Fall 2021 MGCR 382 Second Half of Course Lecture Notes Before Final Exam PDF

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International Business MGCR 382 - Pt.Why Internationalize? International Strategy & OrganizationWhy firms go globalE: financial flows (investments), G&S (transportation) Actors include: firms, public sector org., social sector org. BTP: business, professional & technical services FDI: Fo...

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MGCR 382 - Pt.2 Why Internationalize? : financial flows (investments), G&S (transportation) firms, public sector org., social sector org. business, professional & technical services Foregin direct investment

International Strategy & OrganizationWhy firms go global All commercial transactions that take place between two or more countries 2+ different laws & regulations 2+ different countries 1+ currency Current account

: combine FDI with merchandise & service imports/exports

Merchandise exports & imports Service exports & imports -

Capital Account

(passenger travel & transport of goods, royalties & licensing fees, other private services, BPT, education, financial services, insurance, telecommunications)

Investments - FDI - Portfolio investment

4 Types of business For international business strategy, various types of distance matter. Distance= degree of difference between 2 or more countries/regions Geographic & economic distance are similar to the “gravity model” of international trade. firms engage more with countries that are close (less distant) from) the home country multinational corporations

Values, belidfies, norms, teaksets, language, religion, ethnicity, trust, social networks.

Laws, regulations, politics, legal systems, trading blocs, membership in international org,protectionism level, history, conflict

Physical distance, common borders, time zones, natural physical environment,m physical infrastructure, communication, climate, population density

Income, economic institution, natural resources, financial resources, human resources, information/knowledge, innovation systems, seaving, investment, consumption, level of economic dev.

Affects transport, communication coordination costs (distance, time zone, travel time)

Affects purchasing power, market size, wage levels/labor cost, market attractiveness

(Economic development level, consumption level, relative size of economy) Indicators: GDP, GDP growth, GDP/capita, Human Development Index

technology, marketing, resource extraction increasing bargaining power, helps cover high fixed costs in capital intensive industries, lower input cost due to scale,lower financing cost & credit risk : Sourcing raw materials, Locating production facilities,Financial flexibility transfer pricing–Tax planning (& “tax inversion”*) ) A transaction whereby a company becomes a subsidiary of a new parent company in another country for the purpose of falling under more beneficial tax laws

Seeking Markets Seeking Resources Reducing risk Learning Key guiding factors about whether/where & how to engage in international business

- superior technical know how - leverage editing reputation, brand image, goodwill - Large size & economies of scale - managerial experience & expertise - ability to locate activities elsewhere - information advantages - rosl doversofocatopm across countries

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Indirect exporting Direct exporting Intra-corporate transfers

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Pre-world war II

- Business risks: FX risk (which may be hedged) - Host-country regulations - Different legal systems•Political risks – major regulatory shifts may be greater risk than nationalization, war etc. - Operational difficulties e.g. adapting to local business practices - Cultural differences - Coordination costs

–Firm internalizes activities under common ownershi p when transaction costs of coordinating through the market are too high bauxite→ aluminum/palm oil → soap & margin : brands, marketing skills the greater the number of users / buyers the higher the value to each use

a. Firms involved in multi stage production process face uniceristy on quality and price of supplies (bilateral monopoly plus lacks of commodity futures) b. incentive to internalize value chain through vertical integration under common ownership rather than face market transaction costs & risk of opportunism by other firms 2. Post-World War II: a. –firms with intellectual property faced uncertainty if licensing brand and skills to other firms• i. Seller & buyer uncertainty, high transaction costs & risk of opportunism - IP leaks b. incentive to internalize application of brand and marketing know-how across multiple products: international business based on horizontal scope by applying IP, brand & skills across product-markets 3. Post-2000: a. firms with network platform (network effects1, first-mover advantage) buyer uncertainty, uncertain revenue streams and risk of (IP) leaks. i. •Incentive to internalize ownership and application of network platforms across multiple markets: Facebook, Uber, Alphabet (Google). gradual experiential learning or developing capabilities 1. Initially no regular exports 2. Exports via third parties (agents or distributors) 3. Establishment of own foreign sales affiliates (bricks & mortar sales side) 4. Establishment of foreign production facilities Why/how do some new ventures leapfrog traditional stages and quickly become international? 1. Entrepreneurial vision 2. Mobile knowledge-intensive resources 3. Network platform (Facebook)

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Learn capabilities through following a. Domestic trade association (social capital and domestic cluster in Chile agricultural processing)) b. Regional trade association before going international c. Affiliation with multinational firm as part of international supply chain 2. Indirect internationalization ( indirect exporting): a. Sell components to larger local firm which is

international, thereby becoming part of international supply chain and learning global quality standards 3. Local firms become the vehicle for multinational corporations trying to market to the “bottom of the pyramid” Chpt. 2

Entry Strategies and Strategic Alliances

1. 2. 3. 4. 5. 6.

Firms marketing objective Furim size Gov. encomanet or recitations Production quality requirements Risks: political or economic Control needs

♦ Advantages - Lower cost - Lower risk ♦ Disadvantages - May compete with low-cost locations manufacturers. - Possible high transportation costs. - Tariff barriers. - Possible lack of control over marketing reps 1. carriage, indsunace, documents technology, work methods, patents, copyrights, brand names, or

Export Management Company (EMC) a. Acts as it’s client's export department b. May or may not take titles to goods 2. International Trading Company a. Directly engaged in importing and exporting a wide variety of goods for its own account b. Sogo (general) Shoshas (trading companies) i. Drrk market oppoutyinyird ii. Drvutr nrvrddsty impotsyrf msyrtisld

trademarks

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Water tech for industrial development

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Transit time Predictability cost

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Granting the right to intangible property to another entity for a specified period of time - Reduces development costs and risk - Overcomes restive investment barriers - Lack of control - Cross-border license may be difficulties - Creating a competitor Licensing agreement

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Similar to living but more control - Reduces costs and risk of establishing enterprise - May prohibit movement of profits from one country to support operations in another county

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Contractor agrees to handle every detail of the project and then turn the project over to the purchaser No long term interest in the foreign county May create a competitor

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outsourcing of manufacturing to other firms

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managerial assistance, technical expertise in exchange for monetary compensation

- Building new facilities Advantages - Selection of site - Modern facilities - Clean slate (no debt, no outmoded equipment, labor problems) Disadvantage - Time - Land may not be available - Local contruation - Recruitment of locals

Buying existing assets in a foreign country Advnatges - No risk of losing technical competence to a competitor. - Tight control of operations. - Realize learning curve and location economies. Disadvantages - Bear full cost and risk

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Cooperative arrangement with potential or actual competitor(s)

- Share fixed costs. - Bring together skills and assets that neither company has or can develop - Establish industry technology standards.

- Competitors get low cost route to technology and markets

- Benefit from a partner's knowledge. - Shared costs/risks with a partner. - Reduced political risk.

- Risk giving control of technology to partners. - May not realize experience curve or location economies - Shared ownership can lead to conflict.

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Preempt rivels and capture demand Build sales volume Move down experience curve before rivals and achieve cost advantage - Create switching costs Disadvantages - Pioneering costs - Changes in government policy Chpt 3.

Culture System of values and norms that are shared among a group of people Charact eristics

Values

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Learned Interrelated Adaptive Shared Different layers - Cultural programming - National culture - professional/corporate culture

What a group believed to be good, right desirable + is central to the functioning of society

Attitudes towards - Justice - Individual freedom - Democracy - Truth - Honesty - Role of women Norms

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Mores Derived from the established practices of a society rather than the laws Defines what is wrong and right - breaking the norms are a threat to social organization Like - Adultery - Incest - theft

Folkways Social rules and guidelines that define rituals beliefs, tradition, routine conventions of daily life

Manners, costumes Education Langage Religion Aesthetics Social incisions Material elements

Individualism vs Group -

Western Entrepreneurship Lack of loyalty Mobile managers Hard to build teams

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Non-mobile Identity Lifetime employment Eastern Lack of entrapurnship

Impact on business - Religious holidays - Conflicts - Social and economic role of women - destiny/fate -

Language is primary delineator of culture Nature of language Translation mishaps Verbal & Non verbal Kinesics - body movements & facial expression, posture, gestures Haptics - touch Oculesics - eye contact to communicate Proxemics - personal space Chronemics - concept of time, comfortableness with silence, + process time Chromatics - color

High context behavioral and environmental nuances are an important means of conveying information

1.

Low context most information is conveyed explicitly in the words

Social orientation a. Relative importance of group vs individual (individualism vs collectivism

b. c. d. e. 2. Power a. b.

Relationship between collectivism and wealth per capita Friends as “family” Utilitarian decision making Group performance distance Appropriateness of power/authority within organization Employees afraid to express their disagreements with other managers i. power=respect for the hierarchy ii. Power tolerance 3. Uncertainty orientation a. Emotional response to uncertainty i. Uncertainty avoidance/acceptance ii. Need for formal rules 4. Goal orientation a. Aggressive goal (masculinity) i. Values concerning work goals and assertiveness b. Passive goal (femininity) i. Values conserving personal goals ii. Gettingalone, having friendly atop maher & neurance iii. Sex roles minimixed iv. More women in jobs v. Interpersonal skills reareded vi. Intuitive skills rewarded vii. Socal rewards valued viii. Quality of life -

Chpt 6. Shared patterns of teeth brushing may not be a norm since these are not guided by shared values Various theories exist on how norms emerge, evolve and decline

Motivation approaches - Employee relations vs awards for master of work related skills Leadership styles - Expert power vs referent power/reward power/legitimate power Strategic planning - High impact planning (rules, research, analysis) vs flexible planning process/trust based interactions Political- Legal Environment

Three company and management orientations - Polycentrism - Business units abroad should act like local companies - Ethnocentrism - Home culture is superior to local culture - Overlooks national differences - Geocentrism

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Laws -

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Scorecards / rankings for the politicaladministrative environment of IB • Democracy, political freedom & human rights – Freedom House (founders include Eleanor Roosevelt & Wendell Wilkie) https://freedomhouse.org/ • “Red tape” – excessive bureaucracy impairing ease of doing business – World Bank, Doing Business

Integrate home and host practices & regulations determined by poolical process and enforced by state Laws are rules created by the political process - Acts, executive orders, judicial decisions, statutes, delegated authority government agency decisions - Laws are public, promulgated by public authority Enforcement of laws - The state exercises a monopoly on the legitimate use of physical force within a given territory (loosely paraphrased from Max Weber 1918)

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Norms - Determined by sociaicet & inculcated by socialization and enforced informally by social pressure - Norms are “customary rules that govern behavior in groups - and societies” (Stanford Philosophy, 2011), or norms may be - conventions or collective (conforming) behaviors guided by - shared values - Shared criteria of fairness may be considered a norm as these are guided by shared values - Norms are inculcated by socialization - Enforcement of norms: informal - Enforced by social pressure, including ostracizing those who do not conform - Norms vary:what is gift vs what is bribe

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Standards - Set by private institutions and associations and self-regulated- voluntary industry standard - ISO 9000, CSA canadian standards association - Rules governing specific aspects of behavior that originate with private sector actors - Enforcement varies, can be informal or sanctioned by state – corporate bodies (engineers, accountants)

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Democracy - Liberal democracy is associated with protection of certain rights including for minorities (equality before the law): freedom of speech, press, association. Totalitarianism - “subordinate[s] all aspects of the individual’s life to the authority of the government.” -Encyclopædia Britannica - All “ within the state, none outside the state, none against the state.” - Mussolini Rule of law vs rule of man - Rule of law – the principle that every member of society

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Report must follow the same laws (Magna Carta, 1215) http://www.doingbusiness.org/ran - Rule of man – the notion that the word and whim of the ruler kings no matter how arbitrary are the law - North Korea, Turkmenistan • Economic freedom – – Economic freedom of the What is the legal System? world- Fraser Institute – Index of economic freedom - Components of a legal System – Heritage Foundation - Constitutional Law • Corruption perception index – - Criminal Law Transparency International - Civil and Commercial Law https://www.transparency.org/ • Global competitiveness report - Common Law – World Economic Forum http://www3.weforum.org/docs/G - Based on cumulative wisdom of judges’ decisions on CR2016-2017/05FullReport/TheGl individual cases through history obalCompetitivenessReport2016-20 - Cases create legal precedents 17_FINAL.pdf - Evolutionary differences in case law across countries using common law; emphasis on patterns rather than principles - Common law is foundation of legal systems in the United Kingdom and its former colonies - Civil Law - Based on codification of what is and is not permissible – Relies on declarations of broad, general principles - Originated with Roman Law - Reinforced by French Napoleonic code - French civil law adopts Montesquieu’s theory of separation of powers whereby legislature legislates and courts apply the law (Tetley 1999). - By contrast, common law allows judge-made precedents to be the core of that system. - Civil law judge takes on some of roles of lawyers, determining the scope of evidence collected and presented -

Theocratic (or religious) law - Based on the officially established rules governing faith and practice of a particular religion Theocracy: country that applies religious law to civil and criminal conduct

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Customary law Mixed systems Maritime law & admiralty courts (applies to shipping, salvage rights at sea)

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Laws directed at foreign firms: - Nationalization – transfer of asset ownership from private sector to public sector

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Expropriation – government takeover with compensation - Confiscation – government takeover without compensation to private owners Laws directed at public sector (state-owned) firms: - Privatization – transfer of asset ownership from public sector to private sector - Multiple modes: vouchers, auctions, private sale, private gift (e.g. to top government officials) - Key aspect in privatization is often competition policy – post-transfer entry barriers UN convention on the international sales of goods (vienna convention Techniques - Litigation - mediation/conciliation (ICC rule of conciliation) - Arbitration - New york convention (UN convention on the recognition and enforcement of foreign arbitral awards)

An important determinant of a country’s IPR environment – and the willingness of foreign firms to transfer technology to it – is the degree of legal protection for intellectual property rights - Types of intellectual property rights - Patents - Copyrights - Trademarks/Brand names - Industrial Design - Protection of such rights has been promoted by numerous international treaties (Paris Convention, TRIPS, etc.) but signatories and enforcement vary • Weak protection entails high costs for international business • International disputes often arise from inconsistencies in intellectual property laws or enforcement Any changes in the political environment that may adversely affect the value of the firm's business activities Categories - Ownership risk – threat of property confiscation or expropriation - Operating risk – operations of firm or safety of employees threatened by regulatory changes, fiscal changes, sudden environmental law shifts, terrorism, crime, civil war, etc. - Transfer risk – government interference in firm’s ability to shift funds into and out of country -

Civil disorder

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Expropriation War Remittance restoration Labor disputes

- Price controls - Labor disputes - Remittance restrictions - Fiscal changes - Civil disorder More experience managers perceive risks as similar across country with regulatory risk being the most important Two approaches to political risk Risk evaluation – Country risk – Industry risk – Too often leads to mechanical portfolio approach to evaluating threats and opportunities – May result in overlooking firm-specific threats and opportunities

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Risk management – Involves longer-term commitment to country – Carrot/stick involves adding or withholding new investment in country – Advantage of building country expertise

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Stage in life cycle of FDI and PLC - Firm most vulnerable after making new investment, somewhat less concerned about amortized or obsolete investment - Host may be more eager to attract investment in growth phase of PLC - Higher technology increases MNC power - Sophisticated managerial systems increases MNC power General economic conditions Position of firm in industry stability of government Availability of substitute locations for investment MNC influence on down-s...