Chapter 1: International Business

Vocabulary(1) Economic surplus Portfolio A parent company profit or the money that remains after all the expenses are paid. Portfolio The list of shares in business owned by a person or a company; holdings in the form of stocks, bonds or other securities. A parent company Holding company (branch and subsidiary company) Turnkey project It is a contract under which a firm agree to fully design, construct and equip a facility and then turn the project over to the purchaser when it is ready for operation. It often involves large, complex multiyear projects such as construction of a nuclear power plant, an airport, or an oil refinery.

Vocabulary (2) Contemplate Expropriation Taking away (property) or dispossessing (sb. form an estate, etc.) Contemplate have in view as a purpose, intention or possibility Extraterritorial free from the laws of the state in which one lives Collection Obtaining payment of a debt, e.g. bill Correspondent bank A bank that has regular business with another bank or company in a distance place (esp. in a foreign country)

Vocabulary(3) Insurance policy Insurance certificate Weight memo A document issued by the insurer, setting out the exact terms and conditions of an insurance transaction. Insurance certificate A simplified insurance policy Weight memo A note made out by a seller and used to indicated the net and gross weights of each package. Institutional Of, from , or connected with institution Multilateral Involving two or more participants

Vocabulary(4) Adjudication et al =etc.=etcetera Implement Put (sth.) into effect; carry out Legislation Action of making law Adjudication Judge, esp. in a competition et al =etc.=etcetera The rest; and so on

1.What is Business Business is a combination of all these activities which include production, distribution and sale of goods and service for a profit. Creating profit or economic surplus is a primary goal of business activities.

2.What is International Business International business as a field of management training deals with the special features of business activities that cross national boundaries. Multinational enterprises: an enterprise based in one country and operating in one or more other countries.

3.The Scope of International Business Activities International transactions in physical goods and in service International investment: capital supplied by residents of one country to residents of another. Foreign Direct Investment----it defined as investments that give the investor effective control and are accompanied by managerial participation.(the country in which the parent company’s headquarters is located is called the home country; any other country in which the company operates is known as a host country.) - Foreign Portfolio investment----it is purchase of foreign financial assets (stock, bonds, and certificates of deposit) for a purpose other than control.

Other forms of international business activities Exporting: is the selling of products made in one’s own country for use or resale in other countries. Importing: is the buying of products made in other countries for use or resale in one’s own country. Licensing: is a contractual arrangement in which a firm in one country licenses the use of its intellectual property (patents, trademarks, brand names, copyrights, or trade secrets) to a firm in a second country in return for a royalty payment. Franchising: is a specialized form of licensing, occurs when a firm in one country authorizes a firm in a second country to utilize its operating systems as well as its brand names, trademarks and logos in return for a royalty payment.

Management contract: is an arrangement wherein a firm in one country agrees to operate facilities or provide other management services to a firm in another country for an agreed-upon fee. (Hotel industry: Marriott and Hilton, Hyatt) Park Hyatt, Grand Hyatt, Hyatt Regency

Choosing a Mode of Entry 12-11 Copyright 2010 Pearson Education, Inc.

4.International Risk Carefully evaluate the cost, benefits and risks. The special risk elements confronted in Financial risk----involve balance-of-payments, exchange rates, inflation, interest rates. Political risk----Macropolitical risk affects all firms in a country for example civil war; micropolitical risk affects only a specific firm or firms within a specific industry. Regulatory risk----different legal system, overlapping jurisdictions and dissimilar policies. Tax risk----unforeseen changes in fiscal policies and uncertainty to application of tax laws.

5.International Business Law The Legal Environment ----Common Law ----Civil Law ----Religious Law ----Bureaucratic Law

Common Law Based on wisdom of judges decisions on individual cases through history Cases create legal precedents and jury Countries Using Common Law ---United States ---Canada ---Australia ---India ---New Zealand

Civil Law Based on codification of what is and is not permissable Originated in biblical times with the Romans Reinforced by French Napoleonic code Judge determines scope of evidence collected and presented

Egypt’s legal system is a blend of English common law, the French Napoleonic code, and Islamic Law

Religious Law Based on the officially established rules governing faith and practice of a particular religion. Theocracy: country that applies religious law to civil and criminal conduct.

Bureaucratic Law Bureaucratic law is the legal system in communist countries and in dictatorships.

Laws Affecting International Business Transactions Sanction Embargo Laws may be explicitly designed to regulate international business activities. Sanctions are restraints against commerce. They may take many forms including restricting access to high-technology goods, withdrawing preferential tariff treatment, boycotting a country’s goods, and denying new loans. One form of sanction is to export controls on high-technology goods. Many technologically advanced countries control the export of so-called dual-use products that may be used for both civilian and military purposes. An embargo is a comprehensive sanction against all commerce with a given country. It may be imposed by countries acting in unison or alone. Countries may also attempt to regulate business activities that are conducted outside their borders. This is known as extraterritoriality. Antiboycott provisions in U.S. trade law have extraterritorial reach. The Helms-Burton Act is the most controversial application of extraterritoriality affecting international business today. This act is directed against international firms that “traffic” in the assets of U.S. companies that were confiscated by the Cuban government when Castro assumed control in 1959. The act authorizes the U.S. government and the former U.S. owners of the confiscated assets to take action against new foreign owners. Extraterritoriality 3-19

Laws Directed Against Foreign Firms Nationalization Expropriation Privatization Confiscation Countries may pass laws that are explicitly directed against foreign-owned firms. When governments choose to transfer ownership of resources from the private to the public sector, this is called nationalization. Industries that lack mobility are most susceptible to this, such as crude oil production and mining. When the host government compensates the private owners for the loss, the transfer is called expropriation. When the host government offers no compensation, the transfer is called confiscation. Privatization is the conversion of state-owned property to privately-owned property. It is the opposite of nationalization and it creates opportunities for businesses. Many governments limit foreign ownership of domestic firms to avoid having economies or key industries controlled by foreigners. Countries can also constrain foreign MNCs by imposing restrictions on their ability to repatriate (return to their home countries) the profits earned in the host country. 3-20

When the host government compensates the private owners for their losses, the transfer is called expropriation. When the host government offers no compensation, the transfer is called confiscation. Both are kinds of nationalization. Nationalization means transfer ownership of resources from the private to the public sector.

Dispute Resolution Which country’s law applies? In which country should the issue be resolved? Which technique should be used to resolve the conflict? How will the settlement be enforced?

Conflict Resolution Techniques Litigation Arbitration Mediation Negotiation

6.Commercial Credit a. Remittance b. Collection Mail Transfer (M/T) Telegraphic Transfer (T/T) Demand Draft (D/D)----bank draft b. Collection D/P (documents against payment), insurance policy or certification, weight memo, packing list D/A (documents against acceptance) C. Letter of credit

7.Management of International Business Planning----it involves determining overall company objectives and deciding how these goals can best be achieved. Organizing----it is the process of putting the plan into action. Directing----guide, teach, and motivate workers so that they reach their potential abilities. Coordinating----it is to bring into proper relations among the various departments of the company. Controlling----it evaluates how well company objectives are being met.

Figure 11.2 Steps in International Strategy Formulation Develop a mission statement Perform a SWOT analysis Set strategic goals Develop tactical goals and plans These are the steps in international strategy formulation. Each step will be discussed in the following slides. Develop a control framework 11-26

Mission Statements Clarifies the organization’s purpose, values, direction; Communicates firm’s strategic direction; Specifies firm’s target customers and markets, principal products, geographical domain, core technologies, concerns for survival, plans for growth and profitability, basic philosophy, and desired public image. Most organizations begin the international strategic planning process by creating a mission statement, which clarifies the organization's purpose, values, and directions. The mission statement is often used as a way of communicating with internal and external constituents and stakeholders about the firm's strategic direction. It may specify such factors as the firm's target customers and markets, principal products or services, geographical domain, core technologies, concerns for survival, plans for growth and profitability, basic philosophy, and desired public image. MNCs may have multiple mission statements--one for the overall firm and one for each of its various foreign subsidiaries. 11-27

SWOT Analysis Strengths Weaknesses Opportunities Threats 11-28 The second step in developing a strategy is conducting a SWOT analysis. SWOT is an acronym for "Strengths, Weaknesses, Opportunities, and Threats." A firm typically initiates its SWOT analysis by performing an environmental scan (environmental scanning is defined on the next slide). In conducting a SWOT analysis, a firm's strategic managers must also assess the firm's internal environment, that is, its strengths and weaknesses (the S and W in SWOT). Organizational strengths are skills, resources, and other advantages the firm possesses relative to its competitors. Potential strengths, which form the basis of a firm's distinctive competence, might include an abundance of managerial talent, cutting-edge technology, well-known brand names, surplus cash, a good public image, and strong market shares in key countries. A firm also needs to acknowledge its organizational weaknesses. These weaknesses reflect deficiencies or shortcomings in skills, resources, or other factors that hinder the firm's competitiveness. They may include poor distribution networks outside the home market, poor labor relations, a lack of skilled international managers, or product development efforts that lag behind competitors'. 11-28

Strategic Goals Strategic goals are the major objectives the firm wants to accomplish through pursuing a particular course of action. With the mission statement and SWOT analysis as context, international strategic planning is largely framed by the setting of strategic goals. Strategic goals are the major objectives the firm wants to accomplish through pursuing a particular course of action. By definition, they should be measurable, feasible, and time-limited (answering the questions "how much, how, and by when?"). 11-29

Tactical Goals and Plans Middle management issues Details of implementation Examples Hiring Compensation Career paths Distribution and logistics After a SWOT analysis has been performed and strategic goals set, the next step in strategic planning is to develop specific tactical goals and plans, or tactics. Tactics usually involve middle managers and focus on the details of implementing the firm’s strategic goals. 11-30

Control Framework A control framework is the set of managerial and organizational processes that keep the firm moving toward its strategic goals. The final aspect of strategy formulation is the development of a control framework. Each set of responses stems from the control framework established to keep the firm on course. The control framework can prompt revisions in any of the preceding steps in the strategy formulation process. It is discussed further in chapter 14. 11-31

8.Brief introduction to WTO Its essential functions are Administering and implementing the multilateral and plural-lateral trade agreement which together make up the WTO; Acting as a forum for multilateral trade negotiation, establishing impartial procedure for resolving trade disputes; Overseeing National trade policies and reduce remaining trade barriers through multilateral negotiations; Cooperating with other international institutions involved in global economic policy-making.

Differences between WTO and GATT (General Agreement on Tariffs and Trade) GATT focused on promoting trade in goods; WTO’s mandate includes trade in goods trade in services international intellectual property protection trade-related investment WTO’s enforcement powers are stronger

The WTO’s Principles of the Trading System

Enforcement of WTO Decisions Country failing to live up to the agreement may have a complaint filed against it； WTO panel evaluates complaint； If found in violation, the country may be asked to eliminate the trade barrier.

WTO Challenges General Agreement on Trade in Services (GATS) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) Trade-Related Investment Measures Agreement (TRIMS)

9. Tariffs (1) It is a tax placed on goods involved in international trade, four functions; Ad valorem tariff is assessed as a percentage of the value for duty of the imported goods; Fixed tariff is assessed as a fixed dollar amount per unit of quantity such as weight or other standard measure;

9.Tariffs (2) --A composite tariff has both an ad valorem component and a fixed component; --An alternative tariff consists of an ad valorem tariff and a fixed tariff and an instruction to pay either the higher or the lower amount.

10. Dumping and subsidies Dumping occurs when an exports sells a product to country at a lower price than the price charged in its home market. Countries often offer a variety of subsidies to firms operating within their borders to increase economic activity and job creation.

11.Supplement reading (1) Doha ministerial conference about medicine issue It confirms right of countries to take measures to protect public health in general but not only in the case of health crisis; It lay out key measures and flexibilities to overcome barriers to access to medicine; The grounds for issuing a compulsory license are unlimited. Members are free to determine for themselves what a national emergency, in case the procedure for issuing a compulsory license easier and faster.

11.Supplement reading (2) Unsolved problems: Political issue influence can easily be brought to bear on government to make them unlikely to issue compulsory license; No matter how emergency, must negotiation with patent holder. On the other hand, increased patent protection leads to higher drug prices; All countries only are allowed to import if they can show either they don’t have any manufacturing capacity in pharmaceutical or what capacity they do is currently insufficient for the purpose of meeting its need. Enforcement of WTO rules has negative effect on local manufacturing capacity; How to ensure that production for export to a country that has issued compulsory license. At the same time, ambiguous on scope of disease; Grants developed countries have extra 10 years, until 2016 to the implementation deadline for pharmaceutical product patent production because weakening patent protection have devastating efforts on research and development capabilities of research based industry.

Comprehension questions (Page 13)