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o Log Out <http://www.scribd.com/logout> * Embed Doc * Copy Link * Readcast * Collections * CommentGo Back Download International Business:Competing in the GlobalMarketplace Student: Maya Mansour.Program: Bachelor.Major: Business Management. 1 Table of Contents IntroductionPart I- Introduction and Overview Chapter One <http://///E:\hypertext\chapter01\frame001.html> GlobalizationPart II- Country Factors Chapter Two <http://///E:\hypertext\chapter02\frame031.html> Country Differences in Political Economy Chapter Three <http://///E:\hypertext\chapter03\frame076.html> Differences in CulturePart III- The Global Trade and Investment Environment Chapter Four <http://///E:\hypertext\chapter04\frame117.html> International Trade Theory Chapter Five <http://///E:\hypertext\chapter05\frame150.html> The Political Economy of InternationalTrade Chapter Six <http://///E:\hypertext\chapter06\frame180.html> Foreign Direct Investment Chapter Seven <http://///E:\hypertext\chapter07\frame206.html> The Political Economy of Foreign DirectInvestment Chapter Eignt <http://///E:\hypertext\chapter08\frame230.html> Regional Economic Integration 2 <http://///E:\hypertext\chapter01\frame001.html> <http://///E:\hypertext\chapter02\frame031.html> <http://///E:\hypertext\chapter03\frame076.html> <http://///E:\hypertext\chapter04\frame117.html> <http://///E:\hypertext\chapter05\frame150.html> <http://///E:\hypertext\chapter06\frame180.html> <http://///E:\hypertext\chapter07\frame206.html> <http://///E:\hypertext\chapter08\frame230.html> Part IV- The Global Monetary System Chapter Nine <http://///E:\hypertext\chapter09\frame275.html> The Foreign Exchange Market Chapter Ten <http://///E:\hypertext\chapter10\frame304.html> The International Monetary System Chapter Eleven <http://///E:\hypertext\chapter11\frame342.html> The Global Capital MarketPart V- The Strategy and Structure of InternationalBusiness Chapter Twelve <http://///E:\hypertext\chapter12\frame375.html> The Strategy of International Business Chapter Thirteen <http://///E:\hypertext\chapter13\frame400.html> The Organization of InternationalBusiness

Chapter Fourteen <http://///E:\hypertext\chapter14\frame426.html> Entry Strategy and Strategic AlliancesPart VI- Business Operations Chapter Fifteen <http://///E:\hypertext\chapter15\frame481.html> Exporting, Importing, and Countertrade Chapter Sixteen <http://///E:\hypertext\chapter16\frame502.html> Global Manufacturing and MaterialsManagement Chapter Seventeen <http://///E:\hypertext\chapter17\frame530.html> Global marketing and R&D Chapter Eighteen <http://///E:\hypertext\chapter18\frame562.html> Global Human Resource Management Chapter Nineteen <http://///E:\hypertext\chapter19\frame588.html> Accounting in the InternationalBusiness Chapter Twenty <http://///E:\hypertext\chapter20\frame610.html> Financial Management in theInternational Business 3 <http://///E:\hypertext\chapter09\frame275.html> <http://///E:\hypertext\chapter10\frame304.html> <http://///E:\hypertext\chapter11\frame342.html> <http://///E:\hypertext\chapter12\frame375.html> <http://///E:\hypertext\chapter13\frame400.html> <http://///E:\hypertext\chapter14\frame426.html> <http://///E:\hypertext\chapter15\frame481.html> <http://///E:\hypertext\chapter16\frame502.html> <http://///E:\hypertext\chapter17\frame530.html> <http://///E:\hypertext\chapter18\frame562.html> <http://///E:\hypertext\chapter19\frame588.html> <http://///E:\hypertext\chapter20\frame610.html> INTRODUCTION Two of the more remarkable developments over the pasthalf a century have been the growth of international business and the growth of computing andcommunications technologies. This paper highlightsadvantages of using the Internet to improve the researchin and teaching of international business, and by that leadto a greater appreciation of the importance and linkages between technology and international business.The book has been structured with reader-accessibilityfirmly in mind: each chapter features a summary of keyconcepts and self-test questions, as well as guidance for 4 further study and references. It is a core modular text for undergraduate courses on International Business, as wellas being appropriate for a supplementary reading onequivalent courses in Europe and on MBA programs.Chapter One Globalization Introduction The global telecommunications industry, which was profiled in the opening case, is one industry at theforefront of this development. A decade ago mostnational telecommunications markets were dominated bystate-owned monopolies and isolated from each other bysubstantial barriers to cross-border trade and investment. 5 This is rapidly becoming a thing of the past. A globaltelecommunications market is emerging. In this newmarket, prices are being bargained down astelecommunications providers compete with each other around the world for residential and business customers.The big winners are the customers, who should see the price of telecommunications services plummet, savingthem billions of dollars.The rapidly emerging global economy raises a multitudeof issues for businesses both large and small. It createsopportunities for businesses to expand their revenues,drive

down their costs, and boost their profits. started acompany to manufacture it, and has now sold the mouseto consumers worldwide, using the Internet as hisdistribution channel. 2 What is Globalization The Globalization of Markets The globalization of markets refers to the merging of historically distinct and separate national markets intoone huge global marketplace. It has been argued for some time that the tastes and preferences of consumers indifferent nations are beginning to converge on someglobal norm, thereby helping to create a global market. 3 The global acceptance of consumer products such asCiticorp credit cards, Coca-Cola . By offering astandardized product worldwide, they are helping to create a global market. A company does not have to bethe size of these multinational giants to facilitate, and benefit from, the globalization of markets. 6 In the case of many products, these differencesfrequently require that marketing strategies, productfeatures, and operating practices be customized to bestmatch conditions in a country. Thus different car modelsdepending on a whole range of factors such as local fuelcosts, income levels, traffic congestion, and culturalvalues.The most global markets currently are not markets for consumer products--where national differences in tastesand preferences are still often important enough to act asa brake on globalization--but markets for industrialgoods and materials that serve a universal need the worldover. These include the markets for commodities such asaluminium, oil, and wheat, the markets for industrial products such as microprocessors.In many global markets, the same firms frequentlyconfront each other as competitors in nation after nation. The Globalization of Production The globalization of production refers to the tendencyamong firms to source goods and services from locationsaround the globe to take advantage of nationaldifferences in the cost and quality of factors of production. By doing so, companies hope to lower their overall cost structure or improve the quality or functionality of their product offering, there by allowingthem to compete more effectively. The result of having a global web of suppliers is a better final product, whichenhances the chances of Boeing winning a greater shareof total orders for aircraft than its global rival, Airbus.Boeing also out sources some production to foreign 7 countries to increase the chance that it will winsignificant orders from airliners based in that country.The global dispersal of productive activities is notlimited to giants such as Boeing. Many much smaller firms are also getting into the act. Nevertheless, we are travelling down the road toward afuture characterized by the increased globalization of markets and production. Modern firms are importantactors in this drama, fostering by their very actionsincreased globalization. These firms, however, aremerely responding in an

efficient manner to changingconditions in their operating environment--as well theyshould. In the next section, we look at the main drivers of globalization. Drivers of Globalization Declining Trade and Investment Barriers International trade occurs when a firm exports goods or services to consumers in another country. Foreign directinvestment occurs when a firm invests resources in business activities outside its home country. Many of the barriers to international trade took the form of hightariffs on imports of manufactured goods. The typicalaim of such tariffs was to protect domestic industriesfrom "foreign competition." One consequence, however,was "beggar thy neighbour" retaliatory trade policieswith countries progressively raising trade barriers againsteach other. 8 In addition to reducing trade barriers, many countrieshave also been progressively removing restrictions toforeign direct investment .Such trends facilitate both the globalization of marketsand the globalization of production. The lowering of barriers to international trade enables firms to view theworld, rather than a single country, as their market. Thelowering of trade and investment barriers also allowsfirms to base production at the optimal location for thatactivity, serving the world market from that location.Thus, a firm might design a product in one country, produce component parts in two other countries,assemble theFinally, the globalization of markets and production andthe resulting growth of world trade, foreign directinvestment, and imports all imply that firms are findingtheir home markets under attack from foreigncompetitors. The bottom line is that the growingintegration of the world economy into a single, hugemarketplace is increasing the intensity of competition ina range of manufacturing and service industries.Having said all this, declining trade barriers can't betaken for granted. As we shall see in the followingchapters, demands for "protection" from foreigncompetitors are still often heard in countries around theworld, including the United States. The Role of Technological Change Microprocessors and Telecommunications 9 Perhaps the single most important innovation has beendevelopment of the microprocessor, which enabled theexplosive growth of high-power, low-cost computing,vastly increasing the amount of information that can be processed by individuals and firms. The microprocessor also underlies many recent advances intelecommunications technology. These technologies relyon the microprocessor to encode, transmit, and decodethe vast amount of information that flows along theseelectronic highways. The cost of microprocessorscontinues to fall, while their power increases . As thishappens, the costs of global communications are plummeting, which lowers the costs of coordinating andcontrolling a global organization. The Internet and World Wide Web The phenomenal recent growth of the Internet and theassociated World Wide Web is the latest expression of this development.The Internet and

World Wide Web (WWW) promise todevelop into the information backbone of tomorrow'sglobal economy. Companies such as Dell Computer are booking over $4 million a day in Web-based sales, whileInternet equipment giant Cisco Systems books more than$20 million per day in Web-based sales.Included in this expanding volume of Web-basedelectronic commerce--or e-commerce as it is commonly called--is a growing percentage of cross-border Packard has new-productdevelopment teams composed of individuals based indifferent countries. When developing new products,these individuals use videoconferencing to "meet" on a 10 weekly basis. They also communicate with each other daily via telephone, electronic mail, and fax.Communication technologies have enabled Hewlett-Packard to increase the integration of its globallydispersed operations and to reduce the time needed for developing new products. Implications for the Globalization of Markets In addition to the globalization of production,technological innovations have also facilitated theglobalization of markets. As noted above, low-costtransportation has made it more economical to ship products around the world, thereby helping to createglobal markets. Low-cost global communicationsnetworks such as the World Wide Web are helping tocreate electronic global marketplaces. In addition, low-cost jet travel has resulted in the mass movement of people between countries. This has reduced the culturaldistance between countries and is bringing about someconvergence of consumer tastes and preferences. At thesame time, global communications networks and globalmedia are creating a worldwide culture. We must becareful not to overemphasize this trend. While moderncommunications and transportation technologies areushering in the "global village," very significant nationaldifferences remain in culture, consumer preferences, and business practices. The Changing Demographics of the Global Economy 11 The Changing World Output and World TradePicture In The same occurred to Germany, France, and theUnited Kingdom, all nations that were among the first toindustrialize. This decline in the US position was not anabsolute decline, since the US economy grew at arelatively robust average annual rate of close.Rather, itwas a relative decline, reflecting the faster economicgrowth of several other economies, particularly in Asia. The Changing Foreign Direct Investment Picture Reflecting the relative decline in US dominance, its position as the world's leading exporter was threatened.Over the past thirty years, US dominance in exportmarkets has waned as Japan, Germany, and a number of newly industrialized countries such as South Korea andChina have taken a larger share of world exports.In 1997 and 1998 the dynamic economies of the AsianPacific region were hit by a serious financial crisis thatthreatened to slow their economic growth rates for several years. Despite this, their powerful growth maycontinue over the long run, as will that of several other important emerging economies in Latin America . Notwithstanding the financial crisis that is gripping someAsian economies, most forecasts now predict a rapid risein the share of world output accounted for by developingnations such as China. For international businesses, theimplications of this changing economic geography areclear; many of tomorrow's economic opportunities may be found in the developing nations of the world, and 12

many of tomorrow's most capable competitors will probably also emerge from these regions.However, as the barriers to the free flow of goods,services, and capital fell, and as other countries increasedtheir shares of world output, non-US firms increasingly. The Changing Nature of the Multinational Enterprise A multinational enterprise is any business that has productive activities in two or more countries.. Non-US Multinationals Global business activity was dominated by large USmultinational corporations. With US firms accounting for about two-thirds of foreign direct investment one wouldexpect most multinationals to be US enterprises. Thelarge number of US multinationals reflected USeconomic dominance in the three decades after WorldWar II, while the large number of British multinationalsreflected that country's industrial dominance in the earlydecades.Looking to the future, we can reasonably expect growthof new multinational enterprises from the world'sdeveloping nations. As the accompanying Country Focusdemonstrates, South Korean firms are starting to investoutside their national borders. The South Koreans maysoon be followed by firms from countries such asMexico The Rise of Mini-Multinationals 13 Another trend in international business has been thegrowth of medium-sized and small multinationals. When people think of international businesses they tend tothink of firms such as Exxon, General Motors complexmultinational corporations with operations that span theglobe. Although it is certainly true that most internationaltrade and investment is still conducted by large firms, itis also true that many medium-sized and small businessesare becoming increasingly involved in international tradeand investment.The point is, international business is conducted not just by large firms but also by medium-sized and smallenterprises. The Changing World Order Many of the former communist nations of Europe andAsia seem to share a commitment to democratic politicsand free market economics. If this continues, theopportunities for international businesses may beenormous. For the best part of half a century, thesecountries were essentially closed to Western international businesses. Now they present a host of export andinvestment opportunities. The economies of most of theformer communist states are in very poor condition, andtheir continued commitment to democracy and freemarket economics cannot be taken for granted.Disturbing signs of growing unrest and totalitariantendencies are seen in many Eastern European states.Thus, the risks involved in doing business in suchcountries are very high, but then, so may be the returns.In sum, the last quarter of century has seen rapid changesin the global economy. Barriers to the free flow of goods, 14 services, and capital have been coming down. Thevolume of cross-border trade and investment has beengrowing more rapidly than global output, indicating thatnational economies are become more closely integratedinto a single, interdependent, global economic system.As their economies advance, more nations are joining theranks of the developed world. Thus, follow more permanent and widespread, the liberal vision of a more prosperous global economy based on free market principles might not come to pass as quickly as manyhope. Clearly, this would be a tougher world for international businesses to compete in.For now it is simply

worth noting that even from a purelyeconomic perspective, globalization is not all good. The Globalization Debate: Prosperity orImpoverishment? Globalization, Jobs, and Incomes One frequently voiced concern is that far from creating jobs, falling barriers to international trade actuallydestroy manufacturing jobs in wealthy advancedeconomies such as the United States and UnitedKingdom. The critics argue that falling trade barriersallow firms to move their manufacturing activitiesoffshore to countries where wage rates are much lower.They argue that free trade results in countriesspecializing in the production of those goods and 15 services that they can produce most efficiently, whileimporting goods that they cannot produce as efficiently.When a country embraces free trade, there is alwayssome dislocation--lost textile jobs at Harwood Industries,Supporters of globalization do concede that the wage rateenjoyed by unskilled workers in many advancedeconomies has declined in recent years. They maintainthat the declining real wage rates of unskilled workersowes far more to a technology-induced shift withinadvanced economies away from jobs where the onlyqualification was a willingness to turn up for work everyday and toward jobs that require significant educationand skills. They point out that many advanced economiesreport a shortage of highly skilled workers and an excesssupply of unskilled workers. Thus, growing incomeinequality is a result of the wages for skilled workers being bid up by the labor market, and the wages for unskilled workers being discounted. If one agrees withthis logic, a solution to the problem of declining incomesis to be found not in limiting free trade and globalization, but in increasing society's investment in education toreduce the supply of unskilled workers. 35 Globalization, Labor Policies, and the Environment A second source of concern is that free trade encouragesfirms from advanced nations to move manufacturingfacilities offshore to less developed countries that lack adequate regulations to protect labor and theenvironment from abuse by the unscrupulous.Globalization critics often argue that adhering to labor and environmental regulations significantly increases thecosts of manufacturing enterprises and puts them at acompetitive disadvantage in the global marketplace vis16 -vis firms based in developing nations that do not haveto comply with such regulations. Firms deal with thiscost disadvantage, the theory goes, by moving their production facilities to nations that do not have such burdensome regulations, or by failing to enforce theregulations they have on their books. If this is the case,one might expect free trade to lead to an increase in pollution and result in firms from advanced nationsexploiting the labor of less developed nations.Supporters of free trade also argue that business firms arenot the amoral organizations that critics suggest. Whilethere may be a few rotten apples, the vast majority of business enterprises are staffed by managers who arecommitted to behave in an ethical manner and would beunlikely to move production offshore just so they could pump more pollution into the atmosphere or exploitlabor. Furthermore, the relationship between pollution,labor exploitation, and production costs may not be thatsuggested by critics. In general, a well-treated labor forceis productive, and it is productivity rather than base wagerates that often has the greatest influence on costs. Giventhis, in the vast

majority of cases, the vision of greedymanagers who shift production to low-wage companiesto "exploit" their labor force may be misplaced. Globalization and National Sovereignty A final concern voiced by critics of globalization is thatin today's increasingly interdependent global economy,economic power is shifting away from nationalgovernments and toward supranational organizationssuch as the World Trade Organization, the EuropeanUnion, and the United Nations. As perceived by critics, 17 unelected bureaucrats are now able to impose policies onthe democratically elected governments of nation-states,thereby undermining the sovereignty of those states. Inthis manner, claim critics, the national state's ability tocontrol its own destiny is being limited. 40 The World Trade Organization is a favorite target of those who attack the world's headlong rush toward aglobal economy. Managing in the Global Marketplace An international business is any firm that engages ininternational trade or investment. A firm does not have to become a multinational enterprise, investing directly inoperations in other countries, to engage in international business, although multinational enterprises areinternational businesses. As their organizationsincreasingly engage in cross-border trade andinvestment, it means managers need to recognize that thetask of managing an international business differs fromthat of managing a purely domestic business in manyways. At the most fundamental level, the differencesarise from the simple fact that countries are different.Countries differ in their cultures, political systems,economic systems, legal systems, and levels of economicdevelopment. Despite all the talk about the emergingglobal village, and despite the trend toward globalizationof markets and production, as we shall see in this book,many of these differences are very profound andenduring.Differences between countries require that aninternational business vary its practices country bycountry. A further way in which international business 18 differs from domestic business is the greater complexityof managing an international business. In addition to the problems that arise from the differences betweencountries, a manager in an international business isconfronted with a range of other issues that the manager in a domestic business never confronts. An international business must decide where in the world to site its production activities to minimize costs and to maximizevalue added.Conducting business transactions across national bordersrequires understanding the rules governing theinternational trading and investment system. Managers inan international business must also deal with governmentrestrictions on international trade and investment. Theymust find ways to work within the limits imposed byspecific governmental interventions. As this book explains, even though many governments are nominallycommitted to free trade, they often intervene to regulatecross-border trade and investment. Managers withininternational businesses must develop strategies and policies for dealing with such interventions.Cross-border transactions also require that money beconverted from the firm's home currency into a foreigncurrency and vice versa. Since currency exchange ratesvary in response to changing economic conditions, aninternational business must develop policies for dealingwith exchange rate movements. A firm that adopts awrong policy can lose large amounts of money, while afirm that adopts the right policy can increase the profitability of its

international transactions. 19 Chapter Two National Differences in Political Economy Introduction Countries have different political systems, economicsystems, and legal systems. Cultural practices can varydramatically from country to country, as can theeducation and skill level of the population, and countriesare at different stages of economic development. All of 20 Most modern democratic states practice what iscommonly referred to as representative democracy . Ina representative democracy, citizens periodically electindividuals to represent them. These electedrepresentatives then form a government, whose functionis to make decisions on behalf of the electorate. Toguarantee that elected representatives can be heldaccountable for their actions by the electorate, an idealrepresentative democracy has a number of safeguardsthat are typically enshrined in constitutional law. Totalitarianism In a totalitarian country, all the constitutional guaranteeson which representative democracies are built--such asan individual's right to freedom of expression andorganization, a free media, and regular elections--aredenied to the citizens. In most totalitarian states, politicalrepression is widespread and those who question theright of the rulers to rule find themselves imprisoned, or worse.Four major forms of totalitarianism exist in the worldtoday. Until recently the most widespread was communist totalitarianism . As discussed earlier,communism is a version of collectivism that advocatesthat socialism can be achieved only through totalitariandictatorship. A second form of totalitarianism might belabeled theocratic totalitarianism . Theocratictotalitarianism is found in states where political power ismonopolized by a party, group, or individual thatgoverns according to religious principles.A third form of totalitarianism might be referred to as tribal totalitarianism . Tribal totalitarianism is found 24 principally in African countries . Tribal totalitarianismoccurs when a political party that represents the interestsof a particular tribe.A fourth major form of totalitarianism might bedescribed as right-wing totalitarianism . Right-wingtotalitarianism generally permits individual economicfreedom but restricts individual political freedom on thegrounds that it would lead to the rise of communism.One common feature of most right-wing dictatorships isan overt hostility to socialist or communist ideas. Economic Systems Market Economy In a pure market economy all productive activities are privately owned, as opposed to being owned by the state.The goods and services that a country produces, and thequantity in which they are produced, are not planned byanyone. Rather, production is determined by theinteraction of supply and demand and signaled to producers through the price system. If demand for a product exceeds supply, prices will rise, signaling producers to produce more. If supply exceeds demand, prices will fall, signaling

producers to produce less. Inthis system consumers are sovereign. The purchasing patterns of consumers, as signaled to producers throughthe mechanism of the price system, determine what is produced and in what quantity.Given the dangers inherent in monopoly, the role of government in a market economy is to encouragevigorous competition between private producers.Governments do this by outlawing monopolies and 25 restrictive business practices designed to monopolize amarket. Private ownership also encourages vigorouscompetition and economic efficiency. Private ownershipensures that entrepreneurs have a right to the profitsgenerated by their own efforts. This gives entrepreneursan incentive to search for better ways of servingconsumer needs. That may be through introducing new products, by developing more efficient production processes, by better marketing and after-sale service, or simply through managing their businesses moreefficiently than their competitors. Command Economy In a pure command economy , the goods and servicesthat a country produces, the quantity in which they are produced, and the prices at which they are sold are all planned by the government. In addition, in a pure command economy, all businesses are state owned, therationale being that the government can then direct themto make investments that are in the best interests of thenation as a whole, rather than in the interests of privateindividuals.While the objective of a command economy is tomobilize economic resources for the public good, just theopposite seems to have occurred. In a commandeconomy, state-owned enterprises have little incentive tocontrol costs and be efficient, because they cannot go outof business. Mixed Economy Between market economies and command economiescan be found mixed economies. In a mixed economy , 26 certain sectors of the economy are left to privateownership and free market mechanisms, while other sectors have significant state ownership and government planning. In mixed economies, governments also tend totake into state ownership troubled firms whose continuedoperation is thought to be vital to national interests. State-Directed Economy A state-directed economy is one in which the state plays a significant role in directing the investmentactivities of private enterprise through "industrial policy"and in otherwise regulating business activity inaccordance with national goals. Private Action Private action refers to theft, piracy, blackmail, and thelike by private individuals or groups. While theft occursin all countries, in some countries a weak legal systemallows for a much higher level of criminal action than inothers.However, there is an enormous difference between themagnitude of such activity in Russia and its limitedimpact in Japan and the United States. This differencearises because the legal enforcement apparatus, such asthe police and court system, is so weak in

Russia. Public Action 27 Public action to violate property rights occurs when public officials, such as politicians and government bureaucrats, extort income or resources from propertyholders. This can be done through a number of mechanisms including levying excessive taxation,requiring expensive licenses or permits from propertyholders, taking assets into state ownership withoutcompensating the owners . The Protection of Intellectual Property Intellectual property refers to property, such ascomputer software, a screenplay, a music score, or thechemical formula for a new drug, that is the product of intellectual activity. It is possible to establish ownershiprights over intellectual property through patents,copyrights, and trademarks. A patent grants the inventor of a new product or process exclusive rights to themanufacture, use, or sale of that invention. Copyrights are the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish anddisperse their work as they see fit. Trademarks aredesigns and names, often officially registered, by whichmerchants or manufacturers designate and differentiatetheir products .The philosophy behind intellectual property laws is toreward the originator of a new invention, book, musicalrecord, clothes design, restaurant chain, and the like, for his or her idea and effort. Such laws are a very importantstimulus to innovation and creative work. They providean incentive for people to search for novel ways of doingthings and they reward creativity. 28 The protection of intellectual property rights differsgreatly from country to country. While many countrieshave stringent intellectual property regulations on their books, the enforcement of these regulations has often been lax. This has been the case even among somecountries that have signed important internationalagreements to protect intellectual property, such as the Paris Convention for the Protection of IndustrialProperty . Weak enforcement encourages the piracy of intellectual property. China and Thailand have recently been among the worst offenders in Asia. Local bookstores in China commonly maintain a section that isoff-limits to foreigners; it ostensibly is reserved for sensitive political literature, but it more often displaysillegally copied textbooks. Pirated computer software isalso widely available in China.International businesses have a number of possibleresponses to such violations. Firms can lobby their respective governments to push for internationalagreements to ensure that intellectual property rights are protected and that the law is enforced. An example of such lobbying is given in the next Management Focus,which looks at how Microsoft prompted the USgovernment to start insisting that other countries abide bystricter intellectual property laws.One problem with these new regulations, however, is thatthe world's biggest violator--China--is not yet a member of the WTO and is therefore not obliged to adhere to theagreement.In addition to lobbying their governments, firms maywant to stay out of countries where intellectual property

29 laws are lax, rather than risk having their ideas stolen bylocal entrepreneurs.. In addition, Microsoft hasencountered significant problems with pirated softwarein China, the details of which are discussed in theManagement Focus. Product Safety and Product Liability Product safety laws set certain safety standards to whicha product must adhere. Product liability involves holdinga firm and its officers responsible when a product causesinjury, death, or damage. Product liability can be muchgreater if a product does not conform to required safetystandards. There are both civil and criminal productliability laws. Civil laws call for payment and moneydamages. Criminal liability laws result in fines or imprisonment.In addition to the competitiveness issue, countrydifferences in product safety and liability laws raise animportant ethical issue for firms doing business abroad.When product safety laws are tougher in a firm's homecountry than in a foreign country and/or when liabilitylaws are more lax, should a firm doing business in thatforeign country follow the more relaxed local standardsor should it adhere to the standards of its home country?While the ethical thing to do is undoubtedly to adhere tohome-country standards, firms have been known to takeadvantage of lax safety and liability laws to do businessin a manner that would not be allowed back home. Contract Law Contract law can differ significantly across countries,and as such it affects the kind of contracts an 30 international business will want to use to safeguard its position should a contract dispute arise. Two main legaltraditions are found in the world today--the common lawsystem and the civil law system . The common lawsystem evolved in England over hundreds of years. It isnow found in most of Britain's former colonies, includingthe United States. Common law is based on tradition, precedent, and custom. When law courts interpretcommon law, they do so with regard to thesecharacteristics. Civil law is based on a very detailed setof laws organized into codes. Among other things, thesecodes define the laws that govern business transactions. The Determinants of Economic Development Differences in Economic Development Different countries have dramatically different levels of economic development. One common measure of economic development is a country's gross national product per head of population. GNP is often regarded asa yardstick for the economic activity of a country; itmeasures the total value of the goods and services produced annually. However, GNP per head figures can be misleading because they don't take into accountdifferences in the cost of living.As can be seen, there are striking differences between thestandard of living in different countries..A problem with the GNP and PPP data discussed so far is that they give a static picture of development. Thus, intime they may become advanced nations themselves andhuge markets for the products of international businesses.Given their future potential, it may well be good advice 31

for international businesses to start getting a foothold inthese markets now. Even though their currentcontributions to an international firm's revenues might besmall, their future contributions could be much larger.A number of other indicators can also be used to assess acountry's economic development and its likely futuregrowth rate. These include literacy rates, the number of people per doctor, infant mortality rates, life expectancy,calorie (food) consumption per head. In an attempt toestimate the impact of such factors upon the quality of life in a country, the United Nations has developed a Human Development Index . This index is based uponthree measures: life expectancy, literacy rates, andwhether average incomes, based on PPP estimates, aresufficient to meet the basic needs of life in a country . Political Economy and Economic Progress Innovation Is the Engine of Growth There is general agreement now that innovation is theengine of long-run economic growth. 28 Those who makethis argument define innovation broadly to include not just new products, but also new processes, neworganizations, new management practices, and newstrategies. One can conclude that if a country's economyis to sustain long-run economic growth, the businessenvironment within that country must be conducive tothe production of innovations. 32 Innovation Requires a Market Economy Those who have considered this issue highlight theadvantages of a market economy. It has been argued thatthe economic freedom associated with a market economycreates greater incentives for innovation than either a planned or a mixed economy. In a market economy, anyindividual who has an innovative idea is free to try tomake money out of that idea by starting a business.Similarly, existing businesses are free to improve their operations through innovation. To the extent that they aresuccessful, both individual entrepreneurs and established businesses can reap rewards in the form of high profits.Thus, in market economies there are enormous incentivesto develop innovations.In contrast, in a planned economy the state owns allmeans of production. Consequently there is noopportunity for entrepreneurial individuals to developvaluable new innovations, since it is the state, rather thanthe individual, that captures all the gains. Innovation Requires Strong Property Rights Strong legal protection of property rights is another requirement for a business environment to be conduciveto innovation and economic growth. 31 Both individualsand businesses must be given the opportunity to profitfrom innovative ideas. Without strong property rights protection, businesses and individuals run the risk thatthe profits from their innovative efforts will beexpropriated, either by criminal elements, or by the stateitself. The state can expropriate the profits frominnovation through legal means, such as excessivetaxation, or through illegal means, such as demands from 33 state bureaucrats for kickbacks in return for granting anindividual or firm a license to do business in a certainarea. According to the Nobel prize-winning economistDouglass North, throughout history many governmentshave displayed a tendency to engage in such

behavior.Inadequately enforced property rights reduce theincentives for innovation and entrepreneurial activity--since the profits from such activity are "stolen"--andhence reduce the rate of economic growth. The Required Political System There is a great deal of debate as to the kind of politicalsystem that best achieves a functioning market economywhere there is strong protection for property rights. Wein the West tend to associate a representative democracywith a market economic system, strong property rights protection, and economic progress. Building on this, wetend to argue that democracy is good for growth. Allthese economies had one thing in common at the start of their economic growth-undemocratic governments.However, those who argue for the value of a totalitarianregime miss an important point-if dictators madecountries rich, then much of Africa, Asia, and LatinAmerica should have been growing rapidly for, and thishas not been the case. Only a certain kind of totalitarianregime is capable of promoting economic growth. It must be a dictatorship that is committed to a free marketsystem and strong protection of property rights.Moreover, there is no guarantee that a dictatorship willcontinue to pursue such progressive policies. Dictatorsare rarely so benevolent. Many are tempted to use theapparatus of the state to further their own private ends, 34 violating property rights and stalling economic growth.Given this, it seems likely democratic regimes are far more conducive to long-term economic growth than aredictatorships, even benevolent ones. Only in a well-functioning, mature democracy are property rights trulysecure. Economic Progress Begets Democracy While it is possible to argue that democracy is not anecessary precondition for establishment of a free marketeconomy in which property rights are protected,subsequent economic growth often leads to establishmentof a democratic regime.A strong belief that economic progress leads to adoption of a democratic regimeunderlies the fairly permissive attitude that manyWestern governments have adopted toward human rightsviolations in China. Other Determinants of Development: Geography andEducation While a country's political and economic system is probably the big locomotive driving its rate of economicdevelopment, other factors are also important. One thathas received attention recently is geography. But the belief that geography can influence economic policy, andhence economic growth rates, goes back to Adam Smith.Education emerges as another important determinant of economic development. The general assertion is that 35 nations that invest more in education will have higher growth rates because an educated population is a more productive population. Some rather striking anecdotalevidence suggests this is the case. States in Transition The Spread of Democracy Among the criteria that Freedom House uses todetermine ratings for political freedom are the following: Free and fair elections of the head of state andlegislative representatives. Fair electoral laws, equal campaigningopportunities, and fair polling. The right to organize into different political parties.

A parliament with effective power. A significant opposition that has a realistic chanceof gaining power. Freedom from domination by the military, foreign powers, totalitarian parties, religious hierarchies, or any other powerful group. A reasonable amount of self-determination for cultural, ethnic, and religious minorities.There are three main reasons for the spread of democracy. First, many totalitarian regimes failed todeliver economic progress to the vast bulk of their populations. Second, new information andcommunications technologies, including shortwaveradio, satellite television, fax machines, desktop publishing, and now the Internet, have broken down the 36 ability of the state to control access to uncensoredinformation. These technologies have created newconduits for the spread of democratic ideals andinformation from free societies . Third, in many countriesthe economic advances of the last quarter century haveled to the emergence of increasingly prosperous middleand working classes who have pushed for democraticreforms.Having said this, it would be naive to conclude that theglobal spread of democracy will continue unchallenged.There have been several reversals. The Spread of Market-Based Systems Paralleling the spread of democracy has been thetransformation from centrally planned commandeconomies to market-based economies. A complete listof countries would also include Asian states such asChina and Vietnam, as well as African countries such asAngola...The underlying rationale for economic transformationhas been the same the world over. In general, commandand mixed economies failed to deliver the kind of sustained economic performance that was achieved bycountries adopting market-based systems. The Nature of Economic Transformation Deregulation Deregulation involves removing legal restrictions to thefree play of markets, the establishment of privateenterprises, and the manner in which private enterprises 37 operate. In mixed economies, deregulation has involvedabolishing laws that either prohibited private enterprisesfrom competing in certain sectors of the economy or regulated the manner in which they operated. Privatization Privatization transfers the ownership of state propertyinto the hands of private individuals, frequently by thesale of state assets through an auction. Privatization isseen as a way to unlock gains in economic efficiency bygiving new private owners a powerful incentive--thereward of greater profits--to search for increases in productivity, to enter new markets, and to exit losingones.The opening case to this chapter details the extent of privatization activity in Brazil, and the Country Focusfeature discusses privatization in India. As these twoexamples suggest, privatization has become a worldwidemovement. Implications The global changes in political and economic systemsdiscussed above

have several implications for international business. The free market ideology of theWest has won the Cold War and has never been morewidespread than it was at the beginning of themillennium. Although command economies still remainand totalitarian dictatorships can still be found around theworld, the tide is running in favor of free markets anddemocracy. 38 The implications for business are enormous. However, just as the potential gains are large, so are the risks.There is no guarantee that democracy will thrive in thenewly democratic states of Eastern Europe, particularly if these states have to grapple with severe economicsetbacks. Totalitarian dictatorships could return, althoughthey are unlikely to be of the communist variety.Moreover, although the bipolar world of the Cold War era has vanished, it may be replaced by a multi-polar world dominated by a number of civilizations. In such aworld, much of the economic promise inherent in theglobal shift toward market-based economic systems mayevaporate in the face of conflicts between civilizations.While the long-term potential for economic gain frominvestment in the world's new market economies is large,the risks associated with any such investment are alsosubstantial. It would be foolish to ignore these.Implications for Business The implications for international business of thematerial discussed in this chapter fall into two broadcategories. Benefits In the most general sense, the long-run monetary benefitsof doing business in a country are a function of the sizeof the market, the present wealth. While international businesses need to be aware of this distinction, they alsoneed to keep in mind the likely future prospects of acountry.By identifying and investing early in a potential futureeconomic star, international firms may build brand 39 loyalty and gain experience in that country's business practices. These will pay back substantial dividends if that country achieves sustained high economic growthrates. In contrast, late entrants may find that they lack the brand loyalty and experience necessary to achieve asignificant presence in the market. In the language of business strategy, early entrants into potential futureeconomic stars may be able to reap substantial first-mover advantages , while late entrants may fall victim to late-mover disadvantages . A country's economicsystem and property rights regime are reasonably good predictors of economic prospects. Countries with freemarket economies in which property rights are well protected tend to achieve greater economic growth ratesthan command economies and economies where propertyrights are poorly protected. It follows that a country'seconomic system and property rights regime . Costs A number of political, economic, and legal factorsdetermine the costs of doing business in a country. Withregard to political factors, the costs of doing business in acountry can be increased by a need to pay off the politically powerful in order to be allowed by thegovernment to do business. The need to pay what areessentially bribes is greater in closed totalitarian statesthan in open democratic societies where politicians areheld accountable by the electorate. Whether a companyshould actually pay bribes in return for market accessshould be determined on the basis of the legal and ethicalimplications of such

action. We discuss thisconsideration below. 40 With regard to economic factors, one of the mostimportant variables is the sophistication of a country'seconomy. It may be more costly to do business inrelatively primitive or undeveloped economies becauseof the lack of infrastructure and supporting businesses.At the extreme, an international firm may have to provide its own infrastructure and supporting business if it wishes to do business in a country, which obviouslyraises costs.As for legal factors, it can be more costly to do businessin a country where local laws and regulations set strictstandards with regard to product safety, safety in theworkplace, environmental pollution, and the like .It canalso be more costly to do business in a country like theUnited States, where the absence of a cap on damageawards has meant spiraling liability insurance rates.Moreover, it can be more costly to do business in acountry that lacks well-established laws for regulating business practice .In the absence of a well-developed body of business contract law, international firms mayfind that there is no satisfactory way to resolve contractdisputes and, consequently, routinely face large lossesfrom contract violations. Risks As with costs, the risks of doing business in a country aredetermined by a number of political, economic, and legalfactors. On the political front, there is the issue of political risk . Political risk has been defined as thelikelihood that political forces will cause drastic changesin a country's business environment that adversely affectthe profit and other goals of a particular business 41 enterprise. So defined, political risk tends to be greater incountries experiencing social unrest and disorder or incountries where the underlying nature of a societyincreases the likelihood of social unrest. Social unresttypically finds expression in strikes, demonstrations,terrorism, and violent conflict.Social unrest can result in abrupt changes in governmentand government policy or, in some cases, in protractedcivil strife. Such strife tends to have negative economicimplications for the profit goals of business enterprises.On the economic front, economic risks arise fromeconomic mismanagement by the government of acountry. Economic risks can be defined as the likelihoodthat economic mismanagement will cause drasticchanges in a country's business environment thatadversely affect the profit and other goals of a particular business enterprise. Economic risks are not independentof political risk. Economic mismanagement may giverise to significant social unrest and hence political risk. Nevertheless, economic risks are worth emphasizing as aseparate category because there is not always a one-to-one relationship between economic mismanagement andsocial unrest. One visible indicator of economicmismanagement tends to be a country's inflation rate.Another tends to be the level of business and governmentdebt in the country.The borrowers failed to generate the profits required tomeet their debt payment obligations. In turn, the banksthat had lent money to these businesses suddenly foundthat they had rapid increases in nonperforming loans ontheir books. Foreign investors, believing that many local 42 companies and banks might go bankrupt, pulled their money out of these countries, selling local stocks, bonds,and currency.On the legal front, risks arise when a country's legalsystem fails to provide adequate

safeguards in the case of contract violations or to protect property rights. Whenlegal safeguards are weak, firms are more likely to break contracts and steal intellectual property if they perceive itas being in their interests to do so. Thus, legal risks might be defined as the likelihood that a trading partner will opportunistically break a contract or expropriate property rights. When legal risks in a country are high,an international business might hesitate entering into along-term contract or joint-venture agreement with a firmin that country. Overall Attractiveness The overall attractiveness of a country as a potentialmarket and/or investment site for an international business depends on balancing the benefits, costs, andrisks associated with doing business in that country.Generally, the costs and risks associated with doing business in a foreign country are typically lower ineconomically advanced and politically stable democraticnations and greater in less developed and politicallyunstable nations. The calculus is complicated, however, by the fact that the potential long-run benefits bear littlerelationship to a nation's current stage of economicdevelopment or political stability. Rather, the benefitsdepend on likely future economic growth rates.Economic growth appears to be a function of a freemarket system and a country's capacity for growth 43 Ethics and Human Rights One major ethical dilemma facing firms from democraticnations is whether they should do business in totalitariancountries that routinely violate the human rights of their citizens .There are two sides to this issue. Some arguethat investing in totalitarian countries provides comfortto dictators and can help prop up repressive regimes thatabuse basic human rights. For instance, Human RightsWatch, an organization that promotes the protection of basic human rights around the world, has argued that the progressive trade policies adopted by Western nationstoward China has done little to deter human rightsabuses.In contrast, some argue that Western investment, byraising the level of economic development of atotalitarian country, can help change it from within. Theynote that economic well-being and political freedomsoften go hand in hand.Since both positions have some merit, it is difficult toarrive at a general statement of what firms should do.Unless mandated by government each firm must makeits own judgments about the ethical implications of investing in totalitarian states on a case-by-case basis. Ethics and Regulations A second important ethical issue is whether aninternational firm should adhere to the same standards of product safety, work safety, and environmental protection that are required in its home country. This is 44 Max Weber, who is famous for expounding on theProtestant work ethic, also argued that the ascetic principles embedded in Hinduism do not encourage thekind of entrepreneurial activity in pursuit of wealthcreation that we find in Protestantism. According toWeber, traditional Hindu values emphasize thatindividuals should not be judged by their materialachievements, but by their spiritual achievements.Indeed, Hindus perceive the pursuit of material well- being as making the attainment of nirvana more difficult.Given the emphasis on an ascetic lifestyle, Weber thought that devout Hindus would be less likely toengage in entrepreneurial

activity than devoutProtestants.Mahatma Gandhi, the famous Indian nationalist andspiritual leader, was certainly the embodiment of Hinduasceticism. It has been argued that the values of Hinduasceticism and self-reliance that Gandhi advocated had anegative impact on the economic development of post-independence India.Hinduism also supports India's caste system. The conceptof mobility between castes within an individual's lifetimemakes no sense to Hindus. Hindus see mobility betweencastes as something that is achieved through spiritual progression and reincarnation. An individual can bereborn into a higher caste in his next life if he achievesspiritual development in this life. In so far as the castesystem limits individuals' opportunities to adopt positions of responsibility and influence in society, theeconomic consequences of this religious belief are boundto be negative. 59 Buddhism Siddhartha achieved nirvana but decided to remain onEarth to teach his followers how they too could achievethis state of spiritual enlightenment. These desires can becurbed by systematically following the Noble Eightfold Path, which emphasizes right seeing, thinking, speech,action, living, effort, mindfulness, and meditation.Unlike Hinduism, Buddhism does not support the castesystem. Nor does Buddhism advocate the kind of extreme ascetic behavior that is encouraged byHinduism. Nevertheless, like Hindus, Buddhists stressthe afterlife and spiritual achievement rather thaninvolvement in this world.Because Buddhists, like Hindus, stress spiritualachievement rather than involvement in this world, theemphasis on wealth creation that is embedded inProtestantism is not found in Buddhism. Confucianism Confucianism teaches the importance of attaining personal salvation through right action. Confucianism is built around a comprehensive ethical code that sets downguidelines for relationships with others. The need for high moral and ethical conduct and loyalty to others arecentral to Confucianism. Economic Implications of Confucianism There are those who maintain that Confucianism mayhave economic implications that are as profound as thosefound in Protestantism, although they are of a somewhatdifferent nature. In this regard, three values central to the 60 Confucian system of ethics are of particular interest-loyalty, reciprocal obligations, and honesty in dealingswith others.In Confucian thought, loyalty to one's superiors isregarded as a sacred duty--an absolute obligation that isnecessary for religious salvation. In modernorganizations based in Confucian cultures, the loyaltythat binds employees to the heads of their organizationcan reduce the conflict between management and labor that we find in class-conscious societies such as Britain.Cooperation between management and labor can beachieved at a lower cost in a culture where the virtue of loyalty is emphasized in the value systems.However, in a Confucian culture, loyalty to one'ssuperiors, such as a worker's loyalty to management, isnot blind loyalty. The concept of reciprocal obligationsalso comes into play.

Language One of the most obvious ways in which countries differ is language. By language, we mean both the spoken andthe unspoken means of communication. Language is oneof the defining characteristics of a culture. Unspoken Language Unspoken language refers to nonverbal communication.We all communicate with each other by a host of nonverbal cues. A failure to understand the nonverbalcues of another culture can lead to a failure of communication. 61 Another aspect of nonverbal communication is personalspace, which is the comfortable amount of distance between you and someone you are talking to. In theUnited States, the customary distance apart adopted by parties in a business discussion is five to eight feet. Theresult can be a regrettable lack of rapport between two businesspeople from different cultures. Education Formal education plays a key role in a society. Formaleducation is the medium through which individuals learnmany of the language, conceptual, and mathematicalskills that are indispensable in a modern society. Formaleducation also supplements the family's role insocializing the young into the values and norms of asociety. Values and norms are taught both directly andindirectly. Schools generally teach basic facts about thesocial and political nature of a society. They also focuson the fundamental obligations of citizenship. Culturalnorms are also taught indirectly at school. Respect for others, obedience to authority, honesty, neatness, beingon time, and so on, are all part of the "hiddencurriculum" of schools. The use of a grading system alsoteaches children the value of personal achievement andcompetition.From an international business perspective, perhaps oneof the most important aspects of education is its role as adeterminant of national competitive advantage. Theavailability of a pool of skilled and educated workersseems to be a major determinant of the likely economicsuccess of a country. 62 Not only is a good education system a determinant of national competitive advantage, but it is also animportant factor guiding the location choices of international businesses. It would make little sense to base production facilities that require highly skilled labor in a country where the education system was so poor thata skilled labor pool wasn't available.The general education level of a country is also a goodindex of the kind of products that might sell in a countryand of the type of promotional material that should beused. Culture and the Workplace Hofstede's Model Hofstede's power distance dimension focused on how asociety deals with the fact that people are unequal in physical and intellectual capabilities. According toHofstede, high power distance cultures were found incountries that let inequalities grow over time intoinequalities of power and wealth. Low power distancecultures were found in societies that tried to play downsuch inequalities as much as possible.The individualism versus collectivism dimensionfocused on the relationship between the individual andhis or her fellows. In individualistic societies, the ties between individuals were loose and individualachievement and freedom were highly valued. Insocieties where collectivism was emphasized, the ties between

individuals were tight. In such societies, peoplewere born into collectives, such as extended families, and 63 everyone was supposed to look after the interest of his or her collective.Hofstede's uncertainty avoidance dimension measuredthe extent to which different cultures socialized their members into accepting ambiguous situations andtolerating uncertainty. Members of high uncertaintyavoidance cultures placed a premium on job security,career patterns, retirement benefits, and so on. They alsohad a strong need for rules and regulations; the manager was expected to issue clear instructions, andsubordinates' initiatives were tightly controlled. Lower uncertainty avoidance cultures were characterized by agreater readiness to take risks and less emotionalresistance to change.Hofstede's masculinity versus femininity dimensionlooked at the relationship between gender and work roles. In masculine cultures, sex roles were sharplydifferentiated and traditional "masculine values," such asachievement and the effective exercise of power,determined cultural ideals. In feminine cultures, sex roleswere less sharply distinguished, and little differentiationwas made between men and women in the same job. Evaluating Hofstede's Model Hofstede's results are interesting for what they tell us in ageneral way about differences between cultures. Many of Hofstede's findings are consistent with standard Westernstereotypes about cultural differences. For example,many people believeHowever, one should be careful about reading too muchinto Hofstede's research. It is deficient in a number of 64 important respects. 36 First, Hofstede assumes there is aone-to-one correspondence between culture and thenation-state, but as we saw earlier, many countries havemore than one culture. Hofstede's results do not capturethis distinction. Second, the research may have beenculturally bound. The research team was composed of Europeans and Americans. The questions they asked of IBM employees and their analysis of the answers mayhave been shaped by their own cultural biases andconcerns. So it is not surprising that Hofstede's resultsconfirm Western stereotypes, since it was Westernerswho undertook the research! Cultural Change Culture is not a constant; it evolves over time. Changesin value systems can be slow and painful for a society.The culture of societies may also change as they becomericher because economic progress affects a number of other factors, which in turn impact on culture. For example, increased urbanization and improvements inthe quality and availability of education are both afunction of economic progress, and both can lead todeclining emphasis on the traditional values associatedwith poor rural societies.As for globalization, some have argued that advances intransportation and communications technologies, thedramatic increase in trade that we have witnessed. 65 policies toward education, and the like. Government canshape domestic demand through local product standardsor with regulations that mandate or influence buyer needs. Government policy can influence supporting andrelated industries through regulation and influence firmrivalry through such devices as capital market regulation,tax policy, and

antitrust laws.Implications for Business Location Implications Underlying most of the theories we have discussed is thenotion that different countries have particular advantagesin different productive activities. Thus, from a profit perspective, it makes sense for a firm to disperse its productive activities to those countries where, accordingto the theory of international trade, they can be performed most efficiently. If design can be performedmost efficiently in France, that is where design facilitiesshould be located; if the manufacture of basiccomponents can be performed most efficiently inSingapore, that is where they should be manufactured;and if final assembly can be performed most efficientlyin China, that is where final assembly should be performed. The result is a global web of productiveactivities, with different activities being performed indifferent locations around the globe depending onconsiderations of comparative advantage, factor endowments, and the like. If the firm does not do this, itmay find itself at a competitive disadvantage relative tofirms that do. 77 The manufacture of advanced components such asmicroprocessors and display screens is a capital-intensive process requiring skilled labor, and cost pressures areless intense. Since cost pressures are not so intense at thisstage, these components are manufactured in countrieswith high labor costs that also have pools of highlyskilled labor (primarily Japan and the United States).Finally, assembly is a relatively labor-intensive processrequiring only low-skilled labor, and cost pressures areintense. As a result, final assembly may be carried out ina country such as Mexico, which has an abundance of low-cost, low-skilled labor. First-Mover Implications The new trade theory suggests the importance of first-mover advantages. According to the new trade theory,firms that establish a first-mover advantage in the production of a new product may dominate global tradein that product. This is particularly true in thoseindustries where the global market can profitably supportonly a limited number of firms, such as the aerospacemarket, but early commitments also seem to be importantin less concentrated industries such as the market for cellular telephone equipment For the individual firm, theclear message is that it pays to invest substantialfinancial resources in building a first-mover, or early-mover, advantage, even if that means several years of substantial losses before a new venture becomes profitableFinally, Porter's theory of national competitive advantagealso contains policy implications. Porter's theorysuggests that it is in a firm's best interests to upgrade 78 advanced factors of production; for example, to invest in better training for its employees and to increase itscommitment to research and development. It is also inthe best interests of business to lobby the government toadopt policies that have a favorable impact on eachcomponent of the national "diamond."Chapter 5 The Political Economy of International Trade 79 Introduction In this chapter, we look at the political reality of international trade. While many nations are nominallycommitted to free trade, in practice nations tend tointervene in international trade. The nature of these political realities are amply illustrated in the case thatopens this chapter. In this chapter, we explore the political and economic

reasons for intervening ininternational trade. When governments intervene, theyoften do so by restricting imports of goods and servicesinto their nation, while adopting policies that promoteexports. Normally their motives for intervention are to protect domestic producers and jobs from foreigncompetition, while increasing the foreign market for domestic products. However, as the opening caseillustrates, in recent years "social" issues have tended tointrude in the decision making. Instruments of Trade Policy Tariffs A tariff is a tax levied on imports. The oldest form of trade policy, tariffs fall into two categories. Specifictariffs are levied as a fixed charge for each unit of agood imported. Ad valorem tariffs are levied as a proportion of the value of the imported good.A tariff raises the cost of imported products relative todomestic products. While the principal objective of mosttariffs is to protect domestic producers and employeesagainst foreign competition, they also raise revenue for the government. 80 The important thing to understand about a tariff is whosuffers and who gains. The government gains, becausethe tariff increases government revenues. Domestic producers gain, because the tariff gives them some protection against foreign competitors by increasing thecost of imported foreign goods. Consumers lose becausethey must pay more for certain imports. Whether thegains to the government and domestic producers exceedthe loss to consumers depends on various factors such asthe amount of the tariff, the importance of the importedgood to domestic consumers, the number of jobs saved inthe protected industry, and so on.Although detailed consideration of these issues is beyondthe scope of this book, two conclusions can be derivedfrom a more advanced analysis. First, tariffs areunambiguously pro-producer and anti-consumer. Whilethey protect producers from foreign competitors, thissupply restriction also raises domestic prices. Thus, asnotedA second point worth emphasizing is that tariffs reducethe overall efficiency of the world economy. They reduceefficiency because a protective tariff encouragesdomestic firms to produce products at home that, intheory, could be produced more efficiently abroad. Theconsequence is inefficient utilization of resources Subsidies 81 A subsidy is a government payment to a domestic producer. Subsidies take many forms including cashgrants, low-interest loans, tax breaks, and governmentequity participation in domestic firms. By lowering costs,subsidies help domestic producers in two ways: they helpthem compete against low-cost foreign imports and theyhelp them gain export markets.But subsidies must be paid for. Governments typically pay for subsidies by taxing individuals. Therefore,whether subsidies generate national benefits that exceedtheir national costs is debatable. In practice, manysubsidies are not that successful at increasing theinternational competitiveness of domestic producers.They tend to

protect the inefficient, rather than promoting efficiency. Import Quotas and Voluntary Export Restraints An import quota is a direct restriction on the quantity of some good that may be imported into a country. Therestriction is normally enforced by issuing importlicenses to a group of individuals or firms. A variant onthe import quota is the voluntary export restraint (VER).A voluntary export restraint is a quota on tradeimposed by the exporting country, typically at therequest of the importing country's government.As with tariffs and subsidies, both import quotas andVERs benefit domestic producers by limiting importcompetition. Quotas do not benefit consumers. Animport quota or VER always raises the domestic price of an imported good. When imports are limited to a low percentage of the market by a quota or VER, this bids the price up for that limited foreign supply. 82 Local Content Requirements A local content requirement calls for some specificfraction of a good to be produced domestically. Localcontent regulations have been widely used by developingcountries as a device for shifting their manufacturing base from the simple assembly of products whose partsare manufactured elsewhere, to the local manufacture of component parts. More recently, the issue of localcontent has been raised by several developed countries.For a domestic producer of component parts, localcontent regulations provide protection in the same wayan import quota does: by limiting foreign competition.The aggregate economic effects are also the same;domestic producers benefit, but the restrictions onimports raise the prices of imported components. In turn,higher prices for imported components are passed on toconsumers of the final product in the form of higher prices. As with all trade policies, local contentregulations tend to benefit producers and not consumers. Antidumping Policies In the context of international trade, dumping isvariously defined as selling goods in a foreign market at below their costs of production, or as selling goods in aforeign market at below their "fair" market value. Thereis a difference between these two definitions, since the"fair" market value of a good is normally judged to begreater than the costs of producing that good. Dumping isviewed as a method by which firms unload excess production in foreign markets. Alternatively, somedumping may be the result of predatory behavior, with producers using substantial profits from their home 83 markets to subsidize prices in a foreign market with aview to driving indigenous competitors out of thatmarket. Once this has been achieved, so the argumentgoes, the predatory firm can raise prices and earnsubstantial profits. Antidumping policies are policies designed to punishforeign firms that engage in dumping. The ultimateobjective is to protect domestic producers from "unfair"foreign competition. Although antidumping policies varysomewhat from country to country, the majority aresimilar to the policies used in the United States. Administrative Policies In addition to the formal instruments of trade policy,governments of all types sometimes use a range of informal or administrative policies

to restrict imports and boost exports. Administrative trade policies are bureaucratic rules designed to make it difficult for imports to enter a country. Some would argue that theJapanese are the masters of this kind of trade barrier. The Case for Government Intervention Political Arguments for Intervention . Protecting Jobs and Industries Perhaps the most common political argument for government intervention is that it is necessary for protecting jobs and industries from foreign competition.Antidumping policies are frequently justified on suchgrounds. The voluntary export restraints that offeredsome protection to the US automobile, machine tool, and 84 Protecting and promoting human rights in other countriesis an important element of foreign policy for manydemocracies. Governments sometimes use trade policy totry to improve the human rights policies of trading partners.On the other hand, some argue that limiting trade withcountries such as China where human rights abuses arewidespread makes matters worse, not better. The bestway to change the internal human rights stance of acountry is to engage it in international trade, they argue. Economic Arguments for Intervention The Infant Industry Argument The infant industry argument is by far the oldesteconomic argument for government intervention.According to this argument, many developing countrieshave a potential comparative advantage inmanufacturing, but new manufacturing industries therecannot initially compete with well-established industriesin developed countries. To allow manufacturing to get atoehold, the argument is that governments shouldtemporarily support new industries until they have grownstrong enough to meet international competition.Also, the infant industry argument has been recognizedas a legitimate reason for protectionism by the WTO. Nevertheless, many economists remain very critical of this argument. They make two main points. First, 87 protection from foreign competition does no good unlessthe protection helps make the industry efficient. In caseafter case, however, protection seems to have done littlemore than foster the development of inefficient industriesthat have little hope of ever competing in the worldmarket. Brazil.A second point is that the infant industry argument relieson an assumption that firms are unable to make efficientlong-term investments by borrowing money from thedomestic or international capital market. Consequently,governments have been required to subsidize long-terminvestments. Strategic Trade Policy The strategic trade policy argument has been proposed by the new trade theorists. There are two components tothe strategic trade policy argument. First, a governmentcan help raise national income if it can somehow ensurethat the firm or firms to gain first-mover advantages insuch an industry are domestic rather than foreignenterprises. Thus, according to the strategic trade policyargument, a government should use subsidies to support promising firms in emerging industries.The second component of the strategic trade policyargument is that it might pay government to intervene inan industry if it helps domestic firms

overcome the barriers to entry created by foreign firms that havealready reaped first-mover advantages. This argumentunderlies government support of Airbus Industrie,Boeing's major competitor. If these arguments arecorrect, they clearly suggest a rationale for governmentintervention in international trade. Specifically, 88 governments should target technologies that may beimportant in the future and use subsidies to supportdevelopment work aimed at commercializing thosetechnologies. The Revised Case for Free Trade Retaliation and Trade War Krugman argues that strategic trade policy aimed atestablishing domestic firms in a dominant position in aglobal industry are beggar-thy-neighbor policies that boost national income at the expense of other countries.A country that attempts to use such policies will probably provoke retaliation. In many cases, the resultingtrade war between two or more interventionistgovernments will leave all countries involved worse off than if a hands-off approach had been adopted. Domestic Politics Governments do not always act in the national interestwhen they intervene in the economy. Instead, they areinfluenced by politically important interest groups. Thus,a further reason for not embracing strategic trade policy,is that such a policy is almost certain to be captured byspecial interest groups within the economy, who willdistort it to their own ends. Development of the World Trading System From Smith to the Great Depression The Corn Laws placed a high tariff on corn imports. Theobjectives of the Corn Law tariff were to raisegovernment revenues and to protect British corn 89 producers. There had been annual motions in Parliamentin favor of free trade since the 1820s when DavidRicardo was a member of Parliament. However,agricultural protection was withdrawn only after a protracted debate when the effects of a harvest failure inBritain were compounded by the imminent threat of famine in Ireland. Faced with considerable hardship andsuffering, among the populace, Parliament narrowlyreversed its long-held position. The Uruguay Round and the World TradeOrganization Against the background of rising pressures for protectionism, in 1986 the members of the GATTembarked upon their eighth round of negotiations toreduce tariffs, the Uruguay Round (so named becausethey occurred in Uruguay). This was the most difficultround of negotiations yet, primarily because it was alsothe most ambitious. Until then, GATT rules had appliedonly to trade in manufactured goods and commodities. Inthe Uruguay Round, member countries sought to extendGATT rules to cover trade in services. They also soughtto write rules governing the protection of intellectual property, to reduce agricultural subsidies, and tostrengthen the GATT's monitoring and enforcementmechanisms. Services and Intellectual Property In the long run, the extension of GATT rules to cover services and intellectual property may be particularlysignificant. Extending GATT rules to this importanttrading arena could significantly increase both the totalshare of world trade accounted for by services and the 90

overall volume of world trade. Having GATT rules cover intellectual property will make it much easier for high-technology companies to do business in developingnations where intellectual property rules have historically been poorly enforced High-technology companies willnow have a mechanism to force countries to prohibit the piracy of intellectual property. The World Trade Organization The clarification and strengthening of GATT rules andthe creation of the World Trade Organization also holdout the promise of more effective policing andenforcement of GATT rules in the future. This shouldhave a beneficial effect on overall economic growth anddevelopment by promoting trade. The WTO will act asan umbrella organization that which will encompass theGATT along with two new sister bodies, one on servicesand the other on intellectual property. The WTO willtake over responsibility for arbitrating trade disputes andmonitoring the trade policies of member countries. Whilethe WTO will operate as GATT now does--on the basisof consensus--in the area of dispute settlement, member countries will no longer be able to block adoption of arbitration reports. Arbitration panel reports on tradedisputes between member countries will be automaticallyadopted by the WTO unless there is a consensus to rejectthem. Implications of the Uruguay Round The world is better off with a GATT deal than without it.Without the deal, the world might have slipped intoincreasingly dangerous trade wars, which might havetriggered a recession. With a GATT deal concluded, the 91 current world trading system looks secure, and there is agood possibility that the world economy will now growfaster than would otherwise have been the case.Estimates as to the overall impact of the GATTagreement, however, are not that dramatic. WTO: Early Experience WTO as a Global Policeman Countries' use of the WTO represents an important voteof confidence in the organization's dispute resolution.The backing of the leading trading powers has beencrucial to the early success of the WTO. Initially, somefeared that the United States might undermine the system by continuing to rely on unilateral measures when itsuited or by refusing to accept WTO verdicts.Encouraged perhaps by the tougher system, developingcountries are also starting to use the settlement procedures more than they did under the GATT. So far the United States has proved willing to accept WTOrulings that go against it. The United States agreed toimplement a WTO judgment that called for the countryto remove discriminatory antipollution regulations thatwere applied to gasoline imports. In a dispute with Indiaover textile imports, the United States rescinded quotas before a WTO panel could start work. WTO Telecommunications Agreement As explained above, the Uruguay Round of GATTnegotiations extended global trading rules to cover services. The WTO was given the role of brokering 92 future agreements to open global trade in services. TheWTO was also encouraged to extend its reach toencompass regulations governing foreign directinvestment--something the GATT had never done. Twoof the first industries targeted for reform were the globaltelecommunications and financial services industries.Given its importance in the global economy, thetelecommunications services industry was a veryimportant target for reform. The WTO's goal was to getcountries to open their

telecommunications markets tocompetition, allowing foreign operators to purchaseownership stakes in domestic telecommunications providers and establishing a set of common rules for fair competition in the telecommunications sector. Three benefits were cited.First, advocates argued that inward investment andincreased competition would stimulate the modernizationof telephone networks around the world and lead tohigher-quality service. Second, supporters maintainedthat the increased competition would benefit customersthrough lower prices. WTO Financial Services Agreement Fresh from its success in brokering a telecommunicationsagreement, in April 1997 the WTO embarked onnegotiations to liberalize the global financial servicesindustry. The financial services industry includes banking, securities businesses, insurance, assetmanagement services, and the like.Participants in the negotiations wanted to see morecompetition in the sector both to allow firms greater opportunities abroad and to encourage greater efficiency. 93 Developing countries need the capital and financialinfrastructure for their development. But governmentsalso have to ensure that the system is sound and stable because of the economic shocks that can be caused byexchange rates, interest rates, or other market conditionsfluctuating excessively. They also have to avoideconomic crisis caused by bank failures. Therefore,government intervention in the interest of prudentialsafeguards is an important condition underpinningfinancial market liberalization. The Future: Unresolved Issues The 1994 GATT deal still leaves a lot to be done on theinternational trade front. Substantial trade barriers stillremain in areas such as financial services and broadcastentertainment, although these seem likely to be reducedeventually. More significantly perhaps, WTO has yet todeal with the areas of environmentalism, worker rights,foreign direct investment, and dumping.High on the list of the WTO's future concerns will be theinteraction of environmental and trade policies and how best to promote sustainable development and ecologicalwell-being without resorting to protectionism. The WTOwill have to deal with environmentalists' claims thatexpanded international trade encourages companies tolocate factories in areas of the world where they are freer to pollute and degrade the environment.Paralleling environmental concerns are concerns that freetrade encourages firms to shift their production tocountries with low labor rates where worker rights areroutinely violated. 94 Implications for Business Trade Barriers and Firm Strategy Trade barriers constrain a firm's ability to disperse its productive activities in such a manner. First, and mostobviously, tariff barriers raise the costs of exporting products to a country. This may put the firm at acompetitive disadvantage vis--vis indigenouscompetitors in that country. In response, the firm maythen find it economical to locate production facilities inthat country so it can compete on an even footing withindigenous competitors. Second, voluntary exportrestraints may limit a firm's ability to serve a countryfrom locations outside of that country. The firm'sresponse might be to set up production facilities in thatcountry--even though it may result in higher productioncosts.Third, to conform with local content regulations, a firmmay have to locate more production activities in a givenmarket than it would otherwise. From the firm's perspective, the consequence might be to raise costsabove the level that could be achieved if each

productionactivity was dispersed to the optimal location for thatactivity. And fourth, even when trade barriers do notexist, the firm may still want to locate some productionactivities in a given country to reduce the threat of trade barriers being imposed in the future.All the above effects are likely to raise the firm's costsabove the level that could be achieved in a world withouttrade barriers. The higher costs that result need not 95 translate into a significant competitive disadvantage,however, if the countries imposing trade barriers do so tothe imported products of all foreign firms, irrespective of their national origin. Policy Implications Government policies with regard to international tradealso can have a direct impact on business.In general, however, the arguments contained in thischapter suggest that a policy of government interventionhas three drawbacks. Intervention can be self-defeating,since it tends to protect the inefficient rather than helpfirms become efficient global competitors. Interventionis dangerous because it may invite retaliation and trigger a trade war. Finally, intervention is unlikely to be well-executed, given the opportunity for such a policy to becaptured by special interest groups. Most economistswould probably argue that the best interests of international business are served by a free trade stance, but not a laissez-faire stance. It is probably in the bestlong-run interests of the business community toencourage the government to aggressively promotegreater free trade by, for example, strengthening theWTO. Business probably has much more to gain fromgovernment efforts to open protected markets to importsand foreign direct investment than from governmentefforts to support certain domestic industries in a manner consistent with the recommendations of strategic trade policy.This conclusion is reinforced by a phenomenon that wetouched on in Chapter 1, the increasing integration of theworld economy and internationalization of production 96 that has occurred over the past two decades. We live in aworld where many firms of all national originsincreasingly depend for their competitive advantage onglobally dispersed production systems. Such systems arethe result of free trade. Free trade has brought greatadvantages to firms that have exploited it and toconsumers who benefit from the resulting lower prices. 97 Chapter Six Foreign Direct Investment Introduction This chapter is concerned with the phenomenon of foreign direct investment (FDI). Foreign directinvestment occurs when a firm invests directly infacilities to produce and/or market a product in a foreigncountry.In the remainder of the chapter, we first look at thegrowing importance of FDI in the world economy. Nextwe look at the theories that have been used to explainhorizontal foreign direct investment. Horizontal foreigndirect investment is FDI in the same industry as a firmoperates in at home. Electrolux's investments in EasternEurope and Asia are examples of horizontal FDI. Havingreviewed horizontal FDI, we consider the theories thathelp to explain vertical foreign direct investment. Vertical foreign direct investment

is FDI in an industrythat provides inputs for a firm's domestic operations, or itmay be FDI in an industry abroad that sells the outputs of a firm's domestic operations. Finally, we review theimplications of these theories for business practice. Horizontal Foreign Direct Investment Transportation Costs When transportation costs are added to production costs,it becomes unprofitable to ship some products over alarge distance. This is particularly true of products thathave a low value-to-weight ratio and can be produced in 98 specific task and whose value is significantly reduced inits next-best use.Consider the case of an aluminum refinery, which isdesigned to refine bauxite ore and produce aluminum.Bauxite ores vary in content and chemical compositionfrom deposit to deposit. Each type of ore requires adifferent type of refinery. Imagine that a US aluminumcompany must decide whether to invest in an aluminumrefinery designed to refine a certain type of ore. Assumefurther that this ore is available only through anAustralian mining firm at a single bauxite mine.Implications for Business The implications of the theories of horizontal and verticalFDI for business practice are relatively straightforward.First, the location-specific advantages argumentassociated with John Dunning does help explain the direction of FDI, both with regard to horizontal andvertical FDI.Firms for which licensing is not a good option tend to beclustered in three types of industries:1.High-technology industries where protecting firm-specific expertise is of paramount importance andlicensing is hazardous.2.Global oligopolies, where competitiveinterdependence requires that multinational firmsmaintain tight control over foreign operations sothat they have the ability to launch coordinated 105 attacks against their global competitors (as Kodak has done with Fuji).3.Industries where intense cost pressures require thatmultinational firms maintain tight control over foreign operations (so they can dispersemanufacturing to locations around the globe wherefactor costs are most favorable to minimize costs). 106 Chapter Seven The Political Economy of Foreign Direct Investment Introduction The government of a source country for FDI also canencourage or restrict FDI by domestic firms. In recentyears, the Japanese government has pressured manyJapanese firms to undertake FDI. The Japanesegovernment sees FDI as a substitute for exporting andthus as a way of reducing Japan's politicallyembarrassing balance of payments surplus. In contrast,the US government has, for political reasons, from timeto time restricted FDI by domestic firms. Political Ideology and Foreign Direct Investment The Radical View The radical view traces its roots to Marxist political andeconomic theory. Radical writers argue that themultinational enterprise (MNE) is an instrument of imperialist domination. They see the MNE as a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries. They argue thatMNEs extract profits from the host country and takethem to their home country, giving

nothing of value tothe host country in exchange. Thus, according to theextreme version of this view, no country should ever permit foreign corporations to undertake FDI, since theycan never be instruments of economic development, onlyof economic domination. Where MNEs already exist in acountry, they should be immediately nationalized. 107 The Free Market View The free market view traces its roots to classicaleconomics and the international trade theories of AdamSmith and David Ricardo.. The free market view arguesthat international production should be distributed amongcountries according to the theory of comparativeadvantage. Countries should specialize in the productionof those goods and services that they can produce mostefficiently. Within this framework, the MNE is aninstrument for dispersing the production of goods andservices to the most efficient locations around theglobeFor reasons explored earlier in this book, in recentyears, the free market view has been ascendantworldwide, spurring a global move toward the removalof restrictions on inward and outward foreign directinvestment. Pragmatic Nationalism In practice, many countries have adopted neither aradical policy nor a free market policy toward FDI, butinstead a policy that can best be described as pragmaticnationalism. The pragmatic nationalist view is that FDIhas both benefits and costs. FDI can benefit a hostcountry by bringing capital, skills, technology, and jobs, but those benefits often come at a cost. When productsare produced by a foreign company rather than adomestic company, the profits from that investment goabroad. Many countries are also concerned that aforeign-owned manufacturing plant may import manycomponents from its home country, which has negative 108 implications for the host country's balance-of-payments position. The Benefits of FDI to Host Countries Resource-Transfer Effects Capital Given this tension, the mode for transferringtechnology--licensing or FDI--can be a major negotiating point between an MNE and a host government. Whether the MNE gets its way depends on the relative bargaining powers of the MNE and the host government. Management Foreign management skills acquired through FDI mayalso produce important benefits for the host country.Beneficial spin-off effects arise when local personnelwho are trained to occupy managerial, financial, andtechnical posts in the subsidiary of a foreign MNE leavethe firm and help to establish indigenous firms.The benefits may be considerably reduced if mostmanagement and highly skilled jobs in the subsidiariesare reserved for home-country nationals. Employment Effects The beneficial employment effect claimed for FDI is thatit brings jobs to a host country that would otherwise not be created there. Cynics note that not all the "new jobs"created by FDI represent net additions in employment. Inthe case of FDI by Japanese auto companies in theUnited States, some argue that the jobs created by this 109 investment have been more than offset by the jobs lost inUS-owned auto companies, which have lost market shareto their Japanese competitors. Balance-of-Payments Effects

Balance-of-Payments Accounts A country's balance-of-payments accounts keep track of both its payments to and its receipts from other countries. Any transaction resulting in a payment to other countries is entered in the balance-of-payments accountsas a debit and given a negative ( - ) sign. Any transactionresulting in a receipt from other countries is entered as acredit and given a positive (+) sign.Balance-of-payments accounts are divided into two mainsections: the current account and the capital account. Thefirst category, merchandise trade, refers to the export or import of goods. The second category is the export or import of services . The third category, investment income, refers to income from foreign investments and payments that have to be made to foreigners investing ina country.A current account deficit occurs when a countryimports more goods, services, and income than itexports. A current account surplus occurs when acountry exports more goods, services, and income than itimports. The capital account records transactions thatinvolve the purchase or sale of assets. Thus, when aJapanese firm purchases stock in a US company, thetransaction enters the US balance of payments as a crediton the capital account. This is because capital is flowing 110 into the country. When capital flows out of the UnitedStates, it enters the capital account as a debit.Thus, any international transaction automatically givesrise to two offsetting entries in the balance of payments.Because of this, the current account balance and thecapital account balance should always add up to zero.Governments normally are concerned when their countryis running a deficit on the current account of their balance of payments. When a country runs a currentaccount deficit, the money that flows to other countries isthen used by those countries to purchase assets in thedeficit country. FDI and the Balance of Payments Given the concern about current account deficits, the balance-of-payments effects of FDI can be an importantconsideration for a host government. There are three potential balance-of-payments consequences of FDI.First, when an MNE establishes a foreign subsidiary, thecapital account of the host country benefits from theinitial capital inflow. However, this is a one-time-onlyeffect. Set against this must be the outflow of earnings tothe foreign parent company, which will be recorded as adebit on the current account of the host country.Second, if the FDI is a substitute for imports of goods or services, it can improve the current account of the hostcountry's balance of payments. A third potential benefitto the host country's balance-of-payments position ariseswhen the MNE uses a foreign subsidiary to export goodsand services to other countries. 111 Effect on Competition and Economic Growth Economic theory tells us that the efficient functioning of markets depends on an adequate level of competition between producers. By

increasing consumer choice,foreign direct investment can help to increase the level of competition in national markets, thereby driving down prices and increasing the economic welfare of consumers. As we saw in the Management Focus,foreign direct investment has helped increasecompetition in the South Korean retail sector. Theincrease in choices, and the resulting fall in prices,clearly benefits South Korean consumers. The Costs of FDI to Host Countries Adverse Effects on Competition Although we have just outlined in the previous sectionhow foreign direct investment can boost competition,host governments sometimes worry that the subsidiariesof foreign MNEs may have greater economic power thanindigenous competitors. If it is part of a larger international organization, the foreign MNE may be ableto draw on funds generated elsewhere to subsidize itscosts in the host market, which could drive indigenouscompanies out of business and allow the firm tomonopolize the market.In practice, the above arguments are often used byinefficient indigenous competitors when lobbying their government to restrict direct investment by foreignMNEs. Although a host government may state publiclyin such cases that its restrictions on inward FDI aredesigned to protect indigenous competitors from the 112 capital flows. To Feldstein, patient money is stillrelatively rare, primarily because although capital is freeto move internationally, its owners and managers still prefer to keep most of it at home.A lack of information about the fundamental quality of foreign investments may encourage speculative flows inthe global capital market. Faced with a lack of qualityinformation, investors may react to dramatic news eventsin foreign nations and pull their money out too quickly.Despite advances in information technology, it is stilldifficult for an investor to get access to the same quantityand quality of information about foreign investmentopportunities that he can get about domestic investmentopportunities. This information gap is exacerbated bydifferent accounting conventions in different countries,which makes the direct comparison of cross-border investment opportunities difficult for all but the mostsophisticated investor. The Eurocurrency Market Genesis and Growth of the Market The eurocurrency market was born in the mid-1950swhen Eastern European holders of dollars, including theformer Soviet Union, were afraid to deposit their holdings of dollars in the United States lest they beseized by the US government to settle US residents'claims against business losses resulting from theCommunist takeover of Eastern Europe. These countriesdeposited many of their dollar holdings in Europe, particularly in London. The eurocurrency market 171 received a major push in 1957 when the Britishgovernment prohibited British banks from lendingBritish pounds to finance non-British trade, a businessthat had been very profitable for British banks. British banks began financing the same trade by attracting dollar deposits and lending dollars to companies engaged ininternational trade and investment. Because of thishistorical event, London became, and has remained, theleading center of euro currency trading.The euro currency market received another push in the1960s when the US government enacted regulations thatdiscouraged US banks from lending to non-US

residents.Would-be dollar borrowers outside the United Statesfound it increasingly difficult to borrow dollars in theUnited States to finance international trade, so theyturned to the eurodollar market to obtain the necessarydollar funds.Although these various political events contributed to thegrowth of the eurocurrency market, they alone were notresponsible for it. The market grew because it offeredreal financial advantages--initially to those who wantedto deposit dollars or borrow dollars and later to thosewho wanted to deposit and borrow other currencies. Wenow look at the source of these financial advantages. Attractions of the Eurocurrency Market The main factor that makes the eurocurrency market soattractive to both depositors and borrowers is its lack of government regulation. This allows banks to offer higher interest rates on eurocurrency deposits than on depositsmade in the home currency, making eurocurrencydeposits attractive to those who have cash to deposit. The 172 lack of regulation also allows banks to charge borrowersa lower interest rate for eurocurrency borrowings than for borrowings in the home currency, making eurocurrencyloans attractive for those who want to borrow money. Inother words, the spread between the eurocurrency depositrate and the eurocurrency lending rate is less than thespread between the domestic deposit and lending ratesDomestic currency deposits are regulated in allindustrialized countries. Such regulations ensure that banks have enough liquid funds to satisfy demand if large numbers of domestic depositors should suddenlydecide to withdraw their money. All countries operatewith certain reserve requirements.In contrast, a eurobank can offer a higher interest rate ondollar deposits and still cover its costs. The eurobank,with no reserve requirements regarding dollar deposits,can lend out all of a $100 deposit. Clearly, there are verystrong financial motivations for companies to use theeurocurrency market. By doing so, they receive a higher interest rate on deposits and pay less for loans. Giventhis, the surprising thing is not that the euromarket hasgrown rapidly but that it hasn't grown even faster. Drawbacks of the Eurocurrency Market The eurocurrency market has two drawbacks. First, whendepositors use a regulated banking system, they knowthat the probability of a bank failure that would causethem to lose their deposits is very low. Regulationmaintains the liquidity of the banking system. In anunregulated system such as the eurocurrency market, the probability of a bank failure that would cause depositorsto lose their money is greater. Thus, the lower interest 173 rate received on home-country deposits reflects the costsof insuring against bank failure. Some depositors aremore comfortable with the security of such a system andare willing to pay the price.Second, borrowing funds internationally can expose acompany to foreign exchange risk. The Global Bond Market Attractions of the Eurobond Market Regulatory Interference National governments often impose tight controls ondomestic and foreign issuers of bonds denominated in thelocal currency and sold within their national boundaries.These controls tend to raise the cost of issuing bonds.However, government limitations are generally lessstringent for securities denominated in foreign currenciesand sold to holders of those foreign currencies.Eurobonds fall outside of the

regulatory domain of anysingle nation. As such, they can often be issued at alower cost to the issuer. Disclosure Requirements Eurobond market disclosure requirements tend to be lessstringent than those of several national governments. For example, if a firm wishes to issue dollar-denominated bonds within the United States, it must first comply withSEC disclosure requirements. The firm must disclosedetailed information about its activities, the salaries andother compensation of its senior executives, stock trades by its senior executives, and the like. In addition, the 174 issuing firm must submit financial accounts that conformto US accounting standards. Favorable Tax Status This did not encourage foreigners to hold bonds issued by US corporations. Similar tax laws were operational inmany countries at that time, and they limited marketdemand for Eurobonds. As a result, US corporationsfound it feasible for the first time to sell eurobondsdirectly to foreigners. Repeal of the US laws causedother governments--including those of France, Germany,and Japan--to liberalize their tax laws likewise to avoidoutflows of capital from their markets. The consequencewas an upsurge in demand for eurobonds from investorswho wanted to take advantage of their tax benefits. The Global Equity Market Although we have talked about the growth of the globalequity market, strictly speaking there is no internationalequity market in the sense that there are internationalcurrency and bond markets. Rather, many countries havetheir own domestic equity markets in which corporatestock is traded.A second development internationalizing the worldequity market is that companies with historic roots in onenation are broadening their stock ownership by listingtheir stock in the equity markets of other nations. Thereasons are primarily financial. Listing stock on a foreignmarket is often a prelude to issuing stock in that marketto raise capital. 175 Foreign Exchange Risk and the Cost of Capital Consider a South Korean firm that wants to borrow 1 billion Korean won for one year to fund a capitalinvestment project. The company can borrow this moneyfrom a Korean bank at an interest rate of 10 percent, andat the end of the year pay back the loan plus interest, for a total of W 1.10 billion. Or the firm could borrowdollars from an international bank at a 6 percent interestrate. Unpredictable movements in exchange rates caninject risk into foreign currency borrowing, makingsomething that initially seems less expensive ultimatelymuch more expensive. The borrower can hedge againstsuch a possibility by entering into a forward contract to purchase the required amount of the currency being borrowed at a predetermined exchange rate when theloan comes due.When a firm borrows funds from the global capitalmarket, it must weigh the benefits of a lower interest rateagainst the risks of an increase in the real cost of capitaldue to adverse exchange rate movements. Althoughusing forward exchange markets may lower foreignexchange risk with short-term borrowings, it cannotremove the risk. Most importantly, the forward exchangemarket does not provide adequate coverage for long-term borrowings.Implications for BusinessThe implications of the material discussed in this chapter for international business are quite straightforward but noless important for being obvious. The growth of theglobal capital market has created opportunities for international businesses that wish to borrow and/or invest

176 money. On the borrowing side, by using the globalcapital market, firms can often borrow funds at a lower cost than is possible in a purely domestic capital market.This conclusion holds no matter what form of borrowinga firm uses--equity, bonds, or cash loans. The lower costof capital on the global market reflects their greater liquidity and the general absence of governmentregulation. Government regulation tends to raise the costof capital in most domestic capital markets. The globalmarket, being transnational, escapes regulation. Balancedagainst this, however, is the foreign exchange risk associated with borrowing in a foreign currency. 177 to charge higher prices and/or to build sales volume morerapidly. Timing of Entry Once attractive markets have been identified, it isimportant to consider the timing of entry . Theadvantages frequently associated with entering a marketearly are commonly known as first-mover advantages .One first-mover advantage is the ability to preempt rivalsand capture demand by establishing a strong brand name.A second advantage is the ability to build sales volume inthat country and ride down the experience curve ahead of rivals, giving the early entrant a cost advantage over later entrants. A third advantage is the ability of early entrantsto create switching costs that tie customers into their products or services. Such switching costs make itdifficult for later entrants to win business.There can also be disadvantages associated with enteringa foreign market before other international businesses.These are often referred to as first-moverdisadvantages . These disadvantages may give rise to pioneering costs. Pioneering costs are costs that an earlyentrant has to bear that a later entrant can avoid.Pioneering costs arise when the business system in aforeign country is so different from that in a firm's homemarket that the enterprise has to devote considerableeffort, time, and expense to learning the rules of thegame.Pioneering include the costs of promoting andestablishing a product offering, including the costs of educating customers. These costs can be particularly 204 significant when the product being promoted is one thatlocal consumers are not familiar with. In many ways.An early entrant may be put at a severe disadvantage,relative to a later entrant, if regulations change in a waythat diminishes the value of an early entrant'sinvestments. This is a serious risk in many developingnations where the rules that govern business practices arestill evolving. Early entrants can find themselves at adisadvantage if a subsequent change in regulationsinvalidates prior assumptions about the best businessmodel for operating in that country. Scale of Entry and Strategic Commitments The final issue that an international business needs toconsider when contemplating market entry is the scale of entry. Entering a market on a large scale involves thecommitment of significant resources.The consequences of entering on a significant scale areassociated with the value of the resulting strategiccommitments. A strategic commitment is a decisionthat has a long-term impact and is difficult to

reverse.Deciding to enter a foreign market on a significant scaleis a major strategic commitment. Strategic commitments,such as large-scale market entry, can have an importantinfluence on the nature of competition in a market.The value of the commitments that flow from large-scaleentry into a foreign market must be balanced against theresulting risks and lack of flexibility associated withsignificant commitments. But strategic inflexibility canalso have value. A famous example from military historyillustrates the value of inflexibility. Balanced against the 205 value and risks of the commitments associated withlarge-scale entry are the benefits of a small-scale entry.Small-scale entry allows a firm to learn about a foreignmarket while limiting the firm's exposure to that market.Small-scale entry can be seen as a way to gather information about a foreign market before decidingwhether to enter on a significant scale and how best toenter. Exporting Advantages Exporting has two distinct advantages. First, it avoids theoften-substantial costs of establishing manufacturingoperations in the host country. Second, exporting mayhelp a firm achieve experience curve and locationeconomies . Disadvantages Exporting has a number of drawbacks. First, exportingfrom the firm's home base may not be appropriate if thereare lower-cost locations for manufacturing the productabroad . Thus, particularly for firms pursuing global or transnational strategies, it may be preferable tomanufacture where the mix of factor conditions is mostfavorable from a value creation perspective and to exportto the rest of the world from that location. This is not somuch an argument against exporting as an argumentagainst exporting from the firm's home country.A second drawback to exporting is that high transportcosts can make exporting uneconomical, particularly for bulk products. One way of getting around this is to 206 manufacture bulk products regionally. This strategyenables the firm to realize some economies from large-scale production and at the same time to limit itstransport costs.A thirth drawback to exporting arises when a firmdelegates its marketing in each country where it does business to a local agent. There are ways around this problem, however. One way is to set up a wholly ownedsubsidiary in the country to handle local marketing. Bydoing this, the firm can exercise tight control over marketing in the country while reaping the costadvantages of manufacturing the product in a singlelocation. Turnkey Projects Advantages The know-how required to assemble and run atechnologically complex process, such as refining petroleum or steel, is a valuable asset. Turnkey projectsare a way of earning great economic returns from thatasset. The strategy is particularly useful where FDI islimited by host-government regulations. A turnkeystrategy can also be less risky than conventional FDI. Ina country with unstable political and economicenvironments, a longer-term investment might exposethe firm to unacceptable political and/or economic risks. 207

Disadvantages Three main drawbacks are associated with a turnkeystrategy. First, the firm that enters into a turnkey dealwill have no long-term interest in the foreign country.This can be a disadvantage if that country subsequently proves to be a major market for the output of the processthat has been exported. Second, the firm that enters into aturnkey project with a foreign enterprise mayinadvertently create a competitor. Third, if the firm's process technology is a source of competitive advantage,then selling this technology through a turnkey project isalso selling competitive advantage to potential and/or actual competitors. Licensing A licensing agreement is an arrangement whereby alicensor grants the rights to intangible property to another entity for a specified period, and in return, the licensor receives a royalty fee from the licensee. Advantages In the typical international licensing deal, the licensee puts up most of the capital necessary to get the overseasoperation going. Licensing is very attractive for firmslacking the capital to develop operations overseas. Inaddition, licensing can be attractive when a firm isunwilling to commit substantial financial resources to anunfamiliar or politically volatile foreign market.Licensing is also often used when a firm wishes to participate in a foreign market but is prohibited fromdoing so by barriers to investment. 208 Disadvantages Licensing has three serious drawbacks. First, it does notgive a firm the tight control over manufacturing,marketing, and strategy that is required for realizingexperience curve and location economies . Licensingtypically involves each licensee setting up its own production operations.Second, competing in a global market may require a firmto coordinate strategic moves across countries by using profits earned in one country to support competitiveattacks in another . Technological know-how constitutesthe basis of many multinational firms' competitiveadvantage. Most firms wish to maintain control over howtheir know-how is used, and a firm can quickly losecontrol over its technology by licensing it. Many firmshave made the mistake of thinking they could maintaincontrol over their know-how within the framework of alicensing agreement.Another way of reducing the risk associated withlicensing is to follow the Fuji-Xerox model and link anagreement to license know-how with the formation of a joint venture in which the licensor and licensee take animportant equity stake. Such an approach aligns theinterests of licensor and licensee, since both have a stakein ensuring that the venture is successful. Franchising Franchising is basically a specialized form of licensingin which the franchiser not only sells intangible propertyto the franchisee, but also insists that the franchiseeagree to abide by strict rules as to how it does business. 209 Advantages The advantages of franchising as an entry mode are verysimilar to those of licensing. The firm is relieved of many of the costs and risks of opening a foreign marketon its own. Instead, the franchisee typically assumesthose costs and risks. This creates a good incentive for the

franchisee to build profitable operation as quickly as possible. Disadvantages The disadvantages are less pronounced than in the caseof licensing. Since franchising is often used by servicecompanies, there is no reason to consider the need for coordination of manufacturing to achieve experiencecurve and location economies. But franchising mayinhibit the firm's ability to take profits out of one countryto support competitive attacks in another.A more significant disadvantage of franchising is qualitycontrol. The foundation of franchising arrangements isthat the firm's brand name conveys a message toconsumers about the quality of the firm's product. Oneway around this disadvantage is to set up a subsidiary ineach country in which the firm expands. The subsidiarymight be wholly owned by the company or a jointventure with a foreign company. The subsidiary assumesthe rights and obligations to establish franchisesthroughout the particular country or region. Joint Ventures A joint venture entails establishing a firm that is jointlyowned by two or more otherwise independent firms. 210 Advantages Joint ventures have a number of advantages. First, a firm benefits from a local partner's knowledge of the hostcountry's competitive conditions, culture, language, political systems, and business systems. Second, whenthe development costs and risks of opening a foreignmarket are high, a firm might gain by sharing these costsand/or risks with a local partner. Third, in manycountries, political considerations make joint venturesthe only feasible entry mode. Disadvantages Despite these advantages, there are two major disadvantages with joint ventures. First, as withlicensing, a firm that enters into a joint venture risksgiving control of its technology to its partner. A seconddisadvantage is that a joint venture does not give a firmthe tight control over subsidiaries that it might need torealize experience curve or location economies. Nor doesit give a firm the tight control over a foreign subsidiarythat it might need for engaging in coordinated globalattacks against its rivals.A third disadvantage with joint ventures is that theshared ownership arrangement can lead to conflicts and battles for control between the investing firms if their goals and objectives change or if they take differentviews as to what the strategy should be. 211 location for manufacturing a product is beset by politicalrisks. Under such circumstances, foreign directinvestment to establish a component manufacturingoperation in that country would expose the firm to political risks.However, maintaining strategic flexibility has itsdownside. Lower Costs First, the greater the number of subunits in anorganization, the greater are the problems of coordinatingand controlling those units. Coordinating and controllingsubunits requires top management to process largeamounts of information about subunit activities. Thegreater the number of subunits, the more information topmanagement must process and the harder it is to do well.Second, the firm that vertically integrates into component part manufacture may find that because its internalsuppliers have a captive customer in the firm, they lack an incentive to reduce costs. The fact that they do nothave to compete for

orders with other suppliers mayresult in high operating costs. Third, leading on from the previous point, vertically integrated firms have todetermine appropriate prices for goods transferred tosubunits within the firm. Offsets Another reason for outsourcing some manufacturing toindependent suppliers based in other countries is that itmay help the firm capture more orders from that country.As noted in the Management Focus on Boeing, the 240 practice of offsets is common in the commercialaerospace industry. Trade-offs Trade-offs are involved in make-or-buy decisions. The benefits of manufacturing components in-house seem to be greatest when highly specialized assets are involved,when vertical integration is necessary for protecting proprietary technology, or when the firm is simply moreefficient than external suppliers at performing a particular activity.When these conditions are not present, the risk of strategic inflexibility and organizational problemssuggest that it may be better to contract out component part manufacturing to independent suppliers. Coordinating a Global Manufacturing System Materials management, which encompasses logistics, embraces the activities necessary to get materials to amanufacturing facility, through the manufacturing process, and out through a distribution system to the enduser.Materials management is a major undertaking in a firmwith a globally dispersed manufacturing system andglobal markets. Consider the example of BoseCorporation, which is presented in the accompanyingManagement Focus. The Power of Just-in-Time The basic philosophy behind just-in-time (JIT) systems isto economize on inventory holding costs by having 241 materials arrive at a manufacturing plant just in time toenter the production process and not before. The major cost saving comes from speeding up inventory turnover;this reduces inventory holding costs, such aswarehousing and storage costs.In addition to the cost benefits, JIT systems can also helpfirms improve product quality. The Role of Organization As the number and dispersion of domestic and foreignmarkets and sources grow, the number and complexity of organizational linkages increase correspondingly. In amultinational enterprise, the challenge of managing thecosts associated with purchases, currency exchange,inbound and outbound transportation, production,inventory, communication, expediting, tariffs and duties,and overall administration is massive. A major requirement seems to be to legitimize materialsmanagement by separating it out as a function and givingit equal weight, in organizational terms, with other moretraditional functions such as manufacturing, marketing,and R&D. According to materials managementspecialists, purchasing, production, and distribution arenot separate activities but three aspects of one basic task:controlling the flow of materials and products fromsources of supply through manufacturing and distributioninto the hands of customers.Having established the legitimacy of materialsmanagement, the next dilemma is determining the beststructure in a multinational enterprise. In practice,authority is either centralized or decentralized.

23 Under acentralized solution, most materials management 242 decisions are made at the corporate level, which canensure efficiency and adherence to overall corporateobjectives. This is the case at Bose Corporation, for example. In large, complex organizations with manymanufacturing plants, however, a centralized materialsmanagement function may become overloaded andunable to perform its task effectively. In such cases, adecentralized solution is needed.A decentralized solution delegates most materialsmanagement decisions to the level of individualmanufacturing plants within the firm, although corporateheadquarters retains responsibility for overseeing thefunction. The great advantage of decentralizing is that itallows plant-level materials management groups todevelop the knowledge and skills needed for interactingwith foreign suppliers that are important to their particular plant. This can lead to better decision making.The disadvantage is that a lack of coordination between plants can result in less than optimal global sourcing. Itcan also lead to duplication of materials managementefforts. These disadvantages can be attenuated, however, by information systems that enable headquarters tocoordinate the various plant-level materials managementgroups. The Role of Information Technology As we saw in the Management Focus on BoseCorporation, information systems play a crucial role inmodern materials management. By tracking component parts as they make their way across the globe toward anassembly plant, information systems enable a firm tooptimize its production scheduling according to when 243 components are expected to arrive. By locatingcomponent parts in the supply chain precisely, goodinformation systems allow the firm to accelerate production when needed by pulling key components outof the regular supply chain and having them flown to themanufacturing plant. 244 Chapter Seventeen Global Marketing and R&D The Globalization of Markets? In a now-famous Harvard Business Review article,Theodore Levitt wrote lyrically about the globalizationof world markets. Levitt's arguments have becomesomething of a lightning rod in the debate about theextent of globalization. The rise of global media such asMTV , and the ability of such media to help shape aglobal culture, would seem to lend weight to Levitt'sargument. If Levitt is correct, his argument has major implications for the marketing strategies pursued byinternational business. However, the current consensusamong academics seems to be that Levitt overstates hiscase. Although Levitt may have a point when it comes tomany basic industrial products, such as steel, bulk chemicals, and semiconductor chips, globalization seemsto be the exception rather than the rule in many consumer goods markets and industrial markets.Market Segmentation Market segmentation refers to identifying distinctgroups of consumers whose purchasing behavior differsfrom others in important ways. Markets can besegmented in numerous ways: by geography,demography , social-cultural factors, and psychologicalfactors. Because different segments exhibit different patterns of purchasing behavior, firms often adjust their marketing mix from segment to segment. Whenmanagers in an international business consider marketsegmentation in foreign countries, they need to be 245

cognizant of two main issues--the differences betweencountries in the structure of market segments, and theexistence of segments that transcend national borders.The structure of market segments may differ significantly from country to country. An importantmarket segment in a foreign country may have no parallel in the firm's home country, and vice versa.Product Attributes Cultural Differences Countries differ along a whole range of dimensions,including social structure, language, religion, andeducation. The most important aspect of culturaldifferences is probably the impact of tradition. Traditionis particularly important in foodstuffs and beverages.Tastes and preferences are becoming more cosmopolitan.Coffee is gaining ground against tea in Japan and GreatBritain, while American-style frozen dinners have become popular in Europe (with some fine-tuning tolocal tastes). Taking advantage of these trends, Nestlehas found that it can market its instant coffee, spaghetti bolognese, and Lean Cuisine frozen dinners in essentiallythe same manner in both North America and WesternEurope. However, there is no market for Lean Cuisinedinners in most of the rest of the world, and there maynever be. Economic Differences Consumer behavior is influenced by the level of economic development of a country. Firms based inhighly developed countries such as the United States tendto build a lot of extra performance attributes into their 246 products. These extra attributes are not usually demanded by consumers in less developed nations, where the preference is for more basic products. Product and Technical Standards Even with the forces that are creating some convergenceof consumer tastes and preferences among advanced,industrialized nations. Differing government-mandated product standards can rule out mass production andmarketing of a standardized product. Several special parts must be built into backhoe-loaders that will be soldin Germany: a separate brake attached to the rear axle, aspecial locking mechanism on the backhoe operatingvalve, specially positioned valves in the steering system,and a lock on the bucket for traveling.Differences in technical standards also constrain theglobalization of markets. Some of these differences resultfrom idiosyncratic decisions made long ago, rather thanfrom government actions, but their long-term effects arenonetheless profound.Distribution Strategy A Typical Distribution System The three main differences between distribution systemsare retail concentration, channel length, and channelexclusivity. 247 Differences between Countries Retail Concentration In some countries, the retail system is very concentrated, but it is fragmented in others. In a concentrated system, afew retailers supply most of the market. A fragmentedsystem is one in which there are many retailers, no one of which has a major share of the market. This hasfacilitated system concentration. Japan's much greater population density together with the large number of urban centers that grew up before the automobile haveyielded a more fragmented retail system of many smallstores that serve local neighborhoods and to which people frequently walk. Channel Length Channel length refers to the number of intermediaries between the

producer and the consumer. If the producer sells directly to the consumer, the channel is very short.If the producer sells through an import agent, awholesaler, and a retailer, a long channel exists. Thechoice of a short or long channel is primarily a strategicdecision for the producing firm. However, somecountries have longer distribution channels than others.The most important determinant of channel length is thedegree to which the retail system is fragmented.Fragmented retail systems tend to promote the growth of wholesalers to serve retailers, which lengthens channels. Channel Exclusivity An exclusive distribution channel is one that is difficultfor outsiders to access. For example, it is often difficult 248 for a new firm to get access to shelf space in USsupermarkets. This occurs because retailers tend to prefer to carry the products of long-established manufacturersof foodstuffs with national reputations rather thangamble on the products of unknown firms. Theexclusivity of a distribution system varies betweencountries. First, after a decade of lackluster economic performance, Japan is changing. In their search for profits, retailers are far more willing than they have beenhistorically to violate the old norms of exclusivity.Second, P&G has been in Japan long enough and has a broad enough portfolio of consumer products to give itconsiderable leverage with distributors, enabling it to push new products out through the distribution channel. Choosing a Distribution Strategy A choice of distribution strategy determines whichchannel the firm will use to reach potential consumers.The optimal strategy is determined by the relative costsand benefits of each alternative. The relative costs and benefits of each alternative vary from country to country,depending on the three factors we have just discussed:retail concentration, channel length, and channelexclusivity.Because each intermediary in a channel adds its ownmarkup to the products, there is generally a critical link between channel length, the final selling price, and thefirm's profit margin. The longer a channel, the greater isthe aggregate markup, and the higher the price thatconsumers are charged for the final product.If such an arrangement is not possible, the firm mightwant to consider other, less traditional alternatives to 249 gaining market access. Frustrated by channel exclusivityin Japan, some foreign manufacturers of consumer goodshave attempted to sell directly to Japanese consumersusing direct mail and catalogs. REI, a retailer of outdoor clothing and equipment based in the northwestern UnitedStates, had trouble persuading Japanese wholesalers andretailers to carry its products. So instead it began adirect-mail campaign in Japan that is proving verysuccessful.Communication Strategy Barriers to International Communications International communication occurs whenever a firmuses a marketing message to sell its products in another country. Cultural Barriers Cultural barriers can make it difficult to communicatemessages across cultures. We discussed some sourcesand consequences of cultural differences between nationsin Chapter 3 and in the previous section of this chapter.Due to cultural differences, a message that means onething in one country may mean something quite differentin another. The best way for a firm to overcome cultural barriers is to develop cross-cultural literacy .In addition,it should use local input, such as a local advertisingagency, in developing its marketing message. If the firmuses direct selling rather than advertising tocommunicate its

message, it should develop a local salesforce whenever possible. Cultural differences limit a 250 firm's ability to use the same marketing message theworld over. What works well in one country may beoffensive in another. Source Effects Source effects occur when the receiver of the messageevaluates the message based on the status or image of thesender. Source effects can be damaging for aninternational business when potential consumers in atarget country have a bias against foreign firms.Source effects are not always negative. French wine,Italian clothes, and German luxury cars benefit fromnearly universal positive source effects. In such cases, itmay pay a firm to emphasize its foreign origins. Noise Levels Noise tends to reduce the probability of effectivecommunication. Noise refers to the amount of other messages competing for a potential consumer's attention,and this too varies across countries. Push versus Pull Strategies The main decision with regard to communicationsstrategy is the choice between a push strategy and a pullstrategy. A push strategy emphasizes personal sellingrather than mass media advertising in the promotionalmix. Although very effective as a promotional tool, personal selling requires intensive use of a sales forceand is relatively costly. A pull strategy depends more onmass media advertising to communicate the marketingmessage to potential consumers. 251 Factors that determine the relative attractiveness of pushand pull strategies include product type relative toconsumer sophistication, channel length, and mediaavailability. Product Type and Consumer Sophistication A pull strategy is generally favored by firms in consumer goods industries that are trying to sell to a large segmentof the market. For such firms, mass communication hascost advantages, and direct selling is rarely used. But a push strategy is favored by firms that sell industrial products or other complex products. Direct selling allowsthe firm to educate potential consumers about thefeatures of the product. Channel Length The longer the distribution channel, the moreintermediaries there are that must be persuaded to carrythe product for it to reach the consumer. This can lead toinertia in the channel, which can make entry verydifficult. Using direct selling to push a product throughmany layers of a distribution channel can be veryexpensive. In such circumstances, a firm may try to pullits product through the channels by using massadvertising to create consumer demand--once demand iscreated, intermediaries will feel obliged to carry the product. Media Availability The rise of cable television in the United States hasfacilitated extremely focused advertising. With a fewexceptions such as Canada and Japan, this level of media 252 Systems, which developed the routers that sit at the hubsof internet connections, directing the flow of digitaltraffic. In today's world, competition is as much abouttechnological innovation as anything else. The pace of technological change has accelerated since the IndustrialRevolution in the 18th century, and it continues to do sotoday. The result has been a dramatic shortening of product life cycles. Technological innovation is bothcreative and destructive. An

innovation can makeestablished products obsolete overnight. But aninnovation can also make a host of new products possible. Witness recent changes in the electronicsindustry.This "creative destruction" unleashed by technologicalchange makes it critical that a firm stay on the leadingedge of technology, lest it lose out to a competitor'sinnovations. As we explain in the next subsection, thisnot only creates a need for the firm to invest in R&D, butit also requires the firm to establish R&D activities atthose locations where expertise is concentrated TheLocation of R&D By and large, ideas for new products are stimulated bythe interactions of scientific research, demand conditions,and competitive conditions. Other things being equal, therate of new product development seems to be greater incountries where: More money is spent on basic and applied researchand development. Underlying demand is strong. Consumers are affluent. Competition is intense. 23 259 Basic and applied research and development discoversnew technologies and then commercializes them. Strongdemand and affluent consumers create a potential marketfor new products. Intense competition between firmsstimulates innovation as the firms try to beat their competitors and reap potentially enormous first-mover advantages that result from successful innovation. Integrating R&D, Marketing, and Production Although a firm that is successful at developing new products may earn enormous returns, new-productdevelopment is very risky with a high failure rate. Onestudy of product development in 16 companies in thechemical, drug, petroleum, and electronics industriessuggested that only about 20 percent of R&D projectsresult in commercially successful products or processes.The reasons for such high failure rates are various andinclude development of a technology for which there isonly limited demand, failure to adequatelycommercialize promising technology, and inability tomanufacture a new product cost effectively. Firms canavoid such mistakes by insisting on tight cross-functionalcoordination and integration between three corefunctions involved in the development of new products:R&D, marketing, and production. Tight cross-functionalintegration between R&D, production, and marketing canhelp a company to ensure that1.Product development projects are driven bycustomer needs.2.New products are designed for ease of manufacture.3.Development costs are kept in check.4.Time to market is minimized. 260 Cross-Functional Teams. First, the team should be led by a "heavyweight" projectmanager who has high status within the organization andwho has the power and authority required to get thefinancial and human resources the team needs tosucceed. The "heavyweight" leader should be dedicated primarily. Second, the team should be composed of atleast one member from each key function. The teammembers should have a number of attributes, includingan ability to contribute functional expertise, highstanding

within their function, a willingness to shareresponsibility for team results, and an ability to putfunctional and national advocacy aside. Third, the teammembers should be physically co-located if possible tocreate a sense of camaraderie and to facilitatecommunication. This presents problems if the teammembers are drawn from facilities in different nations. Implications for the International Business The need to integrate R&D and marketing to adequatelycommercialize new technologies poses special problemsin the international business, since commercializationmay require different versions of a new product to be produced for different countries.While there is no one best model for allocating productdevelopment responsibilities to various centers, onesolution adopted by many international businessesinvolves establishing a global network of R&D centers.Within this model, fundamental research is undertaken at basic research centers around the globe. These centersare normally located in regions or cities where valuablescientific knowledge is being created and where there is 261 a pool of skilled research talent . These technologies are picked up by R&D units attached to global productdivisions and are used to generate new products to servethe global marketplace. At this level, emphasis is placedon commercialization of the technology and design for manufacturing. If further customization is needed so the product appeals to the tastes and preferences of consumers in individual markets, such redesign work will be done by an R&D group based in a subsidiary inthat country or at a regional center that customizes products for several countries in the region. 262 Chapter Eighteen Global Human Resource Management Introduction Human resource management refers to the activities anorganization carries out to use its human resourceeffectively. These activities include determining thefirm's human resource strategy, staffing, performanceevaluation, management development, compensation,and labor relations.The strategic role of HRM is complex enough in a purelydomestic firm, but it is more complex in an international business, where staffing, management development, performance evaluation, and compensation activities arecomplicated by profound differences between countriesin labor markets, culture, legal systems, economicsystems, and the like . The Strategic Role of International HRM We examined four strategies pursued by international businesses--the multidomestic, the international, theglobal, and the transnational. Multidomestic firms try tocreate value by emphasizing local responsiveness;international firms, by transferring core competenciesoverseas; global firms, by realizing experience curveand location economies; and transnational firms, bydoing all these things simultaneously. Success alsorequires HRM policies to be congruent with the firm'sstrategy and with its formal and informal structure andcontrols. The opening case alluded to the relationship between strategy, structure, and HRM. Through its 263 employee selection, management development, performance appraisal, and compensation policies, theHRM function can help develop these things. Staffing Policy

Staffing policy is concerned with the selection of employees for particular jobs. At one level, this involvesselecting individuals who have the skills required to do particular jobs.The need for integration is substantially lower in amultidomestic firm. There is less performance ambiguityand not the same need for cultural controls. In theory,this means the HRM function can pay less attention to building a unified corporate culture. In multidomesticfirms, the culture can be allowed to vary from nationaloperation to national operation. Types of Staffing Policy The Ethnocentric Approach An ethnocentric staffing policy is one in which all keymanagement positions are filled by parent-countrynationals. First, the firm may believe the host countrylacks qualified individuals to fill senior management positions. Second, the firm may see an ethnocentricstaffing policy as the best way to maintain a unifiedcorporate culture. Third, if the firm is trying to createvalue by transferring core competencies to a foreignoperation, as firms pursuing an international strategy are,it may believe that the best way to do this is to transfer parent - country nationals who have knowledge of thatcompetency to the foreign operation.. 264 The Polycentric Approach A polycentric staffing policy requires host-countrynationals to be recruited to manage subsidiaries, while parent-country nationals occupy key positions atcorporate headquarters. In many respects, a polycentricapproach is a response to the shortcomings of anethnocentric approach. One advantage of adopting a polycentric approach is that the firm is less likely tosuffer from cultural myopia. Host-country managers areunlikely to make the mistakes arising from culturalmisunderstandings that expatriate managers arevulnerable to. A second advantage is that a polycentricapproach may be less expensive to implement, reducingthe costs of value creation. Expatriate managers can bevery expensive to maintain.A polycentric approach also has its drawbacks. Host-country nationals have limited opportunities to gainexperience outside their own country and thus cannot progress beyond senior positions in their ownsubsidiary.. 8 The Geocentric Approach A geocentric staffing policy seeks the best people for key jobs throughout the organization, regardless of nationality. There are a number of advantages to this policy. First, it enables the firm to make the best use of its human resources. Second, and perhaps moreimportant, a geocentric policy enables the firm to build acadre of international executives who feel at homeworking in a number of cultures. Creation of such acadre may be a critical first step toward building a strongunifying corporate culture and an informal management 265 country to country, as does the nature of collective bargaining. Approaches to Labor Relations International businesses differ markedly in their approaches to

international labor relations. The maindifference is the degree to which labor relations activitiesare centralized or decentralized. Historically, mostinternational businesses have decentralized internationallabor relations activities to their foreign subsidiaries because labor laws, union power, and the nature of collective bargaining varied so much from country tocountry. It made sense to decentralize the labor relationsfunction to local managers. The belief was that there wasno way central management could effectively handle thecomplexity of simultaneously managing labor relationsin a number of different environments. 275 Chapter Nineteen Accountingin the International Business Country Differences in Accounting Standards Accounting is shaped by the environment in which itoperates. Just as different countries have different political systems, economic systems, and cultures, theyalso have different accounting systems. In each country,the accounting system has evolved in response to thedemands for accounting information.Despite attempts to harmonize standards by developinginternationally acceptable accounting conventions , amyriad of differences between national accountingsystems still remain.Although many factors can influence the development of a country's accounting system, there appear to be fivemain variables:1. The relationship between business and the providers of capital.2. Political and economic ties with other countries.3. The level of inflation.4. The level of a country's economic development.5. The prevailing culture in a country. Relationship between Business and Providers of Capital 276 The three main external sources of capital for businessenterprises are individual investors, banks, andgovernment. In most advanced countries, all threesources are important. In the United States, for example, business firms can raise capital by selling shares and bonds to individual investors through the stock marketand the bond market. They can also borrow capital from banks and, in rather limited cases, from the government.The importance of each source of capital varies fromcountry to country.In countries such as Switzerland, Germany, and Japan, afew large banks satisfy most of the capital needs of business enterprises. Individual investors play arelatively minor role. In these countries, the role of the banks is so important that a bank's officers often haveseats on the boards of firms to which it lends capital. Insuch circumstances, the information needs of the capital providers are satisfied in a relatively straightforwardway--through personal contacts, direct visits, andinformation provided at board meetings. Consequently,although firms still prepare financial reports, becausegovernment regulations in these countries mandate some public disclosure of a firm's financial position, thereports tend to contain less information than those of British or US firms. Because banks are the major providers of capital, financial accounting practices areoriented toward protecting a bank's investment. Thus,assets are valued conservatively and liabilities areovervalued to provide a cushion for the bank in theevent of default. Political and Economic Ties with Other Countries 277 Similarities in the accounting systems of countries aresometimes due to the countries' close political and/or economic ties. Similarly, the European Union has beenattempting to harmonize accounting practices in

itsmember countries. The accounting systems of EUmembers such as Great Britain, Germany, and France arequite different now, but they may all converge on somenorm eventually. Inflation Accounting In many countries, including Germany, Japan, and theUnited States, accounting is based on the historic costprinciple. This principle assumes the currency unit usedto report financial results is not losing its value due toinflation. Firms record sales, purchases, and the like atthe original transaction price and make no adjustments inthe amounts later. The appropriateness of this principlevaries inversely with the level of inflation in acountry.Called current cost accounting, it adjusts allitems in a financial statement--assets, liabilities, costs,and revenues--to factor out the effects of inflation. Themethod uses a general price index to convert historicfigures into current values. Level of Development Developed nations tend to have large, complexorganizations, whose accounting problems are far moredifficult than those of small organizations. Developednations also tend to have sophisticated capital markets inwhich business organizations raise funds from investorsand banks. These providers of capital require that theorganizations they invest in and lend to providecomprehensive reports of their financial activities. The 278 work forces of developed nations tend to be highlyeducated and skilled and can perform complexaccounting functions. Culture A number of academic accountants have argued that theculture of a country has an important impact upon thenature of its accounting system. Using the culturaltypologies developed by Hofstede, researchers havefound that the extent to which a culture is characterized by uncertainty avoidance seems to have an impact onaccounting systems. Uncertainty avoidance refers to theextent to which cultures socialize their members toaccept ambiguous situations and tolerate uncertainty. Accounting Clusters Few countries have identical accounting systems. Notable similarities between nations do exist, however,and three groups of countries with similar standards areidentified in Map 19.1. One group might be called theBritish-American-Dutch group. Great Britain, the UnitedStates, and the Netherlands are the trendsetters in thisgroup. All these countries have large, well-developedstock and bond markets where firms raise capital frominvestors. A second group might be called the Europe-Japan group. Firms in these countries have very close tiesto banks, which supply a large proportion of their capitalneeds. third group might be the South American group.The countries in this group have all experienced persistent and rapid inflation. 279 National and International Standards Consequences of the Lack of Comparability An unfortunate result of national differences inaccounting and auditing standards is the general lack of comparability of financial reports from one country toanother. For example: Research and development costs must be written off in the year they are

incurred in the United States, but in Spain they may be deferred as an asset andneed not be amortized as long as benefits that willcover them are expected to arise in the future. German accountants treat depreciation as a liability,whereas British companies deduct it from assets.Transnational financing occurs when a firm based in onecountry enters another country's capital market to raisecapital from the sale of stocks or bonds. Transnationalinvestment occurs when an investor based in one countryenters the capital market of another nation to invest in thestocks or bonds of a firm based in that country.The rapid expansion of transnational financing andinvestment in recent years has been accompanied by acorresponding growth in transnational financialreporting. The lack of comparability between accountingstandards in different nations can lead to confusion.In addition to the problems this lack of comparabilitygives investors, it can give the firm major headaches.The firm has to explain to its investors why its financial position looks so different in the two accountings. Also,an international business may find it difficult to assess 280 the financial positions of important foreign customers,suppliers, and competitors. International Standards Substantial efforts have been made in recent years toharmonize accounting standards across countries. TheInternational Accounting Standards Committee (IASC) isa major proponent of standardization. Other areas of interest to the accounting profession worldwide,including auditing, ethical, educational, and public-sector standards, are handled by the International Federation of Accountants (IFAC), which has the same membership.Another hindrance to the development of internationalaccounting standards is that compliance is voluntary; theIASC has no power to enforce its standards.Despite this, support for the IASC and recognition of itsstandards is growing. Increasingly, the IASC is regardedas an effective voice for defining acceptable worldwideaccounting principles. Japan, for example, beganrequiring financial statements to be prepared on aconsolidated basis after the IASC issued its initialstandards on the topic.The impact of the IASC standards has probably beenleast noticeable in the United States because most of thestandards issued by the IASC have been consistent withopinions already articulated by the US FinancialAccounting Standards Board (FASB). Another body that promises to have substantial influence on theharmonization of accounting standards, at least withinEurope, is the European Union (EU). In accordance withits plans for closer economic and political union, the EU 281 is attempting to harmonize the accounting principles of its 15 member countries. The EU does this by issuingdirectives that the member states are obligated toincorporate into their own national laws. Because EUdirectives have the power of law, we might assume theEU has a better chance of achieving harmonization thanthe IASC does, but the EU is experiencingimplementation difficulties. These difficulties arise fromthe wide variation in accounting practices among EUmember countries.Multinational Consolidation and Currency Translation Consolidated Financial Statements Many firms find it advantageous to organize as a set of separate legal entities. Multinationals are often required by the countries in which they do business to set up aseparate company. However, although the subsidiariesmay be separate legal entities, they are not separateeconomic entities. Economically, all the companies in acorporate

group are interdependent.Preparing consolidated financial statements is becomingthe norm for multinational firms. Investors realize thatwithout consolidated financial statements, amultinational firm could conceal losses in anunconsolidated subsidiary, thereby hiding the economicstatus of the entire group. Currency Translation The Current Rate Method 282 Under the current rate method, the exchange rate at the balance sheet date is used to translate the financialstatements of a foreign subsidiary into the home currencyof the multinational firm. Although this may seemlogical, it is incompatible with the historic cost principle,which, as we saw earlier, is a generally acceptedaccounting principle in many countries. The Temporal Method One way to avoid this problem is to use the temporalmethod to translate the accounts of a foreign subsidiary.The temporal method translates assets valued in a foreigncurrency into the home-country currency using theexchange rate that exists when the assets are purchased.Because the various assets of a foreign subsidiary will inall probability be acquired at different times and becauseexchange rates seldom remain stable for long, differentexchange rates will probably have to be used to translatethose foreign assets into the multinational's homecurrency.Although the balance sheet balances in yen, it does not balance when the temporal method is used to translatethe yen-denominated balance sheet figures back intodollars. Current US Practice US-based multinational firms must follow therequirements of Statement 52, According to Statement52, the local currency of a self-sustaining foreignsubsidiary is to be its functional currency. The balancesheet for such subsidiaries is translated into the homecurrency using the exchange rate in effect at the end of 283 the firm's financial year, whereas the income statement istranslated using the average exchange rate for the firm'sfinancial year. But the functional currency of an integralsubsidiary is to be US dollars. The financial statementsof such subsidiaries are translated at various historic ratesusing the temporal method, and the dangling debit or credit increases or decreases consolidated earnings for the period.Accounting Aspects of Control Systems In the typical firm, the control process is annual andinvolves three main steps:1.Head office and subunit management jointlydetermine subunit goals for the coming year.2.Throughout the year, the head office monitorssubunit performance against the agreed goals.3.If a subunit fails to achieve its goals, the head officeintervenes in the subunit to learn why the shortfalloccurred, taking corrective action when appropriate.The accounting function plays a critical role in this process. Most of the goals for subunits are expressed infinancial terms and are embodied in the subunit's budgetfor the coming year. The budget is the main instrumentof financial control. The budget is typically prepared bythe subunit, but it must be approved by headquartersmanagement. During the approval process, headquartersand subunit managements debate the goals that should beincorporated in the budget. Exchange Rate Changes and Control Systems 284

The Lessard - Lorange Model Lessard and Lorange point out three exchange rates thatcan be used to translate foreign currencies into thecorporate currency in setting budgets and in thesubsequent tracking of performance: The initial rate, the spot exchange rate when the budget is adopted. The projected rate, the spot exchange rate forecastfor the end of the budget period (i.e., the forwardrate). The ending rate, the spot exchange rate when the budget and performance are being compared.These three exchange rates imply nine possiblecombinations . Lessard and Lorange ruled out four of thenine combinations as illogical and unreasonable.With three of these five combinations-II, PP, and EE-thesame exchange rate is used for translating both budgetfigures and performance figures into the corporatecurrency. All three combinations have the advantage thata change in the exchange rate during the year does notdistort the control process. This is not true for the other two combinations, IE and PE. The projected rate in suchcases will typically be the forward exchange rate asdetermined by the foreign exchange market or somecompany-generated forecast of future spot rates, whichLessard and Lorange refer to as the internal forwardrate. The internal forward rate may differ from theforward rate quoted by the foreign exchange market if the firm wishes to bias its business in favor of, or against,the particular foreign currency. 285 Transfer Pricing and Control Systems Two of these strategies, the global strategy and thetransnational strategy, give rise to a globally dispersedweb of productive activities. Firms pursuing thesestrategies disperse each value creation activity to itsoptimal location in the world. The volume of intrafirmtransactions in such firms is very high.The choice of transfer price can critically affect the performance of two subsidiaries that exchange goods or services.International businesses often manipulate transfer pricesto minimize their worldwide tax liability, minimizeimport duties, and avoid government restrictions oncapital flows. Separation of Subsidiary and Manager Performance Many accountants, however, argue that although it islegitimate to compare subsidiaries against each other onthe basis of return on investment (ROI) or other indicators of profitability, it may not be appropriate touse these for comparing and evaluating the managers of different subsidiaries. Accordingly, it has been suggestedthat the evaluation of a subsidiary should be keptseparate from the evaluation of its manager. 16 Themanager's evaluation should consider how hostile or benign the country's environment is for that business. 286 Chapter Twenty Financial Management in the International Business Introduction

Included within the scope of financial management arethree sets of related decisions: Investment decisions, decisions about what activitiesto finance. Financing decisions, decisions about how to financethose activities. Money management decisions, decisions about howto manage the firm's financial resources mostefficiently.In an international business, investment, financing, andmoney management decisions are complicated by thefact that countries have different currencies, different taxregimes, different regulations concerning the flow of capital across their borders, different norms regarding thefinancing of business activities, different levels of economic and political risk, and so on. Good financialmanagement can be an important source of competitiveadvantage. Investment Decisions A decision to invest in activities in a given country mustconsider many economic, political, cultural, and strategicvariables.. Capital Budgeting 287 Capital budgeting quantifies the benefits, costs, and risksof an investment. This enables top managers to compare,in a reasonably objective fashion, different investmentalternatives within and across countries so they can makeinformed choices about where the firm should invest itsscarce financial resources. Capital budgeting for aforeign project uses the same theoretical framework thatdomestic capital budgeting uses. Once the cash flowshave been estimated, they must be discounted todetermine their net present value using an appropriatediscount rate. The most commonly used discount rate iseither the firm's cost of capital or some other requiredrate of return.Among the factors complicating the process for aninternational business are these:1.A distinction must be made between cash flows tothe project and cash flows to the parent company.2.Political and economic risks, including foreignexchange risk, can significantly change the value of a foreign investment.3.The connection between cash flows to the parentand the source of financing must be recognized. Project and Parent Cash Flows A theoretical argument exists for analyzing any foreign project from the perspective of the parent company because cash flows to the project are not necessarily thesame thing as cash flows to the parent company. The project may not be able to remit all its cash flows to the parent for a number of reasons. When evaluating aforeign investment opportunity, the parent should beinterested in the cash flows it will receive--as opposed to 288 those the project generates--because those are the basisfor dividends to stockholders, investments elsewhere inthe world, repayment of worldwide corporate debt, andso on.But the problem of blocked earnings is not as serious asit once was. The worldwide move toward greater acceptance of free market economics has reduced thenumber of countries in which governments are likely to prohibit the affiliates of foreign multinationals fromremitting cash flows to their parent companies. Adjusting for Political and Economical Risk

Political Risk We defined it as the likelihood that political forces willcause drastic changes in a country's businessenvironment that hurt the profit and other goals of a business enterprise. Political risk tends to be greater incountries experiencing social unrest or disorder andcountries where the underlying nature of the societymakes the likelihood of social unrest high. When political risk is high, there is a high probability that achange will occur in the country's political environmentthat will endanger foreign firms there.In extreme cases, political change may result in theexpropriation of foreign firms' assets. In less extremecases, political changes may result in increased tax rates,the imposition of exchange controls that limit or block asubsidiary's ability to remit earnings to its parentcompany, the imposition of price controls, andgovernment interference in existing contracts. 289 Economic Risk We defined it as the likelihood that economicmismanagement will cause drastic changes in a country's business environment that hurt the profit and other goalsof a business enterprise. This can be a serious problemfor a foreign firm with assets in that country because thevalue of the cash flows it receives from those assets willfall as the country's currency depreciates on the foreignexchange market. The likelihood of this occurringdecreases the attractiveness of foreign investment in thatcountry. Risk and Capital Budgeting In analyzing a foreign investment opportunity, theadditional risk that stems from its location can behandled in at least two ways. The first method is to treatall risk as a single problem by increasing the discountrate applicable to foreign projects in countries where political and economic risks are perceived as high. Financing Decisions Source of Financing If the firm is going to seek external financing for a project, it will want to borrow funds from the lowest-costsource of capital available. The cost of capital is typicallylower in the global capital market, by virtue of its sizeand liquidity, than in many domestic capital markets, particularly those that are small and relatively illiquid.However, host-country government restrictions may ruleout this option. The governments of many countriesrequire, or at least prefer, foreign multinationals to 290 finance projects in their country by local debt financingor local sales of equity. In addition to the impact of host-government policies on the cost of capital and financingdecisions, the firm may wish to consider local debtfinancing for investments in countries where the localcurrency is expected to depreciate on the foreignexchange market. The amount of local currency requiredto meet interest payments and retire principal on localdebt obligations is not affected when a country's currencydepreciates. Financial Structure There is a quite striking difference in the financialstructures of firms based in different countries. Byfinancial structure we mean the mix of debt and equityused to finance a business. It is not clear why thefinancial structure of firms should vary so much acrosscountries. One possible explanation is that different taxregimes determine the relative attractiveness of debt andequity in a country.The interesting question for the international business iswhether it should conform to local capital structurenorms. One advantage claimed for conforming to

host-country debt norms is that management can more easilyevaluate its return on equity relative to local competitorsin the same industry. However, this seems a weak rationale for what is an important decision. Another pointoften made is that conforming to higher host-countrydebt norms can improve the image of foreign affiliatesthat have been operating with too little debt and thusappear insensitive to local monetary policy. Global Money Management: the Efficiency Objective 291 Minimizing Cash Blanances For any given period, a firm must hold certain cash balances. This is necessary for serving any accounts andnotes payable during that period and as a contingencyagainst unexpected demands on cash. In contrast, thefirm could earn a higher rate of interest if it could investits cash resources in longer-term financial instruments. Reducing Transaction Costs Transaction costs are the cost of exchange. Every time afirm changes cash from one currency into another currency it must bear a transaction cost--the commissionfee it pays to foreign exchange dealers for performing thetransaction. Most banks also charge a transfer fee for moving cash from one location to another; this is another transaction cost. The commission and transfer feesarising from intrafirm transactions can be substantial. Global Money Management: the Tax Objective Many nations follow the worldwide principle that theyhave the right to tax income earned outside their boundaries by entities based in their country. Doubletaxation occurs when the income of a foreign subsidiaryis taxed both by the host-country government and by the parent company's home government. A tax credit allowsan entity to reduce the taxes paid to the homegovernment by the amount of taxes paid to the foreigngovernment. A tax treaty between two countries is anagreement specifying what items of income will be taxed by the authorities of the country where the income is 292 earned. A deferral principle specifies that parentcompanies are not taxed on foreign source income untilthey actually receive a dividend. For the international business with activities in many countries, the varioustax regimes and the tax treaties have importantimplications for how the firm should structure its internal payments system among the foreign subsidiaries and the parent company. A tax haven is a country with anexceptionally low, or even no, income tax. International businesses avoid or defer income taxes by establishing awholly owned, nonoperating subsidiary in the tax haven.The tax haven subsidiary owns the common stock of theoperating foreign subsidiaries. This allows all transfers of funds from foreign operating subsidiaries to the parentcompany to be funneled through the tax havensubsidiary. Moving Money Across Borders:Attaining Efficiencies and Reducing TaxesDividend Remittances Payment of dividends is probably the most commonmethod by which firms transfer funds from foreignsubsidiaries to the parent company. The

dividend policytypically varies with each subsidiary depending on suchfactors as tax regulations, foreign exchange risk, the ageof the subsidiary, and the extent of local equity participation. With regard to foreign exchange risk, firmssometimes require foreign subsidiaries based in "high-risk" countries to speed up the transfer of funds to the parent through accelerated dividend payments. Thismoves corporate funds out of a country whose currencyis expected to depreciate significantly. 293 Royalty Payments and Fees Royalties represent the remuneration paid to the ownersof technology, patents, or trade names for the use of thattechnology or the right to manufacture or sell productsunder those patents or trade names. It is common for a parent company to charge its foreign subsidiariesroyalties for the technology, patents, or trade names ithas transferred to them. Royalties may be levied as afixed monetary amount per unit of the product thesubsidiary sells or as a percentage of a subsidiary's grossrevenues.A fee is compensation for professional services or expertise supplied to a foreign subsidiary by the parentcompany or another subsidiary. Royalties and fees havecertain tax advantages over dividends, particularly whenthe corporate tax rate is higher in the host country than inthe parent's home country. Royalties and fees are oftentax deductible locally so arranging for payment inroyalties and fees will reduce the foreign subsidiary's taxliability. If the foreign subsidiary compensates the parentcompany by dividend payments, local income taxes must be paid before the dividend distribution, and withholdingtaxes must be paid on the dividend itself. Transfer Prices In any international business, there are normally a largenumber of transfers of goods and services between the parent company and foreign subsidiaries and betweenforeign subsidiaries. This is particularly likely in firms pursuing global and transnational strategies becausethese firms are likely to have dispersed their valuecreation activities to various "optimal" locations around 294 the globe . As noted in Chapter 19, the price at whichgoods and services are transferred between entitieswithin the firm is referred to as the transfer price. Transfer prices can be used to position funds within aninternational business. Benefits of Manipulating Transfer Prices At least four gains can be derived by manipulatingtransfer prices.1.The firm can reduce its tax liabilities by usingtransfer prices to shift earnings from a high-taxcountry to a low-tax one.2.The firm can use transfer prices to move funds outof a country where a significant currencydevaluation is expected, thereby reducing itsexposure to foreign exchange risk. 3. The firm can use transfer prices to move funds froma subsidiary to the parent company when financialtransfers in the form of dividends are restricted or blocked by host-country government policies.4.The firm can use transfer prices to reduce the importduties it must pay when an ad valorem tariff is inforce--a tariff assessed as a percentage of value. Problems with Transfer Pricing Significant problems are associated with pursuing atransfer pricing policy. Few governments like it. Whentransfer prices are used to reduce a firm's tax liabilities or import duties, most governments feel they

are beingcheated of their legitimate income. Similarly, whentransfer prices are manipulated to circumventgovernment restrictions on capital flows, governments 295 perceive this as breaking the spirit--if not the letter--of the law. A number of governments limit international businesses' ability to manipulate transfer prices in themanner described. Transfer pricing is inconsistent with a policy of treating each subsidiary in the firm as a profitcenter. When transfer prices are manipulated by the firmand deviate significantly from the arm's-length price, thesubsidiary's performance may depend as much ontransfer prices as it does on other pertinent factors, suchas management effort. A subsidiary told to charge a hightransfer price for a good supplied to another subsidiarywill appear to be doing better than it actually is, while thesubsidiary purchasing the good will appear to be doingworse.. Fronting Loans A fronting loan is a loan between a parent and itssubsidiary channeled through a financial intermediary,usually a large international bank. In a direct intrafirmloan, the parent company lends cash directly to theforeign subsidiary, and the subsidiary repays it later.From the bank's point of view, the loan is risk free because it has 100 percent collateral in the form of the parent's deposit. The bank "fronts" for the parent, hencethe name. The bank makes a profit by paying the parentcompany a slightly lower interest rate on its deposit thanit charges the foreign subsidiary on the borrowed funds.Under this arrangement, interest payments net of incometax will be as follows:1.The foreign operating subsidiary pays $90,000interest to the London bank. Deducting theseinterest payments from its taxable income results in 296 a net after-tax cost of $45,000 to the foreignoperating subsidiary.2.The London bank receives the $90,000. It retains$10,000 for its services and pays $80,000 interest onthe deposit to the Bermuda subsidiary.3.The Bermuda subsidiary receives $80,000 intereston its deposit tax free. Techniques For Global Money Management Centralized Depositories Every business needs to hold some cash balances for servicing accounts that must be paid and for insuringagainst unanticipated negative variation from its projected cash flows. The critical issue for aninternational business is whether each foreign subsidiaryshould hold its own cash balances or whether cash balances should be held at a centralized depository. First, by pooling cash reserves centrally, the firm can depositlarger amounts. Cash balances are typically deposited inliquid accounts, such as overnight money marketaccounts. Because interest rates on such depositsnormally increase with the size of the deposit, by poolingcash centrally. Second, if the centralized depository islocated in a major financial center , it should have accessto information about good short-term investmentopportunities that the typical foreign subsidiary wouldlack. Third, by pooling its cash reserves, the firm canreduce the total size of the cash pool it must hold inhighly liquid accounts, which enables the firm to invest alarger amount of cash reserves in longer-term, less liquidfinancial instruments that earn a higher interest rate. 297 Multilateral Netting

Multilateral netting allows a multinational firm to reducethe transaction costs that arise when many transactionsoccur between its subsidiaries. These transaction costsare the commissions paid to foreign exchange dealers for foreign exchange transactions and the fees charged by banks for transferring cash between locations. Thevolume of such transactions is likely to be particularlyhigh in a firm that has a globally dispersed web of interdependent value creation activities. Netting reducestransaction costs by reducing the number of transactions.Multilateral netting is an extension of bilateral netting. Under multilateral netting, this simple concept isextended to the transactions between multiplesubsidiaries within an international business. Managing Foreign Exchange Risk Types Of Foreign Exchange Exposre When we speak of foreign exchange exposure, we arereferring to the risk that future changes in a country'sexchange rate will hurt the firm. Transaction Exposure Transaction exposure is typically defined as the extent towhich the income from individual transactions is affected by fluctuations in foreign exchange values. Suchexposure includes obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing or lending of funds in foreign currencies. 298 Translation Exposure Translation exposure is the impact of currencyexchange rate changes on the reported consolidatedresults and balance sheet of a company. Translationexposure is basically concerned with the presentmeasurement of past events. The resulting accountinggains or losses are said to be unrealized--they are "paper"gains and losses--but they are still important. Economic Exposure Economic exposure is the extent to which a firm's futureinternational earning power is affected by changes inexchange rates. Economic exposure is concerned withthe long-run effect of changes in exchange rates onfuture prices, sales, and costs. This is distinct fromtransaction exposure, which is concerned with the effectof exchange rate changes on individual transactions,most of which are short-term affairs that will be executedwithin a few weeks or months. Tactics and Strategies for Reducing Foreign exchangeRisk, Reducing Transaction and Translation Exposure A number of tactics can help firms minimize their transaction and translation exposure. These tactics primarily protect short-term cash flows from adversechanges in exchange rates. In addition to buying forwardand using swaps, firms can minimize their foreign 299 exchange exposure through leading and lagging payablesand receivables--that is, collecting and paying early or late depending on expected exchange rate movements. A lead strategy

involves attempting to collect foreigncurrency receivables early when a foreign currency isexpected to depreciate and paying foreign currency payables before they are due when a currency is expectedto appreciate. A lag strategy involves delayingcollection of foreign currency receivables if that currencyis expected to appreciate and delaying payables if thecurrency is expected to depreciate. Leading and lagginginvolves accelerating payments from weak-currency tostrong-currency countries and delaying inflows fromstrong-currency to weak-currency countries.We have explained that: Transfer prices can be manipulated to move fundsout of a country whose currency is expected todepreciate. Local debt financing can provide a hedge againstforeign exchange risk. It may make sense to accelerate dividend paymentsfrom subsidiaries based in countries with weak currencies. Capital budgeting techniques can be adjusted todeflect the negative impact of adverse exchange ratemovements on the current net value of a foreigninvestment. Reducing Economic Exposure Reducing economic exposure requires strategic choicesthat go beyond the realm of financial management. Thekey to reducing economic exposure is to distribute the 300 firm's productive assets to various locations so the firm'slong-term financial well- being is not severely affected by adverse changes in exchange rates. Developing Policies for Managing Foreign ExchangeExposure The firm needs to develop a mechanism for ensuring itmaintains an appropriate mix of tactics and strategies for minimizing its foreign exchange exposure. Althoughthere is no universal agreement as to the components of this mechanism, a number of common themes stand out.First, central control of exposure is needed to protectresources efficiently and ensure that each subunit adoptsthe correct mix of tactics and strategies. Many companieshave set up in-house foreign exchange centers. Second,firms should distinguish between, on one hand,transaction and translation exposure and, on the other,economic exposure. Third, the need to forecast futureexchange rate movements cannot be overstated, though.Fourth, firms need to establish good reporting systems sothe central finance function can regularly monitor thefirm's exposure positions.Finally, on the basis of the information it receives fromexchange rate forecasts and its own regular reportingsystems, the firm should produce monthly foreignexchange exposure reports. These reports should identifyhow cash flows and balance sheet elements might beaffected by forecasted changes in exchange rates. 301 END International Business is truly a comprehensive andglobal introduction to the subject. Written in scholarlyyet accessible writing style, this text is highly applicableto the issues and problems facing corporate decisionmakers in international business. 302

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Follow </login> Download * Embed Doc * Copy Link * Add To Collection * Comments * Readcast * Share Share on Scribd: Readcast Search TIP Press Ctrl-F F to quickly search anywhere in the document. Search *Search History: * Searching... Result 00 of 00 00results for result for # p. Sections * Table of Contents <http://www.scribd.com/doc/77859536/1/Table-of-Contents> * INTRODUCTION <http://www.scribd.com/doc/77859536/2/INTRODUCTION> * The Globalization of Markets <http://www.scribd.com/doc/77859536/3/The-Globalization-of-Markets> * The Globalization of Production <http://www.scribd.com/doc/77859536/4/The-Globalization-of-Production> * Declining Trade and Investment Barriers <http://www.scribd.com/doc/77859536/5/Declining-Trade-and-Investment-Barrier s> * The Role of Technological Change <http://www.scribd.com/doc/77859536/6/The-Role-of-Technological-Change> * The Changing World Output and World Trade Picture <http://www.scribd.com/doc/77859536/7/The-Changing-World-Output-and-World-Tr ade-Picture> * The Changing Foreign Direct Investment Picture <http://www.scribd.com/doc/77859536/8/The-Changing-Foreign-Direct-Investment -Picture> * The Changing Nature of the Multinational Enterprise <http://www.scribd.com/doc/77859536/9/The-Changing-Nature-of-the-Multination al-Enterprise> * The Changing World Order <http://www.scribd.com/doc/77859536/10/The-Changing-World-Order> * Globalization, Jobs, and Incomes <http://www.scribd.com/doc/77859536/11/Globalization-Jobs-and-Incomes>

* Globalization, Labor Policies, and the Environment <http://www.scribd.com/doc/77859536/12/Globalization-Labor-Policies-and-theEnvironment> * Globalization and National Sovereignty <http://www.scribd.com/doc/77859536/13/Globalization-and-National-Sovereignt y> * Collectivism and Individualism <http://www.scribd.com/doc/77859536/14/Collectivism-and-Individualism> * Democracy and Totalitarianism <http://www.scribd.com/doc/77859536/15/Democracy-and-Totalitarianism> * Market Economy <http://www.scribd.com/doc/77859536/16/Market-Economy> * Command Economy <http://www.scribd.com/doc/77859536/17/Command-Economy> * Mixed Economy <http://www.scribd.com/doc/77859536/18/Mixed-Economy> * State-Directed Economy <http://www.scribd.com/doc/77859536/19/State-Directed-Economy> * The Protection of Intellectual Property <http://www.scribd.com/doc/77859536/20/The-Protection-of-Intellectual-Proper ty> * Product Safety and Product Liability <http://www.scribd.com/doc/77859536/21/Product-Safety-and-Product-Liability> * Contract Law <http://www.scribd.com/doc/77859536/22/Contract-Law> * Differences in Economic Development <http://www.scribd.com/doc/77859536/23/Differences-in-Economic-Development> * Political Economy and Economic Progress <http://www.scribd.com/doc/77859536/24/Political-Economy-and-Economic-Progre ss> * Other Determinants of Development: Geography and Education <http://www.scribd.com/doc/77859536/25/Other-Determinants-of-Development-Geo graphy-and-Education> * The Spread of Democracy <http://www.scribd.com/doc/77859536/26/The-Spread-of-Democracy> * The Spread of Market-Based Systems <http://www.scribd.com/doc/77859536/27/The-Spread-of-Market-Based-Systems> * The Nature of Economic Transformation <http://www.scribd.com/doc/77859536/28/The-Nature-of-Economic-Transformation > * Implications <http://www.scribd.com/doc/77859536/29/Implications> * Values and Norms <http://www.scribd.com/doc/77859536/30/Values-and-Norms> * Culture, Society, and the Nation-State <http://www.scribd.com/doc/77859536/31/Culture-Society-and-the-Nation-State> * The Determinants of Culture <http://www.scribd.com/doc/77859536/32/The-Determinants-of-Culture> * Individuals and Groups <http://www.scribd.com/doc/77859536/33/Individuals-and-Groups> * Social Stratification <http://www.scribd.com/doc/77859536/34/Social-Stratification> * Christianity <http://www.scribd.com/doc/77859536/35/Christianity> * Islam <http://www.scribd.com/doc/77859536/36/Islam> * Hinduism <http://www.scribd.com/doc/77859536/37/Hinduism> * Buddhism <http://www.scribd.com/doc/77859536/38/Buddhism> * Confucianism <http://www.scribd.com/doc/77859536/39/Confucianism> * Hofstede's Model <http://www.scribd.com/doc/77859536/40/Hofstede-s-Model> * Evaluating Hofstede's Model <http://www.scribd.com/doc/77859536/41/Evaluating-Hofstede-s-Model> * The Benefits of Trade <http://www.scribd.com/doc/77859536/42/The-Benefits-of-Trade> * The Pattern of International Trade <http://www.scribd.com/doc/77859536/43/The-Pattern-of-International-Trade>

* Trade Theory and Government Policy <http://www.scribd.com/doc/77859536/44/Trade-Theory-and-Government-Policy> * Mercantilism <http://www.scribd.com/doc/77859536/45/Mercantilism> * Qualifications and Assumptions <http://www.scribd.com/doc/77859536/46/Qualifications-and-Assumptions> * Simple Extensions of the Ricardian Model <http://www.scribd.com/doc/77859536/47/Simple-Extensions-of-the-Ricardian-Mo del> * Factor Endowments <http://www.scribd.com/doc/77859536/48/Factor-Endowments> * Demand Conditions <http://www.scribd.com/doc/77859536/49/Demand-Conditions> * Related and Supporting Industries <http://www.scribd.com/doc/77859536/50/Related-and-Supporting-Industries> * Firm Strategy, Structure, and Rivalry <http://www.scribd.com/doc/77859536/51/Firm-Strategy-Structure-and-Rivalry> * Evaluating Porter's Theory <http://www.scribd.com/doc/77859536/52/Evaluating-Porter-s-Theory> * Location Implications <http://www.scribd.com/doc/77859536/53/Location-Implications> * First-Mover Implications <http://www.scribd.com/doc/77859536/54/First-Mover-Implications> * Tariffs <http://www.scribd.com/doc/77859536/55/Tariffs> * Subsidies <http://www.scribd.com/doc/77859536/56/Subsidies> * Import Quotas and Voluntary Export Restraints <http://www.scribd.com/doc/77859536/57/Import-Quotas-and-Voluntary-Export-Re straints> * Local Content Requirements <http://www.scribd.com/doc/77859536/58/Local-Content-Requirements> * Antidumping Policies <http://www.scribd.com/doc/77859536/59/Antidumping-Policies> * Administrative Policies <http://www.scribd.com/doc/77859536/60/Administrative-Policies> * Political Arguments for Intervention <http://www.scribd.com/doc/77859536/61/Political-Arguments-for-Intervention> * Economic Arguments for Intervention <http://www.scribd.com/doc/77859536/62/Economic-Arguments-for-Intervention> * Retaliation and Trade War <http://www.scribd.com/doc/77859536/63/Retaliation-and-Trade-War> * Domestic Politics <http://www.scribd.com/doc/77859536/64/Domestic-Politics> * From Smith to the Great Depression <http://www.scribd.com/doc/77859536/65/From-Smith-to-the-Great-Depression> * The Uruguay Round and the World Trade Organization <http://www.scribd.com/doc/77859536/66/The-Uruguay-Round-and-the-World-Trade -Organization> * WTO: Early Experience <http://www.scribd.com/doc/77859536/67/WTO-Early-Experience> * The Future: Unresolved Issues <http://www.scribd.com/doc/77859536/68/The-Future-Unresolved-Issues> * Trade Barriers and Firm Strategy <http://www.scribd.com/doc/77859536/69/Trade-Barriers-and-Firm-Strategy> * Transportation Costs <http://www.scribd.com/doc/77859536/70/Transportation-Costs> * Market Imperfections (Internalization Theory) <http://www.scribd.com/doc/77859536/71/Market-Imperfections-InternalizationTheory> * Strategic Behavior <http://www.scribd.com/doc/77859536/72/Strategic-Behavior> * The Product Life Cycle

<http://www.scribd.com/doc/77859536/73/The-Product-Life-Cycle> * Location-Specific Advantages <http://www.scribd.com/doc/77859536/74/Location-Specific-Advantages> * Market Imperfections <http://www.scribd.com/doc/77859536/75/Market-Imperfections> * The Radical View <http://www.scribd.com/doc/77859536/76/The-Radical-View> * The Free Market View <http://www.scribd.com/doc/77859536/77/The-Free-Market-View> * Pragmatic Nationalism <http://www.scribd.com/doc/77859536/78/Pragmatic-Nationalism> * Resource-Transfer Effects <http://www.scribd.com/doc/77859536/79/Resource-Transfer-Effects> * Employment Effects <http://www.scribd.com/doc/77859536/80/Employment-Effects> * Balance-of-Payments Effects <http://www.scribd.com/doc/77859536/81/Balance-of-Payments-Effects> * Effect on Competition and Economic Growth <http://www.scribd.com/doc/77859536/82/Effect-on-Competition-and-Economic-Gr owth> * Adverse Effects on Competition <http://www.scribd.com/doc/77859536/83/Adverse-Effects-on-Competition> * Adverse Effects on the Balance of Payments <http://www.scribd.com/doc/77859536/84/Adverse-Effects-on-the-Balance-of-Pay ments> * National Sovereignty and Autonomy <http://www.scribd.com/doc/77859536/85/National-Sovereignty-and-Autonomy> * Benefits of FDI to the Home Country <http://www.scribd.com/doc/77859536/86/Benefits-of-FDI-to-the-Home-Country> * Costs of FDI to the Home Country <http://www.scribd.com/doc/77859536/87/Costs-of-FDI-to-the-Home-Country> * Home-Country Policies <http://www.scribd.com/doc/77859536/88/Home-Country-Policies> * Host-Country Policies <http://www.scribd.com/doc/77859536/89/Host-Country-Policies> * International Institutions and the Liberalization of FDI <http://www.scribd.com/doc/77859536/90/International-Institutions-and-the-Li beralization-of-FDI> * The Nature of Negotiation <http://www.scribd.com/doc/77859536/91/The-Nature-of-Negotiation> * Bargaining Power <http://www.scribd.com/doc/77859536/92/Bargaining-Power> * Free Trade Area <http://www.scribd.com/doc/77859536/93/Free-Trade-Area> * Customs Union <http://www.scribd.com/doc/77859536/94/Customs-Union> * Common Market <http://www.scribd.com/doc/77859536/95/Common-Market> * Economic Union <http://www.scribd.com/doc/77859536/96/Economic-Union> * Political Union <http://www.scribd.com/doc/77859536/97/Political-Union> * The Economic Case for Integration <http://www.scribd.com/doc/77859536/98/The-Economic-Case-for-Integration> * The Political Case for Integration <http://www.scribd.com/doc/77859536/99/The-Political-Case-for-Integration> * Impediments to Integration <http://www.scribd.com/doc/77859536/100/Impediments-to-Integration> * Political Structure of the European Union <http://www.scribd.com/doc/77859536/101/Political-Structure-of-the-EuropeanUnion> * The Single European Act <http://www.scribd.com/doc/77859536/102/The-Single-European-Act> * European Monetary Union (EMU: The Adoption of A Single Currency <http://www.scribd.com/doc/77859536/103/European-Monetary-Union-EMU-The-Adop

tion-of-A-Single-Currency> * The North American Free Trade Agreement <http://www.scribd.com/doc/77859536/104/The-North-American-Free-Trade-Agreem ent> * Central American Common Market and CARICOM <http://www.scribd.com/doc/77859536/105/Central-American-Common-Market-and-C ARICOM> * Association of Southeast Asian Nations <http://www.scribd.com/doc/77859536/106/Association-of-Southeast-Asian-Natio ns> * Asia Pacific Economic Cooperation <http://www.scribd.com/doc/77859536/107/Asia-Pacific-Economic-Cooperation> * Opportunities <http://www.scribd.com/doc/77859536/108/Opportunities> * Threats <http://www.scribd.com/doc/77859536/109/Threats> * Currency Conversion <http://www.scribd.com/doc/77859536/110/Currency-Conversion> * Insuring against Foreign Exchange Risk <http://www.scribd.com/doc/77859536/111/Insuring-against-Foreign-Exchange-Ri sk> * Prices and Exchange Rates <http://www.scribd.com/doc/77859536/112/Prices-and-Exchange-Rates> * Interest Rates and Exchange Rates <http://www.scribd.com/doc/77859536/113/Interest-Rates-and-Exchange-Rates> * Investor Psychology and Bandwagon Effects <http://www.scribd.com/doc/77859536/114/Investor-Psychology-and-Bandwagon-Ef fects> * The Inefficient Market School <http://www.scribd.com/doc/77859536/115/The-Inefficient-Market-School> * Approaches to Forecasting <http://www.scribd.com/doc/77859536/116/Approaches-to-Forecasting> * Convertibility and Government Policy <http://www.scribd.com/doc/77859536/117/Convertibility-and-Government-Policy > * Countertrade <http://www.scribd.com/doc/77859536/118/Countertrade> * Nature of the Gold Standard <http://www.scribd.com/doc/77859536/119/Nature-of-the-Gold-Standard> * The Strength of the Gold Standard <http://www.scribd.com/doc/77859536/120/The-Strength-of-the-Gold-Standard> * The Role of the IMF <http://www.scribd.com/doc/77859536/121/The-Role-of-the-IMF> * The Role of the World Bank <http://www.scribd.com/doc/77859536/122/The-Role-of-the-World-Bank> * The Jamaica Agreement <http://www.scribd.com/doc/77859536/123/The-Jamaica-Agreement> * Exchange Rates since 1973 <http://www.scribd.com/doc/77859536/124/Exchange-Rates-since-1973> * The Case for Floating Exchange Rates <http://www.scribd.com/doc/77859536/125/The-Case-for-Floating-Exchange-Rates > * The Case for Fixed Exchange Rates <http://www.scribd.com/doc/77859536/126/The-Case-for-Fixed-Exchange-Rates> * Pegged Exchange Rates and Currency Boards <http://www.scribd.com/doc/77859536/127/Pegged-Exchange-Rates-and-Currency-B oards> * Target Zones: The European Monetary System <http://www.scribd.com/doc/77859536/128/Target-Zones-The-European-Monetary-S ystem> * Financial Crises in the Post-Bretton Woods Era <http://www.scribd.com/doc/77859536/129/Financial-Crises-in-the-Post-Bretton -Woods-Era>

* Third World Debt Crisis <http://www.scribd.com/doc/77859536/130/Third-World-Debt-Crisis> * Evaluating the IMF's Policy Prescriptions <http://www.scribd.com/doc/77859536/131/Evaluating-the-IMF-s-Policy-Prescrip tions> * The Functions of a Generic Capital Market <http://www.scribd.com/doc/77859536/132/The-Functions-of-a-Generic-Capital-M arket> * Attractions of the Global Capital Market <http://www.scribd.com/doc/77859536/133/Attractions-of-the-Global-Capital-Ma rket> * Information Technology <http://www.scribd.com/doc/77859536/134/Information-Technology> * Deregulation <http://www.scribd.com/doc/77859536/135/Deregulation> * Global Capital Market Risks <http://www.scribd.com/doc/77859536/136/Global-Capital-Market-Risks> * Genesis and Growth of the Market <http://www.scribd.com/doc/77859536/137/Genesis-and-Growth-of-the-Market> * Attractions of the Eurocurrency Market <http://www.scribd.com/doc/77859536/138/Attractions-of-the-Eurocurrency-Mark et> * Drawbacks of the Eurocurrency Market <http://www.scribd.com/doc/77859536/139/Drawbacks-of-the-Eurocurrency-Market > * Attractions of the Eurobond Market <http://www.scribd.com/doc/77859536/140/Attractions-of-the-Eurobond-Market> * The Firm as a Value Chain <http://www.scribd.com/doc/77859536/141/The-Firm-as-a-Value-Chain> * The Role of Strategy <http://www.scribd.com/doc/77859536/142/The-Role-of-Strategy> * Transferring Core Competencies <http://www.scribd.com/doc/77859536/143/Transferring-Core-Competencies> * Realizing Location Economies <http://www.scribd.com/doc/77859536/144/Realizing-Location-Economies> * Realizing Experience Curve Economies <http://www.scribd.com/doc/77859536/145/Realizing-Experience-Curve-Economies > * Pressures for Cost Reductions <http://www.scribd.com/doc/77859536/146/Pressures-for-Cost-Reductions> * Pressures for Local Responsiveness <http://www.scribd.com/doc/77859536/147/Pressures-for-Local-Responsiveness> * International Strategy <http://www.scribd.com/doc/77859536/148/International-Strategy> * Multidomestic Strategy <http://www.scribd.com/doc/77859536/149/Multidomestic-Strategy> * Global Strategy <http://www.scribd.com/doc/77859536/150/Global-Strategy> * Transnational Strategy <http://www.scribd.com/doc/77859536/151/Transnational-Strategy> * Arguments for Centralization <http://www.scribd.com/doc/77859536/152/Arguments-for-Centralization> * Arguments for Decentralization <http://www.scribd.com/doc/77859536/153/Arguments-for-Decentralization> * Strategy and Centralization in an International Business <http://www.scribd.com/doc/77859536/154/Strategy-and-Centralization-in-an-In ternational-Business> * The Structure of Domestic Firms <http://www.scribd.com/doc/77859536/155/The-Structure-of-Domestic-Firms> * The International Division <http://www.scribd.com/doc/77859536/156/The-International-Division> * Worldwide Area Structure

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