International BusinessSession 2

International vs. DomesticOPPORTUNITIES1.Seek opportunities for growth

through market diversification2.Gain new ideas about products,

services, and business methods3.Better serve key customers that

have relocated abroad4.Be closer to supply sources, benefit

from global sourcing advantages, or gain flexibility in the sourcing of products

International vs. DomesticOPPORTUNITIES

5. Gain access to lower-cost or better-value factors of production

6. Develop economies of scale in sourcing, production, marketing, and R&D

7. Confront international competitors more effectively or thwart the growth of competition in the home market

FDI Based Explanations: Dunning’s Eclectic Paradigm

Three conditions determine whether or not a company will internalize via FDI:

1. Ownership-specific advantages – knowledge, skills, capabilities, relationships, or physical assets that form the basis for the firm’s competitive advantage

2. Location-specific advantages – advantages associated with the country in which the MNE is invested, including natural resources, skilled or low cost labor, and inexpensive capital

3. Internalization advantages – control derived from internalizing foreign-based manufacturing, distribution, or other value chain activities

Factors Relevant to Choice of Foreign Market Entry Strategy1. The goals and objectives of the firm, such as

desired profitability, market share, or competitive positioning;

2. The particular financial, organizational, and technological resources and capabilities available to the firm;

3. Unique conditions in the target country, such as legal, cultural, and economic circumstances, as well as distribution and transportation systems;

4. Risks inherent in each proposed foreign venture in relation to the firm’s goals and objectives in pursuing internationalization;

5. The nature and extent of competition from existing rivals, and from firms that may enter the market later;

6. The characteristics of the product or service to be offered to customers in the market.

Participants in International Business1. The focal firm – initiator of IB

transaction, including MNEs and SMEs

2. Distribution channel intermediary – specialist firm providing logistics and marketing services in the international supply chain

3. Facilitator – a firm providing special expertise in legal advice, banking, customs clearance, market research, and similar areas

Types of Focal Firms

Multi-National Enterprise Joint-Venture SME Born Global Firm NGOs

Common Characteristics of Born Global

Firms

· Emergence often associated with significant product/process breakthrough or innovation

· Products often involve advanced technology, substantial added value, superior quality, and differentiated design

· Internationalization typically via exporting and facilitated through network relationships

· Heavy user of advanced IT and communications technologies

Foreign Market Entry Strategies of Focal Firms

Cross-border business transactions can be grouped into three categories:

1. Trade: buying and selling of products2. Contractual exchange of services or

intangibles: buying and selling of services

3. Equity ownership in foreign operations: establishing foreign presence through direct investment

MODES of International Business Activities

Exporting (importing)Global sourcing (out-s, in-s,

offshore)Contract manufacturingLicensing and Franchising (mgmt.

contract)Foreign Direct Investment (FDI)Strategic Alliances (Joint Venture)Portfolio Investment

Exporting

Advantages Relatively low financial

exposure Permit gradual market

entry Acquire knowledge about

local market Avoid restrictions on foreign

investment

Disadvantages Vulnerability to tariffs and

NTBs Logistical complexities Potential conflicts with

distributors

Export Documentationquotation or pro forma invoicecommercial invoice is the actual demand

for payment issued by the exporter. It includes a description of the goods, the exporter’s address, delivery address, and payment terms.

A packing list, indicates the exact contents of the shipment.

The bill of lading is the basic contract between exporter and shipper.

The shipper's export declaration ("ex-dec”) lists the contact information of the exporter and the buyer (or importer), as well as a full description, declared value, and destination of the products being shipped.

The certificate of origin indicates the country where the product originates.

insurance certificate

Incoterms

Who pays for what?

Load to truck

Export- duty payment

Transport to exporter's port

Unload from truck at the origin's port

Landing charges at origin's port, Loading

Transport to import's port

Landing charges at importer's port, Unloading

Unload onto trucks from the importers' port

Transport to destination Insurance

Entry -Customs clearance

Entry -Taxation

EXW No No No No No No No No No No No No

Main Carriage NOT Paid By Seller (Free… Carrier/Alongside Ship/On Board)

FCA Yes Yes Yes No No No No No No No No No

FAS* Yes Yes Yes Yes No No No No No No No No

FOB* Yes Yes Yes Yes Yes No No No No No No No

Main Carriage Paid By Seller (Cost and Freight … and Insurance… / Carriage Paid to … and Insurance… )

CFR* Yes Yes Yes Yes Yes Yes No No No No No No

CIF* Yes Yes Yes Yes Yes Yes No No No Yes No No

CPT Yes Yes Yes Yes Yes Yes No No No No No No

CIP Yes Yes Yes Yes Yes Yes No No No Yes No No

Arrival (Delivery Duty….. Unpaid/Paid)

DEQ* Yes Yes Yes Yes Yes Yes Yes No No Yes No No

DDU Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No No

DDP Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

* for ship only (+ named Port), others for all carriers (+ named Place)

Methods of Payment -- ExportCash in AdvanceLetter of CreditDraftOpen Account

Global SourcingImportingOutsourcingContract Manufacturing

Contract ManufacturingHiring firm approaches Contract

Manufacturer with Design or Formula

Type of outsourcingBidding Process$ 233 billion businessWistron, HTC

CountertradePayments are made in kind rather

than cash. The focal firm is engaged

simultaneously in exporting and importing.

Also known as “two-way” or “reciprocal” trade

Used when conventional means of payment are difficult, costly, or nonexistent. ◦ Hard currency unavailable◦ Developing country doesn’t have expertise

to sell in foreign markets

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Examples of Countertrade Transactions

Caterpillar received caskets from Columbian customers and wine from Algerian customers in return for selling them earthmoving equipment.

Goodyear traded tires for minerals, textiles, and agricultural products.

Coca-Cola sourced tomato paste from Turkey, oranges from Egypt, and beer from Poland in order to contribute to national exports in the countries it conducts business,.

Control Data Corporation accepted Christmas cards from the Russians in a countertrade deal.

Pepsi-Cola acquired the rights to distribute Hungarian motion pictures in the West in a countertrade transaction.

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Types of Countertrade

Barter refers to the direct exchange of goods without any money. Or a mixture of goods and cash is a compensation deal.

Back-to-back transaction, offset agreements, or counterpurchase involves two distinct contracts, contingent on each other.

Buy-back agreement, the seller agrees to supply technology or equipment to construct a facility and receives payment in the form of goods produced by the facility.

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Licensing and FranchisingContractual AgreementsLicensing is an arrangement in

which the owner of intellectual property (IP) grants another firm the right to use that property for a specified period of time in exchange for royalties or other compensation.

Franchising is an arrangement in which the firm allows another the right to use an entire business system in exchange for fees, royalties or other forms of compensation.

Types of Intellectual Property

A patent provides an inventor with the right to prevent others from using, selling or importing an invention for a fixed period – typically, up to 20 years. It is granted to any firm or individual that invents or discovers any new and useful process, machine, manufactured product, or any new and useful improvement.

A trademark is a distinctive design, symbol, logo, word, or series of words placed on a product label. It identifies a product or service as coming from a common source. E.g., British Petroleum’s ‘BP’ acronym, McDonald's golden arches, and Nike’s swoosh symbol.

A copyright protects original works of authorship, giving the creator the exclusive right to reproduce the work, display and perform it publicly, and to authorize others to do these activities. Copyrights cover works from music, art, literature, films, and computer software.

Types of Intellectual Property (cont.)

An industrial design refers to the appearance or features of a product. The design is intended to improve the aesthetics and usability of a product in order to increase its production efficiency, performance, or marketability. The thin Apple iPod with the company logo is a well-known industrial design.

A trade secret is confidential know-how or information that has commercial value. Trade secrets include information such as production methods, business plans, and customer lists. For example, the formula to produce Coca-Cola is a trade secret.

A collective mark is a logo belonging to an association or group whose members have given firms the right to use the mark to identify the origin of a product or service. E.g., ILGWU is a collective mark for the members of International Ladies Garment Workers Union.

International Licensing Process

Basic Issues1. Set the boundaries

of the agreement2. Establish

compensation rates (2-5% gross sales)

3. Agree on the rights, privileges, and constraints

4. Specify the duration of the agreement (5-7 years)

What is licensed?TrademarksCopyrightsKnow-howPatents

Franchising

Foreign Direct InvestmentBuilding new facilities (the

greenfield strategy)Buying existing assets in a

foreign country (acquisition strategy)

Participating in a joint venture

vs. Portfolio InvestmentMinority stake, no control

Foreign Direct Investment

Advantages+ High profit potential+ Maintain control over

operations+ Acquire knowledge of local

market+ Avoid tariffs and NTBs

Disadvantages- High financial and

managerial investments- Higher exposure to political

risk- Vulnerability to restrictions

on foreign investment- Greater managerial

complexity

Strategic Alliances and Joint VenturesStrategic Alliances

◦One or several functional areas◦Shared or assigned managment

Joint Venture◦Separately incorporated◦Independently managed (delegated

management)◦Can have tax advantages, protects

other assets, allows creative ownership arrangements

The Scope of Strategic Alliances

Figure 13.1 Benefits of Strategic Alliances

Potential Benefitsof Strategic Alliances

Ease ofMarketEntry

SharedRisk

Shared Knowledge

andExpertise

Synergyand

CompetitiveAdvantage

Figure 13.4 Pitfalls of Strategic Alliances

Pitfallsof Strategic Alliances

Incompatibilityof

partners

Access to

Information

Distributionof

Earnings

Loss of

Autonomy

ChangingCircum-stances