International Business Session 2. International vs. Domestic OPPORTUNITIES 1. Seek opportunities for...
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Transcript of International Business Session 2. International vs. Domestic OPPORTUNITIES 1. Seek opportunities for...
International vs. DomesticOPPORTUNITIES1.Seek opportunities for growth
through market diversification2.Gain new ideas about products,
services, and business methods3.Better serve key customers that
have relocated abroad4.Be closer to supply sources, benefit
from global sourcing advantages, or gain flexibility in the sourcing of products
International vs. DomesticOPPORTUNITIES
5. Gain access to lower-cost or better-value factors of production
6. Develop economies of scale in sourcing, production, marketing, and R&D
7. Confront international competitors more effectively or thwart the growth of competition in the home market
FDI Based Explanations: Dunning’s Eclectic Paradigm
Three conditions determine whether or not a company will internalize via FDI:
1. Ownership-specific advantages – knowledge, skills, capabilities, relationships, or physical assets that form the basis for the firm’s competitive advantage
2. Location-specific advantages – advantages associated with the country in which the MNE is invested, including natural resources, skilled or low cost labor, and inexpensive capital
3. Internalization advantages – control derived from internalizing foreign-based manufacturing, distribution, or other value chain activities
Factors Relevant to Choice of Foreign Market Entry Strategy1. The goals and objectives of the firm, such as
desired profitability, market share, or competitive positioning;
2. The particular financial, organizational, and technological resources and capabilities available to the firm;
3. Unique conditions in the target country, such as legal, cultural, and economic circumstances, as well as distribution and transportation systems;
4. Risks inherent in each proposed foreign venture in relation to the firm’s goals and objectives in pursuing internationalization;
5. The nature and extent of competition from existing rivals, and from firms that may enter the market later;
6. The characteristics of the product or service to be offered to customers in the market.
Participants in International Business1. The focal firm – initiator of IB
transaction, including MNEs and SMEs
2. Distribution channel intermediary – specialist firm providing logistics and marketing services in the international supply chain
3. Facilitator – a firm providing special expertise in legal advice, banking, customs clearance, market research, and similar areas
Common Characteristics of Born Global
Firms
· Emergence often associated with significant product/process breakthrough or innovation
· Products often involve advanced technology, substantial added value, superior quality, and differentiated design
· Internationalization typically via exporting and facilitated through network relationships
· Heavy user of advanced IT and communications technologies
Foreign Market Entry Strategies of Focal Firms
Cross-border business transactions can be grouped into three categories:
1. Trade: buying and selling of products2. Contractual exchange of services or
intangibles: buying and selling of services
3. Equity ownership in foreign operations: establishing foreign presence through direct investment
MODES of International Business Activities
Exporting (importing)Global sourcing (out-s, in-s,
offshore)Contract manufacturingLicensing and Franchising (mgmt.
contract)Foreign Direct Investment (FDI)Strategic Alliances (Joint Venture)Portfolio Investment
Exporting
Advantages Relatively low financial
exposure Permit gradual market
entry Acquire knowledge about
local market Avoid restrictions on foreign
investment
Disadvantages Vulnerability to tariffs and
NTBs Logistical complexities Potential conflicts with
distributors
Export Documentationquotation or pro forma invoicecommercial invoice is the actual demand
for payment issued by the exporter. It includes a description of the goods, the exporter’s address, delivery address, and payment terms.
A packing list, indicates the exact contents of the shipment.
The bill of lading is the basic contract between exporter and shipper.
The shipper's export declaration ("ex-dec”) lists the contact information of the exporter and the buyer (or importer), as well as a full description, declared value, and destination of the products being shipped.
The certificate of origin indicates the country where the product originates.
insurance certificate
Who pays for what?
Load to truck
Export- duty payment
Transport to exporter's port
Unload from truck at the origin's port
Landing charges at origin's port, Loading
Transport to import's port
Landing charges at importer's port, Unloading
Unload onto trucks from the importers' port
Transport to destination Insurance
Entry -Customs clearance
Entry -Taxation
EXW No No No No No No No No No No No No
Main Carriage NOT Paid By Seller (Free… Carrier/Alongside Ship/On Board)
FCA Yes Yes Yes No No No No No No No No No
FAS* Yes Yes Yes Yes No No No No No No No No
FOB* Yes Yes Yes Yes Yes No No No No No No No
Main Carriage Paid By Seller (Cost and Freight … and Insurance… / Carriage Paid to … and Insurance… )
CFR* Yes Yes Yes Yes Yes Yes No No No No No No
CIF* Yes Yes Yes Yes Yes Yes No No No Yes No No
CPT Yes Yes Yes Yes Yes Yes No No No No No No
CIP Yes Yes Yes Yes Yes Yes No No No Yes No No
Arrival (Delivery Duty….. Unpaid/Paid)
DEQ* Yes Yes Yes Yes Yes Yes Yes No No Yes No No
DDU Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No No
DDP Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
* for ship only (+ named Port), others for all carriers (+ named Place)
Contract ManufacturingHiring firm approaches Contract
Manufacturer with Design or Formula
Type of outsourcingBidding Process$ 233 billion businessWistron, HTC
CountertradePayments are made in kind rather
than cash. The focal firm is engaged
simultaneously in exporting and importing.
Also known as “two-way” or “reciprocal” trade
Used when conventional means of payment are difficult, costly, or nonexistent. ◦ Hard currency unavailable◦ Developing country doesn’t have expertise
to sell in foreign markets
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Examples of Countertrade Transactions
Caterpillar received caskets from Columbian customers and wine from Algerian customers in return for selling them earthmoving equipment.
Goodyear traded tires for minerals, textiles, and agricultural products.
Coca-Cola sourced tomato paste from Turkey, oranges from Egypt, and beer from Poland in order to contribute to national exports in the countries it conducts business,.
Control Data Corporation accepted Christmas cards from the Russians in a countertrade deal.
Pepsi-Cola acquired the rights to distribute Hungarian motion pictures in the West in a countertrade transaction.
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Types of Countertrade
Barter refers to the direct exchange of goods without any money. Or a mixture of goods and cash is a compensation deal.
Back-to-back transaction, offset agreements, or counterpurchase involves two distinct contracts, contingent on each other.
Buy-back agreement, the seller agrees to supply technology or equipment to construct a facility and receives payment in the form of goods produced by the facility.
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Licensing and FranchisingContractual AgreementsLicensing is an arrangement in
which the owner of intellectual property (IP) grants another firm the right to use that property for a specified period of time in exchange for royalties or other compensation.
Franchising is an arrangement in which the firm allows another the right to use an entire business system in exchange for fees, royalties or other forms of compensation.
Types of Intellectual Property
A patent provides an inventor with the right to prevent others from using, selling or importing an invention for a fixed period – typically, up to 20 years. It is granted to any firm or individual that invents or discovers any new and useful process, machine, manufactured product, or any new and useful improvement.
A trademark is a distinctive design, symbol, logo, word, or series of words placed on a product label. It identifies a product or service as coming from a common source. E.g., British Petroleum’s ‘BP’ acronym, McDonald's golden arches, and Nike’s swoosh symbol.
A copyright protects original works of authorship, giving the creator the exclusive right to reproduce the work, display and perform it publicly, and to authorize others to do these activities. Copyrights cover works from music, art, literature, films, and computer software.
Types of Intellectual Property (cont.)
An industrial design refers to the appearance or features of a product. The design is intended to improve the aesthetics and usability of a product in order to increase its production efficiency, performance, or marketability. The thin Apple iPod with the company logo is a well-known industrial design.
A trade secret is confidential know-how or information that has commercial value. Trade secrets include information such as production methods, business plans, and customer lists. For example, the formula to produce Coca-Cola is a trade secret.
A collective mark is a logo belonging to an association or group whose members have given firms the right to use the mark to identify the origin of a product or service. E.g., ILGWU is a collective mark for the members of International Ladies Garment Workers Union.
International Licensing Process
Basic Issues1. Set the boundaries
of the agreement2. Establish
compensation rates (2-5% gross sales)
3. Agree on the rights, privileges, and constraints
4. Specify the duration of the agreement (5-7 years)
Foreign Direct InvestmentBuilding new facilities (the
greenfield strategy)Buying existing assets in a
foreign country (acquisition strategy)
Participating in a joint venture
vs. Portfolio InvestmentMinority stake, no control
Foreign Direct Investment
Advantages+ High profit potential+ Maintain control over
operations+ Acquire knowledge of local
market+ Avoid tariffs and NTBs
Disadvantages- High financial and
managerial investments- Higher exposure to political
risk- Vulnerability to restrictions
on foreign investment- Greater managerial
complexity
Strategic Alliances and Joint VenturesStrategic Alliances
◦One or several functional areas◦Shared or assigned managment
Joint Venture◦Separately incorporated◦Independently managed (delegated
management)◦Can have tax advantages, protects
other assets, allows creative ownership arrangements
Figure 13.1 Benefits of Strategic Alliances
Potential Benefitsof Strategic Alliances
Ease ofMarketEntry
SharedRisk
Shared Knowledge
andExpertise
Synergyand
CompetitiveAdvantage
Figure 13.4 Pitfalls of Strategic Alliances
Pitfallsof Strategic Alliances
Incompatibilityof
partners
Access to
Information
Distributionof
Earnings
Loss of
Autonomy
ChangingCircum-stances