International Business Chapter 5 Structures of International Business Organizations

5.1 Forms of Business Ownership Sole proprietorship – a business owned by one person Partnership – a business that is owned by two or more people, but is not incorporated Corporation – a business that operates as a legal entity separate from any of the owners Stockholders/shareholders – owners of a corporation Dividends – a share of corporate earnings paid to stockholders

Discussion What are some advantages and disadvantages of each form of ownership?

Sole proprietorships Advantages Disadvantages Easy to start Decision making freedom Owner keeps all the profits – different between revenue and expenses (aka net income) Pride Disadvantages Limited source of funds Long hours Hard work Unlimited liability/risk – owner’s personal assets can be used to pay any business debts Limited life of a the business

Partnership Advantages Disadvantages Easy to start Additional sources of funds Availability of different talents Disadvantages Partners are liable (unlimited) Profits are shared Potential for disagreement Business can dissolve suddenly

Corporation Advantages Disadvantages More source of funds Fixed financial liability (limited liability) – business owner is only responsible for the debts of the business up to the amount invested Specialized management Unlimited life of the company Disadvantages More difficult to create Charter – document granted by the state or federal government allowing a company to form a corporation Owners have limited control Double taxation Corporate income tax Stockholders pay personal income tax on dividends

Other forms of Business Organization Municipal corporation – an incorporated town or city organized to provide services for citizens rather than make a profit Nonprofit corporation – groups created to provide a service and not concerned with making a profit Cooperative – a business owned by its members and operated for their benefit

5.2 Operations of Global Businesses Multinational Company/Corporation – an organization that conducts business in several countries Home country – parent company location Host country – divisions and/or separate companies

Characteristics of Multinational Companies Worldwide market view Standardized products Culturally-sensitive hiring International and local perspective

Teamwork – commissioner in charge As a group: List some local businesses within Dallastown Area School District Identify their form of ownership Are multinational companies a good thing to have in a community? Why or why not? Research what is an LLC? Research what is an S Corporation?

Multinational Companies Advantages Jobs Products/services Improved infrastructure Disadvantages Economic dependence Political interference

5.3 Starting Global Business Activities Methods for getting involved in International Business Indirect Exporting Direct Exporting Management Contracting Licensing Franchising Joint Venture Turnkey Operation Foreign Direct Investment Wholly-Owned Subsidiary

Indirect Exporting and Direct Exporting Indirect exporting – when a company sells its products in a foreign market without any special activity for that purpose Also known as casual or accidental exporting Minimum costs and low risk Direct exporting – when a company actively seeks and conducts exporting Slightly higher costs than indirect exporting More control over foreign activities Relatively low risk

Management Contracting Management contract – agreement under which a company sells only its management skills Contract manufacturing – a company in one country produces an item for a company located in another country Both have low to moderate risk

Licensing and Franchising Licensing – selling the right to use some intangible property (production process, trademark, or brand name) for a fee or royalty TV and movie characters Sports team emblems Low monetary investment, low financial return, low risk Franchising – right to use a company name or business process a specific way Selling a product or service rather than manufacturing Involves royalty payment to parent company Relatively low risk

Joint Venture and Turnkey Project Joint venture – agreement between two or more companies from different countries to share a business project Also called strategic partnerships Increased profit potential, increased risk Turnkey project – allows a company to enter a foreign market by creating a ready-to-use facility Ex: European-based energy company builds a plant in Africa, upon completion local company takes over

Foreign Direct Investment Foreign direct investment (FDI) – company buys land or other resources in another country Real-estate and existing companies are typical purchases Wholly-owned subsidiary – independent company owned by a parent company