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International Business : The Challenge of Global Competition, 8/e
Donald Ball
Wendell H. McCulloch, California State University Long Beach
Paul L. Frantz, California State University Long Beach
Michael Geringer, California Polytechnic State University
Michael S. Minor, University of Texas Pan American
Trading and Investing in International Business (includes distributive forces)

E Learning Session

  1. Large International Firms Invest Overseas, and They Also Export PowerPoint (32.0K)
    1. Volume of Trade
      • In 1990 international trade surpassed 4$ trillion (USD)
      • 1999 international trade reached $7 trillion (USD)
      • Although inflation accounts for some of the increase in value, absolute increase in international trade has been formidable.
      • The quadrupling of world exports in less than 30 years suggests that exporting is a viable option in a firm's strategy
    2. Direction of Trade PowerPoint (30.0K)
      • Expectations might be that goods and services flow from developed to developing nations
      • Only about half of trade flows from developed nations to developing nations
      • An increasing component of trade is from developed nations to other developed nations
      • The three exceptions-Japan, United States, Australia-export to developing nations
        1. Japan established extensive distributions systems in developing countries as a result of raw materials acquisition
        2. US has more subsidiaries in developing nations as well has a large amount of export to developing Latin American countries (geographic importance)
        3. Australia's export has shifted to Asian countries still classified as developing countries (geographic importance is a large factor)
      • Major trading partners of the US
        1. Mexico and Canada are strong partners (NAFTA)
        2. Shift in geographic location of partners, principally to Asia
        3. Three reasons for shift
          1. Rising standards of living enable people to buy more
          2. Purchasing large amounts of capital goods to further industrial expansion
          3. Governments, pressured by the US to reduce trade surpluses, have sent buying missions to the US
  2. Foreign Investment PowerPoint (35.0K)
    1. Portfolio Investment
      • The purchase of stocks or bonds to obtain return on the funds invested
      • Investment not concerned with control of the firm
      • Investments susceptible to currency exchange fluctuations
    2. Foreign Direct Investment
      • Volume
        1. Book value exceeds $4.7 trillion (USD) US leading FDI
      • Direction
        1. Countries with high inflows of FDI are likely good places to invest
        2. Environment, including political and legal, are attractive to investment
      • Trade Leads to FDI
        1. FDI has followed foreign trade.
        2. Foreign trade tends to be less risky and easier
        3. As foreign markets develop and demand increases, FDI becomes more attractive
      • Does Trade lead FDI or does FDI lead trade?
        1. Reduced barriers to FDI during recent times make initial FDI investment more attractive
    3. US Foreign Direct Investment
      • The largest FDI investor
      • US FDI shows changing targets
    4. Foreign Direct Investment in the US
      • Rapid Increase
        1. Inward FDI for US growing at an annual rate of 13%
        2. 75% of all inward FDI made by six countries
      • Acquire going companies or build new ones?
        1. More inward FDI in US has resulted from foreign companies acquiring US companies
        2. Corporate restructure in the US made companies or parts of companies attractive acquisition targets for foreign investors
        3. Foreign companies wanted to gain rapid access to advanced technologies
        4. Foreign companies believed entering the US market with an already known brand would be a competitive advantage so they acquired a brand
  3. Why Enter Foreign Markets? Concept Check: Suggested reasons for entering foreign markets include all but a. obtaining greater profits, b. creating new markets, c. satisfying the whim of upper management and sales, d. Protecting markets from competition Concept Check
    1.  
      • When home markets are saturated, managers may look to foreign markets to find:
        1. markets with rising GNP per capital and population growth
        2. economies of nations in which they do not do business are expanding faster than the home country's economy.
      • New market creation
        1. Analysts look at GNP per capital as an initial measure of market potential
        2. Three potential problems with GNP per capital as a measure of market potential
          1. Statistical data gathering is deficient in some countries
          2. Basis for converting to US currency as a common scale creates misleading information compared to current circumstances
          3. Income distribution may be an important characteristics in defining potential markets for products or services
        3. Growth does not imply equally good potential for all products of services
      • Faster-growing markets
        1. Some emerging markets are growing at rates faster than home markets
        2. Typically developed country growth rates are greater than developing countries'
      • Improved communications
        1. Advancing technologies give managers greater confidence in ability to manage foreign operations
        2. Advanced communications allow large firms to transfer some operations to foreign locations
    2. Obtain greater profits
      • Greater profits obtained by increasing revenue or reducing costs.
      • Lower Cost of goods sold PowerPoint (34.0K)
        1. Increasing total sales reduces some fixed or sunk costs such as research and development
        2. Economic incentives offered by host country governments can also reduce costs,
      • Higher overseas profits as an investment motive
        1. Greater profits was a primary incentives for overseas investment in the 1970s and 1980s,
        2. Trend continues in 1990s
    3. Test market
      • Testing products in foreign markets that may not be as important to total sales as a home market or other foreign markets
    4. Protect markets, profits and sales PowerPoint (33.0K)
      • Protect domestic market
        1. Establish operations where customers are to prevent competitors from achieving advantage by locating first
      • Attack competitors home market
        1. By entering a competitor's home market the competitor may become preoccupied with defending allowing the attacking firm to focus on more important target markets for development
      • Using foreign production to lower costs PowerPoint (34.0K)
        1. Some elements of the value chain can be shifted to mower cost foreign operations
        2. Labor-intensive assembly can be shifted to foreign operations in markets where labor costs are less. (Example: maquiladora industries of Mexico)
        3. North American Free Trade Agreement
          1. In 2001 in-bond plants will be required to pay import duties on component parts
          2. Advantage will be lost by companies from many nations
          3. In addition, larger percentage of production can be sold in Mexico rather than having to be exported
        4. Caribbean Basin Initiative
          1. Initiated by Ronald Reagan to stimulate investment in Caribbean nations
          2. Creates in-bond plants similar to those in Mexico
          3. Apparel industry is taking advantage of the provision to achieve labor cost savings
        5. Andean Trade Preference Act
          1. Unilateral trade agreement similar to Caribbean Basin Initiative
          2. Includes countries in northern section of South America
          3. Designed to open alternatives to drug production
        6. Growth Triangles
          1. Developed by Singapore to encourage development in Asia
          2. Created partner countries sharing resources to improve competitiveness
        7. Export Processing Zones
          1. Many nations developed some form of export processing zone to provide foreign manufactures with incentives to place sub-manufacturing or assembly into the zone
    5. Protect foreign markets. PowerPoint (33.0K) Concept Check: True or False: Protection of foreign markets from competitors is one of the driving forces for FDI. Concept Check
      • Lack of foreign exchange
        1. Delays in currency exchange sometime motivate a firm to establish FDI to absorb
        2. If advantages of investment outweigh the disadvantages then investment is a reasonable choice to facilitate protection of the market
      • Local production by competition
        1. Firm may make FDI is competition is already producing in the foreign location
        2. Sometimes, local production provides a base of competition that gives advantage to the local producer
      • Downstream markets
        1. Producing countries may invest in vertical integration for distribution of products
        2. Example is OPEC countries which have invested in refineries and gasoline station s in developed nations
      • Protectionism
        1. If a local government pronounces a local industry as threatened by imports, local investment will keep local markets available
    6. Guarantee Supply of raw materials
      • Every nations needs raw materials it doesn't produce itself
      • FDI may help secure raw material supplies that may otherwise, be tenuous in availability
    7. Acquire technology and management know-how
      • Some foreign companies suggest that the primary reason for investment in the United States is to acquire management or technical expertise
    8. Geographic diversification
      • Seeking stabilization of sales, some companies use geographic diversification
      • Although sales may be poor in one country at one time, they are rarely bad in all countries at the same time
    9. Satisfy a manager's desire for expansion
      • Sometimes, expansion into foreign markets results in rapid growth for a company, making a leader look good
      • Leaders may seek the reputation of a global leader and require FDI to support the claim
      • Firm managers may have some tie to a country and will create FDI to fulfill a personal desire to solidify the tie
  4. How to Enter Foreign Markets
    1. Exporting
      • Indirect exporting
        1. Requires no special expertise or large outlay of operating cash
        2. An exporting in the home country will do the sell of goods overseas
        3. Local manufacturer only has to follow instructions provided by exporter
        4. Indirect exports face additional expenses, however, including commissions, potential loss of business if the export firm decides to use other sources, and the firm gains little experience from the process
      • Direct
        1. Responsibility for export is assigned to a firm member
        2. Selling-support functions are handled by the same people as domestic sales
        3. A Sales Company may be set up in the foreign location to provide customer contact and local foreign processing
        4. Sales may reach a level where local production is attractive to support the market
    2. Foreign manufacturing PowerPoint (31.0K) Concept check: Foreign manufacturing may include any one of the following except a. joint venture, b. management contract, c. retailing, d., license agreement, e. franchising. Concept Check
      • When management decides to become involved in foreign manufacturing, several options are available
        1. Wholly-owned subsidiary
          1. Start from the ground up to build a new plant
          2. Acquire a going operation
          3. Purchase its distributor
          4. In general, US companies have preferred the wholly-owned subsidiary, but the actual type is not had a marked preference
          5. Sometimes wholly-owned subsidiaries are not an option
            • Host countries may forbid foreign ownership
            • Firm may not have the capital for FDI
            • Tax or other legal considerations may make FDI unattractive
        2. Joint venture PowerPoint (35.0K)
          1. Joint venture may be
            • Corporate entity formed by an international company and local owners
            • Corporate entity formed by two international companies to do business in a third market
            • Corporate entity formed by government agency and international firm
            • Cooperative agreement undertaken by two or more firms for a limited time
          2. When the government of the host country requires local participation, foreign companies must use joint venture, but even when not required some companies find joint ventures with local partners advantageous
            • Strong nationalism
              1. Strong national sentiment in a country may make local participation a must
              2. While many in developing countries believe multinational corporations have exploited them and are negative toward them, they recognize that products are high quality so local ownership participation helps easy the social consciousness
            • Acquiring expertise, tax, and other benefits
              1. Other motivations for local joint ventures include acquisition of some local expertise, tax benefits extended to countries for development, and the need for additional capital or experienced personnel
              2. Some firms use joint venture to help reduce investment risk
              3. Joint ventures can lead to advantages of economies of scale
          3. Disadvantages of joint ventures
            • Profits must be shared
            • Lack of control over joint venture
          4. Control with minority ownership
            • One method requires foreign partner to take 49% ownership, assigning two percent ownership to a law firm or other trusted national ensuring the foreign investor influence 51% of ownership
            • Use a local majority owner who has little or no interest in daily management of the joint venture
        3. Management contract
          1. Arrangement that usually provides management know-how for a fee
          2. Could be for firms that the management company has no ownership, a joint venture or a wholly-owned subsidiary of another company
          3. In the last case, this is dome most often to allow repatriation of more profit than can be process by the subsidiary owner
          4. Used in joint ventures
            • Can enable global partners to control many aspects of joint ventures
            • Global partner can influence production quality or distribution by management contract for personnel
          5. Purchase commissions
            • May provide additional revenue as company serves as a purchasing agent for importing raw materials that are then purchased by others in country
        4. Licensing agreement
          1. Supplying technical expertise
          2. One firm (the licensor) permits another firm (the licensee) to use some expertise, manufacturing process, product design, marketing procedure or trademark
          3. Licensee generally pays a fixed sum for agreement, then royalty for each item produce under the license
          4. Many products are excluded from licensing by owners who want to protect intellectual property even in global markets
        5. Franchising
          1. Franchisee can sell products or services under a well-publicized brand name
          2. Fast foods, hotels, home maintenance, and automotive parts are good examples of franchise businesses
        6. Contract manufacturing
          1. Employed in two ways
            • A means to enter a foreign market without investing in plant facilities
            • Subcontract assembly or production work to independent companies
        7. Strategic alliances PowerPoint (34.0K) Concept check: Strategic alliances become attractive when a. the cost of personnel to staff a foreign operation is high, b. th cost of research and development is high, c. the market allows time for new entities to become profitable, d. the home country cannot speak the language of the host country. Concept Check
          1. Need arises when faced with (a) expanding global competition, (b) growing cost of research, development, and marketing, (c) the need to move faster
          2. Alliances may include any number of types of agreement for cooperation
          3. Alliances may be joint ventures
            • The form of a strategic alliance my be a joint venture when the agreeing companies create a third company to fulfill the alliance goals
          4. Alliances can be mergers or acquisitions
            • Two companies can merge to create a new company as did Swedish ASEA and Swiss Brown Bovari
            • Usual reason is that each company is too small to compete, but together competitiveness position is improved
          5. Future of alliances
            • Many alliances fail or are taken over by one of the partners
            • Incompatibilities among partners eventually bear on alliance operation
            • Despite these challenges, alliances remain the most potentially cost effective way to extend resources
  5. Multidomestic or Global Strategy
    1. World Environment is changing
      • Changes are occurring
        1. Governments generally have liberalized the flows of capital, technology, people, and goods
        2. Improvements in information technology enable managers to more effectively manage foreign operations
        3. Increase in global competition will drive producers to open new markets
    2. Seven global dimensions
      • Product
      • Market
      • Promotion
      • Where value is added to the product
      • Competitive strategy
      • Use of non-home-country personnel
      • Extent of global ownership of the firm
  6. Channels of Distribution
    1. Distribution systems through which a product and its title pass to the user
    2. Can be controllable or uncontrollable
  7. International Channel of Distribution Members
    1. Indirect Exporting
      • A number of US based exports (1) sell for American manufacturers, 92) buy for their overseas customers, (3) buy and sell for their own account, (d) purchase on behalf of foreign middlemen or users
      • Manufacturers export agents
        1. Act as international representative for non-competing domestic manufacturers
        2. Commonly paid a commission for their function
      • Export management companies
        1. Formerly known as combination export managers, they act as the export department for several non-competing manufacturers
        2. Transact business in the name of the manufacturer and well as handling routine details
      • International trading companies
        1. Act as agents for some companies and as a wholesaler or others
        2. They export and import
        3. US trading companies have been operating for centuries (W.R. Grace is example)
        4. Largest trading companies are the Japanese Sogo Shosha
        5. Korean general trading companies
          1. Similar in scope to the Japanese companies
          2. Responsible for a major portion of Korean exports and are major importers of raw materials
        6. Exporting trading companies
          1. US companies now authorized to develop along the lines of the Asian counterparts
          2. New US law provides provisions for ETCs to be competitive
          3. A potential exporter must apply for a Certificate for Review from the Department of Commerce
      • Exporters that buy for their own overseas customers
        1. Exporting commission agents represent overseas purchasers
        2. Paid commission by purchaser
      • Exporters that buy and sell for their own account
        1. Export merchants
          1. Purchases direct from manufacturer then sells to foreign customers
          2. If the exporter has exclusive rights to manufacturer's products, they are called export distributors
        2. Cooperative exporters
          1. Sometimes called "mother hen" of "piggyback" exporters, sell products of other manufacturers along with their own products
          2. A single carrier usually represents 10 to 20 suppliers
        3. Webb-Pomerene associations
          1. Groups of competing companies joined for export
          2. Export law of 1918 allows for the formation of such groups and in generally exempts then from antitrust concerns
          3. They buy from members, then sell abroad
          4. Most active are involved in raw materials distribution
      • Exporters that purchase for foreign users and middlemen
        1. Large world-wide organizations buy centrally for foreign operations to reduce costs through large quantity purchase
        2. Some governments maintain purchasing offices in developed countries to take advantage of proximity to markets
        3. Export resident buyers
          1. Perform essentially the same as export commission agents
          2. Generally more closely associated with a foreign firm
    2. Direct Exporting
      • Manufacturers' agents
        1. Residents of a country or region in which they do business
        2. Represent non-competing companies
        3. Commission basis
        4. Pay own expenses
        5. Do not assume financial responsibility or product or payment
      • Distributors
        1. Wholesale importers are independent merchants that buy for their own account
        2. They import and stick for resale
        3. Usually specialize in a field or product line
      • Retailers
        1. Consumer products retails usually import directly especially if the products are low after-sale maintenance
        2. Contact with retailers is generally through manufacturers' agent
      • Trading companies
        1. Relatively unknown in US but important in other economies
        2. Serve as intermediaries between foreign manufacturers and local sellers
        3. Trading companies may be private or owned by the state
        4. They work to promote export of goods
    3. Foreign Production
      • Wholesale institutions
        1. Take title to goods that are then resold to other components of distribution
        2. Diversity of wholesaling structures
          1. Wholesaling structures differ from country to country
          2. Because structures developed at different times in history and under different conditions of development, channel components are different
          3. Japan's multi-layered system
            • A formidable barrier to foreign trade
            • System is criticized for its inefficiency in delivering goods cost effectively to consumers
          4. Parallel importers and gray market goods
            • Wholesalers who import goods independently of the manufacturer-authorized importer
            • Importer buys from an overseas dealer
            • An unauthorized dealer imports from a foreign subsidiary
            • An unauthorized importer buys from the home country manufacturer and competes against the local subsidiary
            • Goods are bought for export but are sold domestically in a "gray market"
              1. Not counterfeit goods
              2. Occurs when manufacturer sells export goods cheaper than domestic goods
        3. Retail institutions
          1. Size and type of retailer varies widely among countries
          2. Generally, the less developed a country is, the more numerous and smaller are the retailers
          3. The more developed the country, the more likely are mass merchandisers, more self-service, larger units, and retailing is concentrated in location
          4. European trend is to the hypermarket-a huge combination of supermarket and discount house
          5. In Japan




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