International business project
Study Guide
International Business By
A. J. Cataldo
About the Author
A. J. Cataldo is a professor of accounting at West Chester University in West Chester, Pennsylvania. He holds a B.S. in accounting/finance, a master of accounting from the University of Arizona, and a Ph.D. from the Virginia Polytechnic Institute and State University. He has worked in public accounting as a government auditor and as a con- troller, and has provided expert testimony in business litigation engagements. His articles have appeared in Journal of Accountancy, National Tax Journal, Research in Accounting Regulation, Journal of Forensic Accounting, Accounting Historians Journal, and many others. He has published in and served on editorial review boards for Institute of Management Accounting association journals, includ- ing Management Accounting, Strategic Finance, and Management Accounting Quarterly.
Copyright © 2015 by Penn Foster, Inc.
All rights reserved. No part of the material protected by this copyright may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the copyright owner.
Requests for permission to make copies of any part of the work should be mailed to Copyright Permissions, Penn Foster, 925 Oak Street, Scranton, Pennsylvania 18515.
Printed in the United States of America
04/10/14
All terms mentioned in this text that are known to be trademarks or service marks have been appropriately capitalized. Use of a term in this text should not be regarded as affecting the validity of any trademark or service mark.
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INSTRUCTIONS TO STUDENTS 1
LESSON ASSIGNMENTS 5
LESSON 1: THE NATURE OF INTERNATIONAL BUSINESS AND COOPERATION AMONG NATIONS 7
LESSON 2: INTERNATIONAL ENVIRONMENTAL FORCES 35
LESSON 3: THE ORGANIZATIONAL ENVIRONMENT, PART 1 61
LESSON 4: THE ORGANIZATIONAL ENVIRONMENT, PART 2 85
GRADED PROJECT 103
SELF-CHECK ANSWERS 111
INTRODUCTION Welcome to International Business. Your text covers topics of critical importance, especially in light of the recent ups and downs in the values of real property and commodities in the United States and around the world. International actions by governments also move quickly, and you may find the topics we cover in the course will be in the news. Business developments and economic strategies change quickly across the globe. The information you learn in this course, however, will prepare you to make decisions on the timing of personal purchases and investments.
Take a few minutes to examine this study guide and make notes on the brief table of contents on page iii of your textbook. Then read the preface that follows it, to see how each section is developed. Locate the glossary and index at the back of the text and use them as needed.
OBJECTIVES When you complete this course, you’ll be able to
� Discuss theories of and influences on international trade
� Identify cultural forces and values managers must recognize
� Summarize how environmental, political, economic, and socioeconomic factors relate to business
� Discuss labor and employment factors that affect productivity and profitability
� Explain methods for entering the international market
� Explain the decision-making process among parent and subsidiary units of an international company
� Explain the difference between domestic and international marketing
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� Describe the challenges of staffing overseas offices
� Identify the major challenges of international accounting
YOUR TEXTBOOK Your textbook, International Business: The Challenge of Global Competition, Thirteenth Edition, by Donald A. Ball, J. Michael Geringer, Michael S. Minor, and Jeanne M. McNett, is the heart of this course. It contains the study material on which your examinations are based. Each time we mention “your textbook” in this study guide, we’re referring to this book. The textbook provides the material you need to know to successfully complete your International Business course. It’s very important that you read the material in the textbook and study it until you’re completely familiar with it. Before you actually begin reading your assignments, however, it’s important to become thoroughly familiar with the textbook itself. Get your textbook out now and refer to it as you read through the following information.
Start your survey of the textbook on page iii, titled “Contents.” Note that the textbook is organized into three sections. The Preface expands the brief contents by presenting a short sum- mary of the topics covered in each chapter. Skim these topics to see what to expect in your reading. Continue in the preface to read about the various learning tools that are employed throughout the book.
As you use your textbook, take time to study photos, tables, definitions, charts, and other graphics and boxed-text features. These additions supplement or amplify the discussion in the reading. Refer to the glossary as needed and use the index to find topics you may need to review.
Instructions to Students2
You also have access to a variety of learning resources online. Go to www.mhhe.com/ball13e and, in the Online Learning Center box, click Student Edition. Choose a chapter in the left margin and you’ll have access to summaries, outlines, flashcards, quizzes, and other study aids.
A STUDY PLAN This study guide is designed as a blueprint for your course. It’s intended to direct your focus as you study your textbook and progress through your lessons. Your textbook offers a comprehensive understanding of international business topics. Using the following procedures should help you receive the maximum benefit from your studies:
1. Read the lesson in the study guide to introduce you to concepts discussed in the textbook. The lesson empha- sizes the important material discussed in the text and may provide additional tips or examples to help you grasp the material.
2. Note the pages for each assignment in the textbook and read the assignment in the textbook to get a general idea of its content. Then study the assignment, paying attention to all details, especially the main concepts. Be sure to read the boxed features and study any photos, graphs, and maps included in the textbook.
3. Answer the questions provided in the self-checks in the study guide. This will serve as a review of the material covered.
4. After answering the suggested questions, check your answers with those given in the back of the study guide.
5. Complete each assignment in this way. If you miss any questions, review the pages of the textbook covering those questions. The self-checks are designed to reveal weak points you need to review. Do not send the self- check answers to the school. They’re for you to evaluate your understanding of the material.
Instructions to Students 3
6. After you’ve completed and checked the self-checks for Lesson 1, turn to the first exam and complete it. You’ll be sending this exam into the school.
7. Follow this procedure for all four lessons. At any time, you can e-mail your instructor for information regarding the materials.
Now you’re ready to begin Lesson 1.
Good luck!
Instructions to Students4
Remember to check your student portal regularly. Your instructor may
post additional resources that you can access to enhance your learn-
ing experience.
Lesson 1: The Nature of International Business and Cooperation among Nations For: Read in the Read in study guide: the textbook:
Assignment 1 Pages 8–13 Pages 22–49
Assignment 2 Pages 13–19 Pages 50–80
Assignment 3 Pages 21–23 Pages 178–200
Assignment 4 Pages 24–27 Pages 82–109
Assignment 5 Pages 28–33 Pages 224–247
Examination 500662 Material in Lesson 1
Lesson 2: International Environmental Forces For: Read in the Read in study guide: the textbook:
Assignment 6 Pages 36–39 Pages 113–138
Assignment 7 Pages 40–44 Pages 140–177
Assignment 8 Pages 45–49 Pages 324–342
Assignment 9 Pages 50–53 Pages 202–223
Assignment 10 Pages 54–59 Pages 448–476
Examination 500664 Material in Lesson 2
Lesson 3: The Organizational Environment, Part 1 For: Read in the Read in study guide: the textbook:
Assignment 11 Pages 62–69 Pages 252–277
Assignment 12 Pages 70–74 Pages 278–322
Assignment 13 Pages 75–77 Pages 344–363
Assignment 14 Pages 78–84 Pages 364–388
Examination 500666 Material in Lesson 3
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Lesson 4: The Organizational Environment, Part 2 For: Read in the Read in study guide: the textbook:
Assignment 15 Pages 86–90 Pages 390–420
Assignment 16 Pages 91–96 Pages 422–446
Assignment 17 Pages 97–101 Pages 478–500
Graded Project 50067000 Examination 500668 Material in Lesson 4
Lesson Assignments6
Note: To access and complete any of the examinations for this study
guide, click on the appropriate Take Exam icon on your student portal.
You should not have to enter the examination numbers. These numbers
are for reference only if you have reason to contact Student CARE.
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The Nature of International Business and Cooperation among Nations
INTRODUCTION Take a look around you. What kinds of products are part of your home or school environment? Is there a computer, a printer, and furniture? Are there appliances, decorative objects, and lighting? What about your clothing, your coffee mug, and the pencil and paper with which you take notes? Chances are some or all of those products—or at least the materials they’re made from—came from another country. That’s international business at work. But without modern technology and political and commercial cooperation among nations, the globalization of business may never have come about.
OBJECTIVES When you complete this lesson, you’ll be able to
� Discuss international trade and its growth, drivers, and influences
� Explain various theories of trade
� Discuss the two components of foreign investment
� List reasons for a company to enter foreign markets
� Describe the seven dimensions along which a firm can globalize
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ASSIGNMENT 1 Read the following introduction. Then read pages 22–49 in your textbook. Next complete the Textbook Exercises and Self- Check 1 to evaluate your understanding of the material.
International Business Terminology While you’re sure to recognize the brand names in the introductory material in Chapter 1, the terminology of inter- national business is likely to be new to you. The terms world, global, and multinational may be used interchangeably to describe a business with international operations; however, in some cases a global firm is defined as one that attempts to standardize operations in all functional areas, but which responds to national market differences when necessary— a kind of holding company with a number of overseas operations, each of which is left to adapt its products and marketing strategy according to the local markets. Other terms, such as transnational, have gained recognition and may be used for a firm that’s both striving to standardize its functions worldwide and is highly responsive to local environ- ments. Since this is similar to the common definition of global, a global firm has been defined as one that responds weakly to local environments.
As you’ll see, the terms can be somewhat confusing. Make sure you study the definitions as given in your text and use the glossary if necessary to look up terms.
A Brief History of International Business Trading among cultures is probably as old as civilization itself. Ancient trade routes like the Silk Road, which linked China with Europe, Asia, and Northern Africa, and sea routes of similar purpose have existed for thousands of years. The East India Company established a presence in India in 1600 and flourished throughout the seventeenth and eighteenth centuries, expanding its power until it eventually achieved
Lesson 1 9
a military takeover of the country. In the mid-1800s, Samuel Colt’s Patent Firearms Manufacturing Company received patents for his revolvers in France and in England, where he built a plant before the Civil War.
By 1914, there were 37 American companies with production facilities in two or more overseas locations. At that time, American foreign direct investment was $2.53 billion, which amounted to seven percent of the gross national product (GNP). National Cash Register, Burroughs, Parke-Davis, and Ford were some of the first American companies to establish plants abroad. European firms were also going international. Since then, as transportation and communications improved, global- ization of production and markets has greatly increased.
Defining Globalization Although there are many definitions of globalization, including political, social, and even technical applications, the most common definition is the one used in international business: economic globalization. Economic globalization is the interna- tional integration of goods, technology, labor, and capital—that is, firms implement global strategies that link and coordinate their international activities on a worldwide basis. Globalization describes the results of this process. The following are the five major types of drivers in a globalized economy:
Political. The world is getting smaller in many ways, resulting in something of a “global community” with a global market- place. The reduction of barriers to trade and increases in foreign investment have offered new opportunities not only for exports, but also for establishing production facilities in other countries.
Technological. If you’ve ever bought anything online, watched an Internet video, or sent an e-mail to a friend or relative in another country, you can imagine what technology has done for international business. It’s especially helpful to small companies, which can now compete in a global market.
Market. Growth is vital for companies, and with huge populations outside of the United States ready to buy prod- ucts, even companies that have saturated the market at home can find new customers abroad.
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Cost. Economies of scale reduce development, production, and inventory costs, and relocating to where the costs of production are lower also reduces unit cost. It’s part of many companies’ decision to go global.
Competitive. One of the driving forces for globalization is that companies are defending their home markets from foreign competitors by entering the competitors’ home markets to distract them. Another is the trading groups that offer access to a wider market.
There has been explosive growth in the size and number of U.S. and foreign international concerns. Foreign direct investment (FDI) numbers report investments in actual build- ings and equipment, not stock market investments. Consider this data about FDI:
� The world stock of outward FDI is estimated to have risen from $510 billion in 1980 to $9.7 trillion in 1998— a 17-fold increase in just 24 years.
� Total assets of multinational foreign affiliates approxi- mated $26.5 trillion, generating $17.5 trillion in sales and over 53.1 million jobs.
� Majority-owned cross-border mergers and acquisitions (M&As) had estimated growth to $567 billion in 2006. Cross-border M&As are the driving force behind the growth of FDI flows.
� According to UNCTAD, in 2004 there were more than 70,000 companies with 690,000 foreign affiliates that accounted for 25 percent of global output and two-thirds of world trade. Foreign affiliates’ sales ($19 trillion) are far in excess of global trade ($11 trillion).
� Since the 1980s, there has been a marked liberalization of government policies and attitudes toward foreign investment in both developed and developing nations.
Critics of large global firms cite statistics such as the following to “prove” that host governments are powerless before them:
� In 2004, only 19 nations had gross national incomes (GNIs) greater than the total annual sales of Wal-Mart, the world’s largest international company.
� Wal-Mart’s sales are twice the size of Iceland’s GNI, yet Iceland’s value added is twice that of Wal-Mart.
Lesson 1 11
What Makes International Business Different? Not only are there many sets of forces in international busi- ness, but the differences among them are also sometimes extreme. Managers are often unfamiliar with other cultures and many have a tendency to refer unconsciously to their own cultural values. The self-reference criterion, as this is called, is probably the biggest cause of international business blunders.
International business managers must deal with forces from three environments—domestic, international, and foreign— rather than just one. Each force within the environment has particular concerns related to it.
External. These competitive, physical, distributive, political, and economic forces are uncontrollable, since management has no direct influence on them.
Internal. These forces—personnel, production, finance, and marketing—are controllable.
International environment. The international environment comprises interaction between domestic and foreign environ- mental forces and the foreign environmental forces of two different countries; headquarters managers; international organizations, such as the World Bank; regional groupings like the European Union; and organizations of nations bound by industry agreements (OPEC). Multiple forces make decision making more complex.
Foreign environment. All the uncontrollable forces originat- ing outside of a home country that surround and influence the firm are the foreign environment. The forces in these environments are the same as for the domestic environment; force values are interrelated, vary widely, and depend on the influence of legal and political elements.
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Self-Check 1 At the end of each section of international business, you’ll be asked to pause and check
your understanding of what you’ve just read by completing a “Self-Check” exercise.
Answering these questions will help you review what you’ve studied so far. Please
complete self-check 1 now.
Indicate whether each of the following statements is True or False.
______ 1. Workers in foreign subsidiaries of American companies must learn to function within
American norms for scheduling, wages, and other management decisions.
______ 2. In today’s business environment, advancement depends not only on having some
knowledge of international business, but also on having actual overseas experience.
______ 3. Globalization depends on five kinds of drivers, all based on change.
______ 4. The United Nations uses the term transnational to describe a firm doing business in
more than one country.
______ 5. Supporters of globalization generally argue that it’s the best strategy for advancing the
world’s economic development.
(Continued)
TexTbook exercises for AssignmenT 1
At the end of each assignment, you’ll be asked to complete selected
exercises from the text as a review of what you’ve learned. Access
http://highered.mcgraw-hill.com/sites/007811263x/student_view0/index.html
to locate the online exercises. We urge you to complete the
exercises. The more you practice, the better you’ll do on the lesson
examinations.
1. Use the drop down box on the left side of the page. Select
Chapter 1. Access the chapter quiz. Complete the quiz.
2. Access the interactive maps. Complete the map for each region.
Correct answers are provided on the website.
Lesson 1 13
ASSIGNMENT 2 Read the following introduction. Then, read pages 50–80 in your textbook. Next complete the Textbook Exercise and Self- Check 2 to evaluate your understanding of the material.
Growing International Trade The volume of international business has been steadily increasing. Trade in goods and services totaled $11 trillion in 2004, approximately four times what it was in 1970. IT reached $18.9 trillion in 2010. Foreign direct investment reached $1.2 trillion between 2006 and 2009. Study Table 2.1 in your textbook to compare various nations’ value of world exports.
As you’ll observe, both developed and developing nations trade primarily with developed nations. Note the reasons for Japan’s unique trading position and its dependence on the raw materials available in developing nations.
Self-Check 1 Answer the following question in your own words.
6. What are the differences between international, global, and multidomestic companies?
__________________________________________________________
__________________________________________________________
__________________________________________________________
Check your answers with those on page 111.
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Study Table 2.2 to see which countries are major traders with the United States. The major trading partners of the United States are Mexico and Canada, mainly because of their geographic proximity. Now, as members of NAFTA, their importance is growing. The rankings of America’s trading partners have changed markedly in 30 years. Mexico and several Asian nations have become increasingly important trade partners for both exports and imports, while business with India and some European countries lost standing.
Foreign Investment Carefully read the information on portfolio investment and direct investment and make sure you can differentiate the two, although mergers and alliances have reduced the distinctions.
Portfolio investment. Though not directly concerned with the control of the firm, nonresidents owned American stock and bonds worth $4,391 billion in 2005. Americans owned $4,073 billion in foreign securities in 2005. People who lived outside the United States owned $5.3 billion in American stock and bonds in 2010.
Foreign direct investment (FDI). The point of direct invest- ment is buying enough stock to control the company. The United States is one of the largest investors in the world, with more than $2 billion invested abroad, although that amount was actually much lower than it had been in the mid-eighties. In the same time period, developing countries more than doubled their proportion of FDI, from 5 to 11 percent. Overall, between 1980 and 2010, these developing countries increased their share of FDI stock from one to 14 percent. Study Figure 2.4 in your textbook to get a good sense of these trends.
Advantages of Foreign Markets The most obvious advantage of a firm entering a foreign market is to increase sales, and therefore profits. New markets mean new customers, and in developing countries with rising incomes and large populations there are plenty of potential customers.
Lesson 1 15
Another advantage is that with cheap, easy communications through satellites and the Internet, companies can also tap into the skilled labor available in other countries, notably India.
Service companies may follow their domestic customers abroad to maintain their relationship and keep competitors from moving in. For example, an advertising firm that has XYZ Products as a client may establish a European office when XYZ begins to sell in Europe. A supplier may decide to expand into foreign markets if a major customer does, offering to continue the relationship in the new location.
However, new markets aren’t completely open to new busi- nesses. Governments are often protective of domestic industries and will enact tariffs or other barriers to free trade. Whether management wishes to sell products or services or establish a manufacturing site, it must carefully weigh the pros and cons of international business.
International Trade Theory International trade theory attempts to answer the question, “Why do nations trade?” One of the first economic doctrines (1550 to 1800) was mercantilism. The idea was that countries without a source of gold could accumulate wealth by exporting more goods than they imported. This put control of foreign trade into the hands of the government, because individuals might trade gold for imports. Only the government was in a position to assure that only local products were purchased.
Another theory, promoted by Adam Smith (The Wealth of Nations, published in 1776), is the theory of absolute advantage, which was based on market forces, rather than government control of foreign trade. By means of free, unregulated trade, a nation could acquire what it couldn’t produce efficiently. The question was then asked, would it be advantageous for a nation to trade if it weren’t as efficient as another in the production of any product? In 1817, David Ricardo developed the theory of comparative advantage, which describes a “win-win” trade agreement between countries. Make sure you understand the basis of each theory and the differences between them.
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Smith’s and Ricardo’s theories considered labor to be the only important factor in calculating production costs, and no thought was given to the possibility of producing the same goods with different combinations of factors until the Heckscher-Ohlin theory in 1933. This theory proposed that production costs vary among countries based on several factors, including available land, capital, and labor, and that each country should produce whatever is least costly for it to make. For instance, a country with a large population will have low labor costs, so it can choose products that are labor-intensive to produce. In the world market, its goods will be cheap enough to attract buyers. India, which has a large population, is a country that can offer labor-intensive goods and services; Germany, which has more capital than cheap labor, will choose capital-intensive goods.
However, the economist Wassily Leontief observed that the United States—a capital-intensive country—was exporting labor-intensive products and importing capital-intensive products, which seemed paradoxical. The explanation was that there were differences in the labor used for the exported and imported products, with that in the United States being highly skilled and that used to produce the imports being unskilled. Also, transportation costs, taste preferences and the varying availability of technology were ignored in the Heckscher-Ohlin theory.
Newer explanations for the direction of trade have developed in the last 50 years or so. They include the following ideas, but there are more examples in your textbook.
Linder theory of overlapping demand. This is a modifica- tion of the Heckscher-Ohlin theory. The Linder theory says tastes are influenced by income levels and suggests that in manufactured goods, trade will be greater between nations with similar levels of per capita income.
International product life cycle. This concept was offered in the 1960s and is related to the product life cycle. It’s helpful in the analysis of a product’s export potential and may help to predict which products are in danger from import competition. Under the IPLC concept, many products pass through four
Lesson 1 17
stages—as an export from a developed nation, as a foreign production, as receiving competition in export markets, and as receiving import competition in home markets.
Direction of trade. Economies of scale and the experience curve affect international trade because they permit a nation’s industries to become low-cost producers without having an abundance of a certain class of production factors.
First-mover theory. Although some management theorists argue that firms entering the market first (first movers) will soon dominate it, new research indicates that previous studies were flawed because they were based on surveys about surviving firms and didn’t include a large number of the true pioneers.
Porter’s competitive advantage of nations. Michael Porter, an economist, studied 100 firms to learn if a nation’s prominence in an industry can be explained by variables other than factors of production. He found four kinds of variables that influence the ability of local firms to utilize a country’s resources to gain a competitive advantage: demand conditions; factor conditions; related and supporting industries; and firm strategy, structure, and rivalry.
International trade occurs primarily because of relative price differences among nations—production costs, which are the result of differences in the endowment of factors of production; the level of efficiency at which they’re used; and foreign exchange rates. The demand variable of taste differences can reverse the direction of trade predicted by the theory.
Trade Restrictions Although international trade theory provides strong argu- ments for free trade, every country in the world employs trade restrictions to protect local industry. Arguments for trade restrictions include national defense, protection of an infant industry, and protection of domestic jobs from cheap foreign labor.
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Retaliation Industries whose exports have had import restrictions placed on them may request their government to retaliate with similar restrictions, or they may retaliate in other ways. Dumping— selling abroad for less than the cost of production, the home market price, or the price to third countries—is a common form of retaliation. Although for the most part, dumping is prohibited, there are at least five new kinds of dumping for which fair-trade lobbies want sanctions—social dumping, environmental dumping, financial services dumping, cultural dumping, and tax dumping. Government subsidies and counter- vailing duties are also used as retaliation.
Tariffs Import duties—taxes whose purpose is to raise the selling price—are designed to protect domestic producers. There are several kinds of tariffs, including
� Ad valorem duty
� Specific duty
� Compound duty
Nontariff barriers are other methods of discriminating against imported products. They include
� Quotas
� Voluntary export restraints (VERs)
� Nonquantitative nontariff barriers
Who pays the cost of trade barriers? The consumer. For an example of how this works, read the “WORLDview” article on sugar subsidies.
International Investment Theories Contemporary theories of foreign direct investment include monopolistic advantage theory, product and factor market imperfections, the international product life cycle, follow-the- leader, cross-investment, and Dunning’s eclectic theory of international production.
Lesson 1 19
Self-Check 2 Indicate whether each of the following statements is True or False.
______ 1. Direct investment is defined as the purchase of stocks for the purpose of earning
dividends on the investment.
______ 2. Historically, most investing from foreign entities in U.S. businesses have been in ongoing
concerns rather than in establishing new companies.
______ 3. Both developed nations and developing nations tend to trade more with
developed nations.
______ 4. One advantage to firms entering foreign markets is that many foreign markets are
growing faster than the home market.
______ 5. Foreign sales comprised an average of 50 percent of total sales among the top eleven
Fortune Global 500 companies in 2006.
(Continued)
TexTbook exercise for AssignmenT 2
At the end of each assignment, you’ll be asked to complete selected
exercises from the text as a review of what you’ve learned. Access
http://highered.mcgraw-hill.com/sites/007811263x/student_view0/index.html
to locate the online exercises. We urge you to complete the
exercises. The more you practice, the better you’ll do on the lesson
examinations.
1. Use the drop down box on the left side of the page. Select
Chapter 2. Access the chapter quiz. Complete the quiz.
Correct answers are provided on the website.
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Self-Check 2 Answer the questions in a brief paragraph.
6. How can a firm protect its domestic market by investing overseas?
__________________________________________________________
__________________________________________________________
Fill in the blanks.
7. Under the theory of _______, nations export goods they can produce efficiently and import
goods produced more efficiently elsewhere.
8. The central idea of _______ is that there should be an export surplus so a nation can
accumulate precious metals.
9. The process of a country’s export becoming an import is called its _______.
Check your answers with those on page 111.
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ASSIGNMENT 3 Read the following introduction. Then, read pages 178–200 in your textbook. Next complete the Textbook Exercise and Self- Check 3 to evaluate your understanding of the material.
Government Ownership of Business Although in many economic systems the government owns and operates industries, as well as public services, it’s been found that sometimes private companies can do the work much more efficiently. Various public services, such as postal systems, garbage collection, and customs offices have been success- fully privatized in the United States, Germany, Mozambique, and even China. Other public services may be turned over to private contractors; however, unless contracts are put out for competitive bids and the work is closely monitored, they can become more costly and inefficient than government- run services.
Government Protection National governments have historically provided protection for their citizens—not only from the physical aggression of other states, but also of economic activities. In today’s world, various forms of terrorism are a persistent threat to govern- ments, businesses, and even individuals. Generally motivated by political or religious ideology, terrorists use violence against their enemies, including civilians, to achieve their objectives. In some places, terrorists have learned that kidnapping foreign businesspeople for ransom can be a lucrative enterprise, which could make your job much more challenging if you’re sent to a high-risk area. Since no place is entirely safe from terrorist activities, it’s in your best interest to study the information in the text on conducting yourself abroad in a way that will minimize your vulnerability.
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Government Stability Because economic activities can prosper only when the govern- ment is stable, instability or sudden policy changes make successful business conduct difficult or impossible. You probably know of “hotspots” in the world where hostilities between tribes or religious or political factions are longstanding. The economic costs are seen in trade boycotts, lack of foreign investment, and lost opportunities. But international companies (ICs), using their financial power to negotiate with potential sites for manufacturing or distributing products, withhold investments in places that are deemed too risky to enter.
Country Risk Assessment (CRA) If you know whether your personal credit score is high or low, you know something about how credit bureaus assign scores according to various risk factors. The same is true for country risk assessment (CRA)—countries are researched and rated according to their economic health, political stability, legal policies, business atmosphere, and other concerns of potential investors and lenders. While no enterprise is entirely risk-free, when an international business considers entering emerging markets, a country risk assessment is a necessity.
TexTbook exercise for AssignmenT 3
At the end of each assignment, you’ll be asked to complete selected
exercises from the text as a review of what you’ve learned. Access
http://highered.mcgraw-hill.com/sites/007811263x/student_view0/index.html
to locate the online exercises. We urge you to complete the
exercises. The more you practice, the better you’ll do on the lesson
examinations.
1. Use the drop down box on the left side of the page. Select
Chapter 6. Access the chapter quiz. Complete the quiz.
Correct answers are provided on the website.
Lesson 1 23
Self-Check 3 Indicate whether each of the following statements is True or False.
______ 1. The political climate of a country can be as important for business as the country’s
topography, natural resources, and meteorological climate.
______ 2. Entrance into the EU virtually guarantees a country’s economic success.
______ 3. Terrorists use kidnapping and ransom as a source of funding for their operations.
Fill in the blanks.
4. ___________ is the practice of selling an export below cost to force the importing nation’s
domestic producers out of business.
5. Quotas and voluntary export restraints are types of _______.
Check your answers with those on page 112.
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ASSIGNMENT 4 After you read the following introduction, read pages 82–109 iyour textbook. Next complete the Textbook Exercise and Self- Check 4 to evaluate your understanding of the material.
International Institutions and Business Kofi Annan, former Secretary-General of the United Nations, spoke of the interconnectedness of the nations of the world and the need for cooperation. This is relevant to international business and economic interdependence, but Annan was addressing other issues. The threats and challenges to which he referred were global problems like terrorism, HIV/AIDS, genocide, environmental destruction, and the pervasive poverty that afflicts some nations. Although these issues greatly affect economic growth and stability, they can’t be solved through economic policy. Political cooperation is needed to address the world’s mutual problems. That’s where international organizations like the United Nations come in. Other organizations have been formed to address trade and economic issues.
International Political Institutions Because the United Nations (UN) is a political organization, you might wonder at its place in international business. But its involvement in communication, treaties, and solving legal disputes among nations is an economic necessity.
Like some aspects of the United Nations, cooperative military and security agreements provide stability and security for nations and allow trade to continue. The North American Treaty Organization (NATO), the Collective Security Treaty Organization (CSTO) and the Association of Southeast Asian Nations (ASEAN), simply by their existence provide their members with the security to engage in economic activities within and outside of the organization.
Lesson 1 25
International Economic Institutions Other organizations focus on trade, such as the World Trade Organization (WTO), which was founded in 1995 to facilitate trade agreements among nations worldwide. It succeeded the General Agreement on Tariffs and Trade (GATT), which began in 1947 as a way of reducing tariffs, quotas, and other barriers to trade among its members. GATT grew from the original 23 nations to 123 before the WTO took its place. The WTO has more than 150 members and covers 95 percent of global trade.
The Organisation for Economic Cooperation and Development (OECD) comprises 30 wealthy nations. It oversees conduct and legislation among the members, as well as economic policy. OPEC, the Organization of Petroleum Exporting Countries, formed to protect the interests of its members in the world market. However, the members learned they had to control their production, as well at the price, to prevent oversupply and lower prices. In 2008 prices rose to new heights, hitting $147 a barrel in July before economic conditions and conser- vation efforts drove the price back down to $43 in December.
Economic Integration As international interests and competition grow, many coun- tries find it beneficial to join forces with their neighbors to help each other and protect their interests.
The G8—eight developed nations that call themselves the Group of Eight—holds annual economic talks for their heads of state. Less formal than those of some other world organiza- tions, the dialogues have recently expanded to include other issues of shared interest, such as energy, global warming, ter- rorism, health, and law enforcement. The summit meetings allow the leaders to exchange ideas and consider options without trying to reach an immediate solution.
Free trade organizations exist in most areas of the world. You’re probably most familiar with NAFTA if you live in North America, but there are similar agreements in Europe, Africa, Central America, South America, and Asia.
International Business26
The European Union The European Union (EU) grew out of the former European Economic Community (EEU) and established a single market throughout most of Europe. However, the EU is much more than a trade agreement. Its policies include open borders, common laws, and a common currency, the Euro, although not all member states participate in all EU policies. It’s not yet a political unification of Europe; however, the EU has a parliament, a policy-setting council, a court of justice, a central bank, and other official institutions. As one of the largest markets in the world, it’s able to use its influence on world trade, as well as on huge corporations like McDonald’s and Microsoft.
TexTbook exercise for AssignmenT 4
At the end of each assignment, you’ll be asked to complete selected
exercises from the text as a review of what you’ve learned. Access
http://highered.mcgraw-hill.com/sites/007811263x/student_view0/index.html
to locate the online exercises. We urge you to complete the
exercises. The more you practice, the better you’ll do on the lesson
examinations.
1. Use the drop down box on the left side of the page. Select
Chapter 3. Access the chapter quiz. Complete the quiz.
Correct answers are provided on the website.
Lesson 1 27
Self-Check 4 Indicate whether each of the following statements is True or False.
______ 1. The EU member can move and work freely among EU countries.
______ 2. Most favored nation status in the World Trade Organization required that some member
nations receive preferential treatment.
______ 3. The main purpose of the OECD is to control energy prices.
Fill in the blanks.
4. The organization that actively promotes literacy around the world is _______.
5. The International Centre for the Settlement of Investment Disputes is a _______ institution
that resolves disputes between _______ and _______.
6. The largest trader in the world is _______ and boasts _______ member countries.
7. Trade on the North American continent virtually _______ due to _______.
Check your answers with those on page 112.
International Business28
ASSIGNMENT 5 Read the following introduction. Then, read pages 224–247 in your textbook. Next complete the Textbook Exercise and Self- Check 5 to evaluate your understanding of the material.
Financial Forces The world’s economy has gone through many changes in recent years. By the end of 2008, after bank failures and government bailouts, a collapse of the housing market, a sudden drop in oil prices, and major layoffs, it was evident that a recession had hit the United States economy. American consumers were no longer the carefree spenders described in this article, and the government scrambled to save jobs and get people buying again while the rest of the world regrouped from a global economic setback.
Currency Values Transactions in international business obviously require the exchange of goods or services for money, but the transfer of money is complicated by the changing values of currencies. The U.S. dollar is still the central reserve asset of many nations, which is the currency held by a government’s central bank. The dollar is also a vehicle currency, one often used for inter- national trade or investment, and an intervention currency— one bought or sold in foreign currency exchange markets to strengthen a country’s own currency. If you need information on current exchange rates, the best place to look is the foreign exchange column of a financial publication such as the Wall Street Journal.
Other Financial Forces Most countries use some type of controls on currency exchange, but developing countries are more likely to fix their currency at a specific rate. To protect their foreign reserves, they may also limit the convertibility of their currency and the use of foreign currencies.
Lesson 1 29
Because currency restrictions—or even blocking—affect foreign investment and international business in general, companies doing business under these circumstances have to be careful— and sometimes creative, as in the Pepsi deal described in your textbook.
Tariffs, tax laws, inflation, and balance of payments (BOP) are other challenges managers have to consider in the course of doing business overseas. They can affect the cost of doing business and a company’s ability to move funds, and since they also may fluctuate, managers must be prepared to react appropriately.
The Gold Standard Mercantilism maintained that when nations exported more than they imported, they would accumulate gold and become wealthy. Gold has long been the international medium of trade, and it has generally gained in value. The term gold standard refers to the standardization of currency based on a specific amount of gold. This practice works to control inflation, since more money can’t be printed without acquiring more gold, but there’s also less flexibility in dealing with economic crises.
In the eighteenth century, England was one of the world’s great powers and London was the center of International finance. In 1717, Sir Isaac Newton, Master of the Mint, estab- lished the price of gold at 3 pounds, 17 shillings, 10.5 pence per ounce. England was then on the gold standard and stood ready to buy or sell gold at the established price. Other countries followed suit.
The gold standard remained in place until World War I, when England sold off gold to pay for the war. Other European nations then suspended the use of gold for trade, too, and it was never reinstated. During World War II, representatives of 44 nations held a historic meeting in Bretton Woods, New Hampshire, to establish new international monetary institutions that would support trade. They developed the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD).
International Business30
International Monetary Institutions When the representatives of the allied powers met at Bretton Woods, they agreed that previous systems—floating exchange rates and destructive government trade policies—had to change. The IMF and the IBRD established a fixed currency exchange rate based on gold and the U.S. dollar, which could be adjusted if necessary. The system was designed to be flexible, so it has been able to monitor financial changes throughout the world, loan money to developing nations, and help nations develop effective economic policies.
IBRD, now part of the World Bank Group, and the International Development Association (IDA) provide funds both as low- interest loans and as grants for developing countries. The International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for the Settlement of Investment Disputes (ICSID) are also part of the World Bank Group.
Floating Exchange Rates On August 15, 1971, President Richard Nixon closed the “gold window”—the office at the New York Federal Reserve where foreign central banks exchanged their U.S. dollars for gold. The gold exchange was replaced through the Jamaica Agreement, in which currency values began to “float” according to market supply and demand. Two kinds of currency floats— free and managed—have remained, with some additional variations.
The free float. The free or “clean” float allows free trading of currency without any government intervention.
The managed float. In the managed or “dirty” float, central banks buy or sell currencies to influence exchange rates.
Within the two currency exchange arrangements are eight more categories describing the ways in which nations position themselves.
Lesson 1 31
Balance of Payments Each country’s balance of payments (BOP) is presented as a double-entry accounting statement in which total credits and debits are always equal. The statement is divided into several accounts: current account, capital account, official reserves account, and net statistical discrepancy (adjustment account). Make sure you’re familiar with these accounts and how they relate to international business transactions.
Deficits result when a country spends more money abroad than it’s able to earn through the sale of its products or services. If the deficit is large or continuous, foreigners get more of the country’s money than they want and the value of that money tends to decline. The value of the money can’t decline without breaking the fixed exchange rates with other countries.
A temporary deficit may be caused by labor unrest or a crop failure or natural disaster, and can be corrected fairly quickly. A temporary deficit may also be caused by inflation, which the country corrects through monetary and fiscal policies. The IMF may offer money and expert advisors to help correct the situation. Fundamental deficits are those that the country can’t or won’t correct.
The biggest and longest-running BOP deficit belongs to the United States. Classical methods to correct a BOP deficit, such as deflation of the economy and devaluation of the currency, haven’t helped, since the United States wouldn’t deflate the economy—its leaders saw deflation as a greater danger. The country didn’t devalue the U.S. dollar, and its allies and trading partners liked it that way, because the U.S. dollar was a reserve currency, and trading partners liked the export advantages of a relatively weaker currency.
Special drawing rights (SDR) is a bookkeeping entry at the IMF. Each member’s account was credited with SDR in amounts depending on its size, and the value was based on the U.S. dollar, the euro, the Japanese yen, and the British pound sterling. The SDR’s value tends to fluctuate less than that of any one currency because as the value of one goes up, the value of another may be going down. The SDR hasn’t yet replaced the U.S. dollar as the major reserve asset, but it could if necessary.
International Business32
TexTbook exercise for AssignmenT 5
At the end of each assignment, you’ll be asked to complete selected
exercises from the text as a review of what you’ve learned. Access
http://highered.mcgraw-hill.com/sites/007811263x/student_view0/index.html
to locate the online exercises. We urge you to complete the
exercises. The more you practice, the better you’ll do on the lesson
examinations.
1. Use the drop down box on the left side of the page. Select
Chapter 8. Access the chapter quiz. Complete the quiz.
Correct answers are provided on the website.
Self-Check 5 Indicate whether each of the following statements is True or False.
______ 1. The gold standard was established by Sir Isaac Newton.
______ 2. Almost every country has its own currency fixed to the gold standard today.
______ 3. Throughout history, gold has been a refuge for people who fear inflation.
______ 4. Fortunately, the United States has rarely had a balance-of-payments deficit.
______ 5. Under a fixed currency exchange rate system, two or more countries agree on the
exchange rate(s) of their currencies and undertake to maintain those rates.
______ 6. The assumption that the best predictor of tomorrow’s prices is today’s prices is known
as the random walk hypothesis.
______ 7. A currency used to pay for imports or investments is called an intervention currency.
______ 8. When a currency’s forward rate quotes are weaker than spot, it’s trading at a premium.
______ 9. One way to get a quick sense of relative currency values and the direction in which
they’re heading is to use the Big Mac index.
(Continued)
Lesson 1 33
Self-Check 5 Answer each of the following in a short paragraph.
10. Explain the balance of payments (BOP). Include in your explanation the relevance of the
International Monetary Fund (IMF), the importance of the U.S. dollar, and special drawing
rights (SDR).
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
Check your answers with those on page 112-113.
International Business34
Notes
Lesson 2 35
International Environmental Forces
INTRODUCTION Now that you have some background in the general interna- tional landscape, we’ll look at some more specific challenges of doing business abroad. To work with companies, you must work with people, and to make business decisions, you must understand cultural, socioeconomic, political, legal, and finan- cial differences among nations. You also must be familiar with the natural and human resources available in each area you enter. The assignments in this lesson will provide the strate- gic foundation for organizational decisions you’ll make as a manager.
OBJECTIVES When you complete this lesson, you’ll be able to
� Identify cultural forces and values managers must recognize
� Discuss the importance of both language skills and nonverbal communication
� Explain how location, natural resources, topography, and climate affect business
� Summarize how economic and socioeconomic factors relate to production and distribution decisions
� Discuss how political policies and volatile situations affect foreign enterprises
� Explain the legal constraints within which managers must function
� Identify the financial rules, policies, and risks involved in international business
� Discuss labor and employment factors that will affect productivity and profitability
L e
s s
o n
2
L e
s s
o n
2
International Business36
ASSIGNMENT 6 Read the following assignment. Then, read pages 113–138 in your textbook. Next complete the Textbook Exercise and Self- Check 6 to evaluate your understanding of the material.
Know Your Customer Successful domestic companies make a point of learning who their customers are, what they want, and how they like to be approached. It’s even more important to thoroughly research foreign markets before plunging in. Cultural differences must always be considered, and with preparation your first encounter with a potential customer doesn’t have to be a disaster. The opening section of Chapter 4 presents useful rules for Americans going abroad to sell. These are the main ideas to remember:
� Be prepared—do your homework.
� Slow down; most cultures aren’t driven by the clock.
� Establish trust.
� Use an expert translator.
� Respect the culture.
� Understand both surface and deeper components of culture.
What Is Culture? While intellectually you know that attitudes and values vary according to country or region, it’s quite difficult to adapt your business style to fit into another culture—the sum total of an area’s rules, dynamics, and attitudes. Because each culture is very complex, its nuances may escape the attention of outsiders. It’s also sometimes hard for people to accept that unfamiliar ideas and customs are as valid and important as their own. The term sociocultural describes the social and cultural variables within which businesspeople must work.
Lesson 2 37
Recognizing Other Cultures The first step in learning to live with other cultures is realizing how different other cultures are from your own. Learning the characteristics of cultures may help us adapt to them, and being aware of your own ethnocentricity will help you avoid it. E. T. Hall, a noted anthropologist, says the only way to do this is to either spend a lifetime in a country or take an extensive training program that includes language.
Sociocultural Components The concept of culture is so broad that ethnologists break it down into smaller sections to facilitate study. The components covered in this section are
� Aesthetics
� Attitudes and beliefs
� Religion
� Material culture
� Education
� Language
� Societal organization
This section gets quite detailed in defining and explaining what comprises a culture and the various custom you may encounter. Don’t skip over anything—it’s quite interesting, and will be very helpful in increasing your awareness of the wide diversity among people and cultures. Respecting others’ attitudes and beliefs, being mindful of individuals’ back- grounds, and understanding proper etiquette will improve your chances of a good relationship with clients.
International Business38
TexTbook exercise for AssignmenT 6
At the end of each assignment, you’ll be asked to complete selected
exercises from the text as a review of what you’ve learned. Access
http://highered.mcgraw-hill.com/sites/007811263x/student_view0/index.html
to locate the online exercises. We urge you to complete the
exercises. The more you practice, the better you’ll do on the lesson
examinations.
1. Use the drop down box on the left side of the page. Select
Chapter 4. Access the chapter quiz. Complete the quiz.
Correct answers are provided on the website.
Self-Check 6 Indicate whether each of the following statements is True or False.
______ 1. Large companies like Disney have avoided costly errors by making a thorough
cultural study before entering a new market.
______ 2. Trompenaars says that particularist values apply to all people.
______ 3. Hofstede says that women’s roles differ less across cultures than do men’s.
______ 4. The general trend in industrialized nations is longer work hours and shorter vacations.
______ 5. The oldest major religion in the world is Christianity.
______ 6. The sense of beauty and good taste is the only cultural standard that’s the same all
over the world.
(Continued)
Lesson 2 39
Self-Check 6 Answer the questions in one sentence or more.
7. What are the components that define culture?
__________________________________________________________
__________________________________________________________
8. What is assuming that one’s cultural approach is better than others called?
__________________________________________________________
__________________________________________________________
Check your answers with those on page 113.
International Business40
ASSIGNMENT 7 Read the following introduction. Then, read pages 140–177 in your textbook. Next complete the Textbook Exercise and Self- Check 7 to evaluate your understanding of the material.
Natural Resources and Environmental Sustainability Until you consider the huge geographical differences among nations, it’s difficult to predict what each will produce and with whom they’ll trade. However, in this chapter, you’ll learn about some of the elements that are particularly significant to international business, including location, topography, climate, and natural resources. The example on page 141, which describes how Switzerland’s location among the Alps drives its economic choices, is a good start. With few natural resources and high transportation costs, the Swiss have learned to specialize in a few high-value items. As you read the chapter, note how other countries’ economic options are also based on their environment.
Location Location explains many of a nation’s economic and political relationships. For example, Austria’s location between the European Union and Eastern Europe has given it access to trading links with both EU members and formerly communist nations such as Czechoslovakia and Hungary. As a centrally located, neutral nation, Austria not only promotes trade with both the East and the West, but also acts as a financial intermediary and a headquarters for international business, cultural, and political relationships.
Lesson 2 41
Topography Switzerland’s mountains aren’t the only geographical features to affect business. The absence or presence of rivers, lakes, and seas; wide open plains; deserts; and degrees of rugged terrain all influence nations’—and regions’—economy, culture, politics and social structure. Mountains can divide cultures and markets into small segments. Such divisions, especially when languages differ, create problems for man- agers and can also increase costs if materials have to be produced in more than one language.
Deserts, tropical forests, and bodies of water may also divide markets, create concentrations of population, and make transportation difficult. Australia is an example of how water supply affects the location of cities and therefore business. Two-thirds of its population is concentrated on the coast away from the central desert, but the cities are widely sepa- rated. Most goods are moved by coastal shipping, which is the most efficient under the circumstances, but it’s also expensive because of the distances involved. Transportation often adds 30 percent to the cost of products.
Another example is the Canadian Shield, which comprises one-half of Canada’s landmass but supports only 10 percent of the population. Unless managers understand these issues, developing an effective marketing and distribution plan will be very difficult.
Since human beings began to build permanent dwellings, they’ve settled adjacent to bodies of water, mainly rivers. That’s because river valleys are low, there’s fertile soil and water for irrigation, and transportation is uncomplicated and inexpensive. As civilizations grew, rivers with outlets to the sea became vital for both access to the interior and for the export of goods. Landlocked nations have a distinct disadvantage, since they must construct highway systems to connect with coast- lines and are reliant on the governments of the nations through which they must pass.
International Business42
Climate Climate—the temperature, precipitation, and wind that affect a region—sets limits on what the region’s inhabitants achieve both physically and economically. However, your textbook advises that it’s not “deterministic.” That is, while climate can allow certain developments, it doesn’t directly cause them.
As you study various areas, note how similar climates occur in similar latitudes and continental positions. Generally, the more water-dominated an area, the more moderate is its climate. Extremes in temperature, humidity, and exposure to dust create challenges for businesses that sell products sensitive to these elements. International managers must be aware of these and other problems such as how climate affects work- ers and how weather conditions affect transportation.
Natural Resources Minerals and other raw materials used in products or processes ranging from fuels to construction materials to computer parts are called natural resources. Since the avail- ability of natural resources varies widely, each country has to learn to make the most of what it has, developing industries based on what’s nearby. Energy is one vital natural resource, which comes in both nonrenewable and renewable forms. Fossil fuels—petroleum, coal, and natural gas—are nonre- newable. Sources of renewable energy include hydroelectric, solar, wind, geothermal, waves, tides, biomass, and ocean thermal energy conversion.
Lesson 2 43
Environmental Sustainability While in the past natural resources were mined without much regard for the overall impact, today’s businesses must employ sustainable business practices that respect the interdependence of the local ecological, social, and economic systems and make sure the balance isn’t disrupted. Inter- dependence extends beyond the harvesting of natural resources—it includes all aspects of corporate responsibility to the area in which it does business. For instance, local populations, whether in the oil fields of Nigeria or the manu- facturing cities of the American Midwest, are the ones who are affected when a company moves into or out of their area. In addition, deals made with governments or other businesses must consider wide-scale impacts—ecological, social, and economic—such as global warming, ethical interaction with indigenous people, and equity in distribution.
TexTbook exercise for AssignmenT 7
At the end of each assignment, you’ll be asked to complete selected
exercises from the text as a review of what you’ve learned. Access
http://highered.mcgraw-hill.com/sites/007811263x/student_view0/index.html
to locate the online exercises. We urge you to complete the
exercises. The more you practice, the better you’ll do on the lesson
examinations.
1. Use the drop down box on the left side of the page. Select
Chapter 5. Access the chapter quiz. Complete the quiz.
Correct answers are provided on the website.
International Business44
Self-Check 7 Indicate whether each of the following statements is True or False.
______ 1. Extreme climates stimulate human energy and mental power, leading to intellectual
and moral superiority.
______ 2. The stakeholder theory identifies a business approach that considers competing
demands and relationships beyond the traditional economic model.
______ 3. China, India, and the United States are major contributors to the problem of
greenhouse gases due to these countries utilization of coal.
______ 4. Environmental sustainability requires businesses to commit to operating without
reducing the capacity of the environment to provide for future generations.
______ 5. Geothermal power is derived from the sun’s heat on moving water.
______ 6. The United States has signed and ratified the Kyoto Protocol limiting gas emissions
that contribute to global warming.
Answer the questions in one or more sentences.
7. What is heavy oil?
__________________________________________________________
__________________________________________________________
8. Give three examples of nonrenewable fuel.
__________________________________________________________
__________________________________________________________
9. Give three examples of renewable energy sources.
__________________________________________________________
__________________________________________________________
Check your answers with those on page 113.
Lesson 2 45
ASSIGNMENT 8 Read the following introduction. Then, read pages 324–342 in your textbook. Next complete the Textbook Exercise and Self- Check 8 to evaluate your understanding of the material.
Factors in Analyzing Markets Management uses economic indicators to estimate the market potential of areas they wish to enter. Obviously, there has to be a sufficient number of people with sufficient income to purchase the goods or services. Standard indicators such as gross domestic product, gross national income, and other factors have to be studied. Even the underground economy must be considered, because it may distort the official economic data on which managers base their decisions.
Other economic dimensions include interest rates, balance of payments, and inflation rates. Age distribution is a useful tool for marketers and for human resource managers looking at a potential labor force. Generally, developing nations have the more youthful populations, so firms selling to youth mar- kets look to them when they expand overseas, assuming they have sufficient discretionary income.
Many changes are affecting world markets. They include low fertility rates in developed nations and a population shift toward urban areas, which affect population density and population distribution.
Economic and Socioeconomic Forces In this chapter, you’ll look at economic developments around the world. International businesspeople need to know how recognize important changes in economic conditions and understand the complexities of international operations. Huge populations like those in China and India offer potential markets, as well as opportunities for offshoring manufacturing and services.
International Business46
Be sure you understand the terms of economic development. The most technically advanced, industrialized nations are classified as developed, while those that are less advanced are classified as developing. Middle-income economies, such as the four “Asian tigers” (Taiwan, Hong Kong, Singapore, and South Korea) and Brazil, Mexico, Malaysia, Chile, and Thailand are considered newly industrializing countries (NICs); in addition, the Asian tigers are called newly industrialized economies (NIEs).
Political Forces While international business can be both exciting and prof- itable, there are risks involved. In the event of war, political upheaval, or other unstable conditions, foreign companies can lose business—or even have their assets confiscated. Terrorism, kidnapping, and random violence occur in many places in the world, and as a businessperson, you need some background in how things work, what to watch out for, and how to assess and manage risk.
Ideological Forces Although you’re probably familiar with ideologies like commu- nism, socialism, and capitalism, you need to understand how each type of government will affect your business. A change in government may be good news or bad news, depending on your circumstances and which way things change. Make sure you can explain the political terms given in your text and relate them to international business.
Communism. Karl Marx’s idealistic theory proposed a classless society in which the factors of production were owned by the people; in practice, however, the system has operated state-owned industries under a totalitarian government.
Capitalism. In the ideal form of capitalism, all factors of production are privately owned—government provides only the services that can’t be performed through the private sector, such as national defense and international relations; in reality, governments own and regulate businesses, legislate land usage and labor laws, and restrict business in many other ways.
Lesson 2 47
Socialism. Socialism promotes state or collective ownership of the means of production and an even distribution of wealth and power among the people; in practice its policies vary widely from pre-communist revolutions to selective national- ization of key industries within a capitalist system.
Market Screening Market screening and environmental scanning are two ways, similar in approach, to helping managers identify viable markets. Environmental scanning is the process of identifying environmental changes that will affect the company, and market screening takes it one step further by eliminating the less desirable markets.
Initial screening. The initial screening checks for basic need potential to see whether there’s a need present—you can’t sell dehumidifiers in the desert, after all. Once a need is established, the company will check resources like the U.S. Department of Commerce or the International Trade Administration to see what other companies are trading and where. If the competition has a foothold in an area, it’s a sign that there’s a demand; further analysis can reveal more details on the potential market.
Second screening. The second screening will examine market indicators—economic yardsticks for measuring market strength in a given area—and market factors, which correlate highly with market demand for a specific product. The analyst will study trends in inflation rates, exchange rates, and interest rates and find associations among clusters, or groups with similar variables. Any estimates or conclusions have to be updated periodically.
Third screening. In the third screening, businesses analyze political and legal forces, such as entry barriers to market, profit remittance barriers, the political climate, and policy stability. Instability makes planning difficult or impossible.
Fourth screening. Sociocultural forces are the focus of the fourth screening, a difficult phase that involves “soft” data— it’s subjective, and the opinions of a few may not be reliably reflect the culture under consideration. By this stage, the analyst should have a preliminary list of potential markets.
International Business48
Fifth screening. After the company has compiled a list of markets where there’s a demand for its product, in the fifth screening the analyst examines competitive forces—factors such as the number, size, and financial strength of competitors; their market shares, marketing strategies, and the effective- ness of their promotional programs; the quality of their product lines, source of their products, and pricing policies; and their levels of after-sales service, distribution channels, and cover- age of the market.
Final selection. Before the company makes the final selec- tion of new markets, an executive of the firm should visit each country and personally corroborate the findings from the screenings. Observing shoppers and seeing for oneself the way people choose and use products puts research into practice. A government-sponsored trade mission trade fair may provide very valuable information.
Segment Screening For dividing up markets, we naturally think in terms of coun- tries, but market segments often extend across borders. For instance, similar age, income, and lifestyle—teenagers, for example—usually determine a market. But the more closely we can define a group, the better target they’ll be. Therefore, teenagers who play sports, drive a car, and use a cell phone make up a smaller but more specific segment of the market.
TexTbook exercise for AssignmenT 8
At the end of each assignment, you’ll be asked to complete selected
exercises from the text as a review of what you’ve learned. Access
http://highered.mcgraw-hill.com/sites/007811263x/student_view0/index.html
to locate the online exercises. We urge you to complete the
exercises. The more you practice, the better you’ll do on the lesson
examinations.
1. Use the drop down box on the left side of the page. Select
Chapter 12. Access the chapter quiz. Complete the quiz.
Correct answers are provided on the website.
Lesson 2 49
Self-Check 8 Indicate whether each of the following statements is True or False.
______ 1. A subnational analysis of groups of consumers is called market screening.
______ 2. The economic data that serve as yardsticks for measuring the relative market strengths
of various geographic areas are called market ranking.
______ 3. Trend and cluster analyses are used to estimate demand.
______ 4. Imports have a unique ability to identify complete market potential.
______ 5. Import restrictions can be considered positive or negative.
______ 6. Competitive forces screening requires an analyst to evaluate pricing policies and
distribution channels.
Fill in the blanks.
7. Surveys that contain responses calculated to please the interviewer contain _______.
8. The criteria managers should use to identify and assess market segments must consider
those segments to be _______, _______, _______, _______, and _______.
Check your answers with those on page 114.
International Business50
ASSIGNMENT 9 Read the following introduction. Then read pages 202–223 in your textbook. Next complete the Textbook Exercise and Self- Check 9 to evaluate your understanding of the material.
International Legal Forces International companies depend on stability and rule of law and generally can’t afford to do business where they’re sub- ject to the whims of a dictator or a slanted legal system. The legal forces businesspeople deal with are public international law (legal relations between governments), private interna- tional law (laws governing transactions of individuals and companies that cross international borders), and treaties (agreements between two or more countries). When a country attempts to apply its laws to foreigners or nonresidents or to activities outside its borders, it’s called extraterritorial applica- tion of laws. Extraterritorial laws may include tax, antitrust, and environmental laws.
Settling International Disputes The United States has a long tradition of using lawsuits to solve dispute between parties, so businesses in the United States are accustomed to resolving disputes though litigation. But litigation can be extremely complicated and expensive. Before a case goes to trial, lawyers engage in finding and organizing the facts and structuring their argument.
Because the legal systems of different countries vary and conflicts could result in lengthy, expensive lawsuits, interna- tional contracts usually include specific terms under which the parties agree that disputes will be resolved by arbitration, rather than litigation. Arbitration binds all parties to the decision of a neutral person or body.
Lesson 2 51
The Growth of International Business Because more and more companies are entering the interna- tional market, it’s important for businesspeople to be familiar with the distinctions between the United States legal system and others they may find abroad. For instance, laws on patents, trademarks, copyrights, and other legal protection of intellectual property may differ, although there’s generally some legal protection available. The point is, having a patent or trade- mark in the United States doesn’t automatically protect you if you take your product or service elsewhere. The Paris Union, or International Convention for the Protection of Industrial Property, standardized patents to some degree, and in Europe the European Patent Organization (EPO) provides that a patent filed in one country is effective in all member countries. The information in this section of the text will give you a general idea of how laws differ and what organizations help standardize protection, but more specific research would be needed before someone actually took business overseas.
Types of Law British common law, on which the United States legal system is based, and European civil law have distinct differences. Common law is much more open to interpretation than civil law, which develops within a consensus among those who will be affected by it. As a result, civil law is less inclined to be challenged or changed. But the British system of common law differs in several ways from American law. These are important distinctions for American businesspeople who may assume that laws abroad are open to interpretation or that the system itself is comparable to the one they’re familiar with.
Taxation Taxes are a major concern for both businesses and individuals, and understanding their purposes and types is important to preparing for international dealings. It may surprise you to learn that in some countries, personal income tax exceeds 50 percent. Many countries rely more on the value added tax (VAT), which taxes a product at each step of production.
International Business52
Enforcement of tax codes also varies considerably, so companies need to know in advance what the liabilities are in each market. Tax treaties not only standardize terms among nations, they also define jurisdiction and allow governments to share information.
Antitrust Laws Antitrust laws—laws prohibiting monopolies, market sharing, and price fixing—have a long history in the United States, the first having been enacted in 1890. Similar laws in the European Union are called competition policy, but rather than focusing on the consumer, as antitrust laws do, Europe’s policy is concerned with maintaining the competitive struc- ture of industry. The United States is generally more vigorous in enforcing its laws, and among industrial countries, the antitrust laws of Japan are the least effective.
But if you’re spending time—whether a week or several years— doing business in a foreign country, you must be conscious of and sensitive to laws of the host country. Ignorance of the law is never an excuse, and some countries’ laws on personal behavior carry stiff penalties for infractions.
U.S. Laws and International Business Federal laws passed in the United States affect its citizens’ behavior even if they’re out of the country. For instance, antidiscrimination laws in employment apply in overseas offices of any U.S. company, and bribes to foreign officials are unlawful. One gray area is interpretation of the Foreign Corrupt Practices Act (FCPA), which outlaws bribes but not “grease,” payments used to bypass red tape and expedite official actions that often take a good deal of time to work their way through the system. After the Enron scandal, Congress passed the Sarbanes-Oxley Act (SOX) to ensure tighter guidelines for keeping financial records and more accountability from the company CEO and CFO.
Lesson 2 53
TexTbook exercise for AssignmenT 9
At the end of each assignment, you’ll be asked to complete selected
exercises from the text as a review of what you’ve learned. Access
http://highered.mcgraw-hill.com/sites/007811263x/student_view0/index.html
to locate the online exercises. We urge you to complete the
exercises. The more you practice, the better you’ll do on the lesson
examinations.
1. Use the drop down box on the left side of the page. Select
Chapter 7. Access the chapter quiz. Complete the quiz.
Correct answers are provided on the website.
Self-Check 9 Indicate whether each of the following statements is True or False.
______ 1. Private international law covers laws governing transactions of individuals and
companies crossing international borders.
______ 2. A compact and a treaty are the same thing.
______ 3. Hong Kong’s tradition of law is derived from Chinese law.
______ 4. The United States can’t tax its citizens if they live outside the country.
______ 5. Trade names are protected in all countries.
______ 6. Antitrust laws prohibit the formation of monopolies.
Fill in the blanks.
7. Standardization of measurements in almost every sphere of electrotechnology is promoted
by _______.
8. The European Union governs international antitrust situations using _______.
Check your answers with those on page 114.
International Business54
ASSIGNMENT 10 Read the following introduction. Then, read pages 448–476 in your textbook. Next complete the Textbook Exercise and Self- Check 10 to evaluate your understanding of the material.
Labor Forces Besides opening up the world as a potential market for goods and services, global business has changed the way human resources are utilized. In formerly agricultural economies like China, people began moving to cities to work in growing industries. For instance, in 1979, Chinese leader Deng Xiaoping opened several “special economic zones,” including the village of Shenzhen, to foreign investment. Now the fastest-growing city in China, Shenzhen’s population has expanded from only 30,000 to more than 10 million, and its economic growth has averaged more than 16 percent annually.
While there’s great demand for unskilled and skilled laborers in new industries, there’s also a demand for managers, and it’s difficult to find qualified candidates to fill those positions when educational resources haven’t caught up with specific needs. In other nations, such as Japan, the problems include an aging population, a severe labor shortage, and a cultural resistance to accepting foreign workers. Cultural differences between developed and developing nations must be considered carefully in all aspects of international business, and it’s as important in labor relations as it is in marketing.
Conditions and Trends Along with a shift from a rural to an urban labor force, the main occupational trend worldwide is toward service jobs and away from agriculture and manufacturing. Managers find that people coming from an agricultural background are capable of learning skills and doing good work, but that their agenda is quite different—their days revolve around their homes and families and they’re not willing to turn themselves over to the regimentation of production schedules.
Lesson 2 55
Another shift is in the average age of the world’s population. Older people are living longer and in developed nations, at least, younger people are having fewer children. That means that over the next several decades, the proportion of people over age 65 will grow in many places. One issue with an aging population is how a society with fewer younger, working people will be able to support social programs for the elderly, partic- ularly pensions and healthcare.
Labor Issues Once thought to be tied to a single location, working people have proven that they’re willing and able to travel when necessary to secure work. With a mobile labor population, however, comes the potential for problems associated with illegal immigration, including deceptive hiring practices, lack of benefits, and low pay.
Another issue that creates problems for international business is child labor. While the United States has strict laws regulating the ages of working minors and the hours children may work, some developing countries see their youngest workers as a source of low-cost labor they can’t give up. In addition, because of the economic plight of many of the families in these areas, the children’s income is sorely needed—and sending them to school isn’t an option. Still, global companies are criticized if they purchase goods from or contract with companies that use child labor. The same is true of forced labor, still used in some parts of the developing world.
Recruitment and Selection of Employees Three sources of staffing for IC executives are the home country, a host country, or a third country. There are four possible staffing policies:
Ethnocentric. Parent country nationals (PCNs) are hired for key posts. Most decisions are made at headquarters referencing the home country’s culture, but the experience of managers in host countries helps broaden their business and political perspective.
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Polycentric. Host country nationals (HCNs) are used in subsidiaries and PCNs at HQ. The HCNs work in their native language and culture and generally cost less overall, even accounting for training costs, but their lack of familiarity with the corporate culture can be a problem.
Regiocentric. Regional employees are used in key positions in subsidiaries to minimize cultural concerns, but the third country national (TCN) must be from a very similar background— language alone isn’t enough to ensure a successful adaptation.
Geocentric. Staffs are recruited worldwide and employees are promoted based on ability and experience, not nationality. The geocentric staffing policy, HRM strategy remains consistent throughout all subsidiaries.
Training and Development Training programs for managers of international companies must include the study of culture and language in the country where the manager will be working. PCNs sent abroad need to understand that their approach to business isn’t the only way to do things, and HCNs need to learn to work within the corporate culture of the home country.
In addition, the employee’s family situation has to be taken into consideration. Will the spouse be content if she or he isn’t permitted to work in the host country? Will both parents be satisfied with the schools available for the children? Can the children adapt? Unless the family can adjust, as well as the employee, the experience isn’t likely to be successful.
Additional support—before, during, and after the experience— is essential to both the expatriate and the IC. Language skills are especially important. Even though English is spoken in most places in the world, without an understanding of the host country’s language, it’s impossible to function effectively. And unless managers meet performance targets on their international assignments and later are reintegrated into the home office and make use of their experience, the expense of training and sending them overseas is wasted.
Lesson 2 57
Be sure to read the “WORLDview” article on culture shock. Understanding the five phases of culture shock and how to cope with the experience can help individuals overcome the difficulties and learn to enjoy the opportunities available in a new place.
Compensation Compensating overseas managers is more complicated than simply offering a salary based on job title and experience. Each assignment will be different and each employee’s needs will be different, depending on the country, currency rates, cost of living and tax rates, and even the need for hardship or danger pay for certain locations. The information in this section will be very important to you if you decide to accept an overseas assignment.
Employment and Social Status While women have made huge gains in the developed areas of the world, sexism—the denial of equal status for women—is still the custom in many places. Some cultures forbid, or at least discourage, the education of girls and the participation of women in activities outside the home. Even in highly developed nations, women are still struggling to fit into the business world. For instance, in Japan, only 8 percent of senior management positions are held by women; among Fortune 1000 companies, fewer than 10 percent of senior managers are female; and only 11 percent of company directors or members of supervisory boards in the European Union are women.
Sexism, racism, and class systems hold back untold numbers of potentially gifted minds by denying them education and limiting their choices to what’s allowed for their social position. Only the dirty, dangerous, and distasteful jobs are available to the lowest caste. Add to that the number of individuals suffering from malnutrition and ill health due to poverty and deplorable living conditions, plus premature deaths from preventable diseases, and you can begin to imagine the loss of talent and ability the world has suffered for centuries.
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Building Relationships As with other aspects of international business, companies must make a point of learning about the local labor market in any area in which they’re considering expanding. Labor unions are one potential area of difficulty, since laws and bargaining positions can vary greatly depending on the location and its culture. While international organizations and efforts at cooperation have had some effect on labor, it’s not realistic to expect the same high standards in developing countries as in those that are highly developed.
TexTbook exercise for AssignmenT 10
At the end of each assignment, you’ll be asked to complete selected
exercises from the text as a review of what you’ve learned. Access
http://highered.mcgraw-hill.com/sites/007811263x/student_view0/index.html
to locate the online exercises. We urge you to complete the
exercises. The more you practice, the better you’ll do on the lesson
examinations.
1. Use the drop down box on the left side of the page. Select
Chapter 17. Access the chapter quiz. Complete the quiz.
Correct answers are provided on the website.
Lesson 2 59
Self-Check 10 Indicate whether each of the following statements is True or False.
______ 1. Since 1995, immigrants to the United States have filled almost 58 percent of
the new jobs.
______ 2. The disadvantages of hiring HCNs can sometimes be avoided by hiring TCNs instead.
______ 3. Fifty-four percent of the United State’s expats are between 20 and 39 years of age and
are primarily women.
______ 4. Polycentric staffing involves advertising for workers outside the country.
______ 5. Women generally don’t want to take overseas management jobs.
Answer the question in one or more sentences.
6. Define labor market.
__________________________________________________________
__________________________________________________________
Check your answers with those on page 114.
International Business60
Notes
The Organizational Environment, Part 1
INTRODUCTION This lesson deals with strategic matters and forces in busi- ness with which you must be familiar. They include culture and natural resources, as well as socioeconomic, political, legal, financial, and labor forces. The readings include the strategic foundation for organizational decisions made for international expansion and contraction. These topics are covered in the context of other courses in business strategy, marketing, or even cost accounting, but here you’ll find far more detail.
OBJECTIVES When you complete this lesson, you’ll be able to
� Describe the importance of global strategic planning
� Discuss types of strategies and how companies can prepare their managers to use them
� Explain the decision-making process among parent and subsidiary units of an international company
� Define organizational design and explain why it’s important to international business
� Discuss market research, sources of information, and problems that may be encountered in foreign markets
� Explain methods for entering the international market
� Differentiate between direct and indirect exporting
� List sources of support and counseling, export financing, and imports
� Describe documents and tariff schedules required for export
Lesson 3 61
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ASSIGNMENT 11 Read the following introduction and read pages 252–277 in your your textbook. Next complete the Textbook Exercise and Self- Check 11 to evaluate your understanding of the material.
Competitive Strategy In 2008, the price of oil both spiked and crashed, with prices climbing to $147 a barrel in July only to drop to $40 by the end of the year. No wonder oil company executives make use of the “what if?” challenge and involve their man- agers in “rehearsing the future” through the use of scenarios. As the events of 2008 proved, anything can happen and prior assumptions often won’t apply.
Managers and the Competitive Advantage As illustrated in the introduction, a manager must be pre- pared for any eventuality, and to do so he or she needs to know the company thoroughly—its mission, its vision, its strengths and weaknesses, and its competition—and be prepared to meet challenges and opportunities quickly.
While global planning follows the same basic procedures as domestic planning, the uncontrollable forces are more complex in international business, thus requiring an international strategy—the approach to making the best use of resources and achieving the company’s international objectives. With political, economic, social, technological, legal, and environ- mental forces to consider—all within the cultural context of the foreign markets—it’s no wonder planning can be such a challenge.
Strategy requires both internal and external consistency to be effective enough to allow the company to compete. The goal of international strategy is to achieve a competitive advantage, meaning the company earns higher profits than its competitors do.
Lesson 3 63
Global Strategic Planning Keeping decision makers “on the same page” is key to making the best business decisions. When the managers within an organization all see the same big picture, it promotes not only consistent actions, but also managers’ ability to realize the wider consequences of each decision. In a world that’s perceived as increasingly competitive, strategic planning pro- vides an effective management tool for global business. Also, the process of global strategic planning provides a formal structure for decision making and planning.
1. Analyze the firm’s external environments.
2. Analyze the firm’s internal environments.
3. Define the company’s business and mission.
4. Set corporate objectives.
5. Quantify goals.
6. Formulate strategies.
7. Make tactical plans.
As part of the planning process, companies may set up a value-chain analysis, which requires consideration of three key questions:
1. Who are the company’s target customers?
2. What value does the company want to deliver to these customers?
3. How will this customer value be created?
The goal of this analysis is to enable management to deter- mine the set of activities that will comprise the company’s value chain, including which activities the company will do itself and which will be outsourced. Management must also consider the location of various value-chain activities and examine the links among the activities. The analysis extends across activities within the company, with external entities such as suppliers and distributors, and with domes- tic and international customers.
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The pool of knowledge a company possesses is a valuable resource that can contribute to its competitive advantage. Managers should be familiar with both the company knowledge base and the capability of individuals and groups within the company. By encouraging teamwork, even tacit knowledge— that which is understood but difficult to communicate—can be absorbed through shared experiences and then codified for easier access.
Mission, Vision, and Values Statements
While it may seem idealistic or impractical to try to distill a company’s vision into a few words or sentences, focusing on exactly what the company’s goals are sends a powerful mes- sage to its stakeholders. Some firms develop mission, vision, and values statements, while others combine two or more.
Mission statement. The mission statement is a succinct def- inition of the purpose for the company’s existence, including its scope.
Vision statement. The desired future position of the company is described in a vision statement, depending on acquisition of competencies and successful implementation of its strategy.
Values statement. The values statement concisely describes the basic values, beliefs, and priorities of the organization, which promote desirable behavior among the organization’s members and toward their customers, suppliers, and community.
As you read the statement samples in the textbook, think about what each one says about the company that purports to live by it.
Lesson 3 65
Corporate Objectives Once a company has defined its purpose and set goals, it must plan a way to reach those goals. Setting objectives helps guide and maintain the firm’s operations in support of its mission. The company also must turn a profit.
But an effective objective must be measurable. That means that it needs some kind of quantification, so the managers will know when the objective has been reached. For instance, if a hardware company’s vision statement includes the inten- tion to become “the best hardware company in the world,” it has to define what it will do, how it will measure “best,” and a timeframe within which the objective will be met. These standard questions—what, how much, and when—give specific, measurable guidelines for setting objectives.
Once the objectives are set, the bigger question is how the objectives will be achieved. This requires competitive strategies, or action plans designed to meet the objectives. But in inter- national business, the opposing forces of cost reduction and adapting to local markets may put conflicting pressures on firms’ competitive strategies. For instance, in an effort to lower expenses, a firm may consider creating a standardized product. However, the product would have to be modified to meet customers’ expectations in local markets, which would mean added expense. Study the types of strategies companies use under various circumstances, and keep in mind that as conditions change, the strategies have to be revised and contingency plans—worst-case scenarios—must be prepared.
Study the advantages and disadvantages of the following strategies:
� Home replication strategy
� Global strategy
� Multidomestic strategy
� Transnational strategy
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Implementing the Strategic Plan Sales forecasts—estimates of units to be sold and revenue to be collected—and budgets are integral parts of planning strategically. Without a system of planning for production, managers wouldn’t know how much raw material or supplies to order. Without a budget, they wouldn’t know whether they could pay for operations. And once a plan is prepared, it must be implemented using policies—broad guidelines that deal with recurring problems—and procedures—detailed instructions that ensure uniform results. In addition, some type of performance evaluation must be put in place to measure the company’s effectiveness in finding and using appropriate resources, employees’ effectiveness in performing their assigned jobs, and the firm’s progress on achieving its objectives—within the parameters of its stated mission and values.
Kinds of Strategic Plans While the timelines of strategic plans vary widely, they’re usually divided into short-, medium-, and long-term plans— each of which also varies according to the organization. Still, the relative timeframe of each type of plan offers clues about the company’s intentions, even when the plan is reviewed and tweaked regularly.
Planning also varies according to the level in the organization— there will be separate plans for each level, and generally the plan is more specific and has a tighter timeframe the farther down the organizational chart you go.
Various methods of planning are used depending on the organi- zation and the objectives. Make sure you can differentiate the three types of planning discussed in your text and the advan- tages and disadvantages of each:
� Top-down planning, in which corporate headquarters develops and provides guidelines
� Bottom-up planning, in which the lowest levels inform top management of what they expect to do
� Iterative planning, a combination of some aspects of bottom-up and top-down planning
Lesson 3 67
New Directions in Planning Wise CEOs and corporate planners know that a strategic plan must consider that company circumstances, the economy, and/or their customer base could change in the future. Those who assume that conditions will remain as they are and write a strategic plan based on the status quo are merely performing an exercise. Particularly in international business, planners needed to be engaged in day-to-day operations to keep up with economic changes, increases in competition, and political uncertainty.
With managers rather than professional planners on board, strategy takes on a new dimension. For the most part, changes in approach have been made in the following three areas:
� Who does the planning (senior operating managers, not a planning staff)
� How it’s done (a shorter, less-structured document, which includes ideas from all levels of operation)
� The plan’s contents (focuses on issues, strategies and implementation)
Competitive Forces The biggest single problem in international planning is the lack of good information on competitors. Competitor assessment has been going on for a long time, but now management recognizes that increased competition requires broader, more in-depth knowledge of competitors’ activities. Firms need a sophisticated competitor intelligence system to gather, analyze, and disseminate information within the company.
There are five sources from which to gather information on the strengths, weaknesses, and threats of a firm’s competitors:
� From within the firm
� In published material
� Through suppliers and customers
� From competitors’ employees
� Through direct observation
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Benchmarking While a competitor analysis can highlight differences
between firms, it doesn’t analyze what causes the differences. Benchmarking is a technique for measuring a firm’s performance compared to other, even dissimilar, industries. Managers can use one or more of the four basic types of benchmarking:
� Internal, which involves comparing one operation with another in the same firm
� Competitive, which compares a firm’s operation with that of a competitor
� Functional, which compares similar functions of firms in one’s industry
� Generic, which compares operations in totally unrelated industries
The competitive advantage in benchmarking is in exposing employees to new ideas, encouraging creativity, promoting organizational learning, and enhancing performance.
Industrial Espionage Intense competition and lax ethical standards have led to an increase in industrial espionage in recent years, especially in international business. American companies lose billions of dollars every year to competitors who steal their trade secrets. Economic spying isn’t limited to political adversaries—nations the United States calls friends are also guilty of spying.
TexTbook exercise for AssignmenT 11
At the end of each assignment, you’ll be asked to complete selected
exercises from the text as a review of what you’ve learned. Access
http://highered.mcgraw-hill.com/sites/007811263x/student_view0/index.html
to locate the online exercises. We urge you to complete the
exercises. The more you practice, the better you’ll do on the lesson
examinations.
1. Use the drop down box on the left side of the page. Select
Chapter 9. Access the chapter quiz. Complete the quiz.
Correct answers are provided on the website.
Lesson 3 69
Self-Check 11 Indicate whether each of the following statements is True or False.
______ 1. The choices firms make about deploying scarce resources to achieve their international
objectives is called competitive advantage.
______ 2. The only difference between domestic and global strategic planning is in allowing
for differences in cultural values.
______ 3. Organizational knowledge is key to gaining competitive advantage in international
business.
______ 4. Strategic planning takes into consideration two opposing forces in international
markets: reduction of costs and adaptation to local markets.
______ 5. Scenarios use past data to predict changes on which managers create strategic plans.
Answer the question in a brief paragraph.
6. Describe the advantages of top-down planning and bottom-up planning; define iterative
planning methods.
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
Check your answers with those on page 115.
International Business70
ASSIGNMENT 12 Read the following introduction. Then read pages 278–322 in your textbook. Next complete the Textbook Exercises and Self- Check 12 to evaluate your understanding of the material.
The strategic-planning process assures that managers have a clear understanding of the company’s mission, a vision for how to achieve that mission, and an understanding of how they’ll compete with other companies. The next step is organizational design, which senior executives use to structure operations in a way that allows the company to efficiently and effectively conduct its business. To do so, they must integrate the essential structures and systems in a way that’s consistent with the firm’s strategy and environmental context.
Organizational Design Organizing normally follows planning. In designing the organi- zational structure, management is faced with two concerns: finding the most effective way to take advantage of specialization of labor and coordinating the firm’s activities to enable it to meet its overall objectives. Since these concerns are so difficult to balance, reorganizing the company structure is sometimes the only solution.
The four primary dimensions that must be addressed during the design of a company are technical, geographic, client, and functional expertise. Also, businesses have generally gotten away from the formation of international divisions—divisions are more likely to be based on product, region, function, or customer classes.
� Product divisions are responsible for global line and staff operations.
� Geographic divisions are run by area managers who report directly to the CEO.
� Functional divisions are rare and are generally limited to narrow, highly integrated product mixes.
Lesson 3 71
Hybrid organizations, as the name suggests, combine organi- zational forms at the top level. These are usually the result of the acquisition of a firm with distinctive products or the introduction of a new product line. Matrix organizations result when management wishes to maintain clear lines of authority within varied structures that overlap.
Changes in Organizational Forms Because of the rapid changes that can occur in the business environment, today’s companies understand the need to be open to frequent reorganization. Two of the newer organiza- tional forms are the network, or virtual corporation, which relies on outsourcing to conduct its business, and the horizontal corporation, mainly seen in highly competitive technology firms, which is based on cooperation and coordination among employees without strict control from upper management.
Twenty-First Century Trends If they’re going to be able to concentrate on their core busi- ness, modern companies must maintain their focus even as they grow and mature. By outsourcing much of the periph- eral work, such as accounting and marketing, managers can develop a dynamic network structure that breaks down major functions of the firm into smaller companies that can be managed by a smaller control center at the headquarters. That way, a firm can remain competitive in spite of its size.
Control Every successful company uses controls to put its plans into effect and to evaluate and reward or correct executive perform- ance. One element of controls is whether decisions are made by the parent company, the subsidiaries, or by a combination.
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Maintaining Control Subsidiaries—companies controlled and owned in whole or in part by another company—don’t always agree with the parent company on decisions and how or where they’re made. When subsidiary managers are moved into the parent operation or into other subsidiaries, it helps to widen executives’ under- standing of the affiliates’ operations. Conversely, transferring managers from the parent company to the affiliates helps them experience local problems firsthand. As the company grows, it hires more experts, and the longer a company has been an IC, the more decisions will be made at the parent headquarters. Still, managers at the subsidiaries have to be included in decision making, or they’re likely to leave or become hostile.
Joint ventures affect decisions in several ways, but generally there has to be some cooperation between the subsidiary and the parent company, especially when part-ownership is less than 50 percent. Administration of finances and technology can help provide control, as can a management contract and placement of IC managers in executive positions in the subsidiary.
However many units an IC has in the world or how they’re related and structured, it must keep close tabs on those branches. Without complete, accurate, and timely reports from each partner, the firm will have little control over what goes on—a dangerous situation for any business. Regular reports include information in the areas of
� Finance
� Technology
� Market opportunities
� Political conditions
� Economic conditions
Lesson 3 73
Relinquishing Control Most managers couldn’t imagine a business without a central- ized headquarters from which the most important decisions are made. Or could they? The Internet is just such an enterprise, and because its design is based on distributed control, it has grown “organically,” from the bottom up, and adapted to every challenge. While most businesses wouldn’t survive under those conditions, relinquishing some control to workers and rewarding them for coping with evolving tasks and changing team members can be very successful.
TexTbook exercises for AssignmenT 12
At the end of each assignment, you’ll be asked to complete selected
exercises from the text as a review of what you’ve learned. Access
http://highered.mcgraw-hill.com/sites/007811263x/student_view0/index.html
to locate the online exercises. We urge you to complete the
exercises. The more you practice, the better you’ll do on the lesson
examinations.
1. Use the drop down box on the left side of the page. Select
Chapter 10. Access the chapter quiz. Complete the quiz.
2. Use the drop down box on the left side of the page. Select
Chapter 11. Access the chapter quiz. Complete the quiz.
Correct answers are provided on the website.
International Business74
Self-Check 12 Indicate whether each of the following statements is True or False.
______ 1. A company’s organizational structure helps to determine where formal power
and authority are located within the organization.
______ 2. The object of horizontal organizations is to foster cooperation and coordination.
______ 3. A virtual corporation usually disbands after the marketing opportunity that produced
it has come to an end.
______ 4. Organizational structure contributes to a successful business strategy by determining
how resources will be used.
______ 5. Subsidiary management morale is one element in determining where decisions
are made.
Answer the questions in a brief paragraph.
6. What is a virtual corporation?
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
7. What is a horizontal corporation?
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
Check your answers with those on page 115.
Lesson 3 75
ASSIGNMENT 13 Read the following introduction. Then, read pages 344–363 in your textbook. Next complete the Textbook Exercise and Self- Check 13 to evaluate your understanding of the material.
Entering Foreign Markets Being a pioneer in a new market can give a company an edge— sometimes. But there are also many risks in being first, so sometimes being second or third, especially if you enter with plenty of resources, can overcome any advantage a pioneer has. There are many doors to the international market, both equity- and nonequity-based—even through piracy of your ideas—and just as many chances for success.
Entry Modes When a company considers going international, the market- ing manager must decide whether the firm can standardize its approach worldwide, make some changes, or formulate a completely different marketing mix.
Among nonequity-based ways to enter the market, indirect exporting is the simplest route, because export agents do the work. Of course, there are disadvantages, both financially and in the lack of control, but it’s the way many companies start out. Direct export involves setting up a system within the firm to handle all aspects of exporting. Setup and the initial effort can take time, but the Internet has simplified the process of making products available to the international market. It’s somewhat less complicated to invest in a turnkey project—an overseas facility already built and ready to go—or to sell a franchise or license to use the company’s patented ideas or products, although there are risks involved in any new venture.
Equity-based modes of entry include several types of businesses. Wholly-owned subsidiaries, which are preferred because they provide instant access to markets and allow the business to control the product, are one. Another type is joint ventures— corporate entities that are cooperative efforts formed by an
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international company and local owners or a government agency and an international firm for the purpose of doing business in a third market, or two or more firms combining efforts for a limited duration. Joint ventures have both advantages and disadvantages with which you should make yourself familiar.
Strategic alliances are partnerships formed between customers, suppliers, or even competitors, which can speed up market entry and help reduce the costs of research, product develop- ment, and marketing, as well as decreasing risks. Make sure you understand the distinctions between trading and pooling alliances and between alliances and mergers or acquisitions. The other thing to keep in mind is the high failure rate in the long term, usually because one partner takes over the alliance.
Channels of Distribution Which channel of distribution to use is another decision exporters must make. This section in your text examines the uncontrollable forces involved in delivering products to the target market at a reasonable cost. Again, firms can use indirect exporting through agents or exporting managers, or they can work directly through manufacturers’ agents, dis- tributors, retailers, or trading companies.
Exporters based in the United States provide various services to firms that don’t want to handle their own exporting. Services include selling for the manufacturer, buying for overseas cus- tomers, buying and selling for their own accounts, and buying for middlemen serving other companies. An exporter may perform more than one of these functions. Study the examples of each type of export business.
To get involved in direct exporting, companies, there are four choices. A company may work through manufacturers’ agents, distributors, retailers, or trading companies.
Lesson 3 77
TexTbook exercise for AssignmenT 13
At the end of each assignment, you’ll be asked to complete selected
exercises from the text as a review of what you’ve learned. Access
http://highered.mcgraw-hill.com/sites/007811263x/student_view0/index.html
to locate the online exercises. We urge you to complete the
exercises. The more you practice, the better you’ll do on the lesson
examinations.
1. Use the drop down box on the left side of the page. Select
Chapter 13. Access the chapter quiz. Complete the quiz.
Correct answers are provided on the website.
Self-Check 13 Indicate whether each of the following statements is True or False.
______ 1. Contract manufacturing is sometimes referred to as “foreign direct investment
without investment.”
______ 2. Evidence suggests that pioneers gain and maintain a competitive advantage
in new markets.
______ 3. In general, mergers and acquisitions can be considered alliances.
______ 4. The largest and most diversified international trading companies are run by the
European Union.
______ 5. The most significant disadvantage of joint ventures with local partners is lack
of control.
______ 6. Piracy, whether a physical raid on cargo ships or the illegal distribution of copyrighted
software, is damaging to exporters and should be stopped by any means possible.
Check your answers with those on page 116.
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ASSIGNMENT 14 Read the following introduction. Then, read pages 364–388 in your textbook. Next complete the Textbook Exercise and Self- Check 14 to evaluate your understanding of the material.
Export and Import Practices Now that you have some background in how exporting works, we’ll look at how businesses decide whether or not to export, how they make an export marketing plan, arrange finances related to exporting, and deal with all the paperwork involved. Once the process is confirmed, the logistics have to be worked out—how will the product get from the plant to the overseas market? Importing goods offers a similar set of challenges. Make sure you study the list of common mistakes new exporters are likely to make.
Why Businesses Export There are a variety of reasons why firms decide to export. Sometimes a market exists with no supplier, and it’s just too good an opportunity to pass up. Sometimes it’s part of a company’s strategy to increase sales, extend a product’s life cycle, or respond to a challenge by a foreign competitor.
There are also good—and not-so-good—reasons not to try exporting. Sometimes it’s simply a preoccupation with the American market or a reluctance to become involved in a new and unknown operation that keeps companies from entering the international market. To do so requires research and expense to locate foreign markets, and develop export and finance procedures.
Lesson 3 79
Locating Foreign Markets
Resources for Locating Foreign Markets
The screening process described in Chapter 16 is a procedure useful to experienced market analysts, but newcomers to exporting may wish to use an export assistance program, such as one of those offered by the Trade Information Center (www.export.gov/exportcounseling.html), a one-stop source of information on federal assistance programs offered by all federal agencies. On the Web site’s index page, there are links to government export programs, trade promotion events, and trade lead information. After newcomers to exporting see what resources are available, they can contact the Trade Information Center directly for assistance. Other programs, which you’ll read about in your text, are offered through SCORE, Small Business Development Centers, and the Department of Agriculture.
A useful business publication is Business America, a commerce biweekly that includes a section containing announcements about U.S. promotions abroad, opportunities to make direct sales, and foreign concerns looking for licensors, distributor- ships, and joint partners.
“Show-and-sell” type trade events are organized by the Department of Commerce to help businesses locate foreign representatives and make sales. The events include U.S. pavilions at global trade fairs, trade missions for particular sectors of industry, distribution of literature at trade shows, and reverse trade missions, in which the government funds visits by representatives of foreign governments interested in buying American equipment.
Other Sources of Assistance
World Trade Centers Association. More than 300 World Trade Centers provide access to an online trading system. Exporters can place offers to sell in an electronic database via computer, or access can be gained through local telephone service in 800 cities in 100 countries.
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District export councils. The Department of Commerce has 51 district export councils composed of volunteer busi- ness and trade experts who assist in workshops and arrange for consultations for newcomers.
State governments. All states have export development departments offering assistance and counseling to exporters and providing with sales leads and locating overseas representatives.
Writing an Export Marketing Plan As in any marketing plan, research comes first, with specific markets, strategies, and budgets outlined based on what was learned. The chapter appendix offers a sample export business plan beginning on page 387. Make sure you study it.
Payment Terms Payment terms are the next important step in exporting. The International Chamber of Commerce’s current INCOTERMS—13 trade terms establishing the responsibilities of buyers and sellers in international trade—ensure exporters and importers understand the risks and at what point each gains responsi- bility for a shipment. Export payment terms include cash in advance, open account, consignment, letters of credit, and documentary drafts.
� Cash in advance is desirable for sellers, but buyers gen- erally won’t tie up their capital is purchasing this way.
� An open account purchase is risky for the seller, but when offered only to reliable customers in economically stable countries, it can be successful and competitive.
� Consignment sales are also riskier for the seller, since payment isn’t received until the goods are sold.
� Letters of credit (L/C) are documents issued by the buyer’s bank promising to pay the seller a specified amount once certain conditions are met.
� Documentary drafts are unconditional orders instructing the buyer to pay the amount of the draft upon presentation (sight draft) or at an agreed future date (time draft).
Lesson 3 81
While exporters, like other businesses, would prefer to avoid the risks involved in extending credit to customers, most of the time some type of credit is necessary. Both private and public sources are available and include the following:
� Private sources, such as commercial banks, factoring (discounting export accounts payable without recourse), and forfaiting (the purchase of obligations from the sale of goods and services that fall due at a later date without recourse)
� The U.S. Export-Import Bank, a public source, which provides direct loans, intermediary loans, and guarantees
� Other public incentives, such as the overseas private investment corporation (OPIC), foreign sales corporations (FSCs), and foreign trade zones (FTZs)
Export Procedures Exporters are confronted with five or six times as many documents as are domestic shippers. However, foreign freight forwarders will handle much of this work. Foreign freight forwarders act as agents for exporters, prepare documents, book space with carriers, and supply marine insurance if asked.
While it may seem logical that goods require accurate docu- ments to get them safely and legally to their destinations, many businesses waste time and money by failing to ensure that the documentation is correctly completed. Granted, there are numerous papers to be dealt with—shipping documents include the domestic bill of lading, the export packing list, the shipper’s export declaration, the export licenses, the export bill of lading, and the insurance certificate. But once you understand the purposes of each document and how it fits into the export process—and, in the case of insurance, whom it protects—you may decide it’s a good use of time to see that they’re done right the first time.
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All goods except those going to U.S. possessions or Canada require either a general export license or a validated export license from the United States government. Certain types of goods require special authorization, for instance if they’re considered strategic materials or going to an unfriendly country.
Other documents are focused on ensuring the goods go where they’re intended to go and are received by the proper party. Insurance may be required by the importing country, but in some cases is provided by the exporter.
Invoices are similar to those used in domestic business, but they may include additional information about the origin and other details of the sale. Some importing countries may require that the invoice be in their own language.
Inspection certificates are generally required for food, live animals, some types of machinery, and hazardous goods. Because of tighter regulations in Europe, some American goods must be certified before shipment that they meet European safety, health, and environmental standards.
Export Shipments The tremendous advances in materials-handling techniques over the past two decades have simplified delivery, cut costs, and shortened delivery time dramatically. Sealed containers— loaded by the exporter and unloaded by the importer—reduce the risks of damage and theft, as well as reducing costs. RO-RO (roll on–roll off) allows containers to be delivered to small ports that don’t have lifting equipment. Air freight has reduced shipment time to 24 hours in many cases. Even though air freight costs more, it can save money on packing, insurance, and warehousing. Also, some products, such as perishable food, flowers, or quickly changing fashions, require quick shipment to deliver their goods.
Importing Many of the concerns of exporters and importers are similar, although the process is done in reverse. Importers must locate sources, deal with customhouse brokers, and arrange for payment of import duties.
Lesson 3 83
Locating Sources
While it may seem difficult to locate a source for a particular product, a prospective importer has several ways to find import suppliers. An obvious solution is to search the Internet, but a more direct way is to simply examine a similar product, which must be marked with the country of origin, contact the country’s embassy, and ask for the names of manufacturers. Foreign chambers of commerce may have offices in major American cities, and the electronic bulletin board of the World Trade Center offers information on businesses.
Customhouse Brokers
A customhouse broker is an agent for the importer. The broker is thoroughly familiar with import regulations and tariffs, can provide such services as arranging transportation for the goods after they leave customs or placing goods in a bonded warehouse when necessary. The Automated Commercial System (ACS) is used by U.S. Customs to track, control, and process all U.S. imports of commercial goods. Importers who use the ACS to file documents can also pay customs fees and import duties electronically in one transaction. Software links to the system are offered by several companies.
Even if an importer uses a customhouse broker, he or she should be thoroughly familiar with import duties, how the customs office calculates import duties, and the importance of product classification. The Harmonized Tariff Schedule of the United States (HTSUSA) is similar to the global tariff code, known as the Harmonized System. Because each detail added to a product can increase the duty, importers generally work with a customhouse broker or ask U.S. Customs for a deter- mination of duty in advance. One last item: always disclose fully; afterwards, if your firm feels it’s paying excessive import duties and can’t reach an agreement with customs officials, it can take the matter to court.
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TexTbook exercise for AssignmenT 14
At the end of each assignment, you’ll be asked to complete selected
exercises from the text as a review of what you’ve learned. Access
http://highered.mcgraw-hill.com/sites/007811263x/student_view0/index.html
to locate the online exercises. We urge you to complete the
exercises. The more you practice, the better you’ll do on the lesson
examinations.
1. Use the drop down box on the left side of the page. Select
Chapter 14. Access the chapter quiz. Complete the quiz.
Correct answers are provided on the website.
Self-Check 14 Indicate whether each of the following statements is True or False.
______ 1. The Department of Commerce offers assistance in market research and strategy,
orientation briefings, and other services to exporters through U.S. embassies.
______ 2. If you wanted to find out about a foreign corporation, you could elicit help from the
U.S. and Foreign Commercial Service (USCS).
______ 3. A marketing technique that works in one country will probably be successful
in all countries.
______ 4. When goods are sold to an outlet that in turn withholds payment until they’re sold
to a member of the public, the transaction is called consignment.
______ 5. With an irrevocable L/C, the letter of credit is cancelled.
______ 6. OPIC is the international organization that regulates oil prices.
______ 7. A formal application is required for a general export license.
Check your answers with those on page 116.
Lesson 4 85
The Organizational Environment, Part 2
INTRODUCTION This lesson is structured according to business disciplines and includes chapters on marketing issues, supply chain management (operations management), personnel or human resources management, and accounting and financial issues.
OBJECTIVES When you complete this lesson, you’ll be able to
� Explain the difference between domestic and international marketing
� Discuss why consumer products generally require greater modification for international sale than do industrial products or services
� Describe the relationship between design and supply chain management
� Explain global sourcing and electronic purchasing
� Discuss advanced production techniques and standard- ization of production processes and procedures
� Describe the challenges of staffing overseas offices
� Explain capital structure choices and their effect on the MNC
� Identify the major challenges of international accounting
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ASSIGNMENT 15 Read the following introduction. Then, read pages 390–420 your textbook. Next complete the Textbook Exercise and Self- Check 15 to evaluate your understanding of the material.
Marketing Internationally As you’ve already learned, what works in one country or region doesn’t necessarily transfer intact to another. While you’ll study strategies for product, promotion, pricing, and distribution, and while basic marketing functions remain similar, you must always keep in mind the differences in uncontrollable environmental forces. Even the controllable forces vary greatly due to variations in need, preference, and environment.
Strategy decisions on how to reach the target market is the job of the international marketing manager. The question is, can the marketing mix be standardized or must it change for a given market? The manager must decide if a standardized approach will be effective worldwide, if the firm must make some changes, or if it must formulate a completely different marketing mix. Standardization is obviously preferable, since it offers lower costs, allows easier control and coordination from headquarters, and it takes less time and effort to prepare the marketing plans. However, depending on the product (consumer or industrial), environmental forces, and the degree of market penetration, some degree of change is likely to be necessary.
Product Strategies In developing product strategies, managers must consider the total product (the whole package the consumer is buying). A new product can be created without changing the formula of a soap or the brand name of a soft drink to suit the local market— just the way it’s packaged or promoted will make it feasible in the new market, if sociocultural forces are recognized. Maintaining the basic product reduces manufacturing costs and permits international standardization of production, a
Lesson 4 87
goal of most managers. Much of the confusion about whether a firm can develop global products is a failure to differentiate among total product, physical product, and brand name.
The ease with which the total product is changed depends on its type. Industrial goods can often be sold worldwide with few changes; however, sometimes changes are necessary. For instance, in the case of large machinery, the total product often includes a training program in developing countries, because of tendencies to overload equipment and ignore maintenance. Consumer products generally require more modification to meet cultural expectations. They can be sold unchanged to certain market segments, such as the foreign- educated and well traveled (the “jet set”), and expatriates. Note that certain other products (French perfume, American hamburgers) must be sold virtually unchanged since their “foreignness” is a critical part of their consumer appeal.
Services are generally easier to market globally. For instance, consulting firms such as Accenture (formerly Andersen Consulting) offer similar services worldwide. The credit card industry is also largely global. Other services must adapt to local laws if they’re to operate outside the United States.
Environmental Forces The uncontrollable forces that affect a firm’s entrance into a foreign market include sociocultural forces—cultural patterns and beliefs that affect how the name of a product or its label are perceived by the target market. Even colors have cultural nuances that may affect a product’s success. These issues must be carefully researched and incorporated into the marketing approach.
Legal forces are another hurdle in doing business overseas. Firms must adhere to the laws of the land, some of which prevent standardization and protect the local industries. Many legal standards, such as those for safety and environ- mental protection, are much stricter in other countries than in the United States.
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A third obstacle to worldwide product standardization is economic. Products from industrialized nations may be too expensive for developing countries or they may not withstand local operating conditions. Smaller markets may not permit as extensive a product mix as in the home country.
Climate and difficult terrain may also require product adaptations. Heat- or moisture-resistant packaging, heavy-duty machinery and tires, or special insulation are sometimes needed.
Promotional Strategies Promotional strategies both influence and are influenced by the other marketing variables. It’s possible to formulate nine distinct strategies by combining the following three alternatives:
� Marketing the same physical product everywhere
� Adapting the physical product for foreign markets
� Designing a different physical product with the same, adapted, or different promotional messages
Advertising Advertising is the element within the promotional mix with the greatest similarity worldwide. Most advertising is based on American techniques, although the messages are adapted to local markets. Note the various differences U.S. firms must keep in mind when advertising in foreign markets.
Manufacturers are increasingly using global or regional brands for several reasons. First is cost. Creating a commercial for use across a region can save up to 50 percent on production costs. Second, there’s a better chance of finding one regional source to do high-quality work than of finding multiple sources in several countries. In addition, marketing managers prefer their companies to have a single image throughout a region, and firms can centralize their efforts in one location.
However, choosing media for advertising precludes the standardized media mix designed in the home office. Local managers and ad agencies have a much better grasp of the market and the best way to reach it.
Lesson 4 89
Sales Promotions and Public Relations While sales promotions can generally be standardized, there are some sociocultural and economic constraints. Americans are much more likely than other consumers to use coupons, for instance, but contests and raffles are often successful overseas. Much more important is communicating the firm’s activities with the public and government agencies through an effective, ongoing public relations campaign.
Pricing Strategies Price is a controllable variable, but is complex because of its interaction with other elements of the marketing mix. There are also cultural elements involved, since the perception of quality and the importance of relationships affect response to the price of a product. Taxes, legal issues, and domestic competition also affect how prices are set.
Standardized Prices Because managers must be concerned with both foreign national pricing (local pricing in another country) and international pricing (setting prices of goods for export), pricing of exports is complex. Minimum price requirements, cost differentials, labor laws, and competition all affect the options a manager has. The transfer price, the price of goods and services bought and sold among affiliates, may be benefi- cial to the firm as a whole, even when it creates problems for managers who end up with a loss on the deal. However, as consumers and businesses learn to compare prices and buy on the Internet, we come closer to achieving world prices.
Distribution Strategies Getting the goods to foreign markets and delivering the goods to each market makes successful distribution a challenge for marketing managers. Besides their strategies being interde- pendent with other marketing factors, managers must analyze the environmental forces, which range from geography to antitrust laws. The combination of Internet sales and overnight delivery services has contributed to disintermediation, or the unraveling of traditional distribution structures as newer
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methods become available.
The next decision, channel selection, involves direct or indirect marketing. Management may choose to use middlemen or sell directly, depending on factors such as the market, the product, the company and the middlemen’s characteristics.
TexTbook exercise for AssignmenT 15
At the end of each assignment, you’ll be asked to complete selected
exercises from the text as a review of what you’ve learned. Access
http://highered.mcgraw-hill.com/sites/007811263x/student_view0/index.html
to locate the online exercises. We urge you to complete the
exercises. The more you practice, the better you’ll do on the lesson
examinations.
1. Use the drop down box on the left side of the page. Select
Chapter 15. Access the chapter quiz. Complete the quiz.
Correct answers are provided on the website.
Self-Check 15 Indicate whether each of the following statements is True or False.
______ 1. A strong brand name should be retained worldwide, regardless of market or language.
______ 2. The product is the central focus of the marketing mix.
______ 3. Among promotional strategies, advertising has the greatest similarities worldwide.
______ 4. The total product includes the brand name, service, instructions, accessories, and
packaging, in addition to the physical product.
______ 5. Low prices can be expected to increase market share in any market.
______ 6. Positive public relations can help defuse criticism and offset nationalistic feelings.
Check your answers with those on page 116.
Lesson 4 91
ASSIGNMENT 16 Read the following introduction. Then read pages 422–446 in your textbook. Next complete the Textbook Exercise and Self- Check 16 to evaluate your understanding of the material.
Global Supply Chains As is shown in the opening case of Zara’s “fast fashion” revolution, business strategies can change rapidly. Zara’s efficient and effective innovations are part of the operation called supply chain management. While many companies use a global supply chain (see Figure 19.1), Zara’s emphasis on the quick turnaround of their fashions limits their range of sourcing. Yet, through their advanced supply chain manage- ment techniques, beginning with design, they successfully control costs, as well as every element of production.
Global Sourcing The obvious reason for sourcing globally is to find lower prices, but there are other reasons. Availability, quality, and better design are important factors in finding sources and for which firms often make a global search.
Outsourcing is a common way to save on costs and capital investments, improve flexibility and speed of response, enhance quality, or provide other strategic benefits. Quick, cheap communications through Internet and telephone links has made global sourcing easier and opened up new possibilities even for small companies. Automation and digitization of data have also improved the efficiency of global sourcing. As part of an overall strategy, outsourcing can increase value for both the company and its customers. However, the diffi- culties of language, distance, regulations, and legal issues also must be considered.
To see how important global outsourcing is, consider that the proportion of purchased materials in the cost of goods sold has gone from an average of 40 percent in 1945 to 80 percent today. More complex products, more focus on the core business, the need for reduced concept-to-market time, and easier access to global sources all have contributed to the current trend.
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Intrafirm trade—which includes trade between a parent company and its foreign affiliates—accounts for 30 to 40 percent of U.S. exports and 35 to 45 percent of U.S. imports. Be sure to read the Cognizant Technology Solutions example, which illustrates how a small firm took advantage of global sourcing developments.
Electronic Purchasing Electronic purchasing has simplified the business-to-business market for both buyers and sellers. Catalogs of goods can be updated continuously and prospective buyers can find what they’re looking for with a quick Internet search. The bid/quote system allows buyers to post their needs online, and suppliers— whether in the same town or on the other side of the world— can respond with quotes. The system reduces errors, saves money, and improves efficiency on both sides of the transaction.
However, when making foreign purchases, companies must consider all the costs in money and time their purchase entails. A somewhat higher price offered by a domestic sup- plier may be a better buy than one from a foreign source, since transportation, insurance, packing, and duties can add as much as 10 to 12 percent to the quoted price. Fluctuations in currencies can also affect prices.
Other concerns with e-procurement include its isolation from the overall business system and security, both in releasing sensitive product details that could be tapped by competitors and in exposing a business’s systems to hackers.
Manufacturing Systems Another difficulty for an international company is maintain- ing quality across its operations, regardless of the location of various plants and suppliers. Because it’s essential to keep inventory from building up, new approaches to production have been developed. They include just-in-time (JIT) supply chains, synchronized manufacturing systems, computer- integrated manufacturing (CIM), and robotics.
Standardization and the Management of Global Operations This section of your text discusses standards, which are the criteria that provide consistency in products, processes, and services. Standards ensure that your credit card can be used throughout the world and that you aren’t totally confused by the symbols displayed in the car you rent on a trip. Universal stan- dards ensure that there aren’t technical barriers to trade, but as one expert points out, they aren’t necessarily quality standards.
Standardization also simplifies the organization and saves on costs, since replication of design and machinery requires fewer technicians to handle setup, operation, and changes in specifications. Likewise, savings are gained by organizing all production facilities into one logistical supply system. Quality control is also easier to manage when standards are unified, as are maintenance, production control, and planning.
Impediments to Standardization When a company sets up a new facility, it encounters environ- mental forces that affect standardization both in the size of the plant it will build and the machinery and processes it will use. The forces include economic, cultural, and political forces. The final design is often a hybrid or one that uses an inter- mediate technology.
Economic forces. Because markets vary so in size, it’s impossible to standardize plant design; once output is estab- lished, the firm can decide whether to use a previously used design and how much modification will be necessary. The market and the experience of the local labor force will deter- mine whether a capital-intensive or a labor-intensive process is used.
Cultural forces. While capital-intensive processes are almost always employed in industrialized nations, managers must evaluate the education, skills, and work ethic of the local workforce in developing nations. A sufficient number of skilled operators may not be available for general-purpose machinery, so capital-intensive processes may be a better choice there, as well.
Lesson 4 93
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Political forces. Even in markets well supplied with low- cost labor, governments often insist on high-tech equipment. For this reason, hybrid designs, which combine capital- intensive and labor-intensive processes, are sometimes used. Governments have also pressed for intermediate technology— something that will provide more jobs but not require a large capital output.
Local Manufacturing System A local production organization is commonly a scaled-down version of the parent company’s organization. Vertical or horizontal integration, design, and operation of the manufac- turing system all generally resemble those of the parent. However, in a few instances, where local laws demand or prohibit certain practices, the plant has to adapt its system.
Horizontal and Vertical Integration The overseas affiliate is rarely as integrated as is the parent because that would require additional investment. Also, the parent doesn’t want to lose sales to its captive customers, the foreign affiliates, or the inputs that the more highly integrated parent frequently produces.
Design of the Manufacturing System Each manufacturing system is designed for efficient operation, whether it’s producing goods or services. The following factors are essential to the operation:
Plant location. The location affects production and distribution costs; if it’s close to cities, the land and labor costs are high, but transportation and warehousing costs are reduced.
Plant layout. In designing a new plant, the firm must plan efficiently for both present needs and the possibility of expansion. Designers also must be aware of foreign labor laws to ensure the plant meets specifications.
Lesson 4 95
Materials handling. Especially for synchronous manufac- turing, careful planning of materials handling can save considerably on production costs. Poor materials-handling methods can result in idle machinery, damaged products, and late deliveries.
Human element. Regardless of the type or location, no manufacturing system runs without people. The needs of the humans who will work in the plant include limits on noise, heat, and cold; safety accommodations; warning signs, or symbols if illiteracy is prevalent; and suitable food.
Operation of the Manufacturing System There are two classes of activities that must be performed once the manufacturing system is operating. Productive activities, performed by the line organization, are designed to turn raw materials into enough products to meet the demand within the budgeted cost. Supportive activities are performed by staff in charge of quality, inventory, and other essential functions that keep the plant running.
Manufacturing Activities
In this section, you’ll study the problems that interfere with meeting manufacturing standards, and the reasons for the system’s failure. Obstacles include
� Low output
� Inferior product quality
� Excessive manufacturing costs
Supportive Activities
Although not directly involved in production, supportive activities are essential to the system’s success. They include
� Purchasing
� Maintenance
� Technical functions
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TexTbook exercise for AssignmenT 16
At the end of each assignment, you’ll be asked to complete selected
exercises from the text as a review of what you’ve learned. Access
http://highered.mcgraw-hill.com/sites/007811263x/student_view0/index.html
to locate the online exercises. We urge you to complete the
exercises. The more you practice, the better you’ll do on the lesson
examinations.
1. Use the drop down box on the left side of the page. Select
Chapter 16. Access the chapter quiz. Complete the quiz.
Correct answers are provided on the website.
Self-Check 16 Indicate whether each of the following statements is True or False.
______ 1. In U.S. industry, the proportion of purchased materials in the overall cost of goods sold
has been rising for several decades.
______ 2. Industry-based B2B exchanges can help optimize the supply chain across an entire
network of organizations, not merely within a single company.
______ 3. When a country needs new job creation, it follows that government officials will insist
on the use of labor-intensive processes.
______ 4. Intermediate technology creates more jobs and requires less capital than capital-
intensive processes.
______ 5. It’s the responsibility of the marketers, not the production managers, to choose the
price-quality combination that will satisfy the market.
______ 6. To achieve effective implementation, procurement systems must be isolated from the
company’s overall business system.
Check your answers with those on page 116-117.
Lesson 4 97
ASSIGNMENT 17 Read the following introduction. Then, read pages 478–500 in your textbook. Next complete the Textbook Exercise and Self- Check 17 to evaluate your understanding of the material.
Capital Structure of the Firm There are several ways firms can source their capital.
Retained earnings. The firm reinvests profits in the business or keeps part of the surplus in reserve for a specific purpose.
Issuing shares. Companies may raise capital by selling more shares; some issue stocks in foreign markets, which offer both a wider investor pool and the opportunity for marketing the brand.
Debt. Debt is used to finance capital purchases or to repurchase stock. Subsidiaries may tap their local markets first, possibly lowering the cost of capital; off-shore financial centers have the advantages of few banking regulations and low taxes,
Equity. Foreign markets create a broader investment pool and shares parallel to ADRs (American Depository Receipts) in foreign exchanges.
Cash Flow Management Two techniques for managing cash flow are multilateral netting and leading and lagging. Make sure you read these sections closely and understand the strategies involved in both techniques.
Multilateral netting occurs when subsidiaries transfer net cash flows through a clearing center within the company, which results in savings on transaction costs and foreign exchange costs. Leading and lagging refers to timing pay- ments to take advantage of anticipated currency movements and to allow the IC to maneuver when blocked funds are anticipated.
International Business98
Foreign Exchange Risk Management There are three types of exposure that present risks to com- panies when they must operate across currency borders. Since it’s impossible to plan for this type of risk, it can be especially challenging to deal with.
Transaction exposure. In any transaction which involves payment or receipt in the future of a foreign currency, there’s a transaction risk that the foreign currency’s value against the home currency will change. The party that bears the risk can protect itself by hedging currency in several ways, including the forward market, options market, and money market, or through swap contracts.
Translation exposure. In ICs, translation risks are realized when foreign earnings are consolidated to the IC and the foreign currency is converted to the home country currency. To mini- mize translation-caused profit or loss swings, management can neutralize the balance sheet by trying to equalize assets and liabilities in each currency, or use parallel loans or swaps.
Economic exposure. Economic exposure is the long-term, firm- wide potential for the value of future cash flows to be affected by unanticipated exchange rate movements. Management of this type of exposure generally draws on hedging and swap contracts, flexible sourcing, and a portfolio approach to foreign markets.
Swaps and Derivatives Swaps and derivatives offer a range of uses, including protec- tion against transaction and translation risks and raising or transferring capital. But as you’ll see in your reading, the potential for disaster is high with derivatives.
Managers should seek expert advice to identify where risks lie, design an appropriate strategy for managing them, and select the right tools to execute the strategy. They can find partners for these transactions through networking, often facilitated by conferences on risk management sponsored by financial publications.
Lesson 4 99
Swap contracts. Swaps are contracts to exchange currencies, interest rates, or other instruments of value at a future speci- fied date. Swaps are flexible and available for longer periods than in the forward market.
Derivatives. Derivatives are financial instruments, the values of which are tied to price movements of underlying commodities or other instruments. Derivative use can be complex, and if badly done, costly and if too highly leveraged, may become what Warren Buffet called “financial weapons of mass destruction.”
Sales without Money When a developing nation needs products for which they can’t pay in currency, their needs may be met through alter- nate sales. The two types of nonmonetary trade generally used are countertrade—trading goods or services for other goods or services—and industrial cooperation, in which an exporter commits to a long-term relationship in which some of the production is done in the receiving country. At least one of the countries involved in countertrade or industrial cooperation is usually, but not always, a developing country.
Countertrade. There are six varieties of countertrade: counterpurchase, compensation, barter, switch, offset, and clearing account arrangements. Although countertrade deals are usually kept quiet, it’s now extremely important in world trade and its use in growing.
Industrial cooperation. Another device used in trading and dealing with countries that are short of hard, convertible currencies is industrial cooperation. Favored by developing countries, industrial cooperation includes five methods, some of which you should be familiar with: joint venture, copro- duction and specialization, subcontracting, licensing, and turnkey plants.
Taxation and Transfer Pricing This section reviews taxation and its three types: income tax, paid by earner; value-added tax (VAT), a tax on value added during production; and withholding tax, which is paid by businesses that pay for labor.
International Business100
Foreign branches of American ICs are taxed as if they were in the United States. Their subsidiaries are of two types—the minority company or controlled foreign corporation (CFC) is taxed only when remitting to parent company, and passive CFC income sources (royalties, dividends) are taxed as they occur. The transfer price is the bookkeeping cost of goods transferred intracompany. By shifting profits to a subsidiary, the parent company may save a significant amount in taxes and also can control how much profit each business shows.
International Accounting Accounting differences aren’t just a matter of form in interna- tional business. They’re also a matter of culture. Accounting records focus on data most useful to constituents, and the primary users of financial information vary from place to place. International business practices have led to a need for international standards and expansion of the bottom line to include more than a strictly financial impact.
Two occurrences impact accounting: transactions in foreign currencies, such as sales and purchases, and consolidation of international branch and subsidiary results. If functional currency is that of host country, the current rate method is used; if the functional currency is that of the parent company’s country, the temporal rate is used.
Globalization has affected accounting standards in several ways, including cross-listing of stocks, efforts to standardize financial reporting, and the inclusion of environmental and social effects, as well as the financial impacts, in the bottom line.
ICs are also paying increased attention to financial management, seeking to centralize financial management in ways that allow it to be a profit center, rather than a service.
Lesson 4 101
TexTbook exercise for AssignmenT 17
At the end of each assignment, you’ll be asked to complete selected
exercises from the text as a review of what you’ve learned. Access
http://highered.mcgraw-hill.com/sites/007811263x/student_view0/index.html
to locate the online exercises. We urge you to complete the
exercises. The more you practice, the better you’ll do on the lesson
examinations.
1. Use the drop down box on the left side of the page. Select
Chapter 18. Access the chapter quiz. Complete the quiz.
Correct answers are provided on the website.
Self-Check 17 Indicate whether each of the following statements is True or False.
______ 1. The United Kingdom favors a capital structure opposite that of the United States.
______ 2. The key question with translation exposure is what currency rate to use.
______ 3. Objectives of multilateral netting include keeping as much money as possible in
countries with high interest rates or where credit is tighter.
______ 4. Translation exposure and economic exposure are risks that should be avoided
by the IC.
______ 5. Governments tend to ignore transfer pricing.
Respond to the item in a brief paragraph.
6. What is a fronting loan?
__________________________________________________________
__________________________________________________________
__________________________________________________________
Check your answers with those on page 116-117.
International Business102
NOTES
Graded Project 103
Graded Project
NAKED SHORT SELLING
Overview The declining values in Fannie Mae and Freddie Mac stocks in 2007–2008 were the result of risky mortgages and foreclo- sures. This led to a surplus of declining real property values in the United States and a significantly negative impact on equity prices and financial markets in the United States and around the world. It’s likely that this topic will be studied for many years, as Alan Greenspan, former Federal Reserve Chairman, has referred to it as a once-in-a-century “financial tsunami.”
On the following page are graphic representations of the stock price per share for Fannie Mae (FNM) (Figure 1) and Freddie Mac (FRE) (Figure 2), the holders of approximately 50 percent of the mortgages in the United States.
Instructions Read the boxed article, “Reinflating Real Property Values,” by A. J. Cataldo and Anthony P. Curatola, from Strategic Finance, October 2008. Then respond to the questions that follow. Feel free to use Google, Wikipedia, or any other reliable Internet sources for your research. Be sure to verify your answers by checking multiple sources.
G ra
d e
d P
ro je
c t
G ra
d e
d P
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Graded Project104
figUre 1
figUre 2
Graded Project 105
reinflATing reAl ProPerTy VAlUes
By A. J. Cataldo, CMA, CPA, and Anthony P. Curatola
Reprinted with permission from Strategic Finance, October 2008.
On September 8, 2008, Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM), the holders of
approximately 50% of mortgages in the United States, were seized by the U.S. government in
a “bailout” that may cost American taxpayers between $100 billion and $300 billion. Effectively,
owners of common equity saw the value of their holdings in these two firms decline by 80% to
90% as the common stock price per share for Freddie dropped from $5.10 to $0.88 per share
and the common stock price per share for Fannie dropped from $7.04 to $0.73 per share.
Because short positions effectively increase the number of shares issued and outstanding, more
than 110% of the shares of both Freddie and Fannie were held by institutions. Approximately
50% of the shares of Freddie and Fannie were traded on Monday, September 8, 2008, following
the news of the seizure over the preceding weekend. While many possible solutions may be
under consideration, one possible fiscal policy-based answer may be to simply reduce the
depreciable lives for residential real property, effectively increasing the net present value
(and, therefore, the value) of these properties, if held for trade or business purposes. Some
comparison between a less-recent historical crisis and the present situation warrants review.
Change in Fiscal Policy: 1987 Crash
The Economic Recovery Tax Act of 1981 (ERTA81) greatly accelerated the depreciation deduc-
tions available for all asset classes, including real property, under the accelerated cost recovery
system (ACRS).The Tax Reform Act of 1986 (TRA86), passed by Congress on October 22,
1986, provided for an increase in the depreciable lives of real property from their ACRS-based
lives of 15 years to a MACRS-based (modified ACRS) life of 27.5 years (or longer) while
severely restricting passive activity losses (PALs). Approximately one year later, on Monday,
October 19, 1987, the Dow Jones Industrial Average (DJIA) dropped more than 22% in a single
trading day. While there’s no denying that program trading led the list of contributing variables
to the 1987 stock market “crash,” another possible causal link is the extension of depreciable
lives—the move from ACRS to MACRS—and the imposition of passive activity loss limitations
(PALs), which together placed downward pressure on real property values as an asset class.
These provisions of TRA86 may have made economic sense on one dimension, but they were
also likely to have contributed to the end of the real estate boom in the early to mid-1980s as
well as to the savings and loan (S&L) “crisis” and the formation of the Resolution Trust
Corporation (RTC) that followed.
(Continued)
Graded Project106
ReiNFlatiNg Real PRoPeRty ValueS—Continued
Change in Monetary Policy: 2008 Crash
The stage was set for the current housing crisis during the 2002 through 2004 period. Many
Americans refinanced their existing home mortgages at lower interest rates, effectively “cash-
ing in” and consuming much of their equity, but the real problem arose when no-qualifying and
no-documentation (no-doc) mortgages were approved by lenders. In many cases, these were
negative amortization loans for the first few years of the life of the mortgage and/or adjustable
rate mortgages, and, as interest rates recovered (June 2004), payments on these mortgages
were reset at higher interest rates and higher monthly payments. Many new homeowners, as
well as speculators anticipating a continuing rise in real property values, were unable (or
unwilling) to make these higher payments as their equity positions evaporated. Lenders’
declining collateral positions in these real properties, loan defaults, and home foreclosures
grew, increasing the nonperforming components of lender portfolios of home mortgage loans.
The Mortgage Forgiveness Debt Relief (MFDR) Act of 2007 provided some relief to taxpayers.
As real property values declined and mortgages exceeded the fair market value of these
properties, financial institutions holding these nonperforming, or “at risk,” loans experienced
increased shorting and even naked shorting of their equity securities. (“Naked shorting” is the
sale of a stock that you don’t own in anticipation of buying or “covering” this position at a
future date and a lower price for a profit.) The Securities & Exchange Commission, the Federal
Reserve, and the Secretary of the Treasury joined forces to suspend “naked shorting” of
Freddie, Fannie, and 17 other financial institutions, but the suspension was only temporary.
During the early portion of the suspension period (July 11, 2008, through July 23, 2008),
nearly one-third of a trillion dollars of market capitalization recovery occurred for these
financial institutions.
Stabilizing Residential Housing Values and Stimulating Demand
One of many possible solutions might include a reduction in the depreciable lives for residential
housing. Increases in depreciation expense increase the depreciation tax shield, after-tax cash
flow, and net present values for long-lived assets. While this may not solve the problem for
homeowners, the consensus in the business and general press is that home foreclosures and
mortgage defaults combined with the increase of these nonperforming loans in lenders’ portfo-
lios suggests that many of those approved for these troubled loans simply weren’t economically
able to purchase these homes at the time these mortgages were approved. Therefore, it
appears that an insufficient number of creditworthy homeowners may be available to absorb
the increased inventory of residential housing, and the only alternative may be to provide fiscal
policy-based economic incentives to investors to absorb the surplus supply for the near term.
Perhaps it’s merely a question of the “form” of the bailout: (1) a tax-incentive-based fiscal
policy measure or (2) direct governmental ownership of Fannie and Freddie.
a. J. Cataldo, ii, CMa, CPa, Ph.D., is a professor of accounting in the School of Business and
Public affairs at West Chester university, West Chester, Pa. He can be contacted at
acataldo@wcupa.edu. anthony P. Curatola is the Joseph F. Ford Professor of accounting at
Drexel university in Philadelphia, Pa. you can reach tony at (215) 895-1453 or
curatola@drexel.edu. © 2008 a. P. Curatola.
Graded Project 107
Project Questions 1. Fannie Mae and Freddie Mac are GSEs. Define GSE with
a brief explanation. (10%)
2. To slow the decline of market values of Fannie Mae, Freddie Mac, and 17 other financial firms, the Securities and Exchange Commission (SEC) suspended naked shorting for a short period.
a. What is a long position in a stock? (5%)
b. What is a short position in a stock? (5%)
c. What is a naked short position in a stock? (Distinguish between a short and a naked short.) (10%)
d. Are retail investors or traders permitted to naked short a stock? (10%)
e. Who is permitted to naked short a stock (assuming there has been no suspension of this practice)? (5%)
3. a. Following the first SEC suspension of naked shorting (post–June 2008), did other nations follow this practice? (5%)
b. If not, explain why. If so, list a few. (5%)
4. When the temporary suspension of naked shorting was imposed by the SEC, stock prices increased, due to a “short squeeze.” Explain the term “short squeeze.” (10%)
5. The problems with Fannie Mae, Freddie Mac and other financial institutions were said to have been caused by the securitization of risky mortgages issued to uncredit- worthy borrowers along with credit default swaps to insure these risky mortgages. The credit default swaps weren’t capitalized—there was nothing available to pay off on these credit default swaps, so when the borrower defaulted on the mortgage and the credit default swap was to be “cashed in,” there was nothing available and these securitized mortgages became worthless.
Graded Project108
a. Worldwide, what’s the approximate value of credit default swaps in circulation during this period? (5%)
b. How did this amount compare to U.S. and worldwide gross domestic product (GDP) during this period? (5%)
6. a. In what currency is oil traded? (5%)
b. In what currency are credit default swaps traded? (5%)
7. a. Will the U.S. dollar remain the currency of choice? (5%)
b. Have any nations called for a switch from the U.S. dollar? (10%)
Writing Guidelines 1. Type your submission, double-spaced, in a standard
print font, size 12. Use a standard document format with 1-inch margins. (Do not use any fancy or cursive fonts.)
2. Include the following information at the top of your paper:
a. Name and complete mailing address
b. Student number
c. Course title and number (International Business, BUS 430)
d. Project number (50067000)
3. Read the assignment carefully and answer each question. Use proper citation in either APA or MLA style.
4. Be specific. Limit your submission to the questions asked and issues mentioned.
5. Include a reference page in either APA or MLA style. On this page, list Web sites, journals, and all other refer- ences used in preparing the submission.
6. Proofread your work carefully. Check for correct spelling, grammar, punctuation, and capitalization.
Graded Project 109
Grading Criteria Your project will be evaluated according to the following criteria:
� Content 80 percent
� Written communication 10 percent
� Format 10 percent
Here’s a brief explanation of each of these points.
Content
The student
� Provides clear answers to the assigned questions
� Addresses the questions in complete sentences, not just simple yes-or-no statements
� Supports his or her opinion by citing specific information from Web sites and any other references using correct APA or MLA guidelines for citations and references
� Stays focused on the assigned issues
� Writes in his or her own words and uses quotation marks to indicate direct quotations
Written Communication
The student
� Answers each question in one or more complete sentences
� Uses correct grammar, spelling, punctuation, and sentence structure
� Provides clear organization when necessary (for example, uses words like first, however, on the other hand, and so on, consequently, since, next, and when)
� Makes sure the project contains no typographical errors
Graded Project110
Format
The paper is double-spaced and typed in font size 12. It includes the student’s
� Name and complete mailing address
� Student number
� Course title and number (International Business, BUS 430)
� Project number (50067000)
Submitting Your Assignment Submit your research assignment online using the following procedure:
1. On your computer, save a revised and corrected version of your project.
2. Go to http://www.pennfoster.edu and log in.
3. Go to Student Portal.
4. Click on Take Exam next to the lesson you’re working on.
5. Enter your e-mail address in the box provided. (Note: This information is required for online submission.)
6. Attach your file or files as follows:
a. Click on the Browse box.
b. Locate the file you wish to attach.
c. Double-click on the file.
d. Click on Upload File.
Self-Check Answers 111
Self-Check 1 1. False
2. True
3. True
4. True
5. True
6. An international business is a business whose activities are carried out across national borders. A global company (GC) is an organization that attempts to standardize and integrate operations worldwide in all functional areas. A multidomestic company (MDC) is an organization with multicountry affiliates, each of which formulates its own business strategy based on perceived market differences. Foreign business denotes the domestic operations within a foreign country. An international company (IC) refers to both global and multidomestic companies.
Self-Check 2 1. False
2. True
3. True
4. True
5. True
6. A firm protects its domestic market by following domestic accounts overseas, attacking in the competitor’s home market to keep it occupied defending that market, using foreign production to lower costs, and using the in-bond plant concept.
7. absolute advantage
8. mercantilism
9. international product life cycle (IPLC)
A n
s w
e r
s A
n s
w e
r s
Self-Check 3 1. True
2. False
3. True
4. Predatory dumping
5. nontariff barriers
Self-Check 4 1. True
2. True
3. True
4. UNESCO
5. World Bank Group, governments, foreign investors
6. The European Union, 27
7. tariff free, NAFTA
Self-Check 5 1. False
2. False
3. True
4. False
5. True
6. True
7. False
8. False
9. True
10. Each country’s BOP is presented as a double-entry accounting statement in which total credits and debits are always equal. The statement is divided into a current account, capital account, official reserves account, and
Self-Check Answers112
adjustment account. If a country runs a large or continuous deficit, the value of its currency declines, which affects the exchange rates. A BOP deficit can be corrected through deflation of the economy and devaluation of the currency. Members of the IMF hold special drawing rights (SDR), or available credit, in amounts depending on their size. The SDR’s value is based on the U.S. dollar, the euro, Japanese yen, and British pound sterling, so it fluctu- ates less than a single currency.
Self-Check 6 1. False
2. False
3. True
4. False
5. False
6. False
7. The components that define culture are beliefs, rules, techniques, institutions, and artifacts.
8. Ethnocentrism
Self-Check 7 1. False
2. True
3. True
4. True
5. False
6. False
7. Oil that doesn’t flow easily and can’t be drawn from wells
8. Petroleum, coal, natural gas, nuclear energy
9. Hydroelectric wind, solar, geothermal waves, tides, biomass, ocean thermal
Self-Check Answers 113
Self-Check 8 1. False
2. False
3. True
4. False
5. True
6. True
7. social desirability bias
8. definable, large, accessible, actionable, capturable
Self-Check 9 1. True
2. True
3. False
4. False
5. False
6. True
7. the International Electrotechnical Commission (IEC)
8. Treaty of Rome, articles 81 and 82
Self-Check 10 1. True
2. False
3. True
4. False
5. False
6. The pool of available potential employees with the necessary skills within commuting distance from an employer
Self-Check Answers114
Self-Check Answers 115
Self-Check 11 1. False
2. False
3. True
4. True
5. False
6. In top-down planning, corporate headquarters develops and provides guidelines. The disadvantages are that it restricts initiative at lower levels and is insensitive to local conditions; the advantage is that headquarters formulates plans that ensure optimal use of firm’s resources. In bottom-up planning, the lowest levels inform top management of what they expect to do. The advantage is that those responsible for attaining the goals are formulating them. The disadvantage is that there’s no guarantee the goals will coincide with those of headquarters. Iterative planning combine aspects of both bottom-up and top-down planning.
Self-Check 12 1. True
2. False
3. True
4. True
5. True
6. A virtual corporation is an alliance of several businesses that coordinates economic activity to deliver value to customers using resources outside the traditional boundaries of the organization.
7. A horizontal corporation is characterized by a lateral decision-making process and networks, and a strong business philosophy present throughout the company.
Self-Check 13 1. True
2. True
3. False
4. False
5. True
6. False
Self-Check 14 1. True
2. True
3. False
4. True
5. False
6. False
7. False
Self-Check 15 1. False
2. True
3. True
4. True
5. False
6. True
Self-Check 16 1. True
2. True
3. False
Self-Check Answers116
4. True
5. True
6. False
Self-Check 17 1. False
2. False
3. True
4. True
5. True
6. A loan made through an intermediary, usually a bank, from parent company to subsidiary
Self-Check Answers 117