1. Economic Integration and Emerging Market Economies (Chapter 6)
Economic Integration / Free Trade
The tendency toward economic unification of nations within a region, as a means of attaining goals that they cannot achieve in isolation.
Based on the premise that, through economic cooperation, nations in a
region connected by history, geography, culture, politics, or economic
factors, can gain substantial economic advantages by trading freely.
An outgrowth of efforts since 1945 to liberalize trade worldwide.
There are already nearly 30 free trade zones already in place or in
development around the world — free trade is here to stay.
Tariff: A tax on imported goods
Nontariff Barrier: A government policy or measure that restricts trade

2. Effects of Economic Integration
Governments decrease or eliminate trade barriers between countries
within a region:
==> Leads to trade creation and trade diversion
==> Market for producers within the region increases in size, leading to increased demand for goods/services made within the region.
==> Producers internationalize to exploit greater economies of scale and scope in production, marketing, finance, etc.
==> Competition increases in most industries; company efficiency increases; production, marketing, and other costs go down.
Allows firms to become more competitive in global markets.
==> Consumers reap lower prices and a greater selection of goods and services.
==> Reduced environmental damage, less illegal immigration, and a more peaceful world (?)

3. Disadvantages of Economic Integration
==> Companies, especially smaller businesses in smaller partner countries, are impacted as trade barriers slide away. Some firms go out of business.
==> Factories in various industries may be forced to close or relocate. This causes job losses and impacts local communities.
==> Each nation's economy is disrupted in ways that cause certain groups to suffer — a process of "creative destruction."
==> Increased competition may result in substantial corporate restructurings, leading to layoffs and other unhappy
consequences.

4. North American Free Trade
Started out as the Free Trade Agreement, initiated with Canada in 1989.
Mexico was incorporated when NAFTA was activated in 1994.
NAFTA does the following (for Canada, USA, and Mexico):
 Phased out all tariffs on goods and lowered nontariff barriers on both goods and services;
 Eliminated virtually all import and export quotas;
 Improved climate for bilateral trade by liberalizing restrictions on foreign investment;
 Established local content rules which grant preferential treatment to trade in goods originating in the USA, Canada, or Mexico, as opposed to goods originating in other countries (diverts trade);
 Strengthened protections under intellectual property rights.

5. The European Union
Main goal: Create a uniform,integrated market to advance the competi-
tiveness of European industries and companies in the world marketplace.
The EU economic unification program seeks to:
 Eliminate all trade and transportation barriers in Europe to the movement of
of goods, services, people, and capital;
 Harmonize technical and quality standards Europe-wide in the production of
goods and services;
 Harmonize fiscal and taxation policies, as well as social policy regarding workers.
Generally, American products can be marketed to the EU without major
impediments. However, US exporters may still face EU duties of 5% to 20%.
Duties can be avoided by establishing a local presence (assuming 60% local content).
Evolving business strategy:
Completely Completely
customized = = = = > standardized
product product
| |

6. Other Economic Alliances
Southern Cone Common Market (‘Mercosur’)
Brazil, Argentina, Paraguay, Uruguay, Chile, Bolivia
Andean Common Market
Bolivia, Columbia, Ecuador, Peru, Venezuela
Central American Common Market (CACM)
Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua
Caribbean Common Market (CARICOM)
Association of SouthEast Asian Nations (ASEAN)
Asia Pacific Economic Cooperation (APEC)
The entire Western Hemisphere and Pacific Rim
countries are gradually evolving toward one large free trade area

7. Emerging Market Economies: RUSSIA
Geography: Land area nearly twice that of the USA, involving the widest variety
of topographic and climatic types. World’s biggest country in area but
unfavorably located regarding major sea lanes, hindering trade
Natural Resources: Wide natural resource base including major deposits of oil,
natural gas, coal, and many strategic minerals, timber (however, major
obstacles of climate, terrain, and distance hinder exploitation)
Population: About 150 million
Education: 98% literacy rate. Russians are well educated.
Gross Domestic Product: About $700 billion on PPP basis
Per Capita Income : About $5,000
Average inflation rate: Varies, but is typically double or triple digits
Industries: Coal, oil, gas, chemicals, and metals; all forms of machine building from
rolling mills to high-performance aircraft and space vehicles; ship-building; road and
rail transportation equipment; communications equipment; agricultural machinery,
tractors, and construction equipment; electric power generating and transmitting
equipment; medical and scientific instruments; consumer durables

8. Russia’s Economy
In spite of huge natural resources, a well educated population, and a
diverse industrial base, Russia continues to experience serious
difficulties in moving from a centrally planned to a market economy.
Economic reform program included the following steps:
- Freed nearly all prices
- Slashed defense spending
- Eliminated old centralized distribution system
- Initiated ambitious voucher program for privatization of industry
- Established private financial institutions
- Decentralized foreign trade

9. Russia: Three Overriding Problems
1. Poor economic infrastructure -
Unstable economy, high inflation, inadequate banking system,
shortage of loanable funds, etc.
2. Poor facilities and capital infrastructure -
Transportation, communications, information technology, factories, equipment, etc. Russia’s plant and equipment on average are twice the age of the West’s
3. Poor human infrastructure for market economy -
Distrust and insufficient understanding among the people of how a market economy works, shortage of capable managers, dislike of wealthy people, etc.

10. Russian Problems (Cont’d)
Russia has made limited progress in key areas needed to provide a solid foundation
for a market economy.
Financial stability is elusive, with wide swings in monthly inflation rates (makes
business planning difficult; discourages private investment).
Limited restructuring of industry has occurred so far because of scarce
investment funds and failure of managers to make hard cost-cutting decisions.
Federal government has failed to develop a social safety net that would allow faster
restructuring by securing lives of the displaced.
Existing legal framework is insufficient to fully support market economy and to
encourage foreign investment (e.g., poor protection of intellectual property rights).
Many Russians believe they are worse off now than under the old system because
of growing crime, health problems, mounting wage arrears, and job uncertainty. (It
is very difficult, politically, to carry out needed reforms in such an environment.)

11. Factors Making Russia’s Case Worse than those of Eastern European Countries
Communism started in Russia and hence, its legacy will be harder to throw off.
(Communism was forced on Eastern Europe and was always seen as an alien force hindering national destinies.)
Communism started in Russia in 1917 and ended in 1989; there are few
Russians today who did not live under communism or current chaos for all their lives.
(Communism didn’t arrive in Eastern Europe until the 1940s; many Eastern European entrepreneurs who fled to the West since that time are returning to their home countries to aid in economic reform.)
The chain of practical knowledge regarding non-communist approaches was repeatedly broken during this century via purges and other means.
(Much practical knowledge has been retained and passed on to younger
generations in Eastern Europe.)

12. Common Characteristics of Russian and Eastern European Manufacturing
Outdated manufacturing equipment
Inventory hoarding instead of inventory management
Insufficient shop floor control
Insufficient quality control
Low levels of productivity
Lack of meaningful employee involvement
Inadequate information systems
Poor distribution and delivery performance
Lack of flexibility / responsiveness
No supply chain management

13. CHINA (People’s Republic of China)
Geography: Slightly larger than the coterminous United States. Two
thirds of China is mountainous or desert, and only one-tenth is cultivated.
Population: 1.25 billion (280 million in the USA)
Population Density: 315 per square mile; 25% urban (70 per square mile,
76% urban in the USA)
People: The population is heterogeneous; ethnic Chinese constitute 92%
of the total. Most Chinese high school graduates are better educated
than their American counterparts (and they work for only a few dollars
per day; hence the massive shift of manufacturing to China)
Industries: Iron and steel, textiles, agriculture implements, trucks.
Chief crops: Grains, rice, cotton, tea, silk

14. CHINA (Cont’d)
Labor force: 60% agricultural; 25% industrial & commercial.
GDP: Probably over $4 trillion (About $8 trillion in USA)
Per capita GDP: About $3,500 in PPP terms, much lower in non-PPP terms
Biggest Trading Partners:
Imports — Japan, Taiwan, United States, Hong Kong
Exports — Hong Kong, Japan, United States, South Korea
Infrastructure:
Electricity - capacity: About 250 million kW (750 million in USA)
Railroads: About 40,000 miles of track (144,000 in USA)
Highways: About 700,000 miles (385,000,000 in USA)
Airports: About 200 (over 5,000 in USA)
Telephones: About 1 per 20 persons (1 per 1.5 persons in USA)
Distribution networks in general are primitive.

15. CHINA (Cont’d) Economic System:
Formerly centrally planned, now creating a "socialist market economy."
State sector has shrunk; private sector has grown dramatically.
Has become the world’s third largest economy in aggregate GNP terms.
China will likely become a ‘wealthy country’ within coming few decades.
Fast growth is largely the result of huge investments by offshore
Chinese (from places like Hong Kong, Singapore, Taiwan, & Indonesia).
Guangdong and other areas in SE China closest to Hong Kong/Taiwan have become centers of intense capitalism.
China's present per capita GDP is similar to that of Japan in the 1950s.
However, China’s overall level of industrialization is greatly inferior to Japan of the 1950s.

16. Problems Facing China in Attempting to Modernize
Very poor infrastructure.(transportation, communications, electrification, machinery, etc.)
75% of the population are spread out across the vast countryside (creating huge distribution problems).
Conditions in the countryside are still primitive; attitudes there will change slowly.
However, if China continues to grow very quickly, it could put a
tremendous burden on the world's natural resources.
Moreover, as the East Coast prospers, massive migration is occurring from
the western regions, overwhelming eastern infrastructure. Thus, the
Chinese government is rushing to modernize the national infrastructure,
an expensive process likely to delay private sector growth.

17. Comparison of Reform in Russia and China
- Low savings rate
- Ineffective government
- 93% of workers formerly employed in large state enterprises
- Political and economic reforms are being carried out simultaneously
China
- Very high savings rate (as high as 40%)
- Effective government
- Only 18% of workers formerly employed in large state enterprises;
others were local entrepreneurs
- Economic reforms are being carried out first; political reforms
(supposedly) will occur later
Question: Which country is more likely to succeed in the long run?
(End of Chapter 6)

18. National Trade and Investment Policies (Chapter 7)
Governments impose tariff and non-tariff barriers on imported goods in
order to achieve specific policy objectives
Tariff (aka ‘duty’): A government tax levied on imported goods
Non-Tariff Trade Barriers
Specific Limitations on Trade (e.g., quotas, import licensing requirements, local
content rules)
Administrative Barriers (e.g., unfair valuation systems, unfair tariff classification
systems, bureaucratic delays, unreasonably tough standards and testing methods,
unusual packaging and labeling standards)
Government Participation in Trade (e.g., subsidies, biased government
procurement policies, domestic assistance programs)
“Voluntary” Export Restraints

19. Protectionism
Efforts by governments to restrict imports through imposition of trade barriers.
While exceptions exist, protectionism tends to do a country more harm than good.
For example, in the USA tariffs tend to. . .
increase inflation (because a fixed amount of dollars chases fewer goods and because domestic firms can charge higher prices)
special interests' privileges
government control and political considerations in economic matters (thus, controlled more by politics, less by natural market forces)
the number of tariffs (tariffs beget tariffs)
restrict manufacturers' supply sources and choices available to consumers
competition (thereby leading to weak industries, unable to compete efficiently in world markets)
weaken international understanding (leading to trade wars and other conflicts)

20. Rationale for Government- Imposed Trade Barriers (Protectionism)
Unemployment: Free trade tends to result in job losses at home (mainly in the
short run)
Protection of an Infant Industry: Infant industries may need protection until
they are strong enough to compete on even terms with foreign firms
Industrialization of Underdeveloped Countries: Industrialization may not
succeed if the country is constantly faced with foreign competition at home.
Economic Relations with Other Countries: Due to unfavorable economic
conditions in some countries (e.g., trade deficits, high inflation), some trade
intervention may be warranted
Political Objectives: Protectionism viewed as necessary to maintain or protect
essential industries dealing with ‘enemy’ countries (e.g., we don’t export
plutonium to Libya), or maintaining a national identity in certain industries (e.g.,
media, special real estate, sports)

21. Trade Barriers Based on Culture, Customs, and Related Factors: Example
USA / Americans Japan / Japanese
Culture very open; are usually relatively closed; usually
willing to buy foreign goods prefer Japan-made goods
Language world business language; spoken only in Japan;
not very difficult to learn hard to learn
Quality not extremely quality extremely quality
consciousness conscious conscious
Distribution System relatively simple and open complex / relatively closed
Business relatively user-friendly hard to navigate
infrastructure for foreigners (even for Japanese)
Government attitude tend not to interfere with tend to favor
toward imports the marketplace Japanese goods
Big conglomerate weak; often illegal very strong; promote
networks (‘keiretsu’) due to anti-trust laws Japanese business interests
Loyalty in relatively disloyal to extremely loyal to
business relationships suppliers, workers, etc. suppliers, workers, etc.
Overall orientation favors consumers favors producers

22. General Agreement on Tariffs and Trade (GATT)
First trade agreement aimed at reducing trade barriers worldwide.
Signed by the USA and 22 other countries in 1947.
GATT created:
(1) process to reduce tariffs through negotiations among member nations;
(2) agency to serve as a watchdog over world trade;
(3) forum for resolving trade disputes.
GATT members have met eight times since 1947 to negotiate agreements
to reduce trade barriers (most recent meeting — "Uruguay Round" —
ended in 1994).
Today GATT has 130 member and associate nations, accounting for more
than 90 percent of world trade.

23. GATT (Cont’d)
GATT has been extremely successful in reducing trade barriers since
1947, leading to dramatic increase in world trade.
Uruguay Round ( ) accomplished the following:
(1) One-third reduction in tariffs on manufactured goods
(2) Better protections for intellectual property rights
(3) More open markets for trade in services and agriculture
(4) Better dispute settlement procedures
(5) Established the World Trade Organization (WTO), replacing the
GATT.
(End of Chapter 7)

24. The Legal and Political Environment of Global Business (Chapter 8)
KEY LEGAL ISSUES IN INTERNATIONAL BUSINESS
International law
International treaties
Contractual relationships
Dispute resolution
Extraterritoriality
Trade and investment regulation
Financial flows regulation
Ownership regulation
Sanctions and embargoes
Intellectual property protection
Reporting requirements

25. Private International Law / Contracts
Private international law is concerned with three areas:
(1) Choice of law
(e.g., When making a contract with a distributor in France, Microsoft determines in advance which country’s laws should be used to enforce the contract)
(2) Choice of forum
(which country has jurisdiction to hear / try cases in the event of a conflict)
(3) Recognition and enforcement of judgements

26. Private International Law / Contracts (Cont’d)
International contracts attach rights, duties, and obligations to the
contracting parties in three types of business transactions:
(1) Sales of goods and services (directly or via an intermediary)
(2) Licensing and franchising
(a contract allowing a firm to manufacture and/or sell a good or service abroad, usually in conjunction with the use, for a fee, of the original manufacturer’s intellectual property, marketing assets, or other)
(3) Direct Investment
(the operation of a foreign branch office or other facility, creation of a foreign subsidiary, or participation in a joint venture with another firm, abroad)

27. Legal Recourse for Resolving Disputes
Conciliation: A formal process of negotiation whose objective is to
resolve differences in a "friendly" manner. Less aggressive than
arbitration. Practiced particularly in China.
Arbitration: Dispute settlement procedure in which an objective third
party hears both sides and makes a decision. Uses intermediaries such as
representatives of chambers of commerce, trade associations, or third
country institutions (e.g., London Court of Arbitration; International
Chamber of Commerce; Chamber of Commerce of Paris).
Litigation: Lawsuits carried out in public courts. Considered the last
resort for resolving disputes and avoided by most firms because of cost,
delays, aggravation, etc. Often, the biggest winners are the lawyers.

28. Extraterritoriality
Reflects a government’s attempts to set or enforce its own laws and
policies outside of the home country.
Antitrust laws
Regulate business activities that restrain competition or trade;
Means by which US government prevents the creation of monopolies;
Vary from country to country (e.g. strong in USA; weak in Japan);
Extraterritoriality example: The US government sued Pilkington PLC, a British glassmaker, for perceived violation of US antitrust laws.
Foreign Corrupt Practices Act
Passed in 1977, made it illegal for Americans to offers bribes or similar forms of payment in the conduct of international business;
Ignores the fact that bribery is a way of life in some countries.

29. Bases for Legal Systems: Four Types
Islamic Law
 Middle East, Africa, and many parts of Asia (about 1/5 of the world population)
 Based on the Koran, prescribes behavior regarding social and economic activity
 Overriding objective is social justice
 Some elements are many centuries old
Socialist Law:
 Former USSR and its satellites; derived from the Marxist-Socialist system
 Emphasizes rights of the state over rights of the individual
 Now becoming “Westernized”
Common Law
 UK, Canada, Hong Kong, and other countries (formerly) of the British empire
 Based on tradition, past practices, and legal precedents established by the courts
 More open to interpretation by courts and thus more flexible than Code Law
Code Law:
 Most countries of the world
 Based on comprehensive written statutes (laws enacted by legislative bodies)
 All inclusive (in contrast to Common Law), covering all aspects of commercial,
civil, and criminal behavior, although subject to some interpretation by courts
Example: Under Common Law, intellectual property rights are determined by use; under
Code Law, determined by registration

30. Global Political Environment and Its Affect on (International) Business
INTEREST GROUP EXAMPLE ISSUE
Government / Politicians ==> National industrial policy favoring local firms
General Public ==> Nationalism / Concerns about local culture
Religious Bodies ==> Anti-Islam concerns
Big Labor ==> Anti-imports
Competing Businesses ==> Concerns about local resource consumption
Customers ==> Pricing policies
Stockholders ==> Insufficient profits
Minority Groups ==> Perceived discrimination / Sexual harassment
Conservationists ==> Environmental protection
Other Special
Interest Groups ==> You name it

31. Company Strategy for Dealing with Political Issues
1. Constantly scan the environment to track existing and potential issues
2. When an issue is identified, define its nature
3. Identify current and potential action of special interest group(s)
4. Identify key individuals and institutions that can influence issue outcomes (e.g., government agencies, courts, the media)
5. Formulate objectives for addressing the issue and strategies for reaching those objectives
6. Determine the impact of implementing various strategies (e.g., via
cost/benefit analysis)
7. Choose best strategy(s) and implement

32. SAMPLING OF INTERNATIONAL ACCOUNTING PRACTICES
Foreign financial statements often don’t come out for up to a year
following year’s end (compared with a few months in the USA)
ASSETS
Securities Valuation
Most countries: lower of cost or market value
Denmark: Cost method
Brazil: Encourages firms to adjust to reflect monetary corrections.
Receivables
USA: Carried net of an allowance of uncollectable accounts
Belgium, France, India, Spain, South Africa: The allowance has generally not been established.
Germany: Allowance may be carried as a liability rather than as a contra-asset.
Inventory Valuation
Most common method worldwide: FIFO
Japan and Brazil: Weighted average cost is preferred
Australia: LIFO is not allowed

33. INTERNATIONAL ACCOUNTING PRACTICES (CONT’D)
Ownership Stakes over 50%
Most places: Full consolidation into headquarters financial statements
India and South Korea: Usually don’t consolidate
Switzerland: Consolidated statements are often unaudited
Germany, Italy,Finland: Foreign firms may be excluded from consolidation
Plant, Property, and Equipment Valuation
USA, Canada, Japan, Germany: Historical cost
Latin America and Much of Europe: Replacement cost or other
Latin America: Inflation-adjusted market value
South Korea: Fixed assets may be periodically revalued for inflation but are subject to a 3% revaluation tax.
INCOME STATEMENT
Depreciation
Most of the world: Straight line depreciation is the norm
Latin America & other high inflation countries: Based on re-valued book value (thus, total accumulated depreciation can exceed original purchase cost)
R&D Costs
Most of the world: Expensed as incurred
South Korea and Spain: Capitalized
Belgium, Malaysia, and Italy: Both conventions are practiced.
(End of Chapter 8)

34. Organization, Management, and Control of Global Operations (Chapter 9)
The basic functions of an organization are to provide a. . .
(1) place for decision-making and a route for coordination of business activities,
(2) system for communications among business entities and for reporting on
business progress and results.
Generally, organizations evolve as the firm internationalizes. International
organizational structure depends on:
(1) degree of internationalization of the firm;
(2) requirements for grouping resources and people to best achieve
organizational goals; and
(3) type and degree of control to be exercised by headquarters.
Decentralization: granting a high degree of autonomy to subsidiaries
Centralization: concentrating control and strategic decision making at headquarters

35. Organizational Structure
Export Department Structure (Fig. 9.1)
Export department as a separate entity, within or outside the firm;
Common to smaller firms and those new to international business;
Inadequate where international activities involve much more than exporting.
International Division Structure (Fig. 9.2)
Centralizes in one entity and creates a critical mass of international expertise;
Best serves firms with few products that are relatively standardized;
Popular with U.S. firms because of large domestic market;
Campbell Soup Co.
Global Product Structure (Fig. 9.3)
Gives total responsibility for worldwide production and marketing to individual product divisions;
Popular in highly international firms with diverse product lines;
Maximal cost efficiency achieved through centralization of production;
Global synergy and ability to coordinate may suffer;
Motorola, Westinghouse

36. Organizational Structure (Cont’d)
Geographic Area Structure (Fig. 9.4)
Geographic divisions are responsible for all manufacturing and marketing in their respective areas;
Ideal where product characteristics and operating conditions vary dramatically, and when foreign operations are extensive and not dominated by a single region or country;
May lead to costly duplication in the divisions; thus, careful coordination is needed;
Nestle, Asea Brown Boveri
Global Functional Structure (Fig. 9.5)
Arranges the firm’s international activities along functional lines;
Works best in firms with narrow and similar product lines;
Exxon, Alcoa
Matrix Structure
Attempts to combine product, geographic, and functional structures in some ideal fashion;
May be the hardest type to manage well;
AT&T, Eastman Kodak

37. The Multinational Corporation (MNC)
Companies that carry out production, marketing, and other such business functions
in more than one country
Such firms are usually large, operate in several countries at once, and have an
integrated global philosophy encompassing both domestic and overseas operations.
Running an MNC is usually much more complex than running a strictly domestic firm.
Complex issues facing MNC management include:
Locations of decision-making, production, and R&D (e.g., centralized or
decentralized decision-making? Which production locations are best in light of
local business environments, upstream and downstream operations?)
Markets to be served / products to be offered
Operating strategies(e.g.,choice among exporting, licensing, manufacturing, JV, etc.)
Operating tactics (e.g., What pricing methods, which distribution approaches, which methods to minimize taxes and trade barriers? How to appease local interests?)
How to manage the most important resource in each location: people

38. The MNC and Constituencies
The MNC must satisfy everybody:
Stockholders
Employees
Upstream channel members
Downstream channel members
Customers
Host country governments / politicians
Host country competitors / business groups (e.g., Toys R Us in Japan)
Host country special interest groups (e.g., big labor in France)
International special interest groups (e.g., Greenpeace)
Society at large
Decisions made in one country have repercussions elsewhere

39. Impact of the MNC on Host Countries
Positive Impact
Capital formation
Technology and management skills transfer
Industrial development
Internal competition and entrepreneurship
Favorable effect on balance of payments
Increased employment / Increased use of unemployed factors of production
Negative Impact
Industrial dominance
Technological dependence
Disturbance of host country sovereignty / economic plans (some MNCs “economies” are larger than the economies of numerous host countries)
Harm local entrepreneurship
Decrease local R&D undertakings
 Cultural change

40. Challenges Facing MNCs
Exchange rate volatility / Unfavorable exchange rates
Cost of capital / High interest rates in the host country
Coordination / Control of far-flung operations
Tariff and non-tariff trade barriers and restrictions
Inadequate business infrastructure in host country
(e.g., communications, transportation, electricity)
Political risk
Extraterritoriality (e.g., for US firms operating abroad: Foreign Corrupt Practices Act, US antitrust laws)
Adapting operations to suit local conditions

41. Strategies for Dealing with Constituents
Constituents include stockholders, employees, upstream channel members,
downstream channel members, customers, host country governments/ politicians
host country competitors /small business groups, host country special interest
groups, international special interest groups, society at large.
Scan local business environment constantly; be alert for potential problems
Be open about corporate activities; emphasize social, economic, and other benefits of these activities
Use corporate power responsibly, always weighing local interests
Develop contingency plans to deal with disasters and counter criticisms
Maintain integrity: avoid actual wrongdoing as well as the mere appearance of it
Be clear and sensitive in communications; speak the local language
When possible, get involved in local projects that advance societal interests and the public good
Be a good corporate citizen overseas

42. Global Strategy versus Multidomestic Strategy
Global Multidomestic
Strategy Strategy
| |
(lower costs) (higher revenues)
Global Strategy
To minimize costs, the firm configures its various value chains in cost-effective locations around the world. The firm then seeks to optimize resource transference and generally coordinate steps across its value chains.
Global strategy emphasizes. . .
(1) Standardization of products and marketing (reduces costs, but may result in
lost revenues)
(2) Systematic dealings with stakeholders (e.g., consistent pricing, consistent
policies in dealing with governments)

43. Global Strategy versus Multidomestic Strategy
Products and marketing are produced in and/or tailored for each foreign location, often due to unfavorable cost economies or highly specific local tastes.
Multidomestic strategy emphasizes. . .
(1) Customization of products and marketing (increases revenues, but also
increases costs)
(2) Individualized dealings with stakeholders (e.g., pricing locally, dealing with
unique aspects of local and national governments)
Transnational Strategy
A hybrid of global and multidomestic strategies
Emphasizes the exploitation of knowledge and capabilities obtained from the firm’s operations anywhere in the world
Information flows up and down, vertical and horizontal

44. Foreign Direct Investment (FDI)
An investment that gives the investor a controlling interest in a foreign
company (10% per US Department of Commerce definition);
Direct investments in facilities to produce and/or market a product or service
in a foreign country
Horizontal FDI: investment in the same industry
Vertical FDI: investment upstream or downstream in the firm’s own value chain
Growth of FDI
In 1998, global stock of FDI exceeds $3 trillion.
During the 80s, FDI grew twice as fast as the growth in world trade.
From 1988 to 1998, flow of worldwide FDI increased four fold.

45. FDI Determinants / Rationale
Market expansion / marketing factors
Desire / need to expand sales
Lack of domestic capacity / size of foreign market
Need to maintain close customer contact
Dissatisfaction with existing market arrangements
Desire to follow customers / competition
Trade restrictions
Government trade barriers (e.g., Japanese auto firms in US)
Country-of-origin effects / local preference for local product

46. FDI Determinants / Rationale (Cont’d)
Resource-acquisition investments / cost factors
Desire / need to be near source of supply
Availability of appropriate factors of production (e.g., raw materials, capital,
technology)
Lower cost of factors of production (e.g., cheap labor)
 Achieve economies of scale (spread production and marketing costs over many markets)
Lower cost of transportation (e.g., cement, tires, yogurt)
Favorable investment climate
Favorable tax structure or investment incentives
Stable / unstable foreign exchange
Familiarity with country
Globalization strategy (significant presence in every region of the world)

47. International Control
Key questions:
Where are decisions made?
How should worldwide operations be structured so as to optimize results?
How can headquarters “control” foreign operations?
Foreign control is more difficult because of:
Distance - takes more time and distance to communicate and to transport people and assets
Diversity - environmental differences make it hard to control and compare far-flung operations
Uncontrollables - there are many more uncontrollable variables in international business
Degree of certainty - there are often rapid changes in the environment and problems in obtaining reliable data
(End of Chapter 9)

48. GLOBAL BUSINESS AND MARKETING RESEARCH (Chapter 10)
Two major decisions facing the international firm:
 Where to sell
 Where to produce
INTERNATIONAL BUSINESS RESEARCH
The systematic gathering, recording, and analyzing of data to provide information
useful to international business decision making;
The international business environment is usually much more complex than the
domestic market;
Failure to do research is the greatest cause of international business failure;
Cost of research is almost always cheaper than the cost of blunders that result
from not doing research;
Research allows the firm to discover disqualifying problems early and plan for a
successful venture.

49. International Business Research (Cont’d)
Two types of data
Secondary data: Information already collected by others and available in
magazines, trade journals, books, and in reports from entities like the U.N., World
Bank, or from governments (e.g., Exporter’s Encyclopedia).
Primary data: Information collected specifically for the purpose of the
investigation at hand.
Potential problems with secondary data:
(1) Availability — may be hard or impossible to obtain;
(2) Reliability — may not be very reliable; (e.g., governments often exaggerate
to serve their own purposes);
(3) Comparability - may be presented in inconvenient units or may be out of date.
When these problems are severe, firm may need to collect primary data
Problem with primary data: it’s expensive to get

50. The Exporter’s Encyclopedia, Published by Dun & Bradstreet
Lists nearly every country in the world in alphabetical order. Under each heading,
the exporter can find out about all the requirements  licenses, documentation,
packing requirements, tariffs, taxes, and non-tariff barriers  for shipping
products to the given country.
For example, for the countries shown, required documentation:
France: commercial invoice, bill of lading, certificate of origin. Depending on the
nature of the product being shipped, some special documents covering, for example,
sanitation and health, may also be required.
People's Republic of China: bill of lading, packing list, commercial invoice, and
certificate of origin.
Canada: commercial invoice, certificate of origin, bill of lading, and a multitude of
other special certificates issuance of which depends on the nature of the product
or on the request for such by the importer (especially true for Quebec).
Argentina: bill of lading, packing list, commercial invoice, and certificate of origin.

51. Most Important International Information
MACRO DATA
 Tariff barriers to trade
 U.S. export / import data
 Non-Tariff barriers to trade
 Foreign export / import data
 Government trade policy
MICRO DATA
 Local laws and regulations
 Market size / Market intensity
 Local standards and specifications
 Distribution system
 Competitive activity
Source: Czinkota, M International Information Needs for U.S. Competitiveness. Business Horizons, 34 (6):

52. Common Methods for Collecting Primary Data
Observation: Situation of interest is watched and relevant facts, actions, or
behaviors are recorded.
Examples:
Fischer-Price Inc. invites a group of local pre-schoolers to its offices in Rio de
Janeiro and allows them to play in a room containing a variety of their toy products. The children are observed from behind a one-way glass to see which toys Brazilian children seem to prefer.
Microsoft sends researchers into software stores in Germany to check on the
prices charged for various competing brands of spreadsheet software.
Market researchers for Tylenol review a large collection of Japanese magazine ads to see how aspirin is typically promoted in magazine ads in Japan.

53. Collecting Primary Data (Cont’d)
Experimentation: Type of investigation in which a researcher manipulates and
controls one or more independent variables (such as advertising or price) and
observes how a dependent variable (such as sales volume) changes in response to
the manipulations.
Examples:
In Russia, Coca-Cola conducts controlled taste tests of Diet Coke to see how local consumers respond. (Here, differences in the taste of Diet Coke are the independent variables and consumer preference is the dependent variable.)
McDonalds conducts extensive newspaper advertising in Shanghai, but no newspaper advertising in Peking, and then records changes in sales volume at McDonald’s outlets in each city. The purpose is to see if newspaper advertising is an effective approach for promoting McDonald’s restaurants in China.
Hewlett-Packard charges $17 for a certain type of calculator in Bombay and $26 for the same calculator in Calcutta, in order to estimate price elasticity of demand for calculators in India.

54. Collecting Primary Data (Cont’d)
Surveys: The gathering of primary data from respondents by mail, by telephone, or
through personal interviews.
Examples:
In Poland, Procter & Gamble researchers stop people at supermarkets and interview them about their habits regarding the washing of clothes (e.g., hot water vs. cold; use vs. nonuse of anti-static devices; etc.)
In Australia, Compaq Computers conducts a mail survey in which they quiz respondents on the various features and benefits they are seeking in personal computers and the prices they are willing to pay with regard to different computer configurations.
Researchers in Italy telephone households at random to find out, on behalf of International Red Cross, their attitudes about donating blood.

55. Focus Groups
Involves the meeting of a specially trained interviewer with up to a dozen local
consumers at once for a period of two to four hours. A specific topic is introduced
and thoroughly discussed by all participants.
Advantages:
Hidden or subtle issues are often raised that would not otherwise emerge in
individual interviews.
Can provide very detailed information about perceptions, emotions, and attitudes
A highly efficient method for rapidly collecting a large amount of information.
Disadvantages:
Participants may not be representative of consumers in the given market.
Peer pressure or other group phenomena may lead to biased or invalid responses.
May not work in cultures where highly participatory interaction is discouraged.
* * * * * * * * *
Best guide on collecting primary data in international business: Douglas, S. and
S. Craig (1983), International Marketing Research. Englewood Cliffs, NJ: Prentice-Hall
(End of Chapter 10)