IB Final Review Notes - Bianca PDF

**\`PRESENTATION 1** **Introduction & Globalization:** - *Why do we need a course on IB?* - The way we do business in America is different than other countries - The appreciation of one currency over the other may affect how different countries import/export interna...

**\`PRESENTATION 1** **Introduction & Globalization:** - *Why do we need a course on IB?* - The way we do business in America is different than other countries - The appreciation of one currency over the other may affect how different countries import/export internationally - ([Do you need a broom]? by Theodore Levitt): NO; the broom is a product, like many other objects; however, companies should not be focused on creating/making the products -- they should be focused on *creating solutions to human needs;* one of our needs is to live in a clean environment hence the broom; the products we see are just a package of a solution to a problem/issue/need - To succeed in business, understand the human mind (business is between people); understand humans' needs and tailor to it - The needs of customers from one country differ from another country; needs depend on religion, background, gender, etc. - *"Don't find customers for your products, find products for your customers" - Seth Godin* - Product = wrapping for a solution targeted to someone's needs - Understanding the customer is how the business defines its purpose - There are 2 types of international activity: - The **output** side of the supply chain (final product) - The **input** side of the supply chain (raw materials/production process) - *Supply chain* - External sources are produced by suppliers for any product/service (input) - Sellers responsible for delivering the product to customers (retailers/stores/etc.) (output) - We distinguish between: - **Home/source** country (where manufacturers are established) - **Target/destination** country (where the products are being sent to) - Entering this country with the goal of receiving higher benefits - This course focuses on the selling (output) side of the supply chain - Needs are consistent, but products (aka. solutions) change frequently - **Globalization:** the *process* of countries becoming *economically interdependent* and integrated - Manifested in cross-border movements of goods, people, and capital - Outflow FDI = US direct investment abroad - Inward FDI = foreign direct investment in the US - **World Trade Organization (WTO)**: manages trade, specifically imports + exports (total trade in 2019 was \$25T, where the highest category was merchandise) - We use the term "*market*" for geographic places, "*industry*" refers to the sector (a group of firms that sell the same product) - *Why expand internationally?* - **Proactive drivers of international business:** - Profit & revenue growth - Return on investment (*R&D* (research & development) intensive industries in places such as pharmaceutical companies, *technology being outdated* so companies must go international quickly **\*\*Moore's law\*\***) - R&D companies in that intensive industry should go international on day one because they need to find a demographic of people globally to be their customers - ***Economies of scale**,* meaning the more you produce, the cheaper the cost (bargaining power of buyers, tax breaks, cost of capital, and fixed costs) - One of the biggest drivers of globalization - A way to reduce cost & increase profit margin by increasing price or reducing cost of a product - **Tax breaks** relate to cost (some businesses can rally together and demand a tax break otherwise business will lower) - Cost of capital is the interest rate (just like any other product, you need to pay back on money; ex. you take out a loan) - **Risk** is similar to credit score (if you have more risk, you will pay less interest rate; if you have less risk, you'll pay higher interest rate) - **Fixed costs** are things like rent and property tax, which is the opposite of **variable costs** that vary based on production/utilities used - Tax incentives - Risk diversification ("Don't put all your eggs in one basket") - Gaining knowledge - Location advantages - Age of Disruption - **Gordon Moore's law:** The power doubles and costs are cut in half every two years - Originally: the number of transistors in an integrated circuit will double every 18 months (about 1 and a half years) - The average lifespan of electronics is only 4.5 years - **Cost per unit:** how much money a company spends on producing one unit of the product they sell - **Price** is how much the company sells the product for - *Example:* - Ikea products wood furniture - The cost of 1 chair is \$10 and the price is \$25 - The current output is 500K chairs a year - The property tax is \$1M a year - Ikea increased its annual production to 5M chairs - There is NO change in customer's price - All other things are held **constant** (in Latin: *ceteris paribus)* - ***In the new volume of production, how much does one chair cost?*** - *Solution:* - Total cost = variable cost + fixed cost (ie. property tax) - Current variable cost = \$10 \-- (property tax per chair of \$1M / 500K) = 10 -- 2 = \$**8** - New cost per chair \--\> variable cost remains at \$8 per chair, but fixed property tax is spread over more units - New fixed cost = \$1M / 5M chairs = **\$0.2** per chair - Therefore, the new TOTAL fixed costs = variable + fixed = 8 + 0.2 = **\$8.2 is the per unit cost** - **Reactive drivers of international business:** - Competitive pressures in the local market - Small or saturated home market - **Overcapacity** (supply \> demand means that the profit margin decreases) - **Seasonal products** (ex: fruits produced at different seasons, agricultural machineries) - For seasonal product firm to work year-round, the firm must sell international to countries in the other hemisphere where the climate is the opposite - Low *psychic distance* (two or more countries share the same language, religion, etc.) - Psychic distance = gap between cultures, different between languages - Easy to sell products between countries with low psychic distance - Ex: Canada, USA, Australia, New Zealand - What's the difference between reactive & proactive drivers? - **Proactive:** "on purpose"; the company willingly goes international - **Reactive:** there's an external force pushing the company to go international (usually negative) - **Liability of Foreignness:** additional costs that firms operating outside their home country experience above those incurred by local firms (aka. the risk associated with doing international business), examples: - Discrimination hazard - Higher transaction costs (i.e. tariffs) - Lack of familiarity with the target country - Higher risk (i.e. exchange rate fluctuations that might cause either depreciation or appreciation in your revenue) - **Depreciation**: local currency becomes WEAKER than foreign currency - **Appreciation**: local currency becomes STRONGER than foreign currency - Ex: transaction of selling goods worth 100M euros - Exchange rate: 1 dollar = 1 euro - Three possible options: no change, appreciation of the dollar (1 dollar = 2 euros), depreciation of the dollar (1 dollar = ½ euro) - Exchange rates are determined by supply and demand - *Exporters* (seller) prefer weaker local currency \--\> the foreign currency will be stronger and will translate to more local currency when converted - *Importers* (buyer) prefer strong local currency \--\> the foreign currency will be weak so the local buyer can buy more at less price **PRESENTATION 2:** **PEST Analysis & Political Dimension** - There is often a challenge in translating a brand name's specific sounds to an international name (ex: McDonalds and Coca-Cola didn't translate very well to Chinese) - **PEST Analysis:** - Political, Economic, Social (cultural), and Technological - It's important to analyze a specific business question (company, product, target country) - Each dimension should include both negative and positive factors that affect the business research question - **Political Dimension:** - Concerns regulations, local laws, not necessarily "politics" - Issues to consider (political dimension) - *Violent conflicts* - Ex: many companies have left Russia because of the war, and it has significantly impacted their economy and its capacity - *Political Instability* - Firms likes stability \--\> new leaders can bring new policy that alter the exchange rates, tariffs, and overall policies \--\> could discourage international companies - *Nationalization* - When private/individual companies & their assets become owned or controlled by the government - Companies usually don't benefit from nationalization - **ICSID** allows for filed claims & help some companies in fighting against nationalization \--\> not offered in all countries - *Intellectual property rights* - Without proper copyright or patents, R&Ds & other investors/partners might steal the firm's idea - International Property Rights Index 2023 \--\> important website for checking regulations depending on each country - *Local safety laws* - FDA might not approve of all products that might be used in other countries - *Labor laws* - *Regulations affected by religious beliefs* - Analyzed under the "S" \-- Social/Cultural Dimension, NOT political - Ex: a US alcohol company may have difficulties selling its goods to Muslim countries because its law and religion prohibits drinking - *Government policies on moral issues* - Analyzed under the "S" as well - Ex: the snacks that your company is selling has bad chemicals, artificial flavors, and are known to cause cancer -- targets children under 12 years and parents buy it for the children -- will not be successful in all target countries because it raises a moral issue - The UK, Greece, Denmark, Belgium, Norway, and Sweden restrict advertising to children under 12 such as direct coupons, free samples, prizes, etc. - **Consumer behavior** encompasses mental and physical activities that consumers engage in when searching for, evaluating, purchasing, and using products and services - What are consumers' expectations? - How do they perceive information? - What factors influence their buying decisions? - How to capture their attention? - *Different countries have different consumer behavior -- they all behave differently.* - **International Trade Theory** - Mercantilism vs Free Trade Policy - Absolute Advantage - Comparative Advantage - General Agreement on Tariffs and Trade (GATT) - **Mercantilism:** approach that aims to enrich the country by restraining imports and encouraging exports - This is known as a **zero-sum game** because if one player gains a dollar, the other loses a dollar \--\> there cannot be two winners or two losers - **Free Trade Policy:** absence of barriers to the free flow of goods and services between countries - Government doesn't attempt to restrict what citizens can buy or sell from other countries - **Absolute Advantage** - A country has an absolute advantage in producing a product when it is more efficient than any other country in producing it - Smith (1776): Countries differ in their ability to produce goods efficiently - Trade is *NOT a zero-sum game* - Countries should specialize in production of a good if they have absolute advantage in it and then trade these goods for other goods by other countries - Switzerland has a neutral political stance on wars and current issues, so people are enticed to put their money in Swiss banks - Absolute advantage & trade **tables**: First chart is production capabilities, and second chart is domestic consumption -- third table is after trade - **Opportunity cost** refers to what you have to give up to buy what you want, in terms of other goods or services -- relevant for life in general because when you decide, you give up something (whether it's money or efficiency, etc.) - **Comparative advantage** - Oftentimes a situation in which a country has an absolute advantage in all goods - Need to calculate the **per unit opportunity cost** to get one unit of a product to determine trade terms - The country with the greatest comparative advantage is the one that has the least opportunity cost - The term of trade must be between two countries\' per unit opportunity cost - **Overview of Trade Theory** - *Benefits of Trade* - Specialize in manufacturing and exporting of products that can be produced most efficiently in that country - Import products that can be produced more efficiently than other countries - **GATT** - The General Agreement on Tariffs and Trade, 1947 - Multilateral agreement to liberalize trade and gradually eliminate barriers to trade - Tariff reduction was spread over 8 rounds -- very successful in first few rounds (rounds = sending of delegates to countries to negotiate) - Superseded by the WTO in 1995 - **Trade barrier:** any obstacle that impedes trade across countries (tax levied on imports that effectively raises the cost of imported products relative to domestic products) - 2 types of barriers: tariff and non-tariff - Gov't wants to create tariffs so that they can create a situation where citizens will want to buy local goods instead of international, which would create more jobs & supposedly grow the economy - **Specific tariffs:** levied as a fixed charge for each unit of an imported good - **Ad valorem tariffs:** levied as a proportion of the value of an imported good (Latin: *according to value*) - **Non-Tariff barrier:** - **Subsidy:** a government payment to a domestic producer; they help compete against low-cost foreign imports & gain export markets - **Import quota:** a direct restriction on the quantity of some good that may be imported into a country - Requirements for complying with local standards - **Dumping (3 conditions) \* dumping is illegal:** - 1\) A situation of international price discrimination where the price of a product, when sold in the importing country, is less than the price of that product in the market of the exporting country - 2\) The domestic industry producing the like product in the importing country is suffering material injury - 3\) Show that there's a causal link between the two (cause & effect) - **World Trade Organization (WTO)**: the international organization whose primary purpose is to open and facilitate international trade; dispute settlement body; 164 members - Some countries don't have enough authority by their governments to trade while WTO can punish uncooperative countries - **Principles of the Trading System** - Non-discrimination - Most Favored Nation for trade (ex: US & UK almost completely got rid of trade barriers between each other) - National Treatment (foreign companies should receive the same standard/regulation as local companies) - Transparency (every law and regulation should be clear for domestic and global companies -- it\'s important because companies can get in trouble for not knowing the law of the foreign country) - Safety Valves - **The International Monetary Fund (IMF):** - Furthering international monetary cooperation - Encouraging the expansion of trade & economic growth - Discouraging policies that would harm prosperity - 189 members - **Washington Consensus**: - IMF policy is according to the 10 principles: - Fiscal Adjustment - Tax Reforms - Deregulation - Trade Liberalization - Competitive Exchange Rate - Privatization - Removal of Barriers to Foreign Investment - Financial Reforms - Protection of Property Rights - Redirection of Public Sector Investment - **World Bank:** an international development organization owned by 187 countries - Its role is to reduce poverty by lending money to the governments of its poorer members to improve their economies and to improve the standard of living of their people - **Trade Blocs:** - An economic trade bloc consists of a group of nations that have negotiated special agreements regarding their economic relations - Metaphor: like an exclusive club but for countries (only few can participate) - Generally, the agreements aim to relax or eliminate trade barriers between them - *Levels of Economic Integration (from lowest to highest):* - Free trade area (e.g. USMCA is an FTA between US, Canada, and Mexico -- is responsible for 1/3 of the world's GDP \--\> replaced NAFTA) - Customs union (e.g. Mercosur) - Common market (e.g. European Economic Area) - Economic union (e.g. European Union) - Should check if your local country participates in a trade bloc with the destination country, otherwise you're at a disadvantage - **Free Trade Area (FTA)** - All barriers to the trade of goods and services among member countries are removed, but members determine their own trade policies with non-members - **Rules of Origin (ROOs)**: used to determine if products are eligible for duty-free or reduced duties under the FTA rules - 2 main methods: - The *tariff shift method* (you can change the \#-digit code aka harmony s\_\_ so that it appears to be made in a local country when it's been brought from a foreign country) - The *regional value content method (RVC)* (if you can show to custom agents that at least 35% of the component's value is from the country, then the product is eligible for better conditions) - **Mercosur (ex of a trade union)** - Eliminates trade barriers between member countries and adopts a common external trade policy - Most countries that enter a customs union want further integration in the future - 4 members: Brazil, Argentina, Uruguay, Paraguay (\~295M in population) - **Common market (a group of European countries NOT the EU)** - No barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production - Requires significant harmony among members in fiscal, monetary, and employment policies - **European Union (highest level of economic integration)** - Countries committed to the free flow of products and factors of production between members, adoption of a common currency, harmonization of tax rates, and pursuit of a common external trade policy - Involves sacrificing a significant amount of national sovereignty - Not all countries in the EU use the Euro currency (ex: Bulgaria) - **Agreement on Government Procurement (GPA)** - The GPA regulates the conduct of international trade in government procurement markets - Aims to ensure fair, transparent, and non-discriminatory conditions of competition for purchases of goods, services, and construction services by the public entities covered by the agreement - 48 countries \--\> government buys \$1.7T annually **PRESENTATION 3** **PEST Analysis: Economic Dimension** - **Economic Analysis:** - Free Market Economy vs. Command Economy - **Free market** runs with little to no government intervention (laissez-faire) - **Command economy** requires the government to participate and/or control means of production - Monetary Policy vs Fiscal Policy - **Monetary policy:** the actions of central banks, including the Federal Reserve, to achieve macroeconomic policy objectives such as price stability, full employment, and stable economic growth - **Fiscal policy:** the tax and spending policies of a national government - Economic Forecast - Exchange Rate - **Economic Indicators**: - *Unemployment* (if there is low unemployment, the economy is well off) - *Labor Force Participation Rate* (if high like \> 75%, then the economy is well off) - *Poverty* (if poverty rates are high, the population can't buy most products) - Minimum wage - Income does NOT follow a normal distribution -- most income graphs are skewed right - Median is most accurate/reliable source of information in statistics - Average/median wage - Gross/Net wage (tax rate) - **Gross Domestic Product (GDP):** the standard measure of the added value created through the production of final goods and services in a country during a certain period - Limitations of GDP: 1) only includes monetary transactions 2) shadow economy is not included 3) A measure of nominal value - **GDP per capita** is when the total GDP is divided by the total population in a country - GDP is a nominal measure, NOT a real measure (not adjusted for inflation) - **Purchasing power parity (PPP):** a new measure of economic growth - *Basket*: accumulation of goods and services that a household has - PPP means that you can buy more baskets with your GDP \--\> means that the country has more purchasing power - Economists made an artificial currency (international dollar) to better calculate the PPP - **Big Mac Index**: provides a measure of citizens' purchasing power across different countries - Has been calculated by the UBS (Swiss) bank since 1970 - Is calculated by dividing the price of a Big Max by the net hourly wage in different cities around the world - For comparison purposes, the index uses prices in the US (NYC) as the reference point - In the example, the values are determined by the amount of time it takes to walk to get a Big Mac (table: working time required to buy -- 2018) - **Gini Coefficient**: (inspired by Corrado Gini) - Measures the equality of a distribution - Ranges between 0 and 1 (1 = one person holds all the income) - There is no country where income is distributed equally - It's better to enter a foreign country with a Gini coefficient closer to 0 **PRESENTATION 4** **PEST Analysis: Social Dimension** *\*\* most important: we need to understand the needs of international customers \*\** - **Culture:** a system of values and norms shared among a group of people and, when taken together, constitute a design for living - **Society:** a group of people sharing a common set of values and norms - Generally, culture and country don't overlap -- a country can have multiple subcultures/ societies - **"Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth."** - Marcus Aurelius - Cultural differences can affect a product's positioning, characteristics, and sometimes its purpose \--\> developing an objective and *empathic view* is crucial - The Function of Toys (US vs Europe vs China) - Entertainment - Learning and cognitive development - Developing social skills (interacting with others) - Transmission of culture - When evaluating another culture, we subconsciously do so by referring to our own culture - **Cultural Framework** (culture components): - *Values* - Value: Ideas about what a group views as be good, right, and desirable - Beliefs: certain set of assumptions we hold to be true - Customs/practices: a behavior that is culturally/socially acceptable - Ex: in ads, slogans include "You deserve the best\...." or "You're worth\..." from American car companies - *Aesthetics* - Aesthetics towards beauty and good taste in the arts, music, folklore, and drama of a culture - There is no one ideal standard of beauty - Colors convey a different message according to local culture; means associations, symbolisms per country, emotions - *Language* - Spoken language: actual words spoken and ways in which words are pronounced - Unspoken language: non-verbal cues are important communication sources, including facial expressions and hand gestures (ex: the "okay" hand gesture indicates satisfaction in Aus, USA, and UK but it's considered a rude gesture in Brazil) - Cultural taboos (unspoken) such as head touching, eating with hands, etc. - Taboos can be used as a marketing tactic to improve a company's profit; ex: Italian fashion company Benito used provocative images to take advantage of taboos and attract attention - *Religion* - Religious taboo is an action banned from religion; usually stems from the religion's founding documents and include rules designed to protect civil behavior (ex: abortion, LGBT, birth control, dressing modestly, etc.) - *Law and Politics* - A survey found that nearly 2/3 of consumers around the world will buy or boycott a brand solely because of its position on a social or political issue - International companies should be aware NOT to take sides - Celebrities' political and personal beliefs can impact brands they're affiliated with - *Education* - A country's education level influences the type of products and the level of service consumers require - There's a linear relationship between education level and salary - As consumers become more educated, they demand higher quality products, as well as a high level of service - Products sold in one-time transaction (ex: buying a coffee) vs. products sold in a long-term transaction between seller and buyer (ex: buying a car which will need maintenance) \-- educated people want to make sure you can give them a good product post after-sales service - Education level is another macroeconomic determinant of income - *Social Structure* - Social structure refers to how society is organized and structured by different groups of people - Various cultures have different degrees of social integration; in some cultures, there's a clear separation between races, tribes, families, castes, and ethnicities - U.S. uses a merit-based system: you should get the job based on your qualifications (knowledge & experience) - Other countries determine qualifications based on group membership/ social rank (nepotism & favoritism) - *Technology* - **Cultural and Consumer Behavior** - *Brand Loyalty:* the willingness of a consumer to continue purchasing a product of the same brand despite attempts by competing products to entice them (arguably riskier) - If competition level is low, brand loyalty is high - America doesn't have a lot of brand loyalty - *Brand Trust:* the confidence that customers have in a brand's ability to deliver on its promises; the more consistently a brand meets customer expectations, the more trust customers have in the brand - Brand Trust is usually affected by: - Product and service quality - Positive 3^rd^ party reviews for the brand - Cost-quality ratio - The quality and speed of its customer speed - A brand's political or philanthropic approach to business - The way a brand treats its employees - How secure the data of customers is - **Maslow's Hierarchy of Needs (**made by Abraham Maslow): a motivational theory in psychology compromising of a five-tier model of human needs, often depicted as hierarchical levels within a pyramid - Needs lower down in the hierarchy must be satisfied before individuals can attend to needs higher up - *5-Tier model* (from bottom to top): 1) Psychological Needs, 2) Safety & Security, 3) Love and Belonging, 4) Self-esteem, 5) Self-actualization - Maslow's 8 Stage Hierarchy of Needs (refined over time): Psychological Needs, Safety Needs, Esteem Needs, Cognitive Needs, Aesthetic Needs, Self-Actualization, Transcendence \*\* not important to know \*\* - **High and Low Context Cultures** - *Low Context Cultures:* information is communicated primarily through language and rules are explicitly stated - *High Context Cultures:* the rules of communication are primarily transmitted through the contextual elements (i.e., body language, a person's status, tone of voice) and are not explicitly states - Certain words in the same situation can mean different things in different cultures - Ex: US is low context culture because of its extreme diversity, Japan is high context culture because it's more isolated geographically and immigrating there is difficult - **Hofstede's Cultural Dimensions** - Geert Hofstede was a Dutch sociologist - Had IBM employees from 72 countries - One of the largest empirical studies ever conducted - First dimension: **Individualism vs Collectivism** - The degree to which individuals are integrated into groups - On **individualist side** -- societies in which the ties between individuals are lose; everyone is expected to look after themselves and their immediate family - On **collectivist side** -- societies in which people from birth onwards are integrated onto strong, cohesive in-groups, often extended families which continue protecting them in exchange for unquestioning loyalty - Individualism - Right to privacy - Speaking one's mind is healthy - Personal opinion expected: one person, one vote - Purpose of education is learning how to learn - Collectivism - Stress on belonging - Harmony should always be maintained - Opinions and votes predetermined by in-groups - Purpose of education is learning how to do - Second dimension: **Power Distance** - Expresses the degree to which the less powerful members of a society accept and expect that power is distributed equally - Issue is how a society handles inequalities among people; people in societies exhibiting a large degree of power distance accept a hierarchal order - In societies with low power distances, people strive to equalize the distribution of power and demand justification for inequalities of power - **Small Power Distance** - Parents treat children as equals - Older people are neither respected nor feared - Income distribution in society is fairly even - Subordinates expect to be consulted - **Large Power Distance** - Parents teach children obedience - Older people are both feared and respected - Income distribution in society is very uneven - Subordinates expect to be told what to do - Third dimension: **Masculinity vs Femininity** - Masculinity refers to the qualities, characteristics, or roles associated with men - Ex: achievement, heroism, financial independence, autonomy, assertiveness - Femininity characterizes traits, roles, and behaviors associated with women - Stereotypes: cooperation, nurturing behavior, focus on relationships - Fourth Dimension: **Uncertainty Avoidance** - This dimension expresses the degree to which the members of a society feel uncomfortable with uncertainty and ambiguity - Issue is how a society deals with the fact that the future can never be known - Countries with strong UAI have rigid codes of belief and behavior and are intolerant of unorthodox behavior and ideas - Weak UAI societies maintain a more relaxed attitude in which practice counts more than principles - As a result, countries try to reduce uncertainty of some situations, so they have more behavior codes (rules) on how to behave and act - Weak uncertainty avoidance: - Lower stress - Difference in ideas is curiosity - Dislike rules, written or unwritten - Strong uncertainty avoidance: - Higher stress - Different ideas are dangerous - Teachers are supposed to have all the answers; emotional need for rules - USA - Open to new ideas - Focus on the individual - Some commercials are good in one country but not in the other - Critiques - **Gift Giving Etiquette (can be a sensitive topic)** - Whether to give gifts and when - Expensive vs regular gifts - Could be considered bribery - Pretending to refuse the gift - Unwrapping - Reciprocity - AVOID GIVING: - Clock in China (it is associated with death) - Even numbers of flowers in Russia - **World Values Survey (WVS)** - Explores values and norms, how they change, and their impact on society - **Cultural Change** - Culture evolves over time, although changes in value systems can be slow and painful - Cultural change is particularly common as countries become *economically stronger* - As countries get richer, there is a shift from "traditional" values to "secular" rational (less religious, less conservative) - Globalization also creates a *convergence* of tastes and lifestyles, meaning that cultures become similar to one another - Examples of products: sushi, pizza, music (different countries consuming the same product) - Counter trend of some cultures: reemphasizing uniqueness **PRESENTATION 5** **PEST Analysis: Technological Dimension** - **Target Environment Tech's Analysis** - Are there any tech differences between the firm's home country and target country that could affect international operations? - Questions to answer the problem: - Is there a technological gap that could make the company's products irrelevant? - Due to technological gaps, how should marketing/sales be changed? - In what ways can technological gaps impact a company's ability to generate sales and distribute its products? - Ex: hyperbaric medicine is a chamber where scuba divers get special oxygen after an accident -- you can't find this chamber in all countries; MRI machines are not always available either - **Product Life Cycle** - PLC is a model that describes the various stages a product goes through, from its introduction to eventual decline - To sell a product, a firm needs a different action plan, methods, and tools for each stage - PLC includes 4 stages: Introduction, Growth, Maturity, and Decline - 1\. *Introduction:* the curve increases gradually with fairly low sales - 2\. *Growth*: the curve rises sharply as more consumers buy the product and they understand the benefits of the product - 3\. *Maturity*: reaches its highest peak and then decreases, meaning a large portion of the population already bought the product - 4\. *Decline*: the curve decreases gradually, and sales deteriorate because the product is reaching its end - Explains the relationship between time and product sales (x and y axis respectively) - Example of growth stage: 3D printers, which have the potential to revolutionize the business environment \--\> makes the difference between the manufacturer and seller blur because you can print items and sell them directly to consumers instead of buying from suppliers - Researchers found that a specific product could be in different stages in different countries at the same time - Because of that, the PLC is renamed **IPLC** (international product life cycle) - Ex: VCR to DVD to streaming services - **Diffusion of Innovations Theory** - 1\. **Innovators:** those who are open to risks and the first to try new ideas (2.5%) - 2\. **Early Adopters:** people who are interested in trying new technologies and establishing their utility in society (13.5%) - 3\. **Early Majority:** those who pave the way for the use of an innovation within mainstream society and are part of the general population (34%) - 4\. **Late Majority:** people who follow the early majority into adopting the innovation as part of their daily life and are also part of the general population (34%) - 5\. **Laggards:** people who lag behind the general population in adopting innovative products and new ideas (16%) **PRESENTATION 6** **PEST Analysis: Ethical Dimension** - **What's a business ethical dilemma?** - Dealing with the intersection between business and morality in specific cases - Situation where there is a conflict between business aspect and a certain value - **Law vs Morals** - Law: system of rules enforced by a set of institutions that tells us what we can and cannot do -- formal and written rules that everyone must obey in their respective countries - Morals/ethics: principles presented by philosophers, professional groups, or originate from religious beliefs -- adherence is a personal choice Positive (MORALITY) Negative (MORALITY) --------------------- --------------------- ----------------------- Positive (LEGALITY) Legal and moral Legal & not moral Negative (LEGALITY) Moral and not legal Not moral & not legal - **Common Ethical Issues in IB** - Employment practices - Human rights - Environmental regulations - Corruption - Child labor - **Sources of Morality** - Moral values are the standards of good and evil, which govern an individual's behavior and choices - Sources of morality: where morality comes from - Morals may derive from the following sources: - *Cultural relativism* - *Religion* - *Ethical Subjectivism* - **Cultural Relativism** - The view that right and wrong, good and bad, are determined by the standards of certain cultures or societies - Morality is what society, or culture deems as moral behavior - There is no *universal* morality; no morality can exist outside or beyond social / cultural traditions - Can one person from one culture criticize another culture?: *not the right approach* - **Women's Employment** - There\'s still inequality in the workplace in different countries - Many have some form of job restriction, have inequal pay for equal work, legal barriers that prevent their full economic participation - **Moral Imperialism** - The imposition of a set of moral values onto a culture that does not share those values, either through force or through cultural criticism - The morals of one culture are superior to those of another - One set of values for all cultures - A person's ethics are not situational - **Critiques of Cultural Relativism** - According to moral relativism, good and bad are relative (no absolute definition) \-\-\-- can we accept this? - Moral relativism can direct us on how to act in current dilemmas but there are no guidelines for future dilemmas - According to cultural relativism, we should act according to what is acceptable in our culture -- what is the definition of acceptable in a society? - Is it possible to define what is acceptable in society through a survey? A moral code is not a statistical issue - Why should one behave according to what is accepted in society? (pluralism) - **Religion** - In our context, religion refers to any sacred text that a group of people believes represents God's word - Religions often involve norms that are supposed to be govern behavior -- some of these norms may be construed as moral norms - According to this approach, humans cannot define good or bad because they have personal interests; therefore, only God, who is beyond all interests, can define right or wrong - **Ethical Subjectivism** - Objective vs. Subjective - **Objective** refers to something based on facts and evidence that anyone can observe and measure, regardless of personal thoughts or feelings - **Subjective** refers to something based on personal opinions, feelings, or experiences and is not necessarily verifiable or measurable - Ethical subjectivism argues that morality is a matter of individual acceptance because morality is solely determined by one's own personal reactions or feelings - **David Hume** (Scottish philosopher 1711 -- 1776): Hume presented a sophisticated defense of ethical subjectivism, arguing that morality is based only on individual sentiment and emotion, not on reason - **Philosophical Approaches to Ethics** - **Utilitarian ethics:** moral worth of actions or practices is determined by their consequences. - Actions have multiple consequences, some good, some not - Actions are desirable if they produce the greatest good for the greatest number of people - **Immanuel Kant**: Kant argued that people should be treated as ends and never purely as means to the end of others - **Justice Theories**: focus on attainment of just distribution -- one that is considered fair and equitable -- of economic goods and services - **Right theories:** certain people or institutions are obligated to provide benefits or services that secure rights of others - **John Locke** (Natural Rights vs Legal Rights): human beings have fundamental rights and privileges that transcend national boundaries and culture - **Univeral Declaration of Human Rights** - UDHR is a milestone document in the history of human rights - The Declaration was proclaimed by the United Nations General Assembly in Paris on December 10, 1948 as a common standard of achievements for all peoples and all nations - The moral compass of managers should be based on human rights when making ethical decisions - **Article 23** - Everyone has the right to work, to free choice of employment, to just and favorable conditions of work, and to protection against unemployment - Everyone, without any discrimination, has the right to equal pay for equal work - Everyone who works has the right to just and favorable remuneration ensuring for themself and their family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection - Everyone has the right to form and to join trade unions for the protection of his interests - **The Consumer Bill of Rights** - Announced by President JFK in 1962 - Every consumer as 4 fundamental rights: - The right to safety - The right to choose - The right to be heard - The right to be informed - 4 additional rights added later: - The right to redress - The right to consumer education - The right to service - The right to a healthy and sustainable environment - **Consumer Rights** - 1.) The **right to safety** refers to the right to be protected from marketing and sale of products hazardous to human life and property - 2.) The **right to choose** is a consumer's right to have access to a variety of products and services at fair and competitive prices - 3.) The **right to be heard** is the right to have interests and complaints heard and considered; consumers have the right to let businesses know if they are unhappy with products and services - 4.) The **right to be informed** means that consumers are to be provided with adequate, reliable, and sufficient information about products or services to make informed decisions - 5.) The **right to redress** is the right to have problems resolved; customers can return a defective item or complain about poor service - 6.) The **right to consumer education** refers to having access to education that will provide the knowledge and skills needed to make informed consumer decision - 7.) The **right to service** is the right to be treated in a respectful and courteous manner; consumers have the right to expect prompt and non-discriminatory service - 8.) The **right to a healthy and sustainable environment** is the right to live in a non-threatening, safe, and healthy environment - **The Golden Rule** - Positive form: treat others as you would like others to treat you - Negative form: do not treat others in ways that you would not like to be treated - Empathetic form: what you wish upon others, you wish upon yourself - **Rules of Thumb in Applied Ethics**: What would happen if everyone acted the same way? Will you feel comfortable if the action becomes public? Could your reputation, trust, or relationships be damaged? (the MBA Oath) - **Moral Muteness** - The act of following moral principles without discussing morality when making decisions; in other words, people make decisions based on moral principles without saying it - The following are causes of moral muteness: - Threat to harmony - Threat to efficiency - Threat to the image of power and effectiveness - **Ethics Pays** - Companies committed to ethical business practices reap a wide range of benefits - Do good to do business - Cause-and-effect relationship: A causes B - The biggest criticism of ethics pays: conditional argument - **Corporate Social Responsibility** - CSR is the idea that a company should play a positive role in the community and consider the environmental and social impact of business decisions - It's closely linked to sustainability -- creating economic, social, and environmental value, and *ESG* (Environmental, Social, and Governance) - ESG components focus on non-financial factors that companies, large and small, should consider when making business decisions - **CSR Practices** - **Ethical Responsibility** - *Diversity, Equity, and Inclusion*: promoting policies and programs that support diversity, equity, and inclusion - *Fair treatment:* treating employees, users and communities fairly - *Honest Disclosure*: provide honest, timely and transparent disclosure about operating issues that affect an organization (e.g., accounting) - *Training:* educating both staff and management about ethical dilemmas - **Philanthropic Responsibility** - *Donations*: social responsibility can be demonstrated by giving money to charitable causes - *Matching contributions*: providing matching contributions to help a specific cause and encouraging others to contribute - *Community Fundraising*: fundraising efforts and events can be organized and led by the management teams - *Volunteering*: the company should encourage and support employees who wish to volunteer in the community - **Reasons to Adopt CSR** - **Altruism**: a company's and its management's desire to do good and help their communities - **Consumer demand:** in the 20^th^ century, consumers began to hold corporations accountable by asking them how they were being socially and environmentally responsible - **Employee satisfaction:** every organization strives to attract and retain skilled employees; it's important for potential employees to know that their employers are socially responsible - **Brand reputation**: a company's brand how it's perceived in the market can be\ affected directly by its social responsibility \-- or lack of it - **Investors:** CSR strategies are becoming increasingly important to investors who want to invest only in organizations with well-defined CSR strategies (impact investing) - **ISO 26000** - International Organization for Standardization (ISO) is an international non-governmental organization made up of national standard bodies that develop and publish a wide range of proprietary, industrial, and commercial standards - Assists organizations in addressing their social responsibilities while respecting cultural, societal, environmental, and legal differences - Provides practical guidance related to making social responsibility operational - Assists with identifying and engaging with stakeholders and enhancing credibility of reports and claims made about social responsibility - **ISO 26000 7 Key Principles** - Accountability - Transparency - Ethical behavior - Respe ct for stakeholder interests - Respect for the rule of law - Respect for international norms of behavior - Respect for human rights - **Environment, Social, and Governance** - ESG is a corporate governance framework and an investment framework - Companies that adopt ESG principles will define a vision, mission, strategy, and tactics that consider, measure, and report the environmental, social, and governance aspects of their business - Environment: how resources are used, energy efficiency, carbon emission, air and water quality - Social: how a company fosters its people and culture like data protection and a customer satisfaction - Governance: internal systems of control, practices and procedures (board composition, executive compensation and political contributions) - **ESG Guidance Frameworks** - **Sustainability Accounting Standards Board** (SASB): The SASB provides voluntary frameworks that focus on substantive financial information that's relevant to investors. The aim of the SASB is to provide information to the SEC, which investors can then use to compare business performance on critical ESG issues - **Global Reporting Initiative** (GRI): The GRI voluntary disclosures are broad in their aim; these disclosures address ESG topics that are deemed relevant to the organization and all related management approach components. Reporting principles cover the inclusiveness of stakeholders, sustainability, and integrity. GRI standards are divided into universal, sector, and topic-specific standards that can be applied to companies depending on their industry and impact - **10 Principles of Fair Trade** - Creates opportunities for economically disadvantaged producers - Transparency and accountability - Fair trading practices - Payment of a fair price - Ensuring no child labor or forced labor - Commitment to non-discrimination, gender equality, freedom of association - Ensuring good working conditions - Providing capacity building - Promoting fair trade - Respect for the environment - **Critiques of CSR** - Short-term planning - Inconsistent reporting - Empty promises - Greenwashing - Most companies do not engage in CSR - **Milton Friedman's Approach** - Only people can have responsibilities - Corporate executives are employees (agents) of the owners of the business and their responsibility is to conduct the business according to the shareholders - Corporate executives are people, and they may have social responsibilities: - Refraining from increasing the price to prevent inflation - Reducing pollution beyond what is required by law to improve the environment - Hiring an unqualified worker to reduce poverty - The corporate executive would be spending someone else's money for general social interest - Milton Friedman quote: "There is one and only one social responsibility of business -- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud" - A company should analyze the destination's ethical practices in order to determine whether it can work in a corrupt environment - In order to appeal to foreign customers and international investors, CSR is a critical component - Encourages you to behave ethically **PRESENTATION 7** **Presentation 7: Country Classifications and Data Sources** - **Basic Classification of Countries** - OECD countries - G7 and G20 - Developed countries vs. Developing countries - World Bank classification - BRIC countries - **OECD** - Organization for Economic Co-operation and Development: a unique forum where the governments of 38 democracies with market-based economies collaborate to develop policy standards to promote sustainable economic growth - OECD is NOT a trade bloc, but it is still an "exclusive club" - OECD provides a setting where governments can compare experiences, seek answers to common challenges, identify good practices, and develop high standards for economic policy - Majority of OECD members are high-income economies - Accounts for: - 3/5 of world GDP - ¾ of world trade - Half of the world's energy consumption - 18% of the world's population - Disadvantage of targeting one of these countries: facing intense competition if you don't have competitive advantage - Advantage: these countries have sophisticated markets with good infrastructure, technology, consumers have high purchasing power so many businesses want to do business there - **G7** - (Group of Seven) is a forum made up of seven of the world's most advanced economies: Canada, France, Germany, Italy, Japan, the UK, and the US - NOT a trade bloc - Main purpose: to provide a platform for the leaders of the world's most advanced economies - More of a geo-political platform (they're U.S. allies) - **G20** - (Group of Twenty): comprises of top 19 countries + EU - Represents 85% of global GDP and over 75% of world trade - G20 & OECD are NOT trade blocs - **Developed vs Developing Countries** +-----------------------+-----------------------+-----------------------+ | | **Developed** | **Developing** | +=======================+=======================+=======================+ | **Unemployment & | Comparatively lower | Generally higher | | Poverty** | | | +-----------------------+-----------------------+-----------------------+ | **Rates** | Infant mortality | High infant mortality | | | rate, death rate, and | rate, death rate, and | | | birth rate are low. | birth rate. | | | | | | | Life expectancy rate | Low life expectancy | | | is high | | +-----------------------+-----------------------+-----------------------+ | **Living conditions** | Good | Moderate | +-----------------------+-----------------------+-----------------------+ | **Distribution of | Equal | Unequal | | Income** | | | +-----------------------+-----------------------+-----------------------+ | **Factors of | Effectively utilized | Ineffectively | | Production** | | utilized | +-----------------------+-----------------------+-----------------------+ - **New Country Classifications** - The World Bank assigns the world's economies to 4 income groups: - Low income - Lower-middle income - Upper-middle income - High income - The classifications are updated each year on July 1 and are based on the GNI per capita of the previous year - **BRIC Countries** - Acronym referring to the developing countries of Brazil, Russia, India, and China - There's now a formal organization called BRICS including South Africa - From an economic perspective, these countries have dual economies (2 main sides: poor, uneducated, rural areas + educated, high-purchasing power city areas like in Rusia) \--\> you must be more specific where you want to locate your firm because of these differences - BRIC countries are dual economies - Compared to other economies, **dual economies** have relatively large internal disparities in efficiency, productivity, production technology, and innovation - Consists of modern industries that use advanced technology and traditional sectors such as agriculture and textiles that often use manual labor - There\'s a wide gap between residents in terms of income, purchasing power, and education - **\*\* Global Middle Class in 2024** - The global consumer class amounted to 4 billion people in June 2023 and is expected to reach 5 billion by 2031 - The middle class is defined by the World Data Lab as someone who spends at least \$12 per day; these individuals are typically rising in developing regions like Asia and Africa - The new entrants to this customers class in 2024 will originate from... India, China, Indonesia, Bangladesh, Vietnam, etc. - **Country Indexes and Reports** - **BERI** - **GCI (Global Competitive Index)** measures the national competitiveness defined as the set of institutions, policies and factors that determine the level of productivity - Covering 141 economies - **ETI (Enabling Trade Index):** more about the easiness of importing/exporting to a certain country, including mentioning barriers, etc. - **Doing Business 2019**: analysis of the regulations that promote or impede business; 11 subcategories that contribute to the final score - **Economic Freedom**: index that measures economic freedom of 184 countries based on trade freedom, business freedom, investment freedom, and property rights - Economic freedom is based on 12 quantitative and qualitative factors, grouped into four broad categories or pillars of economic freedom: - 1\) Rule of Law - 2\) Government size - 3\) Regulatory Efficiency - 4\) Open Markets - **Corruption Perceptions Index** - CPI is an index which ranks countries "by their perceived levels of public sector corruption," as determined by assessments and opinion surveys - Determined by a scale: the higher the score, the less corrupt a country is - **Human Development Report** - HDI was created to emphasize that people and their capabilities should be the ultimate criteria for assessing the development of a country, not economic growth alone - HDI is a summary measure of 3 key dimensions: - *Long and healthy life* -- assessed by life expectancy at birth - *Knowledge* -- measured by mean of years of schooling for adults aged 25+ and expected years - *Standard of living* -- measured by gross national income per capita - **Credit Rating Agencies** - Credit ratings are forward-looking opinions about the ability and willingness of debt issuers, like corporations or governments, to meet their financial obligations on time and in full - There are 3 main bond rating agencies in the US that account for \~ 95% of all bond ratings: Fitch, Standard & Poor's (S&P), and Moody's - **Country's Credit Score** - A credit rating is a good indicator of an economy's strength because it's based on macroeconomic factors such as per capita income, GDP growth, inflation rate, external debt, economic development, and default history - Bonds dominated in local currency vs foreign currency - A country usually sets an upper limit for the credit ratings of companies within the country, as the government bails out important companies - **Rating Outlook** - Indicates the view regarding the potential direction of a long-term credit rating over the intermediate term (typically 6 months to 2 years) - Positive = a rating may be raised \*\* want to enter a country like this \*\* - Negative = a rating may be lowered - Stable = a rating is not likely to change - **The US Government's Credit Rating** - Fitch downgraded its US credit rating from AAA to AA+ because of its debt - It will take a while for the US to pay the debt back, so the rating as lowered by all three agencies - **Most Problematic Factors for Exporting** - **FILL OUT CHART?** **PRESENTATION 8** **Presentation 8: MNE Strategies** - **What is MNE?** - Multinational enterprises that produce goods and provide services in many countries - They are large, have many employees, and have revenue in the billions -- they operate in more than 100 countries - Ex: IBM, car companies, Nestle, etc. - Aka. MNC (multinational corporations) - **Marketing Mix (the 4 P's)** - *Product* - Functionality - Appearance/packaging - Quality - Branding/guarantee - Returns/features - *Pricing* - List/selling price - Discounts/payment arrangements - Credit terms - Bundling - *Promotion* - Sponsorships - Advertising / PR activities - Message - Media/sales people - *Place* - Distribution channels - Logistics / service levels - Store locations - Inventory / transport - Market coverage - Assortment - Ex: Nestle, who has 8K products in 188 countries, they have a lot of questions and overall decisions from the Marketing Mix (which is a lot) - The most important element of international strategy for an MNE is how to manage these large operations & millions of decisions - **Standardization vs Adaptation** - A central research question in the field of international business/marketing - Examines the conditions that support standardization and adaptation, which firms can benefit from it, how customization should be implemented, and what is required to successfully implement local modifications - MNE's international strategies are based on this question - Not a black and white answer: some aspects will include one and some will include the other - **Standardization** - (from hard to easy): Pricing, Distribution, Sales Force, Promotion, Product, Image, Objective - *Is standardization equally relevant to all industries?* - Likely not because each product provides a different solution; in some industries, you must adapt than standardize and in others you don't - Most industries in beverages, foods, and banking are more likely to adapt instead of standardizing, while pharmaceuticals, aircrafts, and computer companies are more likely to standardize - **Theoretical Background for Standardization: a**ccording to Levitt, the world is becoming a common marketplace where people, regardless of location, are desiring the same products and lifestyles; companies should concentrate on satisfying universal instead of local needs - **Standardization Advantages** - Economies of scale - Consistent image of the firm across markets and countries - International activities are better controlled and supervised - The ability to utilize new ideas/products on a broad basis - **Adaptation** - **Adaptation Advantages** - The motivation of local managers is higher - The solution is tailored to meet the preferences of the local customers - Responding quickly to customer needs and taking advantage of the target country's opportunities - **MNE Strategies** - The term "strategy" does not refer to the entire company's strategy, just an overarching framework for MNE's international activities - Theories are conceptual frameworks that provide different perspectives - As opposed to the textbook's 4 types of strategies, we'll study only 3 - **Pressures for Cost Reduction** - When major competitors are located in low-cost locations - When there's a persistent excess capacity - Where consumers have high bargaining power and face low switching costs - **Pressure for Local Responsiveness** - Firms facing the following pressures need to differentiate their products and marketing strategies in each country: - Differences in consumer tastes and preferences - Differences in infrastructure and traditional practices - Differences in distribution channels - Host-government demands - **Global Strategy** - Low need for local responsiveness, high need for global integration (aka. cost reduction) - Standardized products are offered in different countries, and the strategy is determined by the MNE's headquarters - *Characteristics*: - Focusing on cost reduction and achieving economies of scale - The products are generally the same in the home country and at the destination - *Risks*: - Giving up local opportunities for growth - The units in different countries need to share resources and coordinate their efforts - **Multidomestic Strategy** - High need for local responsiveness, low need for global integration - The strategic and operational decisions are decentralized down to each country's business unit to enable localization - *Characteristics*: - Due to the significance differences between the markets, adjustments are necessary to meet the needs of local customers - Business units are independent of one another - A separate focus on each market's competition - *Disadvantages*: - Increasing uncertainty to the entire corporation - Implementing an effective multidomestic strategy is complex and expensive - **Transnational Strategy** - High need for local responsiveness, high need for global integration - This strategy aims to achieve both global efficiency and local effectiveness - It's difficult to implement because it requires simultaneously contradictory requirements: - On one hand, central supervision and coordination in order to achieve efficiency - On the other hand, decentralization in order to achieve local response - **The Rise of Regionalism**: regional convergence of tastes and preferences can influence product offerings within a bloc of nations - EU and the eurozone - North America and USMCA - Latin America - Greater China, Hong Kong, and Singapore - Middle East - Russia and former Soviet states - MNE Strategies Continuum - \ - Multidomestic strategy Global strategy - Regional Strategy - Transnational Strategy **PRESENTATION 9** **Presentation 9: Entry Mode** - **Opening example:** An American pharmaceutical manufacturer is considering entering a certain country. Three possible options: - *Exporting* -- manufacturing the drug in the USA and exporting it to the destination country - *Licensing* -- allowing a local company in the destination country to produce it - *Factory* (subsidiary) in destination country -- the American company will produce the drug in the destination country under its full supervision - **Selecting an Entry Mode** - There is no one ideal entry mode that should be pursued - Each entry mode has its own advantages and disadvantages - It's possible for two firms manufacturing the same product to enter the same country via different entry modes - Multiple entry modes can be used by a firm for different products in the same country - **Entry Modes & intermediates** - Entry modes differ based on 2 key parameters: - The extent of the firm's control over operational and marketing mix decisions - The level of risk for the firm - *Intermediaries* = companies or individuals that are familiar with the target country and its culture/practices \--\> they help the manufacturer to sell their product by control over operational decisions and the marketing mix \--\> manufacturers pay intermediaries - **Entry Mode Hierarchy** - From high to low: *wholly owned subsidiary, acquisition, JV, franchising, licensing, turnkey project, direct exporting, indirect exporting* - The lower the entry mode, the company relies MORE on intermediaries - The higher the entry mode, the company relies LESS on intermediaries and is responsible for more decisions/aspects within the target country - **Factors Affecting Entry Mode Decisions:** when selecting an entry model, several factors should be considered: - Destination environment - Transportation costs - Trade barriers - Political risks - Economic risks - Industry's conditions - Foreign competitors - Firm\'s resources and capabilities - RBV (resource-based view): provides tools to analyze resources and capabilities of a company - Firm's business goals - Psychological aspects can affect this decision - If risk taker \--\> low entry mode (will invest in challenges) - **Entry Modes (low to high)** - **Exporting** - Refers to the selling and spending of goods and services to another country - No investments in foreign production facilities are needed - Often the first method firms use to enter foreign market (cheap and easy) - 2 sub-categories: **indirect exporting** (exporting through independent intermediaries; domestic purchasing and piggybacking) and **direct exporting** (taking a proactive approach to exporting which requires time and resources; agents & distributors) - Ex of indirect: *domestic purchasing* (foreign organization purchases the product for export to another country; little control over choice of markets entered; for longer term, need a more proactive approach) - Ex of indirect: *piggybacking* (an established international distribution network of one manufacturer used to carry products of a second \--\> particularly good for firms from developing countries) - Ex of direct: *agents* (individuals or independent companies acting on behalf of the exporter, in order to obtain orders on a commission basis \--\> help you find customers, NOT buy the product) - Ex of direct: *distributors* (actually buys the product from the manufacturer & bears the burden of selling it) - **Advantages:** low cost, low risk, firms may achieve experience curve and location economies, & favorable government policies - **Disadvantages**: lower cost manufacturing locations may exist, transport costs can be high, long lead time, tariff barriers can make it uneconomical, foreign distributor fail to act in the exporter's best interest, sharing profits with intermediaries, foreign exchange risks - **Experience Curve Effect** - - **Turnkey Projects** - Involve a contractor who handles every detail of the project for a foreign client - At completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation - Examples: hotels, chemical factories, farms, greenhouses, etc. - **Advantages:** earn great economic returns from the know-how required to assemble and run a technologically complex process, less risky than conventional FDI - **Disadvantages:** the firm has no long-term interest in the country, can create a competitor - **Licensing** - A licensor grants the rights to intangible property to another entity for a specified time period and receives a royalty fee in return - Long-term relationship - Types of Licensing: - **Trademark** (the licensee is granted the right to use a trademark for a limited and specified purpose) - **Technology** (the licensee is granted the right to use the licensor's software or other intellectual property asset) - **Patents** (the licensee is granted the right to use a patented process or technology) - **Advantages**: firm doesn't bear development costs and risks associated with opening a foreign market, firm avoids trade barriers, and long-term agreement (income source?) - **Disadvantages:** firm doesn't have the tight control over manufacturing necessary to realize experience curve and location economies, potential for loss of proprietary (or intangible) technology or property, no guarantee for revenue, risk of diminished reputation - **Franchising** - The franchisor grants the franchisee the right to use a complete business concept/system - There are benefits to franchising for both international business and domestic use - This host country entity can be either a franchisee or a master franchisee (sub-franchisor) - More common in the service industry (ex: Burger King, Subway, KFC, Great Clips, etc.) - *\*\* Franchising vs licensing*: licensing is much more common in manufacturing industries (chemical, pharmaceutical) while franchising is more common in service (like food chains) - **Advantages**: low risk, fast expansion - **Disadvantages:** quality control (putting your company's image in the hands of another firm, which might not be accurately representative) - **Joint Ventures** - Establishment of a firm that is jointly owned by 2 or more otherwise independent firms - Normally a 50-50% ownership \--\> if not equal, it's called *strategic alliance* - Each one of the parent companies has a certain expertise that contributes to the JV - **Disadvantages:** firm risks giving control of its technology to its partner, shared ownership can lead to conflicts and battles for control if goals and objectives differ or change over time, firm may not have the tight control over subsidiaries that it might need to realize experience curve - **Advantages:** firm can benefit from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems, and business systems, shares the costs and risks of opening a foreign market with a partner, can help firms minimize the risk of nationalization or other adverse government interference - **Acquisition** - Defined as a corporate transaction in which one company purchases either a portion or all another company's shares or assets - **Advantages**: quick to execute, enable firms to preempt their competitors, can be less risky than greenfield ventures - **Disadvantages:** many acquisitions are not successful especially cross border M&A - **Wholly Owned Subsidiaries** - Set up a new operation in that country, called a greenfield venture; firm owns 100% of the stock - **Advantages:** reduce the risk of losing control over core competencies, allow for tight control over operations in different countries necessary for engaging in global strategic coordination, may be required if a firm is trying to realize location and experience curve economies - **Disadvantages:** firm bears the full costs and risks of setting up overseas operations -