Part-6(A): International Business Operations

Discussion Questions:

1.      How do you explain the use of countertrade? Under what scenarios might its use increase further by 2015? Under what scenarios might its use decline? How might a company make strategic use of countertrade schemes as a marketing weapon to generate export revenues? What are the risks associated with pursuing such a strategy?

It is true that trading between nations has been happening since a very long time. In ancient time nations traded silk, spices, cloth and animals of all kinds. Today nation trade food items, defense equipment, metals, electronics etc. when we observe that nature of the trade, it seems that the products might have changed but the basic concept is still the same as the underlining need which brings together two nations in a trade relationship still exists. Simply speaking, one such method of trading between nations is called counter trade. Counter trade can be defined as an import / export relationship between nations or large companies in which good and/or services are exchanged for goods and services without using money. In some cases monetary evaluations are made for accounting purposes.

The use of Countertrade might increase when foreign exchange markets are limited or importers don’t have access to foreign exchange (low reserves) when they need to fund their purchases. In addition to that,   currency crises and monetary instability are considered as two major conditions that lead to countertrade. As long as countries lack hard currencies and foreign exchange reserves, counter trade is likely to grow. On the contrary, when the trade barriers lead to decrease world trade and international monetary systems of many countries improve significantly then countertrades are likely to decrease.

Countertrade is nothing more than an alternative means of operating an international sale when conventional means of payment are not possible, risky or costly, or nonexistent.  Some countries, mostly developing countries are likely to prefer having countertrade rather than others. Having said this, however, if a company is willing to enter a countertrade agreement, it may grab an export opportunity to a competitor that is willing to make a countertrade agreement. Companies those are willing to entertain countertrade as a means of financing, will have an advantage over those firms that prefer traditional forms of financing.  In some cases, it may be risky in the sense that some companies engaging in countertrade must be willing to invest in an in-house trading department dedicated to arranging and managing countertrade deals, and must be aware of the quality of the products received in countertrade deals.   

2. A firm must decide whether to make a component part in-house or to contract it out to an independent supplier. Manufacturing the part requires a non-recoverable investment in specialized assets. The most efficient suppliers are located in countries with currencies that many foreign exchange analysts expect to appreciate substantially over the next decade. What are the pros and cons of (a) manufacturing the component in-house, (b) outsourcing manufacturing to an independent supplier? Which option would you recommend and why?

            In this global world, a firm has more choices than ever before for selecting and operating its business activities all over the world.  A firm, for instance, has an option to make a component part in-house or to outsource form an independent supplier. However, choosing right option is quite difficult task in international business because there are many factors to be considered before making a final decision. For this, we have to analyze the pros and cons of each option in detail so that we can say that one is better than another.

Let’s talk about the advantages of making a component part in-house. While it is true that manufacturing the part requires a non-recoverable investment in specialized assets, there are some potential advantages such as lowering costs, facilitating investment in highly specialized assets, protecting proprietary technology and facilitating the scheduling of adjacent processes. On the other hand, buying component parts from independent suppliers is also beneficial to international firm such as greater flexibility for firm, reducing the firm’s cost structure, and helping firm to capture orders from international customers.

            Having said both pros and cons, it may not easy to say which is better to recommend because it depends on nature of products or services or product life cycle or country-specific factors. For example, manufacturing components in-house are better to choose when there are highly specialized assets involved, vertical integration is necessary for protecting proprietary technology and the firm is more efficient than external suppliers at doing a particular activity. On the other hand, out-sourcing would be beneficial if the product using the component fails in the market because the supplier will bear the cost of the non-recoverable investment, and flexibility in case a better component can be designed or bought would be preserved. It also lowers organizational and coordination costs. Based on above information we can say that manufacturing in house may be slightly preferred rather than buying from an independent supplier, but other information could tip the decision the other way.

3. Case Study On “Exporting and Growth for Small Business”

The main benefits of exporting for companies like Morgan and Wadia

It is certainly true that the main benefits of exporting for companies like Morgan and Wadia are that they could sell their products at profitable prices. In case of Morgan the cars are expensive and the market is niche in which their products/ cars are sold only in the UK. While it is necessity for Morgan to export into other countries for doing better, the company sells 70 percent of its output to the US and Europe. In the same way, in case of Wadia the company would not be able to sell its entire output of CD players in the USA so that it is necessary for Wadia to sell 70 to 80 percent of its output abroad. Having said these, therefore, the benefits for Morgan and Wadia are many such as higher sales for their output, high prices for their premium products and access to larger number of customers.

The outlook for a company like Morgan Motors if it neither exported nor imported

It seems that there would not be good sign for a company like Morgan Motors if it neither exported nor imported. In other words, it could earn less revenue and less profit opportunity without exporting or importing. In fact, 70% of Morgan Motors’ total revenue would be generating from exporting their products abroad.  Similarly, it could be difficult to get raw material from within the same country because it exported its most of raw materials from overseas. In a nutshell, the outlook of Morgan Motors without doing importing or exporting does not show a better sign for the company due to above mentioned reasons.

The impediments to exporting success and steps to be followed to improve their profitability of succeeding in export markets

Getting successful in exporting is not easy task because there are lots of challenges and risks involved that are likely to reduce the chance of exporting success. Some of the major impediments to exporting are tariff barriers, complexity in conducting market research, managing finance, absorbing foreign exchange risks and so on.

There are certain steps to be followed while improving profitability of getting successful in export markets. First, it has to utilize exporting assistant or export management company (EMC) that works as an export specialist who act as the export marketing department or international department for their clients firms.

The legitimate for local and national government agencies to use taxpayer money to help small companies export

In my view, it is legitimate for local and national government agencies to use taxpayers’ money to help small companies export. There are many reasons for this. Firstly, it helps to improve the balance of trade position of a country. Secondly, it provides access to foreign exchange resources required for importing essential things. In addition, the exports help the county sell its excess production capacity and enhance the potential for global expansion by local companies. Exports help the country to stabilize fluctuations in market demand. Not only that much, every national and local government is interested that its businesses gain a global market share. It brings in a positive flow foreign exchange. It helps exploit indigenous technology to its fullest and helps increase sales and profits of the exporting firms. It is for this host of reasons that local and national government agencies use taxpayers' money to helps small companies export and make them competitive in the global market.

Case Study: “Building the Boeing 787” (p. 564)

The purpose of this case study is to examine about different challenges and benefits of outsourcing. In the case, Boeing is one of the world largest manufacturers of aircrafts. In 2004-05, company announced the introduction of aircraft, which is fuel efficient and light in weight. There was lot of new Building the Boeing 787 2 modern facilities were added in the aircraft for the passenger and crew members. In the mean time, the management of Boeing opted to outsource most of the parts from other companies. The management was in opinion that, in this way company will be able to get the best quality product in less time and less money. Furthermore, this move will help the company to get orders from foreign countries. But in 2007-08 company went through some supply chain problems, many of its suppliers did not able to deliver the parts of aircraft on time so that company had to lose quality standards and money as a penalty. From these overall activities, the company learned that closer management oversight and coordination are needed to overcome such problems. In this paper, I would like to discuss about Boeing 787 and its outsourcing activities, and strive to come up with a reasonable conclusion.

The benefits and potential risks to Boeing from Outsourcing its activities to foreign suppliers

Like every action has its own benefits and potential risks, Boeing also has its own benefits and potential risks from its foreign suppliers. First, it will help to mitigate the risks by sharing its part of activities to suppliers. Second, it greatly helps to reduce the costs of production or products because of efficient use of resources. Third, it would able to reduce the time taken for the product development (from 6 years to 4 years). Last but not the least; Boeing would increase sales of aircrafts in the foreign countries where outsourcing work done.

On the other hand, there are many potential risks that are very harmful for Boeing. Such potential risks include a higher chance of lower revenue due to penalty or fees caused to late delivery, a conflict of delivery schedules (some outsource manufacturers and/or partners may not meet Boeings due dates), and quality standard may not be achieved as the need of company’s requirements. In addition to these, Boeing found out that their outsourced partners might further outsource critical design work to other companies over which Boeing had no control because other companies reported to outsourcing partners and not Boeing.

From above discussion, it has been concluded that the benefits of outsourcing outweigh the risks associated with it. However, Boeing has to manage some of the challenges to gain such benefits. For this, it must provide closer management oversight and coordination as per the need of work standard in every country or outsourcing company. Thus, offering some tasks to foreign suppliers when managed properly could have more benefits than its risks for gaining a competitive advantage for Boeing 787.

The well-publicized issues with regard to management, their causes and solutions

It is true that there are many causes of these problems. First, delay of delivery was the main cause that derived these problems. Second, Outsourcing partners did not follow the require level of quality standards. In the same way, last but not the least, the company did too much outsourcing but it did not manage the closer management oversight and cordination.

To reslove these problems, the company should follow the just-in-time management for the delivery of its parts and components for making finished products. In addition to that, outsourcing partners should be able to maintain the required level of quality standard. Similarly, the company should foucs on closer management oversight and coordination that are required to manage the proper networking among the outsourcing partners. Lastly, I also advice the company to manage outsourcing logistics functions more systematically to run the smooth operation.

Boeing’s exporting American jobs to overseas, its criticism and company respond to it

Some critics strongly believe that the Boeing act of exporting its jobs to other countries from America is not fair and they criticize this activity of Boeing greatly. However, other people, including myself, believe that it is fair to do so because when the company outsources American jobs to overseas then the prices of these particular products are likely to reduce dramatically so that more job opportunities may occur as business transactions take place in a large volume.

In the same way, the company might respond to this activity as a fair way of doing business. The main purpose of the company is to make the large profit through massive cost reduction and excess sales of productions. In addition, it is inevitably true that company should convince its criticizers by letting them to know the other benefits that may take place when proper management and coordination of outsourcing logistics function occur in the supply chain network.

Summary and Conclusions

Hence, having discussed all the above, while it is not easy task to deploy the outsourcing activities among many countries, when this is managed with proper coordination and closer management insight then all customers, the company and both host and home countries are likely to get more benefits than ever before. Therefore, I believe that outsourcing American jobs to overseas are not bad at all and when supply chain management fucntions are managed with proper care and srong network, all parties are likely to enjoy the benefits so that the company can achive a competitibe advanatge over its rivals.

References

Hill, C. W. (2011). International Business: Competing In the Global Marketplace. New York: McGraw- Hill .

(n.d.) Retrieved October 30, 2015 fromhttp://www.investopedia.com/articles/basics/11/biggest-risks-international-investing.asp

Part-6(B): International Business Operations

Discussion Questions:

1.      Within 20 years, we will have seen the emergence of enormous global markets for standardized consumer products. Do you agree with this statement? Justify your answer.

It is true that within 20 years there will be enormous global markets for many products like Coke and Levis, but when it comes to standardized consumer products I have a doubt on it because while more global consumer markets are emerging, national distinctions for many products are increasing at an alarming rate.

The companies ascribing to global standardized products view the world as one entity, not a collection of national markets so that these companies compete on the bases of price, quality, reliability, and delivery of products that are identical in function and design. On the other hand, the companies ascribing to custom products view that products should be differentiated based on marketing mix such as price, product, distribution, promotion and others. In addition, like many product companies, Coke has used a mix of standardization and localized marketing for its products; for instance, the classic red and white colors remain the same globally while the flavor profile is slightly tweaked based on region of distribution.

To sum up, it is certainly true that there will have seen the emergence of enormous global markets not just for standardized consumer products but also for customized consumer products. However, having said this, within 20 years, there will be both standardization and localization depending up on the nature of products and demands of customers. Therefore, I partially agree with the given statement because more and more change is taking place for customized consumer products as per the need of each country’s individuals.

2.      What are the main advantages and disadvantages of the ethnocentric, polycentric, and geocentric approaches to staffing policy? When is each appropriate?

           

            A staffing policy refers to the selection of employees based on the skills they have to perform a particular job. There are three major types of staffing policy choices at the international level: ethnocentric, polycentric, and geocentric.            

            In an ethnocentric staffing policy, it is believed that employees from their home are better to select for key management positions so these positions are fulfilled by parent country nationals. The ethnocentric approach offers many advantages such as: overcoming lack of qualified managers in host country, cultural harmony, and helping transfer core competencies in host countries.  However, there are some disadvantages of this approach such as: Producing resentment in host country, and leading cultural myopia.  In addition, this approach is typically appropriate for firms pursuing an international strategy. 

            A polycentric staffing policy refers to a policy in which host country nationals to be recruited to manage subsidiaries, while parent country nations occupy key positions at corporate headquarters. The advantages of this approach are: eliminating cultural myopia and it is inexpensive to implement. The disadvantages of this approach are: Limiting career mobility and Isolating headquarters from foreign subsidiaries. This strategy is appropriate when firms are pursuing a multi-domestic strategy.

            In a geocentric staffing policy, the best people for key jobs throughout the organization, regardless of nationality, are recruited for performing a particular job. It is beneficial for the firms to utilize human resources efficiently and help building a strong culture and informal management network.  Its negative part is that immigration policies may limit implementation, and it is expensive to implement in comparison to other staffing policies. Therefore, a geocentric approach is typically appropriate for firms pursuing a global or transnational strategy.

3.      Case Study on “Lenovo”

The staffing policy that Lenovo is pursuing

Staffing policy refers to the selection of employees for particular jobs. It is basically done for two purposes. First, it is done for fulfilling the require jobs or skills needed to perform the given tasks. Second, it can be done to develop and promote the desire corporate culture of the firm. In the case, Lenovo is pursuing a geocentric approach for staffing that seeks the best people for key jobs throughout the company, regardless of nationality. For example, Lenovo made an effort to create a firm that was neither Chinese, nor American, but instead global in its orientation, a firm that is positioned to compete head-to-head with other players in the global PC market.

The company’s strategy and matching it with its staffing policy

After analyzing the case, it is known that the Company is pursuing a transnational strategy. Furthermore, the staffing policy matches its strategy. For example, when Lenovo is deciding who should hold management positions, the national origin of the candidate is not an issue. Rather, the decision focuses on whether the person has the skills and capabilities required for working in a global enterprise. In other words, Lenovo is committed to hiring the very best people, wherever they might come from. Lenovo seeks the best people for key jobs throughout the organization regardless of nationality; this enables the firm to match the best use of its human resources with its strategy.

The strengths of Lenovo’s staffing policy and potential weaknesses

It can be seen that Lenovo uses the same set of principles to guide workforce management in all locations; this in turn helps to maintain a unified corporate culture. In addition, if Lenovo’s employees are predisposed toward the organization's corporate norms and value system, the firm will be able to attain higher performance. On the other hand, Lenovo’s staffing policy is complicated by the profound differences between countries in labor markets, culture, legal systems, economic systems, and the like. The national immigration policies may limit its implementation and it could be more expensive policy as well.

The HRM function to enable Lenovo to become a truly a global enterprise

The HRM functions are essential to enable Lenovo to become a truly a global enterprise. For this, the company must make a culture that accepts workforce diversity and builds upon those differences. The major HRM functions such as job analysis and job description, recruitment and selection, workforce planning and development, motivation and performance appraisal, and compensation should be performed as per the world-class standard. In addition to these, the company should provide proper training and development for all employees so that they may gain a sense of achievement. Therefore, I believe that having these HRM functions performed appropriately with an aim of excelling better in each of the HR policies can truly enable the company to attain its competitive advantage. 

References

Hill, C. W. (2011). International Business: Competing In the Global Marketplace. New York: McGraw- Hill .

(n.d.) Retrieved October 29, 2015 from http://www.investopedia.com/articles/basics/11/biggest-risks-international-investing.asp

(n.d.) Retrieved 2015 November 1 from https://prezi.com/yyahpqva_1r6/lenovo/

(n.d.) Retrieved 2015, November 1 from http://www.ukessays.com/essays/management/history-and-timeline-of-lenevo-management-essay.php

Part-5: The Strategy and Structure of International Business

Discussion Questions:

1.      In a world of zero transportation costs, no trade barriers, and nontrivial differences between nations with regard to factor conditions, firms must expand internationally if they are to survive. Discuss.

It is true that different countries have different factor conditions. According to the theory of comparative advantage, different activities should occur in the counties that perform them most efficiently, given that different countries are endowed with different factors of production. In a world of zero transportation costs, no trade barriers, it seems that many giant companies are likely to suffer from the pressure to expand for international businesses that offer the best set of factor endowments if they are to survive. I agree that small firms will have a little pressure but giant companies must expand their global web of value-creation activities in order to take the benefits of differing factor endowments in different locations.

               

However, the situations in which the firms are operating in the counties with the most favorable factor endowment, it is not necessary for the firms to expand internationally at that moment. Most firms want to expand their business activities in order to take the comparative advantages because by so doing, they can easily achieve economies of scale, lower cost advantage, and product differentiation opportunities etc. Those firms which want to expand internationally have to adopt one of different entry modes such licensing, exporting, franchising, merger & acquisition, green field investment, joint venture, and turnkey projects. Having said this, therefore, both theory and practice suggest that many small firms are able to survive quite well but giant companies have a much pressure to survive locally so that they must go internationally if there are no transportation costs, no trade barrier, and nontrivial differences between different countries with regard to factor conditions.  

References

Hill, C. W. (2011). International Business: Competing In the Global Marketplace. New York: McGraw- Hill .

2.      “The choice of strategy for a multinational firm must depend on a comparison of the benefits of that strategy (in terms of value creation) with the costs of implementing it (as defined by organizational architecture necessary for implementation). On this basis, it may be logical for some firms to pursue a localization strategy, others a global or international strategy, and still others a transnational strategy.” Is this statement correct?

It is certainly true that the choice of strategy for a multinational firm must depend on a comparison of the benefits and costs of implementing that strategy. I totally agree that this statement is correct because the benefits and cost structures of any one of these strategies differ widely for multinational firms operating globally. There should be a cost-benefit trade-off with strategic choices for international firms to pursue a better strategy. Moreover, these strategic choices must fit to their purposes logically so that a multinational firm can achieve a competitive advantage in the global marketplace.

To achieve a competitive advantage, a multinational firm must perform one or more value creating activities in a way that creates more overall value than do competitors. Superior value can be created through lower costs or superior benefits to the ultimate customers. For achieving this benefit, it would be more logical for some firms to pursue international strategies- localization, global, international and transnational.

However, every strategy will bring some benefits and costs that undertaken by a multinational firm. The appropriateness of each and every strategy depends on the pressures for cost reduction and local responsiveness in the global marketplace. So it is logical to think each of these four major strategies from different perspectives-cost and benefits. Localization strategy could be useful for a firm to achieve a competitive edge but it has to reduce its cost structure to compete with aggressive competitors so it would require moving toward a transnational strategy.

On the other hand, international strategy is only viable for short term period and to survive in the long term it has to shift towards a global standardization or a transnational strategy before their potential competitors.

References

Hill, C. W. (2011). International Business: Competing In the Global Marketplace. New York: McGraw- Hill .

3. Discuss how the need for control over foreign operations varies with firms’ strategies and core competencies. What are the implications for the choice of entry mode?

            In this globalized world, different firms have different ways of operating its strategic activities and core competencies for control over foreign operations. It is necessary for these firms to match their strategies and competencies with their operational controls so that they can achieve a competitive advantage. For this, strategies the firms may choose for operating on a global market have to analyze first as follows:

Global Standardization: This strategy focuses on increasing profitability by reaping the cost reductions that come from economies of scale and location economies. These companies standardize their product or service in order to pursue a low-cost strategy on a global scale. Companies that face high pressure for cost reductions and low pressure for local responsiveness should pursue this strategy.

Localization: Companies that pursue this strategy focus on differentiating their product or service to uniquely match the tastes and preferences in their different national markets. Companies that face low pressure for cost reductions and high pressure for local responsiveness should pursue this strategy.

Transnational: This strategy looks to achieve the best of both Global Standardization and Localization simultaneously. That is both low costs and differentiation. Since these are competing goals, such a strategy is very difficult. Companies that face both high pressure for cost reductions and high pressure for local responsiveness should pursue this strategy.

International: Global companies that don't face competition and sell a product that serves a universal need or needs don't need to differentiate their product to local tastes and preferences or cut costs. Companies that face both low pressure for cost reductions and low pressure for local responsiveness should pursue this strategy.

            Generally speaking, there are basically 5 main choices for entry mode over foreign operations.

1.      Exporting: Exporting refers to the process of producing goods and services in the home country and delivering these to host countries for making some profit. It is good when producing these products is cheaper domestically rather than producing in the foreign countries. However, transport costs and tariff barriers hinder exporting.

2.      Licensing: This is when a foreign licensee buys the rights to produce a company's product in the licensee's country for a negotiated fees and the licensee puts up most of the capital necessary to get the overseas operation underway.

3.      Franchising: Franchising is quite similar to the features of licensing, but it involves longer-term commitments and insists that the franchisee agree to abide by strict rules about how it does business.

4.      Joint Ventures: Joint ventures occur when a global company partners with a company that is established in the host country, allowing the global company to benefit from the local partner's knowledge of the host country's competitive conditions, culture, language, political systems and business systems.

5.      Wholly Owned Subsidiaries: This is when a parent company owns 100% of the stock of a company in a host country. This gives the global company tight control over production.

            From the above analysis, it is known that when we go from 1 to 5, we get more expensive, but also get more control over its operations in foreign countries. For instance, no other foreign companies have control over its exporting entry mode, but wholly owned subsidiaries have 100% control over its foreign companies. On the other hand, the distinctive competencies will have effect on which strategies to opt for.  For example, if a company's distinctive competency is based on proprietary technology, entering into a joint venture could be risky due to losing control over that technology. This type of firm should seek expanding into foreign countries through wholly owned subsidiary to maintain control over that technology. In the same way, companies with distinctive management competencies shouldn’t face a risk of losing their management skills to franchisees or joint-venture partners. However, it is better for the firms to go for global strategy at that situation.

References

Hill, C. W. (2011). International Business: Competing In the Global Marketplace. New York: McGraw- Hill .

Case Study on Downey’s Soup:

                                                                 Downey’s Soup

Downey’s is one of the best soup restaurants created over 20 years ago by Jack Downey in Philadelphia. When the Philadelphia office of the Japanese External Trade organization (Jetro) asked Downey to serve his lobster bisque at a minitrade show in 1991, he thought that it could be possible to produce his soup in a mass volume in order to sell in Japanese market. Before a well entry into Japanese market, Downey had to face lots of challenges and plight related to products taste and quality standard. The purpose of this case study is to analyze the different actions taken by Downey’s Soup in order to expand its market into Japan. In this paper, I would like to emphasize on major problems and opportunities faced by Downey’s Soup, and strive to come up with a reasonable conclusion.

Downey Foods’ Export Opportunity

Downey's Foods export opportunity occurred mainly as a result of strategy reactive rather than proactive actions. For example, when they presented the dish to Jetro it was given to them with the regular recipe that was used in Downey's tavern. They reduced salt level in the soup in order to comply with the local Japanese taste after it was requested by the buyer. In the same way, they also had not made sure the soup did not have polysorbate which was not permitted in Japanese food industry. Looking these activities, it seems that opportunity was the result of strategy reactive because initially they made a minor mistake and then they were rectified by the company in order to comply with Japanese food standard or Japanese customers. Therefore, I suggest it was a result of strategy reactive rather than proactive actions.

Downey’s experience of frustrations when trying to export to Japan and improving its prospects of succeeding in the Japanese market

Downey frustrated many times in order to export to Japan. To meet the Japanese market demands, the company attempted to change the contents in the soup to comply with the Japanese health and food regulations. It was so tedious task for the company because it passed the lab in the United States but when it reached the lab in Japan it did not pass the requirements needed by Japan.

Downey improved its prospects of succeeding in the Japanese markets by working with other Japanese traders, i.e. local broker-Santucci Associates and national distributor-Liberty Richter Inc.-in order to increase sales. Doing this just was not enough so it had to redirect its research and development efforts to build its domestic products line. Not only that much, it had to maintain its products quality standard to comply with Japanese food regulations and customize the taste and ingredients as per the need of Japanese customers. Therefore, doing these activities surely would be helpful for improving its prospects of succeeding in the Japanese markets.

The exporting strategy and steps should be taken to increase the volume of its exports

            The exporting strategy refers to the way goods and services are being delivered to final customers from the place of production to the place of consumption, especially from one country to another. To do this task successfully, joint venture or working with foreign trading partner could be a good strategy for Downey to increase the sales volume. On the other hand, marketing research should be conducted to understand the needs and wants of a country’s market. It does not matter whether it is Japan or other countries, but understanding the markets needs in the particular country is essential to increase the volume of its exports. It is also important for Downey to maintain quality standard so that which countries it enters it does not hamper in regard to quality assurance and regulation from that particular countries. In addition to that, it can increase the volume of the export by offering large volume of the products and services at a cheaper price so that other competitors cannot compete with Downey’s soup.   

Summary & Conclusions

In a nutshell, through this case analysis, it has helped to understand the real challenges and opportunities that Downey’s Soup had faced a few years ago. Furthermore, it is the lobster bisque of Downey’s Soup which had made Japanese delegation on Japanese External Trade Organization (JETRO) impressed and offered the company an opportunity to export Lobster Bisque Soup to Japan. However, Downey’s Soup learned that exporting agricultural product to Japan was not as easy as it seems. JETRO did not provide detail information regarding to exporting an agriculture product to Japan and this has resulted in frustration and losing money for the cost of research and development effort, changing contents and delivery regulation etc. Nevertheless, Downey’s Soup learned a valuable lesson from this action. Thus, the research and development effort had been done in order to solve these challenges and convert these challenges into opportunities by expanding the domestic market and luring the attention of one of the nation largest distributor, Liberty Richter Inc. in Japan.

References

Hill, C. W. (2011). International Business: Competing In the Global Marketplace. New York: McGraw- Hill .

(n.d.) Retrieved September 26, 2015 from http://www.quickmba.com/strategy/global/

Part-4: The Global Monetary System

Discussion Questions:

1.      Read Management Focus on Volkswagen (p. 317) and answer the following questions:

(a)Why do you think management at Volkswagen decided to hedge only 30% of their foreign currency exposure in 2003? What would have happened if they had hedged 70% of their exposure?

Volkswagen already had lost a huge amount of profit in 2003, around 50% from the record levels attained in 2002. Among the several causes of having loses, a sharp rise in the value of Euro or decrease in the value of dollars was the major. At the same time, the company hedged just a 30% for a foreign currency i.e. US dollar by estimating that the value of dollars is going to rise in 2003 as well so that management of Volkswagen decided to hedge just 30 percent of its foreign exchange exposure. In addition to that, management thought that there would be no risk if things went as they estimated.

If they had hedged 70% of their exposure in 2003, they would have fewer amounts of losses. In other words, Volkswagen’s operating profit would not be reduced by some $ 1.5 billion. This happened due the fact that the company thought the euro would decline in value relative to the dollar. The company hoped that by saving the cost of the commission involved in selling a currency forward, it would increase its profit margin.  But unfortunately the strategy, of course, backfired on the company.

(b) Why do you think the value of the US dollar declined against that of the euro in 2003?

                                           

The euro had recorded a volatile trading history against the U.S. dollar at the beginning of 1999, 1 January when 12 members of the European Union became the currency unit. In early 1999, the exchange rate stood at 1 pound=1.17 dollar, but by October 2000, it had sharply declined to 1 pound=0.83 dollar. As a result, its rise has been attributed to record U.S. foreign trade deficits and pessimism about the future value of the dollar. Thus, I think the main reason of declining the value of the US dollar against the euro in 2003 was that they had united and involved in the European Union as a currency unit.

(c) Apart from hedging through the foreign exchange market, what else can Volkswagen do to reduce its exposure to future declines in the US dollar against the euro?

Apart from hedging through the foreign exchange market, Volkswagen could use derivative securities as a tool for minimizing their risks. For this, it could use a forward contract that gives the holder the right to exchange one currency for another at some point in the future. In addition to that, it could use currency swaps in which the simultaneous purchase and sale of a given amount of foreign exchange for two different values dates is done (Hill, 2011).

References

Hill, C. W. (2011). International Business: Competing In the Global Marketplace. New York: McGraw- Hill .

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2. Do you think the standard IMF policy prescriptions of tight monetary policy and reduced government spending are always appropriate for emerging nations experiencing a currency crisis? How might the IMF change its approach? What would the implications be for international business?

The standard IMF policy prescriptions of tight monetary policy and government regulation are very important forces for managing a currency crisis. And of course they are very successful in many developed countries. However, some critics argue that the tight macroeconomic policies imposed by the IMF in the recent Asian crisis are not appropriate to countries that are suffering not from excessive government spending and inflation, but from a private-sector debt crisis with inflationary undertones.  Anti-inflationary monetary policies and reductions in government spending usually result in a sharp contraction of demand, at least in the short run.  In the longer term, the policies can promote economic growth and expansion of demand, which creates opportunities for international business.

IMF has changed its approach by focusing on lending money to countries in financial crisis. It basically includes three major crises such as currency crisis, banking crisis, and foreign debt crisis. For example, the IMF was making loans to 68 countries by 2010 all of which require tight macroeconomic and monetary policy. However, some critics think that the “one-size-fits-all” approach to macroeconomic policy is inappropriate for many countries.  In addition to that, the IMF is exacerbating moral hazard. In this way, IMF has become too powerful for an institution without any real mechanism for accountability. In recent years, the IMF has begun to alter its policies and be more flexible.

It seems that it could be very implacable for international business. Ideally, international managers need to understand how the international monetary system affects business activities. It deals with currency management in which how government intervention can influence exchange rates. Another application is that it helps to operate business strategy where it should be understood with how exchange rate shifts can have a major impact on the competitive advantage of businesses. Last but not the least; it can be used for dealing with corporate-government relations where how businesses can influence government policy towards the international monetary system.

References

Hill, C. W. (2011). International Business: Competing In the Global Marketplace. New York: McGraw- Hill .

3. Why has the global capital market grown so rapidly in recent decades? Do you think this growth will continue through the next decade?

As globalization increases in the world, the global capital markets are also growing at an alarming rate. Many giant companies are growing in the global marketplace for the production and selling of goods and services. When giant companies emerge then they need a huge amount of capital to operate nationally and globally so they must be able to raise capital they need. Another reason for growing this is that technological advancement and deregulation of government that are making an ease for doing capital markets globally. For these reasons, global market has grown so rapidly and it seems that this growth will continue through the next decade too.

It can be seen that in 1990, for instance, the stock of cross-border loans was just $3,600 billion.  By 2006, this number had increased to $17, 875 billion.  Likewise, outstanding international bonds soared from $3,515 billion in 1997 to $17,571 billion in 2006.  A similar pattern exists with international equities offerings.  There are basically two reasons for continuity this growth for next decades. First, the need of huge capital for the companies is growing as operation increases in many parts of the world. Another reason is that advances in information technology and deregulation by government. For instance, when multinational company McDonald needs some amount of money to expand its operation then it goes for issuing share or bond in the global market in which foreign investors come and buy the shares or bonds so that it can raise its capital through use of information technology and government support.  Hence, having said this, I strongly agree that the growth of global capital market will continue all over the world for the next decades rapidly.

Reference

Hill, C. W. (2011). International Business: Competing In the Global Marketplace. New York: McGraw- Hill .

Lesson 5 Assignment: Case Study

                                              “Industrial and Commercial Bank of China”

               The industrial and Commercial Bank of China (ICBC) offered the world’s largest Initial Public Offering (IPO) in order to raise some $21 billion as of October 2006. It beat Japan’s 1998 IPO of NTT DoCoMo by a huge margin to earn a place in the record books. At the same time, Chinese enterprises were started expanding into the foreign markets as Chinese sought to give China’s industry leaders global identity. Since 2000, Chinese companies were able to raise more than $100 billion from the equity markets that surpassed the total amount raised by companies in the world’s second largest economy, Japan.

                 In order to raise such amount of money, Chinese companies have been looking the international investors and at that time ICBC also listed its IPO shares on the Hong Kong exchange and Shanghai Stock exchange. By offering its share in Honk Kong it would adhere to the strict laws and government standard that could attract the potential investors who were quite interested to invest in the Chinese economy. ICBC has a great number of bank networks, probably more than 18,000 as it claims 150 million personal accounts and 2.5 million corporate customers. Some $350 billion and $80 billion orders were attracted from Hong Kong and Shanghai stock exchange respectively. Due to an enormous success, ICBC raised its share price and reaped around $2 billion more than initially planned.

Advantages and Disadvantages of issuing equity in markets outside of China

The necessary to issue equity in markets outside of China:

There are some significant reasons for issuing the equity in the foreign markets. If any company issues its shares to its potential investors then the company is going to raise its capital for further development or activities. In the case of ICBC, it felt that it was necessary to issue equity in markets outside of China to raise their capital, to list their IPO shares on the Hong Kong exchange and Shanghai stock exchange (Hill, 2011). The reason of listing such shares was that ICBC wanted to ensure the strict reporting and governance standards to their foreign investors by sending a message. In addition to that, ICBC also thought that Chinese companies not just could raise its money but it could improve corporate governance and transparency, and bring a global recognition in the global marketplace.

 The advantages of such a move:

It is inevitably true that when ICBC lists its shares in the global capital markets such as Hung Kong, and Shangai stock exchange then it would attract a large pool of investors for raising capital. Another advantage for ICBC is that it would create high competition markets that could bring financial innovation and diversity both domestically and globally.  Hence, having said this, it would strengthen the capital markets through competitiveness of its service, and there are many changes to emerge new advantages in days to come.

The disadvantages of such a move:

In spite of its advantages, there are some disadvantages too. One disadvantage is that it could be very risky to create a diversified market for all investors from different countries. Another challenge is to maintain the security investments, and it is also difficult to adhere in accordance with international standards if not managed well. In the same way, Hong Kong was already matured in the stock exchange but for the markets like Shanghai stock exchange were just beginners so that it could be very dangerous to set up all the requirements and strictly adhere to reporting and government standard.

The attraction of the ICBC listing to foreign investors, and the risks for investing in ICBC

The attractions of the ICBC listing to foreign investors:

The ICBC listing fascinated considerable interest from foreign investors, who thought that investing in Chinese economy was beneficial for them. It is also true that ICBC was offering a secure place for investment with a nationwide bank networks. For example, the listing on Hong Kong attracted some $350 billion in orders from global investors, more than any other offering in the history of Hong Kong. The attraction for foreign investors is changing market trends with huge opportunities and cheap labor costs. Another attraction could be growing Chinese economy with massive oversubscription that enabled ICBC to raise the price per share so that foreign investors can earn more than they think.

The risks for a foreigner associated with investing in ICBC:

It is certainly true that although there are many benefits to invest in ICBC for foreign investors, many investors are still hesitant to invest in ICBC because there are also some risks to be considered. First, although we live in a relatively globalized and connected world, transaction costs can still vary greatly depending on various foreign markets. It includes brokerage costs, stamp duties, levies, clearing fees, taxes and exchange charges. Second, currency risks refer to volatility of currency. If there are changes in exchange rate it may hamper the investors because investors cannot trade (buy or sell) stocks in their domestic currency, they must convert it into dollars. Third, liquidity risk could be very high for investing in foreign markets like ICBC because there is risk of not being able to sell shares promptly for getting money. Last but not the least, there are higher government regulatory and standards which must be compiled by all foreign investors to be engaged in trading of shares. Thus, these potential risks must be taken into account before entering into foreign stock exchange for better productivity.

                                                   Summary and Conclusions

While it is true that ICBC was better off to raise its capital required for developing Chinese economy and to give Chine's industry leaders global recognition, some of the reporting and government procedures must be followed to comply with international standard. Like every potential businesses, investing in ICBC has also some sorts of risks and rewards that must be taken into account before entering into it. By understanding these risks and rewards in these markets, an investor should be able to position him/herself to minimize these risks. Lastly, I think that ICBC did a great work to enhance China's capital markets through initial public offering(IPO) as offering was massively oversubscribed.

References

Hill, C. W. (2011). International Business: Competing In the Global Marketplace. New York: McGraw- Hill .

(n.d.) Retrieved September 9, 2015 fromhttp://www.investopedia.com/articles/basics/11/biggest-risks-international-investing.asp

Part-3(B): The Global Trade and Investment Environment

Discussion Questions

4.1. Compare and contrast these explanations of foreign direct investment (FDI): internationalization theory, Vernon’s product life-cycle theory, and Knickerbocker’s theory of FDI. Which theory do you think offers the best explanation of the historical pattern of FDI? Why?

Internationalization theory strives to explain whether MNCs use leasing or licensing methods for selling their products abroad or producing through FDI by themselves. Simply speaking, it tries to answer the question why a firm prefers FDI in lieu of producing in the home country and exporting it. In order to answer that question, it assumes that transportation costs quite high, there are trade barriers, there will be lack of adequate foreign market information, and information asymmetries exist between sellers and buyers.

                                    

According to Vernon’s theory of product life cycle, an innovation may take place in the unsatisfied markets where purchasing power and per capita income are high because the sale of high priced product that contains the innovation so that the research and development (R&D) costs is possible in such markets. There is also possible for creating a proper communication between producers and consumers, and taking feedbacks helps to make product standardization in the markets. Thus, it can help to differentiate the products and specializes on particular products. For example, it is possible to shift from the radio production to table radios, automobile radios and mobile radios.

            Knickerbocker's theory of FDI is based on the idea that FDI flows are a reflection of strategic rivalry between firms in the global market place (Hill, 2011). According to this theory, the action of one firm will lead to competitors immediately imitating the action. Knickerbocker believes that this similar sort of imitative behavior characterizes FDI (Hill, 2011). For instance, such imitative behaviors can occur in the form of a price decrease by one firm with a view to improve its market position, others will decrease their prices accordingly in order not to allow the firm develops a competitive advantage at their expense. For example, when Japanese firm, i.e. Honda invested its FDI in the US and Europe in 1980s, and Toyota and Nissan quickly responded by undertaking their FDI in the US and Europe.

References

Hill, C. W. (2011). International Business: Competing In the Global Marketplace. New York: McGraw- Hill .

4.2. What are the economic and political arguments for regional economic integration? Given these arguments, why don’t we see more substantial examples of integration in the world economy?

Integration is one of the major challenging tasks for doing an international business. Although integration brings lots of benefits to the major parties, it may be very costs for the minor parties. That’s why its concerns over sovereignty often slow or stop integration attempts.

The economic argument for regional economic integration (REI) is very simple and straightforward. It allows unrestricted free trade among the member countries to specialize in the production of goods and services that they can produce most efficiently. A good example of it is European Union (EU) where the same currency is used, and many facilities are provided for trading the goods and services all over the member countries. When this happens, then it is much easier to trade within the member countries. As a result, a greater prosperity for the nations of the region can be achieved without any difficulties.  From the perspective of regional economic integration, it is an attempt to achieve additional gains from the free flow of business or trade and investment between countries.   

The political argument for regional economic integration is also significant for doing international business. Cooperating with neighboring economies and making them increasingly dependent on each other creates a win-win benefit for the development of member countries. It can be seen that when it happens, the potential for violent conflict between the countries are reduced dramatically so that they can create political stability for international trading. In addition to that, by grouping their economies together, the member countries can enhance their political weight in the world. 

While it is true that economical and political arguments for regional economic integration are good for the benefits of all member countries, it has never been easy to achieve that level. There are three main reasons why there are no substantial examples of integration in the world economy. First, it could be good for strong nations or members but it may not be much fruitful for the weaker countries or members so that it can be discriminative. Second, there can be concerns over national sovereignty as well. Third, all countries in the world are not economically and politically feasible for such integration as a whole so that bilateral free trade agreement is being used instead.

References

Hill, C. W. (2011). International Business: Competing In the Global Marketplace. New York: McGraw- Hill .

4.3.   Discussion Questions from the Case study “Lakshmi Mittal and the Growth of Mittal Steel”

Forces that drove Mittal Steel to start expanding across national borders

There can be significant forces for Mittal Steel Company to start expanding across national frontiers. One of the major forces was that there was a range of restrictive government regulations and tough competitiveness between SAIL (a state-owned firm) and Tata Steel (large privately owned firm).  Another force was that Mittal Steel saw more opportunities in foreign countries, and predicted the best growth of the company nationally and globally by applying new method of reducing costs. Because of these positive factors, in 1975, Mittal Steel began expanding across national borders by building and creating a steel making plant in Indonesia.

Mittal Steel’s expansion into different nations through Mergers and Acquisitions

It can be seen that the global steel industry had been in a difficult situation for a 25 years due to excess capacity and slow demand as substitute materials superseded steel in a many applications. At the same time, Lakshmi Mittal, the CEO of Mittal Company, saw a greater value in buying the assets of such distressed companies at a cheaper price, and believed that they could be viable operations through a move towards a greater efficiency and modern technology.

It is believed that when company goes through a merger and acquisition, it could be possible to save lots of money that would be invested when Greenfield investment was used. In a Greenfield investment, the company had to set up all the necessary things by itself from the ground up phase, and surely that could be very costly as well as risky. By skipping these risky and costly processes of setting up from the start, Mittal Steel quickly grabbed the opportunities that were growing through a merger and acquisition in the foreign countries.

The benefits and drawbacks that Mittal Steel brings into the foreign countries

            It is should be noted that there are both benefits and drawbacks when a foreign company enters into a different country. In most cases, there are many advantages than its drawbacks when a foreign company enters into other countries. For instance, Mittal Steel brings the benefits such as job opportunities, new technology transfer, and supply of steel in lower costs in the foreign countries. However, there are some drawbacks that Mittal Steel brings in the foreign countries such as taking money out of the county, intense competition for domestic firms, pollution, and loss of sovereignty.

The benefits to Mittal Steel from entering different nations

There are many significant benefits to Mittal Steel from entering different countries. One of the major advantages is that it can become a global leader with global expansion so that it can be price setter or monopoly in setting the price of steel. Another benefit is that it can minimize the risks of trading by operating its business activities in different countries. For example, when Lakshmi Mittal was producing steel just in India, there were limited opportunities due to government restrictions and regulation. However, when it started to expand into different countries then it got a golden opportunity to manage risks or costs so that its profit margin could increase substantially after some years. Last but not the least, the company can lean new culture, management style, skills and expertise for improving its business activities even in a better way.

The objection for the acquisition of Arcelor to many politicians and their rationale

The acquisition of Arcelor was bitterly contested, and they thought that it can create some conflicts in managing the company’s share and management so that they were objecting to it. I do not think it was reasonable in the sense that nationalistic behavior could occur. However, it is reasonable in the sense that when acquisition takes place of course there is monopoly power. By looking its value, Arcelor’s shareholders agreed to deal with Mittal Steel in late 2006. As a result, it became a Dutch company, world’s largest steel company, headquartered in Luxembourg, generated sales of $ 110 billion and net profit of 10.2 billion in 2007.

References

Hill, C. W. (2011). International Business: Competing In the Global Marketplace. New York: McGraw- Hill .

Lesson 4: Cast Study on NAFTA and the United States Textile Industry

Introduction

When the effect of The North American Free Trade Agreement (NAFTA) took place in 1994, many critics believed that a substantial part of jobs will be moved and lost from the United States to Mexico.  Many people from the US agreed that this treaty should not be adopted because they thought it will have negative impact on the US employment. Between 1994 and 2004, the production fell by 40% and 20% in the textile production in the US. In the same way, the employment in the textile industry also dropped from 478,000 to 239,000 while exports from Mexico to the US surged from 1.26 billion to $3.84 billion. It can be noticed that the critics of NAFTA had a point about the large job losses due to migrating production from the US to Mexico. However, the effect of NAFTA was also positive in many ways. For example, due to the NAFTA, the prices of clothing in the US were reduced since 1994 and it was much beneficial for all US customers as well. In addition to that, NAFTA has enhanced trading and both consumers and producers are gaining from it so that its gains outweigh the losses, however.

 In this paper, I would like to discuss about NAFTA and the United States Textile industry in detail, and finally strive to come up with a reasonable conclusion.

The reasons for migrating textile jobs out of the United States after establishment of NAFTA

It is definitely true that when NAFTA took into effect, the production of apparel and textiles fell by 40% and 20% respectively over the 10 years. However, Overall demand for apparel grew by almost 60% at the same time. According to the research, employment in the textile mills and employment in apparel in the US dropped from 478,000 to 239,000 and 858,000 to 296,000 respectively during this 10 years timeframe. At the same time, the exports of apparel from Mexico to the US increased from $1.26 billion to $3.84 billion, and that is due to migrating apparel production from the US to Mexico.

As textile production migrated from the US to Mexico, more and more jobs were lost in the US and moved to Mexico. There are several reasons that must be taken into account. First, NAFTA provided a free trade area for Mexico as well so that producing and trading didn’t require paying much taxes or custom duties. Second, more textile mills want to operate their business activities in cheaper plants abroad, particularly in Mexico. It means that cheap labor or resources were easily available in Mexico. For example, average labor rates in Mexico ranged between $10 and $20 per day as per compared to $10 to $12 an hour for US textile workers.  Thus, more and more jobs and production of textile shifted from the US to Mexico simply because of the advantages offered by the establishment of NAFTA.

The Winners or losers from the process of readjustment in the textile industry after NAFTA

It is quite common for both American and Mexican to take advantages form the establishment of NAFTA. In fact, both countries could operate their business activities more efficiently and effectively than ever before. Although it seems that job losses in the US textile industry negatively affected by the treaty, the overall efficiency of the economy improved drastically after NAFTA.  For instance, clothing prices in the US fell as textile industry shifted from high cost US producer to lower cost Mexican producers. Thus, it can be said that winners are those customers who live in the NAFTA economic region because they can achieve textile related products at a cheaper price and able to save lots of money.

            In spite of lower prices, the shift in textile production to Mexico also benefited the economy of NAFTA region.  At that time, export of yarn makers surged in the US, indicating an increase from $ 293 million to $1.21 billion between 1994 and 2004.  In the given case, it seems that losers are those textile firms or employees from those textile firms who do not move to Mexico for producing textile related products because they have to compete with Mexican textile producers who can produce the products or services at a cheaper cost.  Moreover, while the US textile industry has lost jobs, advocacy of NAFTA is that the US economy has benefited in the form of lower clothing prices and an increase in exports from the fabric and yarn producers.

The benefits and costs of protection for vulnerable industries that follow entering into FTA

Free Trade Area (FTA) benefits all countries according to the trade theory because it allows countries to specialize in what they do best and trade for everything else.  However, it does not consider the painful adjustment that may occur before the benefits of free trade can be fully realized.  At the meantime, NAFTA is probably viewed quite negatively from the perspective of displaced workers. It is sure to say that consumers are better off with free trade because they are more likely to choose the options for buying the same goods and services. 

While the US consumers and producers in certain sectors are gaining from the trade, sometimes it could be better to protect the vulnerable industry such as textiles because it should be analyzed from the perspective of economy as a whole. When countries go for free trade area then they have more opportunities to perform well but they have to figure out the areas where they can specialize and do better than others. The major benefit from the costs of protection is that national sovereignty would be safe. However, there would be higher costs if it doesn’t let to go into free trade area. Thus, if the economy can improve its efficiency then it is also better to let it go. However, the benefits of NAFTA always outweigh the losses.

Summary and Conclusions

As the closing case explores the effect of NAFTA on the U.S. textile industry, there are many factors that should be considered before signing of the NAFTA agreement. In the case, it is vividly seen that when NAFTA took place in the US, the potential challenge for the US was the loss of jobs in the American textile industry. However, it is a significant benefit to the entire economy of the US and Mexico in the sense that many consumers have enjoyed lower clothing prices and U.S. fabric and yarn makers has seen a boost in their exports to Mexico.  I, therefore, believe that the establishment of a free trade area creates winners in most cases than losers for the transformation of economic development over the member countries.

References

Hill, C. W. (2011). International Business: Competing In the Global Marketplace. New York: McGraw- Hill .