entrants find difficult to
match

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New Trade Theory suggests that a country may become the
dominant exporter of a good because it was the first to
develop large-scale production capabilities for a given
product or industry and thus possessed “first-mover
advantages.”

As the head of a major manufacturing company, what types

of new products, real or imagined, would you start
developing now in order to enjoy first-mover advantages in
the future?
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 What Are The Implications Of
New Trade Theory For
Nations?
Nations may benefit from trade even when they
do not differ in resource endowments or
technology
 a country may dominate in the export of a good
simply because it was lucky enough to have one or
more firms among the first to produce that good
 Governments should consider strategic trade
policies that nurture and protect firms and
industries where first-mover advantages and
economies of scale are important

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 What Is Porter’s Diamond Of
Competitive Advantage?
 Michael Porter (1990) tried to explain why a
nation achieves international success in a
particular industry
 identified four attributes that promote or
impede the creation of competitive
advantage
1. Factor endowments - a nation’s position in
factors of production necessary to compete
in a given industry
 can lead to competitive advantage
 can be either basic (natural resources, climate,
location) or advanced (skilled labor,
infrastructure, technological know-how)

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 What Is Porter’s Diamond Of
Competitive Advantage?
2. Demand conditions - the nature of home
demand for the industry’s product or service
 influences the development of capabilities
 sophisticated and demanding customers
pressure
firms to be competitive
3. Relating and supporting industries - the
presence or absence of supplier industries and
related industries that are internationally
competitive
 can spill over and contribute to other industries
 successful industries tend to be grouped in clusters
in countries

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 What Is Porter’s Diamond Of
Competitive Advantage?
4. Firm strategy, structure, and rivalry - the
conditions governing how companies are
created, organized, and managed, and the
nature of domestic rivalry
 different management ideologies affect the
development of national competitive advantage
 vigorous domestic rivalry creates pressures to
innovate, to improve quality, to reduce costs, and to
invest in upgrading advanced features

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 What Is Porter’s Diamond Of
Competitive Advantage?
Determinants of National Advantage: Porter’s Diamond

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 Does Porter’s Theory
Hold?
 Government policy can
 affect demand through product standards
 influence rivalry through regulation and antitrust laws
 impact the availability of highly educated workers and
advanced transportation infrastructure.
 The four attributes, government policy, and
chance work as a reinforcing system,
complementing each other and in combination
creating the conditions appropriate for
competitive advantage
 So far, Porter’s theory has not been sufficiently
tested to know how well it holds up

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 What Are The Implications Of
Trade Theory For Managers?
1. Location implications - a firm should disperse its
various productive activities to those countries where
they can be performed most efficiently
 firms that do not may be at a competitive
disadvantage
2. First-mover implications - a first-mover advantage can
help a firm dominate global trade in that product
3. Policy implications - firms should work to encourage
governmental policies that support free trade
 want policies that have a favorable impact on each
component of the diamond

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 What Is The
Balance Of

Payments?
A country’s
keep
balance-of-payments accounts
track of the payments to and receipts
from other countries for a particular time period
 double entry bookkeeping
 sum of the current account balance, the
capital account and the financial account
should be zero

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 What Is The
Balance Of

Payments?
There are three main accounts
1. The current account records transactions of goods,
services, and income, receipts and payments
 current account deficit - a country
imports more
than it exports
 current account surplus – a country exports more
than it imports
2. The capital account records one time changes in
the stock of assets
3. The financial account records transactions that
involve the purchase or sale of assets
 net change in U.S. assets owned abroad
 foreign owned assets in the U.S.
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 What Is The
Balance Of
United States Balance-of-Payments Accounts,

Payments? 2013

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 Is A Current
Account Deficit
 Question: Does current account deficit in the
UnitedBad?
States matter?
 A current account deficit implies a net
debtor
 so, a persistent deficit could limit future
economic growth
 But, even though capital is flowing out of
the
U.S. as payments to foreigners, much of it flows
back in as investments in assets
 Yet, suppose foreigners stop buying U.S. assets
and sell their dollars for another currency
 a dollar crisis could occur
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 International Business
11e

By Charles W.L. Hill

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Chapter 7

Government
Policy and
International Trade
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 What Is The Political Reality
Of International Trade?
 Free trade occurs when governments do
not attempt to restrict what citizens can
buy from another country or what they can
sell to another country
 many nations are nominally committed to free
trade, but intervene to protect the interests of
politically important groups

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 How Do Governments
Intervene In Markets?
 Governments use various methods to
intervene in markets including
1. Tariffs - taxes levied on imports that
effectively raise the cost of imported
products relative to domestic products
 Specific tariffs - levied as a fixed charge
for each unit of a good imported
 Ad valorem tariffs - levied as a proportion
of the value of the imported good

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 How Do Governments
Intervene In Markets?
 Tariffs
 increase government revenues
 force consumers to pay more for certain
imports
 are pro-producer and anti-consumer
 reduce the overall efficiency of the world
economy

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 How Do Governments
Intervene In Markets?
2. Subsidies - government payments to
domestic producers
 Subsidies help domestic producers
 compete against low-cost foreign
imports
 gain export markets
 Consumers typically absorb the costs of
subsidies

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 How Do Governments
Intervene In Markets?
3. Import Quotas - restrict the quantity of some
good that may be imported into a country
 Tariff rate quotas - a hybrid of a quota and a
tariff where a lower tariff is applied to
imports within the quota than to those over
the quota
 A quota rent - the extra profit that producers
make when supply is artificially limited by an
import quota

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 How Do Governments
Intervene In Markets?
4. Voluntary Export Restraints - quotas on
trade imposed by the exporting
country, typically at the request of the
importing country’s government
 Import quotas and voluntary export
restraints
 benefit domestic producers
 raise the prices of imported
goods

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 How Do Governments
Intervene In Markets?
5. Local Content Requirements - demand
that some specific fraction of a good
be produced domestically
 benefit domestic producers
 consumers face higher prices
6. Administrative Policies - bureaucratic
rules designed to make it difficult for
imports to enter a country
 polices hurt consumers by limiting
choice
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 How Do Governments
Intervene In Markets?
7. Antidumping Policies–also called
countervailing duties–punish foreign firms that
engage in dumping and protect domestic
producers from “unfair” foreign competition
 dumping - selling goods in a foreign market below
their costs of production, or selling goods in a
foreign market below their “fair” market value
 enables firms to unload excess production in
foreign markets
 may be predatory behavior - producers use
profits from their home markets to subsidize
prices in a foreign market to drive competitors
out of that market, and then later raise prices

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 Why Do Governments
Intervene In Markets?
 There are two main arguments for government
intervention in the market
1. Political arguments - concerned with
protecting the interests of certain groups
within a nation (normally producers), often at
the expense of other groups (normally
consumers)
2. Economic arguments - concerned with
boosting the overall wealth of a nation -
benefits both producers and
consumers
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What Are The Political Arguments
For Government Intervention?
1. Protecting jobs - the most common
political reason for trade restrictions
 results from political pressures by unions or
industries that are "threatened" by more
efficient foreign producers and have more
political clout than consumers

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What Are The Political Arguments
For Government Intervention?
2. Protecting industries deemed important
for national security - industries are often
protected because they are deemed
important for national security
 aerospace or semiconductors

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What Are The Political Arguments
For Government Intervention?
3. Retaliation for unfair foreign competition -
when governments take, or threaten to
take, specific actions, other countries
may remove trade barriers
 if threatened governments do not back
down, tensions can escalate and new trade
barriers may be enacted
 risky strategy
4. Protecting consumers from “dangerous”
products - limit “unsafe” products
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What Are The Political Arguments
For Government Intervention?
5. Furthering the goals of foreign policy -
preferential trade terms can be granted
to countries that a government wants to
build strong relations with
 trade policy can also be used to punish
rogue states

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What Are The Political Arguments
For Government Intervention?
6. Protecting the human rights of individuals in
exporting countries - through trade policy
actions
7. Protecting the environment - international trade
is associated with a decline in environmental
quality
 concern over global warming
 enforcement of environmental regulations

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What Are The Economic
Arguments For Government
Intervention?
1. The infant industry argument - an
industry should be protected until it can
develop and be viable and competitive
internationally
 accepted as a justification for temporary
trade restrictions under the WTO

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What Are The Economic
Arguments For Government
Intervention?
2. Strategic trade policy – first-mover
advantages can be important to success
 governments can help firms from their
countries attain these advantages
 governments can help firms overcome
barriers to entry into industries where foreign
firms have an initial advantage

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 What Is The Future Of The
World Trade Organization?
 The current agenda of the WTO focuses
on
 the rise of anti-dumping policies
 the high level of protectionism in agriculture
 the lack of strong protection for intellectual
property rights in many nations
 continued high tariffs on nonagricultural goods
and services in many nations

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 What Is The Future Of The
World Trade Organization?
 The WTO launched a new round of talks
at Doha, Qatar in 2001 that have
already gone on for 12 years and are
currently stalled.
 The agenda includes
 cutting tariffs on industrial goods and
services
 phasing out subsidies to agricultural
producers
 reducing barriers to cross-border
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 International Business
11e

By Charles W.L. Hill

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Chapter 8

Foreign Direct

Investment
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 What Is FDI?
 Foreign direct investment (FDI) occurs
when a firm invests directly in new
facilities to produce and/or market in a
foreign country
 the firm becomes a multinational
enterprise
 FDI can be in the form of
 greenfield investments - the establishment of
a wholly new operation in a foreign country
 acquisitions or mergers with existing firms in
the foreign country

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 What Is FDI?
 The flow of FDI - the amount of FDI
undertaken over a given time period
 Outflows of FDI are the flows of FDI out of a
country
 Inflows of FDI are the flows of FDI into a
country
 The stock of FDI - the total accumulated
value of foreign-owned assets at a
given time
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 What Are The Patterns Of FDI?

FDI Inflows by Region 1995-2013 ($ billion)

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What Are The Patterns Of FDI?
 The growth of FDI is a result of
1. a fear of protectionism
 want to circumvent trade barriers
2. political and economic changes
 deregulation, privatization, fewer restrictions on
FDI
3. new bilateral investment treaties
 designed to facilitate investment
4. the globalization of the world economy
 many companies now view the world as their
market
 need to be closer to their customers

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 What Is The Source Of FDI?
Cumulative FDI outflows, 1998–2012 ($ billions)

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 What Are The Theoretical
Approaches To FDI?
 The radical view - the multinational enterprise
(MNE) is an instrument of imperialist domination
and a tool for exploiting host countries to the
exclusive benefit of their capitalist-imperialist
home countries
 in retreat almost everywhere
 The free market view - international production
should be distributed among countries according
to the theory of comparative advantage
 embraced by advanced and developing nations
including the United States and Britain, but no country
has adopted it in its purest form
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 How Does FDI Benefit The
Host Country?
 There are four main benefits of inward
FDI for a host country
1. Resource transfer effects - FDI brings
capital, technology, and
management resources
2. Employment effects - FDI can bring
jobs

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 How Does FDI Benefit The
Host Country?
3. Balance of payments effects - FDI can help a
country to achieve a current account surplus
4. Effects on competition and economic growth -
greenfield investments increase the level of
competition in a market, driving down prices
and improving the welfare of consumers
 can lead to increased productivity growth, product
and process innovation, and greater economic
growth

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 What Are The Costs Of FDI
To The Host Country?
 Inward FDI has three main costs:
1. Adverse effects of FDI on competition
within the host nation
 subsidiaries of foreign MNEs may have
greater economic power than indigenous
competitors because they may be part
of a larger international organization

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 What Are The Costs Of FDI
To The Host Country?
2. Adverse effects on the balance of payments
 when a foreign subsidiary imports a substantial
number of its inputs from abroad, there is a debit on
the current account of the host country’s balance of
payments
3. Perceived loss of national sovereignty and
autonomy
 decisions that affect the host country will be made
by a foreign parent that has no real commitment to
the host country, and over which the host
country’s government has no real control

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 How Does FDI Benefit The
Home Country?
 The benefits of FDI for the home country
include
1. The effect on the capital account of the home
country’s balance of payments from the
inward flow of foreign earnings
2. The employment effects that arise from
outward FDI
3. The gains from learning valuable skills from
foreign markets that can subsequently be
transferred back to the home country
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 What Are The Costs Of FDI
To The Home Country?
1. The home-country’s balance of payments
can suffer
 from the initial capital outflow required to
finance the FDI
 if the purpose of the FDI is to serve the home
market from a low cost labor location
 if the FDI is a substitute for direct exports

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 What Are The Costs Of FDI
To The Home Country?
2. Employment may also be negatively affected if
the FDI is a substitute for domestic production
 But, international trade theory suggests that
home-country concerns about the negative
economic effects of offshore production
(FDI undertaken to serve the home market)
may not be valid
 may stimulate economic growth and employment
in the home country by freeing resources to
specialize in activities where the home country
has a comparative advantage

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 How Does Government
Influence FDI?
 Governments can encourage outward FDI
 government-backed insurance programs to
cover major types of foreign investment
risk
 Governments can restrict outward FDI
 limit capital outflows, manipulate tax rules, or
outright prohibit FDI

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 How Does Government
Influence FDI?
 Governments can encourage inward FDI
 offer incentives to foreign firms to invest in
their countries
 gain from the resource-transfer and employment
effects of FDI, and capture FDI away from other
potential host countries
 Governments can restrict inward FDI
 use ownership restraints and performance
requirements

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 International Business
11e

By Charles W.L. Hill

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Chapter 12

The Global Capital

Market

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Why Do
Capital Markets Exist?
 Capital markets bring together investors and
borrowers
 investors - corporations with surplus cash,
individuals, and non-bank financial institutions
 borrowers - individuals, companies, and
governments
 markets makers - the financial service companies
that connect investors and borrowers, either directly
(investment banks) or indirectly (commercial
banks)
 capital market loans can be equity or debt

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Who Are the Main Players in
Capital Markets?
The Main Players in the Generic Capital Market

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 What Makes the Global
Capital Market Attractive?
 Today’s capital markets are highly
interconnected and facilitate the free flow
of money around the world
 Borrowers benefit from the additional
supply of funds global capital markets
provide
 lowers the cost of capital
 the price of borrowing money or the rate of
return that borrowers pay investors

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 What Makes the Global
Capital Market Attractive?
Market Liquidity and the Cost of
Capital

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 What Makes the Global
Capital Market Attractive?
 Investors benefit from the wider range of
investment opportunities
 diversify portfolios and lower risk
 But, volatile exchange rates can make
what would otherwise be profitable
investments, unprofitable

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 How Have Global Capital
Markets Changed Since 1990?
 Global capital markets have grown rapidly
 the stock of cross-border bank loans was just
$3,600 billion in 1990, $7,859 billion in 2000,
$33,913 billion in 2012
 the international bond market has grown
from
$3,515 billion in 1997, $5,908 billion in 2000,
$21,979 billion in 2012

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 Why Is the Global Capital
Market Growing?
 Two factors are responsible for the
growth of capital markets
1. Advances in information
technology
 the growth of international communications
technology and advances in data processing
capabilities
 24-hour-a-day trading
 so, shocks that occur in one financial market
spread around the globe very quickly
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 Why Is the Global Capital
Market Growing?
2. Deregulation by governments
 has facilitated growth in international capital
markets
 governments have traditionally limited foreign
investment in domestic companies, and the
amount of foreign investment citizens could
make
 since the 1980s, these restrictions have been
falling

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 Why Is the Global Capital
Market Growing?
 Deregulation began in the U.S., then moved to
Great Britain, Japan, and France
 Many countries have dismantled capital controls
making it easier for both inward and outward
investment to occur
 The 2008-2009 global financial crisis raised
questions as to whether deregulation had gone
too far
 Question: Are new regulations for the financial
services industry needed?

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 What Are the Risks of the
Global Capital Markets?
 Question: Could deregulation of capital markets
and fewer controls on cross-border capital
flows make nations more vulnerable to the
effects of speculative capital flows?
 can have a destabilizing effect on economies
 Speculative capital flows may be the result of
inaccurate information about investment
opportunities
 if global capital markets continue to grow, better
quality information is likely to be available from
financial intermediaries

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 What Is a Eurocurrency?
 A Eurocurrency is any currency banked outside
its country of origin
 About two-thirds of all Eurocurrencies are
Eurodollars
 dollars banked outside the U.S.
 Other important Eurocurrencies are the euro-yen, the
euro-pound, and the euro-euro
 The Eurocurrency market is an important
source of low-cost funds for
international companies

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 Why Has the Eurocurrency
Market Grown?
 The Eurocurrency market began in the
1950s when the Eastern bloc countries
feared that the United States might seize
their dollars
 so, they deposited them in Europe
 additional dollar deposits came from Western
European central banks and companies that
exported to the U.S.
 could earn a higher rate of interest in London

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 Why Has the Eurocurrency
Market Grown?
 In 1957, the market surged again after
changes in British laws
 under the new laws, British banks had to
attract dollar deposits and loan dollars rather
pounds to finance non-British trade
 London became the leading center of the
Eurocurrency market
 continues to hold this position today

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 Why Has the Eurocurrency
Market Grown?
 In the 1960s, the market grew once again
 Changes in U.S. regulations discouraged
U.S. banks from lending to non-U.S.
residents
 would-be borrowers of dollars outside
the
U.S. turned to the Euromarket as a source of
dollars

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 Why Has the Eurocurrency
Market Grown?
 The next big increase came after the
1973-74 and 1979-80 oil price increases
 Arab members of OPEC accumulated
huge amounts of dollars
 avoided potential confiscation of their dollars
by the U.S. by depositing them in banks in
London

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 What Makes the
Eurocurrency Market
Attractive?
 The Eurocurrency market is attractive
because it is not regulated by the
government
 banks can offer higher interest rates on
Eurocurrency deposits than on deposits
made in the home currency
 banks can charge lower interest rates to
Eurocurrency borrowers than to those who
borrow the home currency

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 What Makes the
Eurocurrency Market
Attractive?
 The spread between the Eurocurrency
deposit and lending rates is less than the
spread between the domestic deposit and
lending rates
 Gives Eurocurrency banks a competitive
edge over domestic banks

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What Makes the
Eurocurrency Market
Attractive?
Interest Rate Spreads in Domestic and Eurocurrency
Markets

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 What Makes the
Eurocurrency Market
Unattractive?
 The Eurocurrency
drawbacks:
market has two significant

1. Because the Eurocurrency market is

unregulated, there is a higher risk that bank
failure could cause depositors to lose
funds
 can avoid this risk by accepting a lower return on a
home-country deposit
2. Companies borrowing Eurocurrencies can be
exposed to foreign exchange risk
 can minimize this risk through forward market
hedges
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 What Is the
Global Bond Market?
 Bonds are an important means of
financing for many companies
 the most common bond is a fixed rate which
gives investors fixed cash payoffs
 The global bond market grew rapidly
during the 1980s and 1990s and
continues to do so in the 20th century

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 What Is the
Global Bond Market?
 There are two types of international bonds
1. Foreign bonds are sold outside the borrower’s country and are denominated in
the currency of the country in which they are issued
 used by companies when they think they will reduce
the cost of capital
2. Eurobonds are underwritten by a syndicate of banks and placed in countries
other than the one in whose currency the bond is denominated

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 What Makes the Eurobond
Market Attractive?
 The Eurobond market is attractive because
1. It lacks regulatory interference
 since companies do not have to adhere to strict
regulations, the cost of issuing bonds is lower
2. It has less stringent disclosure requirements
than domestic bond markets
 it can be cheaper and less time-consuming to offer
Eurobonds than dollar-denominated bonds
3. It is more favorable from a tax perspective
 Eurobonds can be sold directly to foreign investors

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 What Is the
Global Equity Market?
 The global equity market allows firms to
1. Attract capital from international investors
 many investors buy foreign equities to
diversify their portfolios
2. List their stock on multiple
exchanges
 this type of trend may result in an
internationalization of corporate ownership

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 What Is the
Global Equity Market?
3. Raise funds by issuing debt or equity
around the world
 by issuing stock in other countries, firms
open the door to raising capital in the foreign
market
 gives the firm the option of compensating
local managers and employees with stock
 provides for local ownership
 increases visibility with local stakeholders

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 How Do Exchange Rates
Affect the Cost of Capital?
 Adverse exchange rates can increase the cost
of foreign currency loans
 Although it may initially seem attractive to
borrow foreign currencies, it may be less
attractive when exchange-rate risk is factored in
 firms can hedge their risk by entering into forward
contracts
 but this will also raise costs
 Firms must weigh the benefits of a lower
interest rate against the risk of an increase in
the real cost of capital

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Imagine that you are the owner of a promising,
privately owned U.S.-based tech startup with projected
sales of $1 billion over the next 10 years. In order to
expand your company’s infrastructure, you wish to
borrow $5 million, but interest rates in the United
States are unfavorable to borrowers. To lower your cost
of capital, you turn to the global capital market.

Given your current need for capital and your projected

future earnings, do you source your funds from the
Eurocurrency market, the global bond market, or the
global equity market? Explain your reasoning.
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 What Do Global Capital
Markets Mean for Managers?
 Growth in global capital markets has
created opportunities for firms to borrow
or invest internationally
 firms can often borrow at a lower cost than in
the domestic capital market
 firms must balance the cost savings against
the foreign-exchange risk associated with
borrowing in foreign currencies

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 What Do Global Capital
Markets Mean for Managers?
 Growth in capital markets offers
opportunities for firms, institutions, and
individuals to diversify their investments
and reduce risk
 again though, investors must consider
foreign exchange rate risk
 Capital markets are likely to continue to
integrate, providing more opportunities for
business

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 International Business
11e

By Charles W.L. Hill

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Chapter
13
The Strategy of International
Business

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 What Is Strategy?
 A firm’s strategy refers to the actions that
managers take to attain the goals of the
firm
 Firms need to pursue strategies that
increase profitability and profit growth
 Profitability is the rate of return the firm
makes on its invested capital
 Profit growth is the percentage increase in
net profits over time

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 What Is Strategy?
 To increase profitability and profit growth,
firms can
 add value
 lower costs
 sell more in existing markets
 expand internationally

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 What Is Strategy?
Determinants of Enterprise Value

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 How Is Value Created?
 To increase profitability, a firm needs to
create more value
 The firm’s value creation is the difference
between V (the price that the firm can
charge for a product given competitive
pressures) and C (the costs of producing
that product)
 a firm has high profits when it creates more
value for its customers and does so at a
lower cost

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 How Is Value Created?
Value Creation

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 How Is Value Created?
 Profits can be increased by
1. Using a differentiation strategy
 adding value to a product so that customers
are willing to pay more for it
2. Using a low cost strategy
 lowering costs

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 Why Is Strategic
Positioning Important?
 Michael Porter argues that firms need to choose
either differentiation or low cost, and then
configure internal operations to support the
choice
 So, to maximize long run return on invested
capital, firms must
 pick a viable position on the efficiency frontier
 configure internal operations to support that
position
 have the right organization structure in place to
execute the strategy
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 Why Is Strategic
Positioning Important?
Strategic Choice in the International Hotel
Industry

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 How Are a Firm’s
Operations Configured?
 A firm’s operations are like a value chain
composed of a series of distinct value
creation activities:
 production, marketing, materials
management, R&D, human resources,
information systems, and the firm
infrastructure
 All of these activities must be managed
effectively and be consistent with firm
strategy
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 How Are a Firm’s
Operations Configured?
 Value creation activities can be categorized as
1. Primary activities
 R&D
 Production
 marketing and sales
 customer service
2. Support activities
 information systems
 logistics
 human resources

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 How Are a Firm’s
Operations Configured?
The Value Chain

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 How Can Firms Increase Profits
Through International
Expansion?
International firms can
1. Expand their market
 sell in international markets
2. Realize location economies
 disperse value creation activities to locations
where they can be performed most
efficiently and effectively

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 How Can Firms Increase Profits
Through International
3.Expansion?
Realize greater cost economies from
experience effects
 serve an expanded global market from a
central location
4. Earn a greater return
 leverage skills developed in foreign
operations and transfer them elsewhere in
the firm

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 How Can Firms Leverage
Their Products and
Competencies?
 Firms can increase growth by selling
internationally goods or services
developed at home
 The success of firms that expand
internationally depends on
 the goods or services sold
 the firm’s core competencies

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 How Can Firms Leverage Their
Products and Competencies?
 Core competencies - skills within the firm
that competitors cannot easily match or
imitate
 can exist in any value creation activity
 Core competencies allow firms to reduce
the costs of value creation and/or to
create perceived value so that premium
pricing is possible

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 Why Are Location
Economies Important?
 Location economies are economies that arise
from performing a value creation activity in the
optimal location for that activity, wherever in the
world that might be
 By achieving location economies, firms can
 lower the costs of value creation and achieve a low
cost position
 differentiate their product offering

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 Why Are Location
Economies Important?
 Firms that take advantage of location
economies in different parts of the world,
create a global web of value creation
activities
 different stages of the value chain are
dispersed to locations where perceived value
is maximized or where the costs of value
creation are minimized

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 Why Are Experience Effects
Important?
 The experience curve refers to the
systematic reductions in production costs
that occur over the life of a product
 by moving down the experience curve, firms
reduce the cost of creating value
 to get down the experience curve quickly,
firms can use a single plant to serve global
markets

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 Why Are Experience Effects
Important?
 Learning effects are cost savings that
come from learning by doing
 When labor productivity increases
 individuals learn the most efficient ways to
perform particular tasks
 managers learn how to manage the new
operation more efficiently

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Why Are Experience Effects
Important?
The Experience Curve

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 Why Are Experience Effects
Important?
 Economies of scale - the reductions in
unit cost achieved by producing a large
volume of a product
 Sources of economies of scale include
 spreading fixed costs over a large volume
 utilizing production facilities more
intensively
 increasing bargaining power with
suppliers

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 How Can Managers
Leverage Subsidiary Skills?
 Managers should
1. Recognize that valuable skills that could be
applied elsewhere in the firm can arise
anywhere within the firm’s global network - not
just at the corporate center
2. Establish an incentive system that encourages
local employees to acquire new skills
3. Have a process for identifying when valuable
new skills have been created in a subsidiary
4. Act as facilitators to help transfer skills within
the firm

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 What Types of Competitive
Pressures Exist in the Global
Marketplace?
 Firms that compete in the global
marketplace face two conflicting types of
competitive pressures
 the pressures limit the ability of firms to
realize location economies and experience
effects, leverage products, and transfer skills
within the firm
 Dealing with both pressures is
challenging

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 What Types of Competitive
Pressures Exist in the Global
Marketplace?
 Two competitive pressures:
1. Pressures for cost reductions
 force the firm to lower unit costs
2. Pressures to be locally responsive
 require the firm to adapt its product to meet
local demands in each market
 but, this strategy can raise costs

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What Types of Competitive
Pressures Exist in the Global
Marketplace?
Pressures for Cost Reductions and Local
Responsiveness

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 When Are Pressures for
Cost Reductions Greatest?
 Pressures for cost reductions are greatest
1. In industries producing commodity-type products that
fill universal needs (needs that exist when the tastes
and preferences of consumers in different nations are
similar if not identical) where price is the main
competitive weapon
2. When major competitors are based in low cost
locations
3. Where there is persistent excess capacity
4. Where consumers are powerful and face low
switching
costs

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 When Are Pressures for
Local Responsiveness
Greatest?
Pressures for local responsiveness arise
from
1. Differences in consumer tastes and
preferences
 strong pressure emerges when consumer tastes and
preferences differ significantly between countries
2. Differences in traditional practices and
infrastructure
 strong pressure emerges when there are significant
differences in infrastructure and/or traditional
practices between countries

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 When Are Pressures for
Local Responsiveness
3.Greatest?
Differences in distribution channels
 need to be responsive to differences in
distribution channels between countries
4. Host government demands
 economic and political demands imposed by
host country governments may require
local responsiveness

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 Which Strategy
Should a Firm Choose?
 There are four basic strategies to
compete in international
markets
 the appropriateness of each strategy
depends on the pressures for cost
reduction and local responsiveness in
the industry

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 Which Strategy
Should a Firm Choose?
Four Basic Strategies

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Imagine that you are the manager of a foreign subsidiary
of a major U.S. apparel company. Consumer tastes in your
location require a high degree of local responsiveness,
while declining sales in the United States require
significant cost reductions.

Which of the four main strategic postures (global

standardization, localization, transnational, or
international) would you adopt to address
these
pressures? What advantages or disadvantages would that
strategy provide?
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 Which Strategy Should a
Firm Choose?
1. Global standardization - increase
profitability and profit growth by reaping
the cost reductions from economies of
scale, learning effects, and location
economies
 goal is to pursue a low-cost strategy on a
global scale
 This strategy makes sense when
 there are strong pressures for cost
reductions and demands for local
responsiveness are minimal

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 Which Strategy
Should a Firm Choose?
2. Localization - increase profitability by
customizing goods or services so that
they match tastes and preferences in
different national markets
 This strategy makes sense when
 there are substantial differences across
nations with regard to consumer tastes and
preferences and cost pressures are not
too intense

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 Which Strategy
Should a Firm Choose?
3. Transnational - tries to simultaneously achieve
low costs through location economies,
economies of scale, and learning effects
 firms differentiate their product across geographic
markets to account for local differences and foster a
multidirectional flow of skills between different
subsidiaries in the firm’s global network of
operations
 This strategy makes sense when
 both cost pressures and pressures for local
responsiveness are intense

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 Which Strategy
Should a Firm Choose?
4. International – take products first
produced for the domestic market and
sell them internationally with only
minimal local customization
 This strategy makes sense when
 there are low cost pressures and low
pressures for local responsiveness

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 How Does Strategy Evolve?
 An international strategy may not be viable in
the long term
 to survive, firms may need to shift to a global
standardization strategy or a transnational strategy in
advance of competitors
 Localization may give a firm a competitive edge,
but if the firm is simultaneously facing
aggressive competitors, the company will also
have to reduce its cost structures
 would require a shift toward a transnational strategy

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 How Does Strategy Evolve?

Changes in Strategy over Time

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 International Business
11e

By Charles W.L. Hill

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Chapter 15

Entry Strategy and

Strategic Alliances
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 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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 What 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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 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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 How Can Firms Enter
Foreign Markets?
 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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 How Can Firms Enter
Foreign Markets?
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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 How Can Firms Enter
Foreign Markets?
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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Which Entry Mode Is Best?
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

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 Which Is Better –
Greenfield or Acquisition?
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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 What Are 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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