International Business Chapter 5-7 Trading Internationally PDF

CHAPTER 5 TRADING INTERNATIONALLY For use with International Business, 3e by Mike Peng and Klaus Meyer 1 9781473758438 © 2019 Cengage Learning  Why Do Nations Trade? Most nations actively participate in international trade – consisting of exporting (...

CHAPTER 5 TRADING INTERNATIONALLY For use with International Business, 3e by Mike Peng and Klaus Meyer 1 9781473758438 © 2019 Cengage Learning  Why Do Nations Trade? Most nations actively participate in international trade – consisting of exporting (selling abroad) and importing (buying from abroad). Trade is undertaken by ‘firms from different nations’ – rather than by governments. Trade contributes to the trade deficit (a surplus of imports over exports) or to the trade surplus (a surplus of exports over imports) of nation states. For use with International Business, 3e by Mike Peng and Klaus Meyer 2 9781473758438 © 2019 Cengage Learning  For use with International Business, 3e by Mike Peng and Klaus Meyer 3 9781473758438 © 2019 Cengage Learning Table 5.1 Continued For use with International Business, 3e by Mike Peng and Klaus Meyer 4 9781473758438 © 2019 Cengage Learning  Theories of International Trade The theories of international trade are examined in the order in which they evolved: 1) Mercantilism 2) Absolute advantage 3) Comparative advantage 4) Factor endowment theory 5) Product life cycle 6) Strategic trade 7) National competitive advantage. The first four are often regarded as classical trade theories. The last three are viewed as modern trade theories. For use with International Business, 3e by Mike Peng and Klaus Meyer 5 9781473758438 © 2019 Cengage Learning  Classical Theories In summary, classical theories, (1) mercantilism, (2) absolute advantage, (3) comparative advantage, and (4) factor endowments, evolved from approximately 300 years ago to the beginning of the 20th century. More recently, three modern theories (outlined next) emerged: 1) Product life cycle 2) Strategic trade theory 3) National competitive advantage of industries For use with International Business, 3e by Mike Peng and Klaus Meyer 6 9781473758438 © 2019 Cengage Learning  Product Life Cycle Vernon developed the product life cycle theory, which was the first dynamic theory to account for changes in the patterns of trade over time. Vernon divided the world into three categories: 1) Lead innovation nation (which, according to him, is typically the USA) 2) Other developed nations 3) Developing nations For use with International Business, 3e by Mike Peng and Klaus Meyer 7 9781473758438 © 2019 Cengage Learning  Product Life Cycle This theory has been criticized on two accounts: 1) It assumes that the USA will always be the lead innovation nation for new products. 2) It assumes a stage-by-stage migration of production that takes at least several years (if not decades). An increasing number of firms now simultaneously launch new products (such as iPods or game consoles) around the globe. For use with International Business, 3e by Mike Peng and Klaus Meyer 8 9781473758438 © 2019 Cengage Learning  Strategic Trade Theory This suggests that strategic intervention by governments in certain industries can enhance their odds for international success. First mover advantage Advantage that first entrants enjoy and do not share with late entrants. Strategic Trade Policy Government subsidies inspired by strategic trade theory. For use with International Business, 3e by Mike Peng and Klaus Meyer 9 9781473758438 © 2019 Cengage Learning  For use with International Business, 3e by Mike Peng and Klaus Meyer 10 9781473758438 © 2019 Cengage Learning  National Institutions and International Trade There are two broad types of trade barriers: (1) Tariff barriers (2) Nontariff barriers (NTBs) As a major tariff barrier, an import tariff is a tax imposed on imports. For use with International Business, 3e by Mike Peng and Klaus Meyer 11 9781473758438 © 2019 Cengage Learning  Non-Tariff Barriers Taken together, trade barriers reduce or eliminate international trade. NTBs include: (1) Subsidies (2) Import quotas (3) Export restraints (4) Local content requirements (5) Administrative practices (6) Antidumping duties For use with International Business, 3e by Mike Peng and Klaus Meyer 12 9781473758438 © 2019 Cengage Learning  Non-Tariff Barriers – Import quotas are restrictions on the quantity of imports. Import quotas are worse than tariffs because with tariffs, foreign goods can still be imported if tariffs are paid. – Import quotas are protectionist and there are political costs that countries have to shoulder in largely pro-free trade environments. – Voluntary export restraints (VERs) have been developed to show that on the surface, exporting countries voluntarily agree to restrict their exports. – The arsenal of trade warriors also includes anti-dumping duties levied on imports that have been sold at less than a ‘fair’ price – or ‘dumped’ – and thus harm domestic firms. For use with International Business, 3e by Mike Peng and Klaus Meyer 13 9781473758438 © 2019 Cengage Learning Impact of Trade Barriers Was the EU right to slam quotas on imports of clothing from China? For use with International Business, 3e by Mike Peng and Klaus Meyer 14 9781473758438 © 2019 Cengage Learning  Economic Arguments Against Free Trade? The economic arguments against free trade include: a) The need to protect domestic industries: At the height of the recession in 2009, British workers at the Lindsey oil refinery went on strike to protest against IREM, an Italian construction company, bringing its Italian and Portuguese workers into the country to conduct expansion work. b) The necessity to shield infant industries: If domestic firms are as young as ‘infants’, in the absence of government intervention, they stand no chance of surviving and will be crushed by mature foreign rivals. Thus, it is imperative that governments level the playing field by assisting infant industries. For use with International Business, 3e by Mike Peng and Klaus Meyer 15 9781473758438 © 2019 Cengage Learning  Political Arguments Against Free Trade? Political arguments against free trade advance a nation’s political, social and environmental agenda regardless of possible economic gains from trade. These arguments include: (1) National security (2) Consumer protection (3) Foreign policy (4) Environmental and social responsibility For use with International Business, 3e by Mike Peng and Klaus Meyer 16 9781473758438 © 2019 Cengage Learning Implications For Action For use with International Business, 3e by Mike Peng and Klaus Meyer 17 9781473758438 © 2019 Cengage Learning  CHAPTER 6 INVESTING ABROAD DIRECTLY For use with International Business, 3e by Mike Peng and Klaus Meyer 18 9781473758438 © 2019 Cengage Learning  FDI Vocabulary There are two primary kinds of international investment: Foreign portfolio investment (FPI) An investment in a portfolio of foreign securities such as stocks and bonds that do not entail the active management of foreign assets. FPI is ‘foreign indirect investment’. Foreign direct investment (FDI) Defined by the United Nations as involving an equity stake of 10% or more in a foreign-based enterprise. For use with International Business, 3e by Mike Peng and Klaus Meyer 19 9781473758438 © 2019 Cengage Learning  Figure 6.2 Horizontal FDI Horizontal FDI duplicates its home country-based activities at the same value chain stage in a host country through FDI. Vertical FDI is a type of FDI in which a firm moves upstream or downstream in different value chain stages in a host country. For use with International Business, 3e by Mike Peng and Klaus Meyer 20 9781473758438 © 2019 Cengage Learning  If a firm through FDI moves upstream or downstream in different value chain stages in a host country, we label this vertical FDI. Upstream vertical FDI a type of vertical FRI in which a firm engages in an upstream stage of the value. Downstream vertical FDI a type of vertical FDI in which a firm engages in a downstream stage of the value chain in two different countries. For use with International Business, 3e by Mike Peng and Klaus Meyer 21 9781473758438 © 2019 Cengage Learning  MNE versus non-MNE An MNE, by definition, is a firm that engages in FDI. Note that non-MNE firms can also do business abroad by (1) exporting and importing, (2) licensing and franchising, (3) outsourcing, (4) engaging in FPI or other means. What sets MNEs apart from non-MNEs is FDI. In 1990, there were 37,000 MNEs, with 170,000 foreign affiliates. By 2009, more than 82 000 MNEs (more than double the 1990 number) managed about 810 000 foreign affiliates (almost five times the 1990 number). Clearly, there has been a proliferation of MNEs lately. For use with International Business, 3e by Mike Peng and Klaus Meyer 22 9781473758438 © 2019 Cengage Learning  Why Do Firms Engage in FDI? OLI paradigm proposes that FDI is the most appropriate form of international business if three conditions are met: 1. Ownership advantages (O-advantages) Resources of the firm that are transferable across borders, and enable the firm to attain competitive advantages abroad. 2. Locational advantage (L-advantages) Advantages enjoyed by firms operating in certain locations. 3. Internalization advantages (I-advantages) Advantages of organizing activities within a multinational firm rather than using a market transaction. For use with International Business, 3e by Mike Peng and Klaus Meyer 23 9781473758438 © 2019 Cengage Learning  For use with International Business, 3e by Mike Peng and Klaus Meyer 24 9781473758438 © 2019 Cengage Learning Location-bound resources Resources that cannot be transferred abroad. Do firms that are successful domestically have what it takes to win internationally? For use with International Business, 3e by Mike Peng and Klaus Meyer 25 9781473758438 © 2019 Cengage Learning  Location Advantages Five reasons firms set up close to their markets 1. Protectionism in the form of tariffs or non-tariff barriers, may inhibit exports. However MNEs can overcome such barriers by setting up local production. 2. Transportation costs especially over long distances for e.g. perishable, breakable, heavy or bulky products, can be a major barrier. Local production allows serving a market at lower costs. 3. Direct interaction with the customer e.g. suppliers to the automotive industry need to produce near manufacturers to integrate into their supply chain. For use with International Business, 3e by Mike Peng and Klaus Meyer 26 9781473758438 © 2019 Cengage Learning  Location Advantages 4. Production and sale of some services cannot be physically separated e.g. hotels, banking or consultancy. 5. Marketing assets may be more important for a fast-entry strategy. FDI enables MNEs to acquire local firms which control sought-after assets, e.g. distribution networks and brand names. For use with International Business, 3e by Mike Peng and Klaus Meyer 27 9781473758438 © 2019 Cengage Learning  Other Location Advantages Resources as L-advantages Agglomeration as L-advantages Agglomeration – the location advantages that arise from the clustering of economic activities in certain locations. Institutions as L-advantages For use with International Business, 3e by Mike Peng and Klaus Meyer 28 9781473758438 © 2019 Cengage Learning  Internalization Advantages A key advantage of FDI over other modes is the ability to replace (internalize) external market relationships. One firm (the MNE) then owns, controls and manages the activities in two or more countries. Transaction costs are the costs of organizing a transaction, e.g. searching for partners, monitoring product quality and enforcing contracts. Also sub-optimal allocation of resources due to unrealized transactions (opportunity costs). High transaction costs can result in market failure. For use with International Business, 3e by Mike Peng and Klaus Meyer 29 9781473758438 © 2019 Cengage Learning  Asset specificity: an investment that is specific to a business relationship. Market failure: imperfections of the market mechanism that make some transactions prohibitively costly. For use with International Business, 3e by Mike Peng and Klaus Meyer 30 9781473758438 © 2019 Cengage Learning  FDI Versus Licensing There is a choice between licensing the technology to a local firm and FDI establishing its own production facilities. Licensing – Firm A’s agreement to give Firm B the rights to use A’s proprietary technology or trademark for royalty fee paid to A by B. Dissemination risk – The unauthorized diffusion of firm-specific know-how. – If a foreign company grants a license to a local firm to manufacture or market a product, ‘it runs the risk of the licensee, or an employee of the licensee, disseminating the know-how or using it for purposes other than those originally intended’. For use with International Business, 3e by Mike Peng and Klaus Meyer 31 9781473758438 © 2019 Cengage Learning  FDI Versus Licensing Managing proprietary assets through FDI does not completely shield firms from dissemination risks, but FDI is better than licensing that provides no such management control. FDI provides more direct and tighter control over foreign operations, but FDI is likely to more expensive than licensing. For use with International Business, 3e by Mike Peng and Klaus Meyer 32 9781473758438 © 2019 Cengage Learning FDI Versus Outsourcing How does tacit knowledge help Carrefour operate stores in Middle East? For use with International Business, 3e by Mike Peng and Klaus Meyer 33 9781473758438 © 2019 Cengage Learning  For use with International Business, 3e by Mike Peng and Klaus Meyer 34 9781473758438 © 2019 Cengage Learning  National Institutions and FDI Consensus is that FDI leads to a win-win situation for both home and host countries. Most countries retain some institutions that either (1) restrict the presence of FDI or (2) regulate the operations of FDI. Why was the sale of US ports to Dubai Ports World controversial? For use with International Business, 3e by Mike Peng and Klaus Meyer 35 9781473758438 © 2019 Cengage Learning  Debates and Extensions Sovereign wealth funds (SWF) – ‘a state-owned investment fund of financial assets such as stocks, bonds, real estate or other financial instruments funded by foreign exchange assets’. SWFs undertake FDI, yet they operate differently to conventional MNEs: o They are state-owned or controlled. o They typically acquire equity stakes sufficient to influence target forms, yet they do not get involved in day-to-day management or integrate operations. For use with International Business, 3e by Mike Peng and Klaus Meyer 36 9781473758438 © 2019 Cengage Learning  For use with International Business, 3e by Mike Peng and Klaus Meyer 37 9781473758438 © 2019 Cengage Learning  Implications For Action Carefully assess whether FDI is justified in light of other foreign entry modes such as outsourcing and licensing. Pay careful attention to the location advantages in combination with the firm’s strategic goals. Be aware of the institutional constraints and enablers governing FDI and enhance legitimacy in host countries. For use with International Business, 3e by Mike Peng and Klaus Meyer 38 9781473758438 © 2019 Cengage Learning CHAPTER 10 SOCIALLY RESPONSIBLE BUSINESS For use with International Business, 3e by Mike Peng and Klaus Meyer 39 9781473758438 © 2019 Cengage Learning  Opening Case: Starbucks: Standards in the Spotlight Do Starbucks’ customers really care where the coffee is coming from? What is ethical practice for growing coffee? For use with International Business, 3e by Mike Peng and Klaus Meyer 40 9781473758438 © 2019 Cengage Learning  Stakeholders ‘any group or individual who can affect or is affected by the achievement of the organization’s objectives’ Corporate Social Responsibility (CSR) A ‘firms’ consideration of, and response to, issues beyond the narrow economic, technical, and legal requirements of the firm to accomplish social benefits along with the traditional economic gains which the firm seeks’. Triple bottom line The economic, social and environmental performance that simultaneously satisfies the demands of all stakeholder groups. Sustainability The ability to meet the needs of the present without compromising the ability of future generations to meet their needs around the world. For use with International Business, 3e by Mike Peng and Klaus Meyer 41 9781473758438 © 2019 Cengage Learning  For use with International Business, 3e by Mike Peng and Klaus Meyer 42 9781473758438 © 2019 Cengage Learning  Primary and Secondary Stakeholder Groups Primary stakeholder groups The constituents on which the firm relies for its continuous survival and prosperity. Secondary stakeholder groups Those who influence or affect, or are influenced or affected by, the corporation, but are not engaged in transactions with the corporation and are not essential for its survival. Non-governmental organizations (NGOs) Organizations, such as environmentalists, human rights activists and consumer groups that are not affiliated with governments. For use with International Business, 3e by Mike Peng and Klaus Meyer 43 9781473758438 © 2019 Cengage Learning  For use with International Business, 3e by Mike Peng and Klaus Meyer 44 9781473758438 © 2019 Cengage Learning  Why Do Shareholders Matter? Instrumental view A view that treating stakeholders well may indirectly help financial performance. Normative view A view that firms ought to be self-motivated to ‘do it right’ because they have societal obligations. Shared value creation An approach to CSR that focuses on activities that are good for both the firm and its stakeholders. For use with International Business, 3e by Mike Peng and Klaus Meyer 45 9781473758438 © 2019 Cengage Learning  Why Do Shareholders Matter? Do MNEs have moral duties towards local communities? For use with International Business, 3e by Mike Peng and Klaus Meyer 46 9781473758438 © 2019 Cengage Learning  Shareholder Conflicts The challenge is not only to balance between shareholders and other stakeholders, but between different groups of stakeholders. For use with International Business, 3e by Mike Peng and Klaus Meyer 47 9781473758438 © 2019 Cengage Learning  CSR in the Global Economy Acting on the global stage exposes MNEs to more complex ethical issues that increase the importance of creating appropriate CSR policies. To attract foreign direct investment, developing countries may thus enter a ‘race to the bottom’ by lowering (or at least not tightening) environmental standards. For use with International Business, 3e by Mike Peng and Klaus Meyer 48 9781473758438 © 2019 Cengage Learning  CSR in the Global Economy Labour: how to treat those who work for you abroad Labour standards – rules for the employment of labourers including working hours, minimum pay, union representation and child labour. Footloose plants – plants that can easily be relocated. Working poor The miserable working conditions in some parts of the world are periodically highlighted in news reports and scholarly studies. In Focus 10.3 illustrates quotations from El Salvador to New York, showing poor treatment of workers is not culture-specific, but often typical of early stages of industrialization. For use with International Business, 3e by Mike Peng and Klaus Meyer 49 9781473758438 © 2019 Cengage Learning  Standards of Engagement In Europe, many consumers – and NGOs – expect that their shoes and their clothes are made by people being paid and treated fairly. This raises two questions: 1) Are MNEs responsible for what happens in other firms? 2) How can they be sure what actually happens in a sub- suppliers’ plant? For use with International Business, 3e by Mike Peng and Klaus Meyer 50 9781473758438 © 2019 Cengage Learning  Standards of Engagement or Code of Conduct MNEs have standards of engagement that they impose on suppliers. – These establish minimum standards for working hours, age of workers, health and safety, wages and other aspects of operating a manufacturing plant. – With these standards come monitoring and enforcement regimes that should help suppliers achieve higher standards, while – after appropriate warnings – discontinuing relationships with non- compliant suppliers. This allows MNEs to shift from a focus on compliance with the standards of engagement to a commitment approach that involves joint problem solving, information exchange and the diffusion of best practices. For use with International Business, 3e by Mike Peng and Klaus Meyer 51 9781473758438 © 2019 Cengage Learning Institutions, Stakeholders and CSR For use with International Business, 3e by Mike Peng and Klaus Meyer 52 9781473758438 © 2019 Cengage Learning  Debates and Extensions Is CSR good for financial performance? – Some studies indeed report a positive relationship, others find a negative relationship or no relationship. – Consistent CSR policies over long time periods seem to have a positive effect, while short-term or temporary initiatives do not. Is CSR good for society? – Critics describe CSR activity as ‘window dressing’, and assert that the firms only do what is good for themselves i.e. shareholders. – NGOs, journalists and politicians have asserted that firms also have other obligations to their stakeholders. For use with International Business, 3e by Mike Peng and Klaus Meyer 53 9781473758438 © 2019 Cengage Learning  Debates and Extensions Local norms versus hypernorms Hypernorms: norms considered valid anywhere in the world. For use with International Business, 3e by Mike Peng and Klaus Meyer 54 9781473758438 © 2019 Cengage Learning Implications For Action For use with International Business, 3e by Mike Peng and Klaus Meyer 55 9781473758438 © 2019 Cengage Learning  Critical Discussion Questions 3. You find out that one of your suppliers, contrary to your code of conduct, is employing people aged 14 to 16 years of age. How do you react? 4. You are the PR officer of a major MNE in the chemicals industry. The media in your home country allege that your company is covering up an environmental disaster caused by subsidiary in India, in which several people died. How do you react? For use with International Business, 3e by Mike Peng and Klaus Meyer 56 9781473758438 © 2019 Cengage Learning  CHAPTER 11 STARTING INTERNATIONAL BUSINESS For use with International Business, 3e by Mike Peng and Klaus Meyer 57 9781473758438 © 2019 Cengage Learning  Opening Case: Spotify: Going Global, One Song at a Time How has Spotify managed to successfully enter and establish itself in markets across the world to become a global player? For use with International Business, 3e by Mike Peng and Klaus Meyer 58 9781473758438 © 2019 Cengage Learning  Small and Medium Enterprises (SMEs) According to the EU, SMEs are companies with less than 250 employees. They have fewer resources than large firms, and cannot simply buy up local firms to establish a foothold in a foreign market. Compared with domestic business, transaction costs are higher in international business. Foreign entry requires entrepreneurs, who are leaders in identifying opportunities and taking decisions to exploit them. Challenges of entrepreneurial firms occur at early stages of internationalization, including the basic transactions they may undertake. How do companies progress from their first steps to higher levels of international business; and why are some firms, known as ‘born globals’, able to jump ahead and internationalize early? For use with International Business, 3e by Mike Peng and Klaus Meyer 59 9781473758438 © 2019 Cengage Learning Going International Firms can act as sellers or buyers or both. In international trade, the sellers are known as exporters, and the buyers as importers. For use with International Business, 3e by Mike Peng and Klaus Meyer 60 9781473758438 © 2019 Cengage Learning  Sporadic Exporters Many firms start international business through direct exports, that is the sale of products to customers in another country. This strategy is attractive for less experienced firms because they can reach foreign customers directly. When domestic markets downturn, sales abroad may compensate. This is called sporadic (or passive) exporting. Letter of credit (L/C) states that the importer’s bank will pay a specific sum of money to the exporter upon delivery. For use with International Business, 3e by Mike Peng and Klaus Meyer 61 9781473758438 © 2019 Cengage Learning  Intermediaries Direct exports represent the most basic mode capitalizing on economies of scale in production concentrated in the home country, and affording better control over distribution. Indirect exports – exporting through an intermediary. – Intermediaries are more common for standardized products and commodities (e.g. textiles, woods and meats), where competition focuses on price. - Local sales agents receive a commission on sales. - Distributors trade on their own account; in other words, they buy the products and then sell them on in the local market at their own risk and using their own channels. For use with International Business, 3e by Mike Peng and Klaus Meyer 62 9781473758438 © 2019 Cengage Learning What are the merits of participating in a trade fair? For use with International Business, 3e by Mike Peng and Klaus Meyer 63 9781473758438 © 2019 Cengage Learning  International Contracts Contract Licensing – Firm A’s agreement to give Firm B the rights to use A’s proprietary technology (e.g. patent) or trademark for a royalty fee paid to A by B. – Licensor is the company granting a license. – Licensee is the company receiving a license. Franchising represents a similar idea, but typically covers entire business concepts: not only the product, service and trademark, but also the marketing strategy, operation manuals and quality control procedures. – Franchisor is the company granting a franchise. – Franchisee is the company receiving a franchise. The licensor/franchisor does not have tight control over production and marketing, and thus how their technology and brand names are used. For use with International Business, 3e by Mike Peng and Klaus Meyer 64 9781473758438 © 2019 Cengage Learning  Other Forms of Co-operation Turnkey project – A project in which clients pay contractors to design and construct new facilities and train personnel. Design and build (DB) contract – A contract combining the architectural or design work with the actual construction. Build–operate–transfer (BOT) – A contract combining the construction and temporary operation of a project eventually to be transferred to a new owner. Consortium – A project based temporary business owned and managed jointly by several firms. Subcontracting – A contract that involves outsourcing of an intermediate stage of a value chain. For use with International Business, 3e by Mike Peng and Klaus Meyer 65 9781473758438 © 2019 Cengage Learning  Resources to Support Internationalization Experiential knowledge – Knowledge learned by engaging in the activity and context. 1. Uppsala model is a model of internationalization processes focusing on learning processes. Sweden’s IKEA took 20 years (1943–1963) before entering Norway. Then it focused on building Western European operations. Only more recently has it accelerated its internationalization. 2. Network internationalization model Over time, firms in a network reinforce each others’ internationalization processes, thus the expertise in a firm’s network grows both with new members joining, and with existing members gaining more experience. 3. Stages models of internationalization Internationalization seen as a slow stage-by-stage process an SME goes through. For use with International Business, 3e by Mike Peng and Klaus Meyer 66 9781473758438 © 2019 Cengage Learning Internationalization Process Models For use with International Business, 3e by Mike Peng and Klaus Meyer 67 9781473758438 © 2019 Cengage Learning  Accelerating Resources Acquisition Born global (international new venture) Start-up company that from inception seeks to derive significant competitive advantages from the use of resources and the sale of outputs in multiple countries. For use with International Business, 3e by Mike Peng and Klaus Meyer 68 9781473758438 © 2019 Cengage Learning  Institutions and Internationalization The ability of internationally inexperienced firms to engage in international business is to a large extent shaped by: 1. The institutional environment of the home country: Open economies with low trade barriers allow foreign entrants to challenge local firms, and thus indirectly encourage firms to pursue their opportunities abroad. 2. Institutional distance between the home and host countries: The extent of similarity or dissimilarity between the regulatory, normative and cognitive institutions of two countries. Cultural distance is the difference between two cultures along some identifiable dimensions. For use with International Business, 3e by Mike Peng and Klaus Meyer 69 9781473758438 © 2019 Cengage Learning  Debates and Extension Designing and combining entry modes – New forms of contracts are designed to share resources, responsibilities, risk and returns in ways that best suit the partners in the deal. – Foreign entry is often presented first and foremost. Foreign entry in the digital age – Exporters can use the internet to complement their traditional offerings. – From a resource-based perspective, the internet lowers the resource needs of entering international markets. – From an institution-based view, the key question is, whose rules of the game should e-commerce follow? Google adapted its search engines in China to censorship demands of the Chinese government in 2006, but threatened to withdraw when censorship requirements and privacy intrusions escalated in 2010. For use with International Business, 3e by Mike Peng and Klaus Meyer 70 9781473758438 © 2019 Cengage Learning  Implications For Action Table 11.4 Implications for action For use with International Business, 3e by Mike Peng and Klaus Meyer 71 9781473758438 © 2019 Cengage Learning Closing Case: 3D Printing Changes International Business Models How can 3D printing business models be rolled out internationally? 1. For start-ups developing 3D printing technologies, what are the main challenges in developing a variable business model? 2. What are the implications of the 3D printing revolution for production and supply chains of traditional manufacturing enterprises? For use with International Business, 3e by Mike Peng and Klaus Meyer 72 9781473758438 © 2019 Cengage Learning  Chapter Summary 3. Explain how institutions influence exporting behaviour: Institutions of the home environment shape the relative costs and risks associated with international versus domestic growth. Cultural and institutional distance increase the costs of doing business, and thus lead many firms to start international business in locations in close proximity to their origins. 4. Participate in two leading debates on early stage internationalization: A new line of research suggests focusing on the combination of different entry modes. The internet creates new challenges for resource exploitation and for interacting with institutions in many countries simultaneously. For use with International Business, 3e by Mike Peng and Klaus Meyer 73 9781473758438 © 2019 Cengage Learning  Chapter Summary 5. Draw implications for practice: Operations abroad should be designed to: (1) link with local contexts (2) facilitate learning (3) allow for flexibility Start-up businesses aiming for global markets may benefit from creating global structures from the outset. For use with International Business, 3e by Mike Peng and Klaus Meyer 74 9781473758438 © 2019 Cengage Learning  Critical Discussion Questions 3. Your company receives an enquiry by email from an unknown customer in Australia. The customer asks for detailed information about your latest high tech products, and envisages a very large order. How do you react? For use with International Business, 3e by Mike Peng and Klaus Meyer 75 9781473758438 © 2019 Cengage Learning  CHAPTER 12 FOREIGN ENTRY STRATEGIES For use with International Business, 3e by Mike Peng and Klaus Meyer 76 9781473758438 © 2019 Cengage Learning  Figure 12.1 The Building Blocks of an entry strategy Foreign subsidiaries are operations abroad set up by foreign direct investment. Entry strategy is a plan that specifies the objectives of an entry and how to achieve them. For use with International Business, 3e by Mike Peng and Klaus Meyer 77 9781473758438 © 2019 Cengage Learning  Establishing a Subsidiary Abroad Natural resource seeking FDI – Investors’ quest to pursue natural resources in certain locations. Market-seeking FDI – Investors’ quest to go after countries that offer strong demand for their products and services. Efficiency enhancing FDI – Investors’ quest to single out the most efficient locations featuring a combination of scale economies and low-cost factors. Capability-enhancing FDI – Investors’ quest for new ideas and technologies which upgrade their own technological and managerial capabilities. These four strategic goals, while analytically distinct, are not mutually exclusive. For use with International Business, 3e by Mike Peng and Klaus Meyer 78 9781473758438 © 2019 Cengage Learning Where to Enter? For use with International Business, 3e by Mike Peng and Klaus Meyer 79 9781473758438 © 2019 Cengage Learning  When to Enter? For use with International Business, 3e by Mike Peng and Klaus Meyer 80 9781473758438 © 2019 Cengage Learning  How to Enter? Modes of entry The format of foreign market entry. Non-equity modes A mode of entry that does not involve owning equity in a local firm. Equity modes A mode of entry (JVs that involved taking full or partial) equity ownership in a local firm. Wholly-owned subsidiary (WOS) – Subsidiary located in a foreign country that is entirely owned by the parent multi-national. For use with International Business, 3e by Mike Peng and Klaus Meyer 81 9781473758438 © 2019 Cengage Learning  The Resource Dimension Table 12.3 Equity modes of entry: advantages and disadvantages For use with International Business, 3e by Mike Peng and Klaus Meyer 82 9781473758438 © 2019 Cengage Learning  Scale of Entry: Commitment and Experience Resource-rich companies face a strategic choice between entering with a large up-front investment, or with a small foothold operation. Scale of entry: The amount of resource committed to foreign market entry. Platform investment: An investment that provides a small foothold in a market or location. For use with International Business, 3e by Mike Peng and Klaus Meyer 83 9781473758438 © 2019 Cengage Learning Acquisition Dynamics For use with International Business, 3e by Mike Peng and Klaus Meyer 84 9781473758438 © 2019 Cengage Learning  Implications For Action Table 12.6 Implications for action For use with International Business, 3e by Mike Peng and Klaus Meyer 85 9781473758438 © 2019 Cengage Learning  Chapter Summary 1. Explain why MNEs establish subsidiaries abroad (why to enter): Firms’ strategic goals can be grouped into four categories (1) natural resources, (2) market, (3) efficiency and (4) innovation. 2. Identify relevant location-specific advantages that attract foreign investors (where to enter): Foreign entrants seek locational advantages that match their strategic objectives. 3. Compare and contrast first- and late-mover advantages (when to enter): First-movers can attain advantages such as early brand building, yet there are countervailing benefits for fast followers. 4. Compare and contrast alternative modes of entry (how to enter): Entry modes vary by the degree of control that entrants attain over the local operation. Entry modes provide access to local resources in different ways. For use with International Business, 3e by Mike Peng and Klaus Meyer 86 9781473758438 © 2019 Cengage Learning CHAPTER 13 COMPETITIVE DYNAMICS For use with International Business, 3e by Mike Peng and Klaus Meyer 87 9781473758438 © 2019 Cengage Learning  Dynamics of Competition Attack is an initial set of actions to gain competitive advantage. Counter-attack is a set of actions in response to an attack: – The awareness, motivation and capability (AMC) framework A conceptual framework indicating when firms are likely to attack and counter-attack each other. Blue ocean strategy: o A strategy of attack that avoids direct confrontation. o Haier’s entry into the US white goods market. o Although Haier dominated its home country, China, with a broad range of products, it chose to enter the US market in a low profile segment: compact refrigerators for hotels and student residences. For use with International Business, 3e by Mike Peng and Klaus Meyer 88 9781473758438 © 2019 Cengage Learning  Dynamics of Competition Oligopoly A market structure with only a small number of competing firms. Competitive dynamics The actions and responses undertaken by competing firms. Competitor analysis The process of anticipating a rival’s actions in order to both revise a firm’s plan and prepare to deal with rivals’ responses. Blue ocean strategy A strategy of attack that avoids direct confrontation with incumbents. AMC framework A conceptual framework of awareness, motivation, capability indicating when firms are likely to attack and counterattack each other. For use with International Business, 3e by Mike Peng and Klaus Meyer 89 9781473758438 © 2019 Cengage Learning  To Collude or Not to Collude? Collusion – Collective attempts between competing firms to reduce competition. Tacit collusion – Firms indirectly coordinate actions by signalling their intention to reduce output and maintain pricing above competitive levels. Explicit collusion – Firms directly negotiate output, fix pricing and divide markets. Cartel – An entity that engages in output- and price-fixing, involving multiple competitors. Prisoners’ dilemma – In game theory, a type of game in which the outcome depends on two parties deciding whether to cooperate or to defect. For use with International Business, 3e by Mike Peng and Klaus Meyer 90 9781473758438 © 2019 Cengage Learning Competition and Collusion For use with International Business, 3e by Mike Peng and Klaus Meyer 91 9781473758438 © 2019 Cengage Learning  Market Structures Concentration ratio % of total industry sales accounted for by the top 4, 8 or 20 firms. Price leader A firm that has a dominant market share and sets ‘acceptable’ prices and margins in the industry. Capacity to punish Sufficient resources possessed by a price leader to deter and combat defection. For use with International Business, 3e by Mike Peng and Klaus Meyer 92 9781473758438 © 2019 Cengage Learning  Institutions Governing Competition Collusive price setting Price setting by monopolists or collusion parties at a higher than competitive level. Leniency programme A programme that gives immunity to members of a cartel that first report the cartel to the authorities. Market division collusion A collusion to divide markets amongst competitors. For use with International Business, 3e by Mike Peng and Klaus Meyer 93 9781473758438 © 2019 Cengage Learning Resources Influencing Competition Value-creation – Firm has to create more value for the customers than their competition. Rarity – Either by nature or nurture, some assets are very rare and generate significant advantage. Organization – Some firms are better organized for competition, e.g. stealth attacks and willingness to answers challenges ‘tit- for-tat’. Imitability – Most rivals watch each other to see how their rivals compete; fast-moving rivals perform better than passive or slow-moving firms. For use with International Business, 3e by Mike Peng and Klaus Meyer 94 9781473758438 © 2019 Cengage Learning  Formal Institutions: Anti-Dumping Dumping is when an exporter is (1) selling below cost abroad and (2) planning to raise prices after eliminating local rivals. However it is difficult to prove predatory pricing. Firstly it is not exactly clear what ‘cost’ is. Second when firms are found to be selling below cost, courts would want to see evidence that the initially incurred loss will subsequently be recovered, which is hard to provide. An OECD study in Australia, Canada, the EU and the US reports that 90% of the practices found to be unfairly dumping in these countries would never have been questioned under their own anti-trust laws if used by a domestic firm for a domestic sale. For use with International Business, 3e by Mike Peng and Klaus Meyer 95 9781473758438 © 2019 Cengage Learning  Competing in a Recession Survival strategies are designed to ensure survival by ensuring liquidity and positive cash flow. Survival strategies may achieve just that – survival – but not prosperity in the longer term. For use with International Business, 3e by Mike Peng and Klaus Meyer 96 9781473758438 © 2019 Cengage Learning  Long Term Survival Entrepreneurs may view a crisis as an opportunity to enter new markets. Conventionally, businesses try to look into the future by economic forecasting: a technique using econometric models to predict the likely future value of key economic variables. An alternative is scenario planning: a technique generating multiple scenarios of possible future states of the industry. Scenarios provide a basis for contingency plans, implemented when certain events happen or benchmarks are reached (i.e. plans devised for specific situations when things could go wrong). For use with International Business, 3e by Mike Peng and Klaus Meyer 97 9781473758438 © 2019 Cengage Learning  Local firms versus big MNEs Defender strategy – Leveraging local assets in areas in which MNEs are weak. Extender strategy – Leveraging home-grown competencies abroad. Dodger strategy – Cooperating through joint ventures with MNEs and sell- offs to MNEs. Contender strategy – A firm engaging in rapid learning and then expanding overseas. For use with International Business, 3e by Mike Peng and Klaus Meyer 98 9781473758438 © 2019 Cengage Learning  Implications For Action Table 13.3 Implications for action For use with International Business, 3e by Mike Peng and Klaus Meyer 99 9781473758438 © 2019 Cengage Learning  Chapter Summary 1. Explain how attacks and counter-attacks are used in dynamic competition: Attackers need to consider possible counter-attacks, which are driven by (1) awareness, (2) motivation and (3) capability. 2. Explain how and why firms sometimes like to collude: Collusion may enable firms to collectively earn higher return at the expense of their customers and/or suppliers. Industries primed for collusion tend to have (1) a smaller number of rivals, (2) a price leader, (3) homogeneous products, (4) high entry barriers and (5) high market commonality. Without talking directly to competitors, firms can signal to rivals by various means. For use with International Business, 3e by Mike Peng and Klaus Meyer 100 9781473758438 © 2019 Cengage Learning  Critical Discussion Questions 1. As CEO, you feel the price war in your industry is undermining profits for all firms. However, you have been warned by corporate lawyers not to openly discuss pricing with rivals, who you know personally (you went to school with them). How would you signal your intentions? 2. As a CEO of a French firm, you are concerned that your firm and your industry in the EU are being devastated by non-EU imports. Trade lawyers suggest filling an anti-dumping case against leading foreign rivals in China and assure you of a win. Would you file an anti-dumping case or not? Why? For use with International Business, 3e by Mike Peng and Klaus Meyer 101 9781473758438 © 2019 Cengage Learning  Critical Discussion Questions 3. As part of an attack, your firm (firm A) announces that in the next year, it intends to enter country X, where the competitor (firm B) is very strong. Your firm’s real intention is to march in country Y, where B is very weak. There is actually no plan to enter X. However in the process of trying to ‘fool’ firm B, customers, suppliers, investors and the media are also being intentionally misled. What are you the ethical dilemmas here? Do the pros of this action outweigh its cons? 4. You are running a restaurant and wish to serve your country’s leading brands of wine and beer to your customers. The distributor of these brands is happy to supply you on the condition that you exclusively sell these brands. How do you react? For use with International Business, 3e by Mike Peng and Klaus Meyer 102 9781473758438 © 2019 Cengage Learning  CHAPTER 14 GLOBAL STRATEGIES AND ACQUISITIONS For use with International Business, 3e by Mike Peng and Klaus Meyer 103 9781473758438 © 2019 Cengage Learning  Building Global Strategies Global strategies take advantage of operations spread across the world. There are many opportunities in global strategies, considering how companies can make best use of the diversity of the world. The AAA typology of strategies illustrates different ways in which firms can create value – integrating operations across countries: aggregation, adaptation and arbitrage. How do firms use acquisitions to develop the kinds of global operations that allow them to deploy these strategies on the global stage? How do institution- and resource-based views help explain the patterns and performance of acquisitions? For use with International Business, 3e by Mike Peng and Klaus Meyer 104 9781473758438 © 2019 Cengage Learning  Competitive Advantages of the Global Firm Table 14.1 Strategic advantages of global firms For use with International Business, 3e by Mike Peng and Klaus Meyer 105 9781473758438 © 2019 Cengage Learning  Global Business Models Table 14.2 AAA typology of global strategies For use with International Business, 3e by Mike Peng and Klaus Meyer 106 9781473758438 © 2019 Cengage Learning  Global Business Models Table 14.3 Levers of adaptation For use with International Business, 3e by Mike Peng and Klaus Meyer 107 9781473758438 © 2019 Cengage Learning  Growth by Acquisitions Acquisition – The transfer of the control of operations and management from one firm (target) to another (acquirer); – The former becoming a unit of the latter. – For example, Danisco (Opening Case) acquired Cultor of Finland and integrated it in its own operations; Cultor ceased to exist as a firm. Merger – The combination of operations and management of two firms to establish a new legal entity. – Merger in 2005 between Interbrew (Belgium) and Ambev (Brazil) created Inbev, which merged in 2009 with Anheuser Busch (USA) to form AB-Inbev. For use with International Business, 3e by Mike Peng and Klaus Meyer 108 9781473758438 © 2019 Cengage Learning  Mergers and Acquisitions Most large M&As are cross-border (international) M&As. They account for approximately 30 per cent of all M&As. In 2007 (a record year), M&A deals topped €2.9 trillion, of which €1.3 involved European companies. Most of the largest MNEs of the world have grown by acquisitions, as have many MNEs from emerging economies that recently entered the global stage. For use with International Business, 3e by Mike Peng and Klaus Meyer 109 9781473758438 © 2019 Cengage Learning Cross-Border Mergers and Acquisitions For use with International Business, 3e by Mike Peng and Klaus Meyer 110 9781473758438 © 2019 Cengage Learning Table 14.5 Motives for acquisitions For use with International Business, 3e by Mike Peng and Klaus Meyer 111 9781473758438 © 2019 Cengage Learning  Managing Acquisitions Even if potential synergies between two firms make an acquisition look promising, it still requires skillful management of the process both before and after the actual acquisition. These challenges are therefore considered high-risk strategy, and follows these steps: 1. Due diligence 2. Strategic fit 3. Organizational fit 4. Post-acquisition integration For use with International Business, 3e by Mike Peng and Klaus Meyer 112 9781473758438 © 2019 Cengage Learning  Causes of Acquisition Failures Due diligence: The assessment of the target firm’s financial status, resources and strategic fit. Strategic fit: The effective matching of complementary strategic capabilities. Organizational fit: The similarity in cultures, systems and structures. For use with International Business, 3e by Mike Peng and Klaus Meyer 113 9781473758438 © 2019 Cengage Learning  Acquisitions Versus Alliances An alternative to a full take-over of another firm is a collaboration with that firm is a strategic alliance. Joint ventures draw on competences of two (or more) parent firms. They are an attractive options if three conditions are met: 1. Two entities can together achieve something that neither could achieve on its own, for example market leadership in their industry or next- generation innovations. 2. The merged unit depends on inputs such as technologies from both parent firms that may be disrupted by legal separation (in other words, market transaction costs are high). 3. A full take-over is not feasible, perhaps because the competition authorities would object. A strategic alliance may consist of far-reaching operational collaboration, stopping short of full acquisition; or to prepare a full one. For use with International Business, 3e by Mike Peng and Klaus Meyer 114 9781473758438 © 2019 Cengage Learning Institutions Governing Acquisitions For use with International Business, 3e by Mike Peng and Klaus Meyer 115 9781473758438 © 2019 Cengage Learning  Debates and Extensions Hidden champions – International business is often presented as primarily a matter of big MNEs competing for market share. – Across Europe, firms with 1000 or 5000 employees operate on the global stage in a specific, narrowly defined industry. – They are leading in their selected niche markets worldwide with competitive advantages grounded in highly specialized technological competences that are exploited worldwide. Global focusing – A strategic shift from diversification to specialization which increases the international profile. – Acquisitions and divestments, the sale of business units, are often closely related. For use with International Business, 3e by Mike Peng and Klaus Meyer 116 9781473758438 © 2019 Cengage Learning  Figure 14.1 Nokia OY 1990-2014 Nokia ‘hit gold’ with its mobile handset design and marketing, restructuring and refocusing though different periods of transformation. Focusing and Refocusing Nokia For use with International Business, 3e by Mike Peng and Klaus Meyer 117 9781473758438 © 2019 Cengage Learning  Implications For Action Table 14.8 Implications for action For use with International Business, 3e by Mike Peng and Klaus Meyer 118 9781473758438 © 2019 Cengage Learning