1. Introduction to International Business
Chapter 1

2. Managing the Risks of International Business
“THE MANAGEMENT OF INTERNATIONAL BUSINESS IS THE MANAGEMENT OF RISK”
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Managing Risk
Market entry strategy
Shifting the risk
Using the contract to fix responsibility, allocate risk and price accordingly
Payment and credit risk
Managing distance and communications
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Managing Risk
Managing language and cultural differences
Managing currency and exchange rate risk
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Managing Risk
Political risk?
Causes?
How to handle?
Foreign courts and foreign law? See DIP SpA v. Commune di Bassano p.39 challenging Italian retail licensing requirements. What result?
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Managing Risks
Currency/Exchange Rate Risks
Transaction Risks
* delivery risk
* marine risk
* litigation risk- Gaskin, p.34
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Political Risks
Managing political risk
Managing risk of foreign law and courts - choice of law and forum clauses
Risk of international hostilities
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8. Implications for International Business
Political, economic, and legal environments of a country
influence attractiveness
raise ethical Issues
Attractiveness
balance long-term risks with short-term benefits of doing business in a foreign country
benefits depend on: size, wealth, future economic growth
first mover advantages
identify “star” future economies
costs are affected by:
political payoffs
economic sophistication (may be more costly to operate in LDCs, no infrastructure)
legal framework impact on costs
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9. Implications for International Business
Ethical Issues
human rights
adherence to same standards abroad as at home
product safety
work safety
environmental protection
bribes
Foreign Corrupt Practices Act (1977)
what is unethical is not necessarily illegal
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10. Legal Systems and International Business
property rights
use of a resource
use made of income from resource
enforcement issues
Public vs private action violations
protection of Intellectual Property
patent: inventors’ exclusive rights to manufacture, use, sale an invention
copyright: same for authors, composers, artists, publishers
trademarks: unique designs and names, often officially registered
Paris Convention for the Protection of Industrial Property (96 countries)
WTO/GATT
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11. Legal Systems and International Business
product safety and product liability
criminal / civil liability
contract law
document that specifies
conditions under which an exchange will happen
rights/obligations of parties
differences based on legal tradition
common law system
civil law system
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12. Forms of International Business
Trade
International licensing of technology and intellectual property (trademarks, patents and copyrights)
Foreign direct investment
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13. External or “arms-length” Modes of Entry
Firm does business overseas without investing in owned assets and own human resources in target market
Exporting
Sell “domestically” produced products into foreign markets through local independent agents or directly to customers
Turnkey projects
Special case of exporting for firms that set up production plants or build facilities for others
The “exporting firm” builds the facility overseas, starts it up, turns it over to the host country owner, and then departs
Oil firms, construction firms, manufacturers
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14. External or “arms-length” Modes (cont.)
Licensing
Licensor grants rights to licensee for use of intangible property over a specified period in return for a fee
Intangible property: patents, inventions, formulas, processes, designs, copyrights, trademarks
Licensing agreement likely allows licensor quality assurance rights over actual use of intangible asset
If licensee sells to consumers using the licensor’s brand name, the license may also give the licensor rights to strategic brand control
Franchising
Franchisor, grants franchisee use of intangibles under the condition that franchisee follow strict rules of operating the business
Mode of operation is part of the brand image
International strategic alliances
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15. “Internal” Modes of Entry
These involve Foreign Direct Investment
Wholly owned subsidiaries
Firms owned 100% by a company in a foreign country
International joint ventures
Firms that are owned jointly by two or more otherwise independent firms; most IJVs are between two firms
One (or more) parent firms are non-resident in the host market
Ownership % may vary from majority foreign owned, to 50%-50% owned, to minority owned by the foreign firm
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Trade
Exporting
Importing
Subject to government controls over trade:
Tariffs
non tariff barriers
Trade in services - increasing
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17. Intellectual Property and Licensing
Intellectual Property Rights:
Copyrights: legal rights to an artistic or written work
Trademarks: the legal right to use a name or symbol; that identifies a firm or its product
Patents: governmental grants to inventors assuring them of the legal right to produce, use and sell their invention for a period of years
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18. International Licensing Agreements
International licensing agreements: contracts by which the holder of intellectual property will grant certain rights in that property to a foreign firm to use for a period of time under certain conditions in return for a licensing fee
Technology transfer
Franchising Agreements : licenses to use trademark and form of business operations
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19. Protecting Intellectual Property
Importance of IP for US trade
Difficulty of combating piracy
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20. Legal and Political Issues in Technology Transfer Agreements
Regulated by some governments
generally in Asia, Latin America, and the Middle East
terms restricted to benefit the developing country
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21. Foreign Direct Investment
Ownership and active control of ongoing business concerns including investment in manufacturing, mining, farming and other production facilities
Wholly owned foreign subsidiary
Joint venture
Mergers and acquisitions
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22. The Legal Environment in Developing Countries
How different?
Examples: foreign exchange, controls on trade, licensing and investments
Bhopal discussion
Reform and privatization
Transition to market economies
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Ethical Issues
“The law is a floor…but ethical codes and personal values call on us to exceed that which is required by law.”
Do you agree?
Source of ethics?
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Ethical Issues
Bribes?
Child labor?
Different working conditions and wages?
Corporate response?
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Conclusion
Global knowledge
Trade, licensing and investment
How to manage risk? Good research, understand risk, know the law and use contract to protect you and help you manage risk.
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Web Sites
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Pro Golf Case
First Flight v. Pro. Golf, p.15
Facts: Pro Golf negotiated with Wynn to act as sales representative in Japan. Wynn incorporated FFA in Japan. ProGolf entered into an agreement where FFA could use First Flight trademark. FFA tried to sublicense the trademark.
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Pro Golf Case
Progolf terminated the agreement. Pro Golf learned that they had not properly registered their trademark in Japan. FFA sued for breach of contract and Pro Golf counterclaimed for royalties.
Holding: Pro Golf was permitted to terminate its Japanese sales agency with FFA because it was terminable at will.
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Pro Golf Case (cont.)
However Pro Golf was not entitled to royalties because they had not perfected their rights to the trademark under Japanese law.
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Franchising Case
Raymond Dayan v. McDonald’s p. 18
Facts: Dayan had franchise to operate McDonald’s in Paris. There was a serious problem with QSC (quality, service and cleanliness standards. McDonald’s wanted to terminate the franchise but Dayan objected.
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31. Dayan v. McDonald’s Corp.
Holding: After much legal maneuvering on two continents, McDonald’s was able to terminate the franchise. Dayan was able to continue his restaurants under a different name.
What is the impact of this on the franchiser?
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32. DIP SpA v. Commune di Bassano
“…it is sufficient to observe that rules such as those contained in the Italian Act make no distinction according to the origin of the goods distributed by the businesses concerned, that their purpose is not to regulate trade in goods…
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33. DIP SpA v. Commune di Bassano
And that the restrictive effect which they might have on the free movement of goods are too uncertain and indirect for the obligation which they impose to be regarded as hindering trade between member states.”
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Gaskin v. Stumm Handel
Facts:
Issue: Is the forum selection clause in the contract which had been written in German designating the courts of Germany enforceable thus precluding the plaintiff from proceeding in a U.S. Court?
Yes
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Gaskin v. Stumm Handel
Why did the court rule for the defendant?
What circumstances might have altered the result?
What advice do you have for the plaintiff for the future?
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