1. International Business
Wendy Jeffus
Harvard Summer School

2. Introduction Chapter 16: Global Production, Outsourcing, and Logistics
Case Study: Microsoft – Outsourcing Xbox
Case Study: Kodak in Russia
Chapter 17: Global Marketing and R&D
“Global Teen Market”
Chapters 19 & 20: Accounting in the International Business & Financial Management in International Business
Final Exam Review (Brain)

3. Wendy Jeffus Harvard Summer School
Chapter 16:
Wendy Jeffus
Harvard Summer School 3

4. Hangman M A D E I N C H I N A

5. Hangman M A D E O N E A R T H

6. "In a globalized world, bilateral trade figures are irrelevant… The trade balance between the U.S. and China is as irrelevant as the trade balance between New York and Minnesota."
Dong Tao, Economist, UBS

7. Anti “Made In China” Sentiment
A year without 'Made in China‘
By Sara Bongiorni

9. An Example: Automobiles
The Chevrolet Equinox
is from an American company,
but is assembled in Ontario, Canada,
has an engine made in China
and a transmission from Japan.
The Toyota Sienna
hails from Japan,
but has an engine and transmission built in West Virginia, USA.
and is assembled in Indiana, USA.
Under federal regulations, the Chevy doesn't qualify as a "domestic vehicle" but the Toyota does.
wikipedia.org

10. For your final project…
Consider:
Where should production activities be located?
What is the long-term strategic role of foreign production sites?
Should the firm own foreign production activities or is it better to outsource to vendors?

11. The Limited Supply Chain Management
7,500 independent suppliers in 40 countries.
Once orders are received from The Limited they are delivered within 5 weeks.
Yarn from Korea
Woven & dyed in Taiwan
Zippers from Japan
Final assembly in Thailand

12. Outsourcing “Make vs. Buy”
Extreme examples: Nike & Reebok outsource all manufacturing.
Examples of outsourcing include: IT, HR, Legal services, Manufacturing, and R&D.

13. Outsourcing

14. Outsourcing…
Outsourcing is just one question to answer in terms of a firm’s overall Strategy.
Other issues include production & logistics.

15. Strategy, Production, & Logistics
the activities involved in creating a product
Both service and manufacturing activities are “produced”
Logistics
the activities that control the transmission of physical materials through the value chain
Two Goals
Lower the costs of value creation
Add value by better serving customer needs

16. Relationship Between Quality & Costs
Figure 16.1, p. 557

17. Where to Produce
For the firm contemplating international production a number of factors must be considered
Country factors
Technological factors
Product factors

18. Country Factors Optimum economic, political, and cultural conditions
Externalities
Skilled labor pools
Supporting industries
Formal and informal trade barriers
Exchange rate
Note currency appreciation can transform a low-cost location into a high cost location!

19. Country Factors: Clusters
Bangalore, the Silicon Valley of India
The Bangalore Tigers:
TCS (Tata Consultancy Services)
Infosys
WIPRO

20. Country Factors: Clusters
Zhongguancun Science Park “Z-Park,” China's Silicon Valley
Lenovo
Founder Group Corp
UFIDA Software “UFSoft”

21. Country Factors: Policy
Environment
Innovation
Chinese President Hu Jintao's plan, announced in 2006, is to turn China into an "innovation-oriented" country by 2021.
Regulation

22. What Country Factors are Important?
Green Car
(China)
Wheel G
(Brazil)
Spacebox
(China)
AESNI
(U.S.)
P-I-M
(Switzerland)
Charge
(U.S.)
Alt. E
(China)
Shortlister
(Singapore)
Energy
(U.S.)
Natura
(Russia)
Rollasole
(Singapore)
Umbrella
(England)
Consult
(Japan)
Home E
(France)
Shoes
(Ethiopia)
Food
(U.A.E.)
Muvbox
(Spain)
Healthy F
(Netherlands)
Smart H
(Russia)

23. Technological Factors
How high are fixed costs?
Minimum efficient scale
Flexible manufacturing
Reduce setup times for
complex equipment
Increase machine utilization
Improve quality control
Flexible machine cells to perform a variety of operations
Mass customization
Low cost
Product
customization

24. Ohno Taiichi
The father of the “Toyota Production System,” also known as “Lean Manufacturing” (or flexible manufacturing technology)
Ohno wrote several books about the system, the most popular of which is Toyota Production System: Beyond Large-Scale Production.
Born in China.
First an employee of the family's Toyoda Spinning
Moved to the motor company in 1943, and gradually rose through the ranks to become an executive.
In what is considered to be a punishment, (possibly because he spoke publicly about the production system), he was denied the normal executive track and was sent instead to consult with suppliers in his later career.

25. How (comparatively) High are your Fixed Costs?
Green Car
(China)
Wheel G
(Brazil)
Spacebox
(China)
AESNI
(U.S.)
P-I-M
(Switzerland)
Charge
(U.S.)
Alt. E
(China)
High Fixed Costs
Shortlister
(Singapore)
Energy
(U.S.)
Natura
(Russia)
Rollasole
(Singapore)
Umbrella
(England)
Consult
(Japan)
Home E
(France)
Low Fixed Costs
Shoes
(Ethiopia)
Food
(U.A.E.)
Muvbox
(Spain)
Healthy F
(Netherlands)
Smart H
(Russia)

26. Will you customize or standardize your product?
Green Car
(China)
Wheel G
(Brazil)
Spacebox
(China)
AESNI
(U.S.)
P-I-M
(Switzerland)
Charge
(U.S.)
Standardized Products
Alt. E
(China)
Shortlister
(Singapore)
Energy
(U.S.)
Natura
(Russia)
Rollasole
(Singapore)
Umbrella
(England)
Consult
(Japan)
Home E
(France)
Customized Products
Shoes
(Ethiopia)
Food
(U.A.E.)
Muvbox
(Spain)
Healthy F
(Netherlands)
Smart H
(Russia)

27. Product Factors & Location Strategies
Two product features affect location decisions:
Value to weight ratio
Calculator, phone, ipod, vs. sugar, chemicals, paint
Does the product serves universal needs?
How different are consumer needs?
Two basic strategies
Concentrating in a centralized location and serving the world market
Decentralizing them in various regional or national locations close to major markets when opposite conditions exist

28. Is your value-to-weight ratio comparatively high?
Green Car
(China)
Wheel G
(Brazil)
Spacebox
(China)
AESNI
(U.S.)
P-I-M
(Switzerland)
Charge
(U.S.)
High Value-to-Weight
Alt. E
(China)
Shortlister
(Singapore)
Energy
(U.S.)
Natura
(Russia)
Rollasole
(Singapore)
Umbrella
(England)
Consult
(Japan)
Home E
(France)
Low Value-to-Weight
Shoes
(Ethiopia)
Food
(U.A.E.)
Muvbox
(Spain)
Healthy F
(Netherlands)
Smart H
(Russia)

29. Manufacturing Location
Centralized Location
High cost of manufacturing
Low trade barriers
Externalities (i.e. clusters) exist
Stable exchange rates
Flexible manufacturing technology
Product’s value-to-weight ratio is high
Product serves universal needs
Decentralized Location
Low cost of manufacturing
High trade barriers
Location externalities not important
Volatile exchange rates
Flexible manufacturing technology unavailable
Product’s value-to-weight ratio is low
Significant differences in consumer tastes and preferences exist between nations

30. Will you centralize or decentralize manufacturing?
Green Car
(China)
Wheel G
(Brazil)
Spacebox
(China)
AESNI
(U.S.)
P-I-M
(Switzerland)
Charge
(U.S.)
Centralize Manufacturing
Alt. E
(China)
Shortlister
(Singapore)
Energy
(U.S.)
Natura
(Russia)
Rollasole
(Singapore)
Umbrella
(England)
Consult
(Japan)
Home E
(France)
Decentralize Manufacturing
Shoes
(Ethiopia)
Food
(U.A.E.)
Muvbox
(Spain)
Healthy F
(Netherlands)
Smart H
(Russia)

31. Centralized vs. Decentralized Production
Typos see text!

32. Make or Buy Decisions
Should a firm make or buy the component parts that go into their final product?
Issues to consider:
Costs
Does a more efficient producer exist?
Trust
Is there a producer you trust? How high is the need for trust?
Improved scheduling
Does the control make scheduling easier or does it make things more cumbersome to manage?
Offsets
Example: Before Air India places a large order with Boeing, the Indian government might ask Boeing to push some of the subcontracting work to Indian manufacturers.

33. Strategic Alliances with Suppliers
Long-term relationships with suppliers:
Kodak & Cannon
Canon builds photocopiers for sale by Kodak
Apple & Sony
Sony builds laptop computers for Apple
Microsoft & Flextronics
Flextronics builds the Xbox for Microsoft

34. Just-In-Time Inventory
Hold inventory just when you need it (not before) – increases profitability, if things run smoothly.
But, no buffer stock of inventory.
Solutions include: relationships with more than one supplier & improved information technologies.

35. ISO 9000
The EU requires that all products be certified under the ISO 9000 quality standard, which includes:
a set of procedures that cover all key processes in the business;
monitoring processes to ensure they are effective;
keeping adequate records;
checking output for defects, with appropriate and corrective action where necessary;
regularly reviewing individual processes and the quality system itself for effectiveness; and
facilitating continual improvement
November 2008 – ISO 9001

36. What are the “right” answers?
Fortunately it is your thought process that matters most!
What are the “right” answers?
Green Car
(China)
Wheel G
(Brazil)
Spacebox
(China)
AESNI
(U.S.)
P-I-M
(Switzerland)
Charge
(U.S.)
Alt. E
(China)
Good
Question!
Shortlister
(Singapore)
Energy
(U.S.)
Natura
(Russia)
Rollasole
(Singapore)
Umbrella
(England)
Consult
(Japan)
Home E
(France)
Shoes
(Ethiopia)
Food
(U.A.E.)
Muvbox
(Spain)
Healthy F
(Netherlands)
Smart H
(Russia)

37. Case Assignments Case Study: Microsoft – Outsourcing Xbox
Case Study: Kodak in Russia

38. The Global Teen Market
By Elissa Moses 38

39. The Global Teen Market Elissa Moses 1995- Observations
Increasing teen cultural homogenization
2004- Observations
New Segments?
New Values?
New Dilemmas?

40. Is There A New World Teen? & What Do They Look Like?32

41. How Many? Population 15-19-years-olds: millions . . .
India Russia 11.7
China Mexico 10.7
Indonesia Vietnam
US Philippines
Brazil Japan
Under 25: 50% Latin America, 66% of Asia

42. Core Value Segments Boot Straps 14% Resigned 14% Upholders 16%
Thrills & Chills 17%
Quiet Achievers 15%
World Savers 12% 32

43. Thrills & Chills Global Incidence 18%
Driven by Pleasure
• Fun • Friends • Irreverence
• Sensation
Brazil: 17% USA: 28% W. Europe: 29% Japan: 24% China: 5%

44. Boot Straps Global Incidence 14%
Driven by Bold Ambition
• Achievement • Individualism • Optimism
• Determination
• Power
Brazil: 15% USA: 26% W. Europe: 8% Japan: 4% China: 8%

45. Quiet Achievers Global Incidence 15%
• Success
• Anonymity • Anti-Individual
• Social Optimism
Brazil: 12% USA: 10% W. Europe: 7% Japan: 9% China: 44%
Driven by: Success with Humility

46. Resigneds Global Incidence 14%
Driven by: m o m e n t s
• Friends
• Fun • Family
• Low Expectations
Brazil: 8% USA: 9% W. Europe: 21% Japan: 38% China: 3%

47. Upholders Global Incidence 16%
Driven by: Tradition
• Family
• Custom • Tradition
• Respect Individuals
Brazil: 10% USA: 7% W. Europe: 10% Japan: 7% China: 29%

48. World Saver Global Incidence 12%
Driven by: Joy of Life
• Environment
• Humanism • Fun
• Friends
Brazil: 24% USA: 9% W. Europe: 15% Japan: 4% China: 4%

49. Globalization of Markets & Brands
Important to determine when product standardization is appropriate in an international market
Firms may need to vary marketing mix in each different country

50. “The world will improve in my lifetime.” 26%
Backdrop: Attitudes
“The world will improve in my lifetime.” 26%

51. “It’s up to me to get what I want in life.” 85%
Backdrop: Attitudes
“It’s up to me to get what I want in life.” 85%

52. LIFE EXPECTATIONS Top Five Complete my education 85%
Global
Complete my education 85%
Have a job that I like 83%
Succeed in my career 78%
Find someone to love 75%
Be a happy adult 74% 74

53. LIFE EXPECTATIONS Global Bottom Five Live in my country of birth 43%
Be rich %
Be famous %
Live in my current hometown 27%
Be part of government 12% 75

54. Chapter 17: Global Marketing and R&D
Wendy Jeffus
Harvard Summer School 54

55. Globalization of Markets & Brands
Important to determine when product standardization is appropriate in an international market
Firms may need to vary marketing mix in each different country

56. Market Segmentation
Refers to identifying distinct groups of consumers whose purchasing behavior differs from others in important ways
Segments can based on:
Geography
Demography
Socio-cultural factors
Psychological factors
Show the census page

57. Market Segmentation Two main issues relating to segmentation:
Extent of differences between countries in the structure of market segments
Existence of segments that transcend national borders
Examples of segments: how the products are targeted at segments like elderly people or babies…some countries are completely heterogeneous –like the US, which is very diverse.

58. Product Attributes Cultural differences Economic development
Dimensions such as language, religion, and education
Note: some tastes and preferences are becoming cosmopolitan
Economic development
Consumers in highly developed countries tend to demand extra performance attributes in their products
Price is less important due to high income level
Consumers in less developed countries value basic features as more important
Price is a factor due to lower income level
Cars: no air-conditioning, power steering, power windows, radios, and cassette players
Product reliability is more important
Product and technical standards
television/cell phone signal frequencies

59. Distribution Strategy
Optimal channel for delivering a product to the consumer
Retail concentration (Concentrated vs. Fragmented)
Concentrated system (a few retailers supply most of the market)
Common in developed countries
Contributing factors: increase in car ownership, number of households with refrigerators and freezers, and two-income households
Fragmented system (small retailers without much market share supply the market)
Common in developing countries
Contributing factors: great population density with large number of urban centers, e.g. Japan
Uneven or mountainous terrain, e.g. Nepal
Channel length (Long vs. Short)
Example a short distribution channel is where the producer sells directly to the consumer. (Channel length is longer in Fragmented Markets)
Channel exclusivity
Japan - exclusive systems because personal relations, often decades old, play an important role in stocking products

60. Communication Strategy
Defines the process the firm will use in communicating the attributes of its product to prospective customers
Cultural barriers
Source effects
Noise levels

61. HSBC Local Content & Point of View Ads
Source: HSBC, Constance Kratsa

62. Barriers to International Communication
Cultural Barriers
Firm should use local input such as local advertising agency and sales force & Develop cross-cultural literacy
Source and country of origin effects
Receiver of the message evaluates the message based on status or image of the sender (i.e. Anti-Japan wave in US in 1990’s)
Place of manufacturing influences product evaluations (Often used when consumer lacks more detailed knowledge of the product)
Examples: French wines, Italian clothes, and German luxury cars
Noise levels
Amount of other messages competing for a potential customer’s attention
Developed countries - high
Less developed countries - low
Standardized advertising strategy execution more difficult (culture, laws)

63. Push Versus Pull Strategy
Push strategy emphasizes personal selling
Requires intense use of a sales force
Relatively costly
Pull strategy depends on mass media advertising
Can be cheaper for a large market segment
Determining factors of type of strategy
Product type and consumer sophistication
Channel length
Media availability
Pull Strategy: Consumer goods
Large market segment
Long distribution channels
Mass communication has cost advantages
Push Strategy: Industrial products or complex new products
Direct selling allows firms to educate users
Short distribution channels
Used in poorer nations for consumer goods where direct selling only way to reach consumers

64. Channel Length Pull strategy Push Strategy
Long or exclusive distribution channels
e.g. Japan
Mass advertising to generate demand to pull product through various layers
Push Strategy
In countries with low literacy levels to educate consumers

65. Media Availability Pull strategy Push strategy
Relies on access to advertising media
Common in developed nations
Push strategy
Media availability limited by law
All electronic media state owned with no commercial policy

66. Global Advertising Standardized: Non-standardized:
Significant economic advantages
Scarce creative talent
Many global brand names
Non-standardized:
Cultural differences
Advertising regulations can be a restriction

67. Global Advertising Adidas Jose + 10 (2006 World Cup Commercial)
Nike Ad Banned in China
“Chamber of Fear,” stars the NBA’s LeBron James battling a martial arts expert and a pair of dragons, and resisting the temptation of traditionally garbed women in a video game-style setting.
The commercial insulted China’s national pride and culture and was banned in 2004.

68. Pricing Strategy Three aspects of international pricing strategy
Price discrimination
when consumers in different countries are charged different prices for the same product
Two conditions necessary
National markets kept separate to prevent arbitrage
Capitalization of price differentials by purchasing product in countries where prices are lower and reselling where prices are higher
Different price elasticities of demand in different countries
Greater in countries with low income levels and highly competitive conditions
Strategic pricing
Regulatory influence on prices

69. Strategic Pricing Predatory pricing Multipoint pricing strategy
Using price as a competitive weapon to drive weaker competition out of a national market
Firms then raise prices to enjoy high profits
Firms normally have profitable position in another national market
Multipoint pricing strategy
Two or more international firms compete against each other in two or more national markets
A firm’s pricing strategy in one market may impact a rival in another market
Kodak and Fuji
Experience curve pricing
Firms price low worldwide to build market share
Incurred losses are made up as company moves down experience curve, making substantial profits
Cost advantage over its less-aggressive competitors

70. Regulatory Influences on Prices
Antidumping regulations
Selling a product for a price that is less than the cost of producing it
Antidumping rules vague, but place a floor under export prices and limit a firm’s ability to pursue strategic pricing
Article 6 of GATT allows action against an importer if the product is sold at ‘less than fair value’ and causes ‘material injury to a domestic industry’
Competition policy
Regulations designed to promote competition and restrict monopoly practices

71. Configuring the Marketing Mix
Differences Here
Standards
Competition
Distribution
Economy
Culture
Gov’t Regs
Product Attributes
Pricing Strategy
Requires Variation Here
Communications Strategy
Distribution Strategy

72. New Product Development
The location of R & D
Rate of new product development greater in countries where
More money spent on R&D
Underlying demand is strong
Consumers are affluent
Competition is intense

73. Integrating R&D, Marketing and Production
Integrating R&D, production and marketing ensures
Project development driven by customer needs
New products are designed for ease of manufacture
Development costs are kept in check
Time to market is minimized

74. Integrating R&D, Marketing and Production
High failure rate ratio
Between 33 % and 60% of new products fail to earn adequate profits
Reasons for failure:
Limited product demand
Failure to adequately commercialize product
Inability to manufacture product cost-effectively

75. Cross-Functional Product Development Teams
Objective of team to take a product development project from the initial concept development to market introduction
Effective teams must have
“Heavyweight “ project manager
One member from each key function
Physically co-located to facilitate communication
Clear plan and goals
Own process for communication and conflict resolution

76. Chapter 19: Accounting in the International Business
Wendy Jeffus
Harvard Summer School 76

77. Accounting Information & Capital Flows
Figure 19.1, p. 647 77

78. Relationship Between Business and Providers of Capital
Three external sources of capital:
Individual investors
Buying shares and bonds
Banks
Loan capital
Government
Make loans or investment
Importance of each varies from country to country

79. Currency Translation The current rate method: The temporal method:
Exchange rate at the date on the balance sheet is used to translate foreign subsidiary financial statements into home country currency
Incompatible with ‘historic cost principle’ where the assumption is that the currency is not losing value due to inflation.*
The temporal method:
The foreign subsidiary assets are translated into home-country currency at the time of purchase of the asset
Changing exchange rates may mean the balance sheet may not balance!
*Used in Germany, Japan & the U.S. If inflation is high the historic cost principle underestimates a firm’s assets, so the depreciation charges based on these underestimates can be inadequate for replacing assets when they wear out or become obsolete.

80. Current Rate Method: Example
At time = 0 a U.S. firm invests $100,000 in a Malaysian subsidiary.
Exchange Rate at time 0 = 5MYR/1USD
Subsidiary purchases land with 500,000 ringgit.
Exchange rate at time 1 = 4MYR/1USD
If this new exchange rate is used to convert the value of the land back into dollars, it will seem that the land has appreciated by 25%!
The new value of 500,000 ringgit in dollars is $125,000!
(500,000MYR ÷ 4MYR/USD)

81. Temporal Method: Example
At time = 0 a U.S. firm invests $100,000 in a Malaysian subsidiary.
Exchange Rate at time 0 = 5MYR/1USD
Subsidiary purchases land with 500,000 ringgit.
Exchange rate at time 1 = 4MYR/1USD .
MYR
Exchange Rate
USD
Cash
500,000
$1 = 5 RM
$100,000
Owners’ equity
MYR
Exchange Rate
USD
Fixed Asset
500,000
$1 = 5 RM
$100,000
Translation Gains
$25,000
Owners’ equity
$125,000

82. Current US Practice Statement 52 “Foreign Currency Translation”
Self-sustaining autonomous subsidiary:
Functional currency is local currency
Balance sheet uses exchange rate at
end of financial year
Income statement is financial year average
Integral subsidiary:
Functional currency is US currency
Financial statements use the
temporal method
Dangling credit or debit increases or
Decreases consolidated earnings
for the period
Firms using multidomestic or international strategies.
Firms using global or transnational strategies.

83. Transfer Pricing and Control Systems
Transfer prices introduce significant distortions into the control process
Transfer price must be taken into account when setting budgets and evaluating a subsidiary’s performance

84. Chapter 20: Financial Management in International Business
Wendy Jeffus
Harvard Summer School 84

85. Financial Management Investment Decisions Financing Decisions
What activities should the company finance?
Financing Decisions
How should the company finance selected activities?
Money Management Decisions
How can the firm manage its financial resources most efficiently? 85

86. The Finance Function
Competitive Advantage: through reduced costs of value creation and/or adding value by improving customer service.
Reduce the costs of creating value by:
Lowering the firm’s cost of capital
Managing foreign exchange risk
Minimizing the firm’s tax burden
Reducing exposure to unnecessary risk
Managing the cash flows and reserves efficiently
The finance function can be a source of competitive advantage for a firm. 86

87. Investment Decisions Capital budgeting:
Quantifies the benefits, costs and risks of an investment
Managers can reasonably compare different investment alternatives within and across countries
Three issues complicate the process:
Project and Parent Cash Flows
Blocked cash-flows, taxes, reinvestment requirements
2. Adjusting for Political & Economic Risk
3. Risk & Capital Budgeting

88. Blocked Funds
Blocked Funds – When the host country’s government prohibits or limits the remittance of revenues abroad that are earned by foreign corporate investors or by local subsidiaries.
Revenue can be in the form of overdue bills, royalties and dividends, local earnings, or unpaid trade credits.
Why do governments block funds?
To regulate the transfer of FX because of hard currency shortages.
Methods of blocking funds:
Restrictions on the percentage of revenues that can be repatriated, or making the currency inconvertible.
Dealing with Blocked Funds - Examples:
Xerox used its blocked funds to purchase one of the largest buildings in Bogota, Colombia
Volkswagen invested its earnings to acquire ranches in Brazil
Source: Haar Jerry, “Managing the problem of blocked funds in Latin America,”
International Executive, volume 33, issue 3 p

89. Recent Coup d'états 2000: Unsuccessful coup in Fiji.
2000: A coup in Ecuador overthrows the president.
2002: Venezuela against Chávez, within 48 hours, the elected government regained control of the country.
2003: Failed mutiny and coup attempt in the Philippines.
2004: Attempted coup in the Democratic Republic of Congo .
2004: Failed coup d'état in Chad.
2004: Second attempted coup in the Democratic Republic of Congo.
2004: Attempted coup in Equatorial Guinea.
2004: Coup in Haiti.
2005: King Gyanendra of Nepal overthrows the government, making him the head of government. The government is reestablished April 24, 2006 after a massive democracy movement.
2006: The Armed Forces of the Philippines attempted a military coup which lead to a state of emergency.
2006: The United Front for Democratic Change allegedly attempts to instigate a military coup in Chad.
2006: The Royal Thai Army overthrows the Prime Minister while he is out of the country.
2006: Attempted military coup in Madagascar.
2006: The military of Fiji overthrows the President and Prime Minister in a bloodless coup.
2007: Military coup in Turkey, called 'e-coup' (April 27), delivers an ultimatum to the government by .
2008: A military coup in Mauritania.
2008: A military coup occurs in Guinea after the death of President.
2009: Attempted coup in Madagascar the army seized one of the presidential palaces on March 16, at which president Marc Ravalomanana was not present. The proposal offered by the president for a referendum to solve the crisis was rejected. On March 17, the president resigned.
2009: The Honduran military deposed President Manuel Zelaya on the day of a referendum that would have started the process of rewriting the constitution, allegedly to remove the single-term limit on Honduran presidents.
Source: wikipedia.org

90. China: KFC KFC was fried by Chinese health inspectors.
In China, KFC used a cooking oil preservative, that extended the life of frying oil by ten days.
The Chinese press claimed that the preservative caused cancer.
The fact that KFC carefully obeyed regional safety standards, and there was no legitimate link between this oil preservative and cancer, did not matter.
Photo Source:
The Economist, March 18, 2004 issue: A survey of business in China.

91. China Product mistrust. Lipton Tea Colgate-Palmolive
Without any evidence, the Chinese media claimed Unilever's Lipton Instant Tea contained cancer-causing fluorides.
The Chinese Ministry of Agriculture eventually admitted the tea was safe after it was finally tested.
Colgate-Palmolive
Colgate-Palmolive's toothpaste was accused of containing a carcinogen.
All its toothpaste was cleared from shelves in Shandong Province.
Though, when under official investigation, Colgate's toothpaste proven to be harmless by Chinese authorities.
Photo Source:
The Economist, March 18, 2004 issue: A survey of business in China.

92. China: Procter & Gamble
Procter & Gamble (P&G) in China had its SK-II beauty products banned for traces of chromium and neodymium.
Consumers across China dashed to stores for refunds (and even refunds on fake SK-II product) and literally attacked Procter & Gamble's Shanghai offices.
The chromium-neodymium combination is accepted throughout the world; the World Health Organization allows much higher doses in food!
A month later, the Ministry of Health declared SK-II products safe.
P&G lost approximately 80 of its 98 distribution outlets.
Photo Source:
The Economist, March 18, 2004 issue: A survey of business in China.

93. China Joint-Ventures PepsiCo Subway
America's PepsiCo’s joint-partner a Sichuan bottler, sold the joint-venture to the local government in exchange for little goodies such as his own car and play money.
Subway
Subway's Beijing sandwich franchise was robbed by their joint-venture partner for nearly quarter of a million dollars. Subway only runs 30 restaurants, after nine years. They predicted operating 2,000 by this time.
Photo Source:
The Economist, March 18, 2004 issue: A survey of business in China.

94. China: Loral Space
Loral Space and Communications spent $185 million on ChinaSat 8, a telecommunications satellite project.
Before the US Government asked them to abandon due to US security issues.
Photo Source: www. Cia.gov
The Economist, March 18, 2004 issue: A survey of business in China.

95. India: Enron & GE
The Dabhol Power Project, in 1992, was an Enron and General Electric Capital Corp investment.
These sponsors starting building this mega-watt plant in Maharashtra, India.
The sponsors spent over $1.2B.
One of the biggest projects in India's history.
When the plant was 23% complete, the newly elected government, rejected Phase Two of the project because the project had “apparently” not been awarded through competitive bidding, power tariffs were too high and it was environmentally risky.
Photo Source:
Finnerty, John D., “Project Financing: Asset-Based Financial Engineering” (Second Edition): John Wiley & Sons, Inc. Hoboken, NY.

96. Georgia: AES
AES Corporation's 1998 purchase of Telasi, Georgia's electricity-distribution company.
The venture resulted in one catastrophe that could not have been anticipated:
The murder of AES-Telasi's CFO, Niko Lominadze, in 2002.
Although the police officer (whose gun was identified as the murder weapon) was arrested, he was released a few months later.
Photo source:
Source: “How to Bungle Political Risks: A survey finds that most senior executives consider overseas
perils a low priority, even when they have investments and operations abroad.” Helen Shaw, CFO.com
May 24, 2006

97. Venezuela: Telecommunications
Feb 2007 The Venezuelan government signed a memorandum of understanding to purchase CANTV, the country’s largest telecommunications company.
“…the negotiated cost satisfied Verizon and the Venezuelan State”
During ’06 Verizon entered into a definitive agreement to sell its indirect interest in CANTO to Telmex for $677 million…
after two prior extensions, the parties terminated the agreement…
concluding that regulatory approvals would not be granted by the Venezuelan government…
in Jan ’07 the Venezuelan government declared its intent to nationalize CANTV at a price of $572 million…
Source: Venezuelanalysis.com “Venezuelan Government and Verizon Agree to Telecom Nationalization”
Verizon 2006, 10-K, dated Feb. 23, 2007

98. Venezuela: Electric Company
Feb 2007 – Venezuela nationalized EDC, Venezuela’s largest electric company.
AES President Hanrahan stated “I think the deal is a fair one”
In connection with the agreement, management concluded that a material impairment of the investment has occurred… Management estimates this impairment charge to be in the range of $550 to $650 million
Source: Venezuelanalysis.com “Venezuela and Electric Company Sign Memorandum for Nationalization”
SEC FORM 8-K filed, Feb. 27, 2007

99. Venezuela Oil
April Major international oil companies, agreed Wednesday to grant the Venezuelan government majority control over four multibillion-dollar heavy-oil projects in the vast Orinoco reserve.
"We're optimistic that on these conversions of the heavy oil projects there's an opportunity for the companies to come out OK," said Peter Sommer, Chevron's commercial manager for Latin American exploration and production.
Source: Boston.com “Chevron "optimistic" about Venezuelan takeover”

100. Hyperinflation: Zimbabwe
At a supermarket in Zimbabwe, toilet paper costs $417 Zimbabwean dollars.
Not per roll. $417 is the value of a single two-ply sheet.
A roll costs $145,750 (US$0.69).
Toilet paper, bread, margarine, meat, and tea — have become unimaginable luxuries.
The government tripled the salaries of civil servants
The government admitted that it had printed at least $21 trillion in local currency — and critics say much more — to buy the American dollars to pay IMF loans.
The rise of inflation was caused by a flight of foreign capital (after the government seized farmland), and a steep increase in the money supply - the fall was caused by a rise in interest rates and an economic slowdown.
Source: New York Times, “How Bad Is Inflation in Zimbabwe?” by Michael Wines, May 2, 2006 Available at:
zimbabwe.html?ex= &en=e4f95916b4e5d098&ei=5088
100

101. 3. Risk & Capital Budgeting
Two Methods to account for risky cash flows:
Change the discount rate
Example:
Use 6% for investments in Great Britain, United States, & Germany
Use 15% for investments in Russia
The higher the discount rate, the higher the projected net cash flows must be for an investment to have a positive NPV.
Critics argue: 1) it penalizes early cash flows too much and 2) does not penalize distant cash flows enough.
Change the cash flows

102. Formula for NPV
Net Present Value (NPV) is the sum of discounted expected cash flows.
Example: expect $10 for 3 years at a 5% discount rate.

103. Expected CF IRR = 20% NPV = 0 40 100 110 130 160 200 (10) (50) (80)
(100)
IRR = 20%
NPV = 0

104. Increase the Discount Rate40
100
110
130
160
200
(10)
(50)
(80)
(100)
Discount Rate = 10%
Positive NPV = 141
Discount Rate = 15%
New NPV = 30

105. Reduce Future CFs Discount Rate = 10% New NPV = 102 40 100 110 130 130
(10)
(50)
(80)
(100)
Discount Rate = 10%
New NPV = 102

106. “The goal of financial forecasting is to turn chaos into error.”
Elliott Smith, Boston College

107. Financing Decisions Source of Financing Financial Structure
Global Capital Markets
Typically have a lower cost of capital
Host government-regulations
Local debt financing
Use local debt financing if the currency is expected to depreciate (because if you have foreign debt, it will take more of the depreciated currency to repay your loans).
Financial Structure
Debt – Equity Ratios
Tax laws regarding dividends and interest
Norms
Average debt ratio in Singapore is 0.34
Average debt ratio in Italy is 0.76
Average debt ratio in US & UK is 0.55
Use local debt financing if the currency is expected to depreciate… because if you have foreign debt it will take more of the depreciated currency to pay for it.
The lower the host-country tax rate on dividends the more likely this option will be used.
Source: Multinational Business Finance, 11th Edition
107

108. Lower Interest Rate Domestic If you lend 90% of $100
Eurocurrency Market
If you lend 100% of $100 $
Available to
Lend
(90%)
Reserve
Requirement (10%)
at 10%,
you earn
$9.
at 9.5%,
you earn
$9.50. $
Available to
Lend
(100%)
Zero Reserve
Requirement

109. Money Management Efficiency Goals: Tax Considerations Minimize Cash
Reduce Transaction Costs
Tax Considerations
Tax credits, tax treaties, etc.
Dividend Remittances
Royalty Payments & Fees
Transfer Prices
P&G decided to centralize the overall management of finance within the organization for several reasons:
International subsidiares can trade currencies with one another
By grouping currency purchases P&G can get a better price
By pooling foreign exchange risk the company can purchase an “umbrella” option (which is cheaper than purchasing options for each subsidiary)
The company can also facilitate loans between subsidiaries at a lower overall cost.
109

110. 3 Foreign Exchange Risks
Transaction exposure
The extent to which income from individual transactions is affected by fluctuations in foreign exchange values.
Translation exposure
The extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange values.
Economic exposure
The extent to which a firm’s international earning power is affected by changes in interest rates.
Transaction exposure concerns individual transactions
Economic exposure is the long-run impact of FX changes.
110

111. Example: CHC Helicopters
Suppose that CHC Helicopters of Canada[1] has billed British Petroleum (BP) for services provided to BP’s sites on the North Sea.
CHC’s invoice is for £1 million, due in three months.
When CHC Helicopters receives £1 million three months from now, it will convert the British pounds into Canadian dollars at the spot rate.
Imagine the exchange rate at time 0 = 1GBP/1CAD
What are three things that can happen to the British pound over the next three months?
The GBP goes…
0.5GBP/1CAD
1GBP/2CAD up
C$ 2,000,000
1GPB/1CAD
No where
C$ 1,000,000
1.5GBP/1CAD
(1GBP/0.667CAD)
down
C$ ,667
[1] A “world leader in supply logistics to offshore oil rigs”
Photo source:

112. (becomes A/R for the seller)
The Life Span of a Transaction Exposure
Time and Events
CHC offers
services to
BP for £1M
CHC
provides
services
and bills
BP £1M
BP accepts
bid for £1M t1 t2 t3 t4
Seller quotes
a price to buyer
(in verbal or
written form)
Buyer places
firm order with
seller at price
offered at time t1
Seller ships
product (or
performs service)
and bills buyer
(becomes A/R for the seller)
Buyer settles A/P
with cash in
amount of currency
quoted at time t1
Quotation
Exposure
Backlog
Exposure
Billing
Exposure
t = 3 months
Spot Rate
(unknown)
t = 0
Spot Rate
(known)
Time between quoting
a price and reaching a
contractual sale
Time it takes to
fill the order after
contract is signed
Time it takes to
get paid in cash after
A/R is issued
Source: Modified from Multinational Financial Management, 11th edition, Ch 8, Exhibit 8.3

113. Example: CHC Helicopters
Suppose that CHC Helicopters of Canada[1] has billed British Petroleum (BP) for services provided to BP’s sites on the North Sea.
CHC’s invoice is for £1 million, due in three months.
When CHC Helicopters receives £1 million three months from now, it will convert the British pounds into Canadian dollars at the spot rate.
Core Issue:
The future spot rate cannot be known in advance. Consequently, in terms of the CAD, the value of the settlement is uncertain.
If CHC Helicopter does nothing to address this uncertainty, it is effectively speculating on the future course of the exchange rate.
Doing nothing is as if CHC is willing to take a bet that the
British pound will appreciate against the Canadian dollar.
[1] A “world leader in supply logistics to offshore oil rigs”
Photo source:

114. Strategic Management
The objective of strategic management is to anticipate and influence the effect of unexpected changes in exchange rates on a firm’s future cash flows, rather than merely hoping for the best.
A natural hedge refers to an off-setting operating cash flow, a payable arising from the conduct of business.
Suppose CHC can use the incoming British pounds to pay for parts, maintenance, or other operating cash flows.
A financial hedge refers to either an off-setting debt obligation (such as a loan) or some type of financial derivative.
If CHC borrows one million pounds today, the value of the loan will change in the opposite direction of the value of the expected cash flows.

115. World Perspective: Corporate Tax Rates
Country
Rate
Brazil
34.00%
India
33.99%
Belgium
Canada
33.50%
Italy
31.40%
Nigeria
30.00%
Australia
Spain
Germany
29.51%
Mexico
28.00%
U.K.
Singapore
25.50%
China
25.00%
Russia
24.00%
Switzerland
19.20%
Ireland
12.50%
U.S. Census Bureau, Foreign Trade Division, TradeStats express, at
115

116. International Offshore Financial Centers

117. Transfer Pricing
Today a product may be designed in one country, some of the components manufactured in another country, other components manufactured in a third country, all assembled in a fourth country, and sold worldwide.
The volume of intrafirm transactions is high.

118. Transfer Pricing Example
Price paid to German SBU: $23
Sale price: $25
Profit: $2
Example:
A U.S. parent company sells
Stuffed Bears.
Parts are made
at an Australian subsidiary,
assembled in a German
subsidiary and sold in the U.S.
U.S. Parent Company
Ships Product
Component Source:
Australian subsidiary
Ships Parts
German subsidiary
Price paid to Australian SBU: $10
Additional Cost to Produce: $10
Sale price: $23
Profit: $3
Cost to produce: $8
Sale Price: $10
Profit: $2

119. Transfer Pricing Example
Price paid to German SBU: $23
Sale price: $25
Profit: $2
Example:
A U.S. parent company sells
Stuffed Bears.
Parts are made
at an Australian subsidiary,
assembled in a German
subsidiary and sold in the U.S.
U.S. Parent Company
Tax Rate 35%
= Profit $1.30
Ships Product
Total Profit After Tax:
$4.40
Component Source:
Australian subsidiary
Ships Parts
German subsidiary
Price paid to Australian SBU: $10
Additional Cost to Produce: $10
Sale price: $23
Profit: $3
Cost to produce: $8
Sale Price: $10
Profit: $2
Tax Rate 35% = Profit $1.30
119
Tax Rate 40% = Profit $1.80

120. Transfer Pricing Example
Price paid to German SBU: $23
Sale price: $25
Profit: $2
Example:
A U.S. parent company sells
Stuffed Bears.
Parts are made
at an Australian subsidiary,
assembled in a German
subsidiary and sold in the U.S.
U.S. Parent Company
Tax Rate 35%
= Profit $1.30
Ships Product
Total Profit After Tax:
$4.50
Component Source:
Australian subsidiary
Ships Parts
German subsidiary
Price paid to Australian SBU: $12
Additional Cost to Produce: $10
Sale price: $23
Profit: $1
Cost to produce: $8
Sale Price: $12
Profit: $4
Tax Rate 35% = Profit $2.60
120
Tax Rate 40% = Profit $0.60

121. Manipulating Transfer Prices
Pros
Minimizes tax liabilities
Hedges against foreign exchange risk
Circumvents government restrictions on capital flows
Reduce tariff payments
Cons
Distorts incentive systems
Ethical considerations
Regulation Scrutiny!

122. “International finance is the art of passing currency from hand to hand until it disappears”
Anonymous Author

123. Wednesday
All Final Reports Due – Please note 5 point penalty if received after 3:15 (Session 2) 6:30 (Session 1)
All final presentations should be loaded on the desktop before class starts! -- Please note 5 point penalty if loaded after 3:15 (Session 2) 6:30 (Session 1)
Presentations are timed (practice)! We will warn you at 10 min and we will ask you to stop after a 2 minute penalty. Please note 5 point penalty if we have to ask you to stop.
Team Evaluations are Due (Handout & On Course Website)
Final Lecture: “The Bottom Line”
Bring your cameras!

124. Some comments on team building
Now is the time to exercise your management skills – time management,
team management, stress management etc. As well as your coordination skills.
This is the high stress moment, where you can shine... But it isn’t easy.

125. Please Note… Monday: Final Exam Harvard Hall 202
Both Sessions 1 & 2: 6:30pm – 9:30pm
If you have a conflict contact please let us know and contact Academic Services or
This will be posted by the end of the week on summer.harvard.edu.