BSM 404, International Business - VSM | CityU
MC 573, International Business
Course Review
© 2009 James S. Caldwell, J.D.
Vysoká Škola Manažmentu/City University of Seattle in Trenčín, Slovak Republic
Winter Term, 2009
Instructor: James S. Caldwell, J.D.
Revision: 23 February 2009
All page references refer to pages in the textbook, unless otherwise indicated. “G&P” indicates a reference to a page or pages in the following textbook: Griffin, R. & Pustay, M. (2005). International business (4th ed.). Upper Saddle River, NJ (USA): Pearson Education.
1. An international business transaction entails a significantly greater risk than does a similar domestic transaction. Why should a business consider expanding into international business, in spite of this greater risk?
At least two reasons:
Growth – when the domestic market becomes too saturated and competition becomes tight, the only prospect for growth might be to expand abroad
Diversify risk – the economies of different countries follow different cycles, so recession in one country’s economy does not match recession in another country’s economy, so the risk associated with investment is smaller; this guarantees more stable profits. “Don’t put all of your eggs in one basket.”
2. Identify the three basic forms of international business.
a) Trade (cross-border) – import/export of goods and services
b) Licensing of intellectual property – the owner grants permission to someone else to use the owner’s I/P;
Forms of licensing:
• Patent – legal monopoly granted by a government to an inventor who receives the exclusive right to make or sell a new product or to exercise a new process (limited to a time period – must be at least 20 years under TRIPS);
• Copyright – legal monopoly granted by law to the author of a creative work (music, movie, book, software, etc.); only the owner of the copyright can make copies of it or distribute it, whereby he or she owns not the idea but the expression of the idea; Under the Bern convention (189 countries signatories), the standard formula for claiming copyright is ( Year Name.
• Trademark – protected name/word/symbol that can be used only by the trademark owner
• Trade secrets – confidential information developed at private expense and protected from unauthorized disclosure or use, know-how can be an example
• Franchising – a licensor licenses a licensee to use his trademark and know-how and receives royalties (license fees) in return
c) Foreign Direct Investment – the purpose is controlling an asset (vs. portfolio investment – its purpose is other than control); Example: Joint venture
3. Referring to German company names, what is the difference between XYZ GmbH and XYZ AG? See G&P, pg. 7.
XYZ GmbH (Gesellshaft mit beschränkter Haftung) refers to a privately-held company. XYZ AG (Aktiengesellshaft) refers to a publicly-traded company.
4. Referring to British company names, what is the difference between XYZ Ltd. and XYZ PLC? See G&P, pg. 7.
XYZ Ltd. refers to a privately-held company. XYZ PLC refers to a publicly-traded company.
5. Referring to American company names, what is the difference between XYZ, Inc. and XYZ Corp.? See G&P, pg. 7.
There is no difference. Under American company name conventions we cannot tell by the name if a company is privately-held or publicly-traded.
Types of companies:
1. publicly-traded companies – shares of stock are traded on the stock exchange and can be bought by anyone from the general public; they are bound by at least stock exchange rules if not also by law to issue an annual report and to disclose their financial statements to the public;
2. privately-held companies – the general public has no right to buy into the company; not obliged to disclose their financial records to the general public, only to the tax authorities.
6. Why is ignorance of the world not uncommon among American people? See pg. xx, and table 1.6 on pg. 15. G&P: see figure 1.1 on pg. 9.
Almost 10% of the US economy is driven by exports (2004 data, in 5th ed.) – little need to deal with foreigners. Many Americans don’t need to know about the world and other cultures, because they spend their entire lives and careers in the USA dealing with (buying from and selling to) only fellow Americans.
7. What is an MNC? - Multinational Corporation. See pg. 10.
8. The world’s 20 largest corporations are headquartered in which countries? G&P: See table 1.1 on pg. 11 (G&P 5th ed., p.10) and figure 2.2 on pg. 27. (5th ed., p.30).
USA, Canada, Japan, EU-15 – 18 countries in total, or a 3-polar concentration of the wealth of the world.
9. International trade has grown explosively after 1950. “Between 1975 and 2002, global trade in goods has increased by 266 percent.” See pg. 2. G&P: figure 6.1 on pg. 147 and figure 10.1 on pp. 272 & 273. Why?
a) Governments have changed their laws and protectionist policies to free trade policies to stimulate international trade and investment; tariffs are decreasing and WTO has achieved great uniformity at low tariff levels;
b) Technological innovation – especially the improvements in transportation and communications (I-net), which has enabled global sourcing.
10. What phenomenon occurred in international business during the years 1945 – 1960?
The era of US economic domination of the Western world economy; after WWII there was virtually no competition for the US from the war-torn Europe and Japan. American companies became “fat, dumb, and happy”.
11. What phenomenon occurred in international business during the years 1960– 1980?
Western Europe and Japan successfully challenged US economic domination. They built brand new, state of the art factories with modern equipment and plant design, which were more productive than the outdated US factories.
12. Describe the earlier structure of the modern world economy, in other words, what is meant by the “Triad” concept and what are its implications for business? G&P: See figure 2.1 on pg. 24 (G&P 5th ed., p. 27) and figure 6.2 on pg. 147.
The current world economy has evolved from a tri-polar system (the Triad concept) – there were three big poles with relatively equal economic activity – North America (USA and Canada), Japan and the EU. They generated 75% of the world’s domestic product. The implications for business – a competitive international business had to operate in all 3 poles, as they have large rich markets and a company cannot cede a pole to its competitors.
13. Describe the latest structure of the world economy, in other words, add in the concept of the BRIC-4 countries. What does BRIC stand for?
New data shows an evolution from the old Triad concept. See G&P (5th ed.), p. 38. Now the Triad-30 countries (EU, US, JP + CA) produce 47.08% of the world’s GDP (adjusted for purchasing power parity), according to the IMF’s data for 2007. This is a steep drop from their dominating 75% share since just 2001. (Note: Cross-border comparison: The level of GDP in different countries may be compared by converting their value in national currency by the purchasing power parity exchange rate (PPP): GDP calculated by PPP of each currency relative to selected standard, usually the U.S. dollar).
As of October 2007, the BRIC countries (BR, RU, IN & CN) now produce 21.58% of the world’s GDP (PPP).
Together, the Triad-30 countries plus the BRIC-4 countries produce 68.66% of the world GDP (PPP). To reach the 75% mark, it takes the following:
Triad-30 + BRIC-4 + KR + MX + ID + TW + AU (39 territories) = 75.63% of world GDP (PPP)
World GDP (PPP) Data for Year 2007
Source: International Monetary Fund (dated October 2007)
Downloaded on 4 March 2008 from:
external/pubs/ft/weo/2007/02/weodata/weoselco.aspx?g=20018sg=All+countries
Territory GDP (PPP) in $ m % of World GDP (PPP)
World 72,337,649 100.0
1. EU 14,953,057 20.67
2. US 13,543,330 18.72
3. CN 6,963,801 9.63
4. IN 4,726,537 6.53
5. JP 4,346,080 6.01
6. DE 2,714,469 3.75
7. GB 2,270,884 3.14
8. FR 2,040,109 2.82
9. BR 2,013,893 2.78 Note: BR = Brazil
10. RU 1,908,739 2.64
11. IT 1,888,492 2.61
12. ES 1,310,206 1.81
13. KR 1,250,490 1.73 Note: KR = South Korea
14. MX 1,249,738 1.73
15. CA 1,217,069 1.68
16. ID 1,053,696 1.46 Note: ID = Indonesia
17. TW 749,943 1.04 Note: TW = Taiwan
18. AU 730,590 1.01 Note: AU = Australia
19. TR 722,581 1.0 Note: TR = Turkey
25. PL 631,833 0.87
30. UA 399,866 0.55 Note: UA = Ukraine
31. GR 391,395 0.54
37. AT 318,428 0.44
39. CH 296,259 0.41 Note: CH = Switzerland
41. CZ 260,305 0.36
43. RO 238,910 0.33
48. HU 211,575 0.29
51. IE 202,918 0.28 Note: IE = Ireland
62. SK 108,237 0.15
69. BG 83,798 0.12
80. RS 54,547 0.08 Note: RS = Serbia
126. MK 16,905 0.02 Note: MK = Republic of Macedonia
139. MD 10,464 0.01 Note: MD = Moldova
14. What is meant by the “rule of 3”?
A stable, competitive market can only support three large competitors; small companies can exist, but they specialize in certain small niches of the market. The small co. does one thing very well. It does not and cannot compete with the big guys across the entire line of products in its field.
15. Regarding the source of total world FDI funds, what is the approximate ratio of money from the developed countries compared to that from developing countries?
86% from developed countries vs. 14% from developing countries. Source: UNCTAD (2006). The ratio used to be 90/10.
The following paragraphs are quoted from a briefing called “Emerging market multinationals: The challengers”, in The Economist, January 12, 2008, pp. 58 – 60.
“Ford Motor Co. decided in 2007 to sell their Jaguar and Land Rover lines. The two firms shortlisted to take the prize come from India. Tata Motors, the carmaking unit of India’s largest industrial conglomerate, Tata Group, has edged ahead of Mahindra & Mahindra, a sprawling group that makes tractors and off-road vehicles, to become the preferred bidder. Tata just announced in January 2008 its unveiling of the revolutionary cheap car, which will sell in India and South East Asia for the equivalent of $2,500.” Note: it will be the world’s cheapest priced car, the Nano.
“In the 1960s, American multinationals made huge investments in Europe. In the 1980s, the Japanese made huge investments in the U.S., particularly in Hollywood film studios and Manhattan real estate. UNCTAD is turning its attention to the new shape of global business: investment now flows increasingly from south to north and south to south, as emerging economies invest both in the rich world and in less developed countries.”
“A Chinese example is Lenovo, which bought IBM’s PC business. Lenovo bought IBM’s PC business partly to acquire management talent, and went on to create a firm that blended the best of the two businesses.” Note: Lenovo has operations in Bratislava (SK).
16. Regarding the destination of total world FDI funds, what is the approximate ratio of money going into the developed countries compared to versus that from developing countries? G&P: See figure 6.7 on pg. 164 (G&P 5th ed., p. 165).
65% goes into the developed countries vs. 35% goes into the developing countries (source: UNCTAD Investment Brief, No. 1, 2007); as a result of the Triad concept on one hand, and because the cost of opening a business in the developing world is smaller, on the other hand. The ratio used to be 75/25. The “BRIC” countries (Brazil, Russia, India, China), with Mexico right behind, are receiving more and more massive investment.
17. What phenomenon explains the fact that approximately 65% of the world’s total FDI funds are invested in the developed countries of the world?
The Triad concept explains this fact. In order to survive and be competitive MNCs must operate in all 3 poles of the world’s economy, which are in fact the world’s most developed countries.
18. Why is it unlikely that a North American common market would be formed any time soon?
NAFTA allows for free trade in goods, but NOT services, labor or capital. Reasons are mainly cultural: the affluent English-speaking North vs. the poorer Spanish-speaking South; the civilized Canadians vs. the aggressive, arrogant, uncivilized, violent Americans; the large population of the USA, which can virtually take over Canada (300 M vs. 32 M, in 5th ed.).
19. Regarding the effect of FDI on NAFTA, where is an optimal location to locate a factory in North America and why? G&P: See map 2.1 on pg. 26 (G&P 5th ed. p. 28).
The optimal location is in the northern part of Mexico close to the US border. Reasons: 1) save on cheap Mexican labor ($2.75/hr vs. $23.82/hr, see source below); 2) cut transportation costs. Business wants to assemble products in MX to take advantage of the much cheaper MX labor rates, but they want to sell the products for a high price in the affluent markets of the U.S. and Canada.
Source: U.S. Department of Labor’s 2006 Hourly Manufacturing Workers’ Compensation Rate, see contract-manufacturing/trends-observations/2008, accessed on 4 March 2008.
“Canamex”: the humorous name for the as yet fictional union of US, MX and CA.
“Amero”: the suggested name for the as yet fictional common currency of “Canamex”.
20. The Višegrad Four (V-4) countries will enjoy a particular advantage with respect to attracting FDI over the next 20 years. Why?
The V-4 have a position very similar to that of the northern border zone of Mexico. The V-4 countries can offer very advantageous labor and tax rates compared to affluent countries like Germany, yet they are right next door, so it reduces logistics expenses. (Logistics = transportation + storage).
21. What is Poland’s natural advantage over Slovakia in attracting FDI?
Size of population, therefore of market. 38.5 M vs. 5.4 M. Many foreign companies decide to start with Poland, if they are successful there, then they can expand into the other, smaller V-4 countries.
22. What is the Czech Republic’s natural advantage over Slovakia in attracting FDI?
Geography. Next door to large, affluent Germany. DE is single largest national market in European Union.
23. What is Hungary’s man-made advantage over Slovakia in attracting FDI?
Hungary’s real property law (law relating to ownership rights in land and buildings) is remarkably similar to traditional English real property law. Much more so than the law of its neighbors. This is by historical accident. Investors from the English-speaking world automatically feel more comfortable because of this fact.
24. What are three of Slovakia’s advantages over its V-4 neighbors in attracting FDI?
a) Relatively lower labor rates, b) advantageous tax system (19% flat corporate and individual income tax and VAT), plus dividend income is tax exempt (very attractive to investors), and c) relatively high degree of labor peace (no strikes).
Country Corp Inc Tax Ind Inc Tax VAT
PL 19% 18 or 32% 22%
CZ 20% 15% 19%
SK 19% 19% 19%
HU 16% 18% or 36% 20%
Source: “Tax Rates Around the World”, at index.asp#partthree , accessed on 23 February 2009.
25. What are 5 of Romania’s advantages over Bulgaria in attracting FDI?
a) Geographically closer to the heart of Europe, thereby reducing transport costs
b) larger domestic market, thereby facilitating greater economies of scale within the domestic market (RO’s 21.4 m pop. vs. BG’s 7.7 m).
c) its western, northwestern, and northern regions as well as part of the northeastern region share historic and cultural bonds with neighboring central Europe (i.e., the Banat, Transylvania, Maramureş, and Bucovina were all part of the Austro-Hungarian monarchy), thereby possibly facilitating cross-border understanding.
d) RO shares the Latin cultural affinity with the other Latin countries in Europe, of whom FR, IT and ES have large economies and provide ready sources of FDI. Example: The RO legal and accounting systems were heavily influenced by the French codes.
e) significantly less government corruption (RO’s 3.8 beats BG’s 3.6). Source for (e): TI’s 2008 Corruption Perception Index at
layout/set/print/news_room/in_focus/2008/cpi2008/cpi_2008_table (accessed on 13 October 2008).
26. What are 4 of Bulgaria’s advantages over Romania in attracting FDI?
a) hugely lower labor rates. BG average monthly salary is 515 BGN (263 EUR), in June 2008, lowest in the EU, vs. RO’s 1,769 RON (416 EUR at 1 EUR = 4.2510 RON, on 10 February 2009), in July 2008. RO’s average salary is almost 60% higher than the BG average.
b) significantly lower income tax rates in general (BG’s 10% beats RO’s 16%).
c) the lev is fixed to the euro, thereby eliminating that important currency exchange rate risk for EU investors ( 1 EUR = 1.95583 BGN).
d) cultural and historic affinity between Russians and Bulgarians (beginning of BG’s liberation after the Russo-Turkish War of 1877 - 1878) facilitates cross-cultural understanding (RU is 9th largest national economy in the world and, being cash rich with oil and gas revenue, they are actively investing). Examples: the Burgas – Alexandroupolis oil pipeline, real estate investments.
Sources: for (a), , citing the National Statistics Institute of BG, retrieved on 14 October 2008. , citing the Romanian National Institute of Statistics, retrieved on 14 October 2008. For (b), see “Tax Rates Around the World” at index.asp#partthree (accessed on 28 January 2009).
26A. Notes on Russia: The Economist, 1 March 2008, p. 25: “Russia’s transformation in the past few years is impressive. A country that almost went bust ten years ago now boasts a $1.3 trillion economy, foreign-currency reserves of nearly $480 billion and a $144 billion stabilization fund for surplus oil and gas revenue. Annual growth of real incomes has been in double digits. GDP per head has risen from less than $2,000 in 1998 to $9,000 today at current rates of exchange.”
“The economy is growing at 7% per year. Never before have Russians shopped or travelled so much. Restaurants, megamalls and airports are heaving; streets are choked with foreign cars. Nor is the wealth confined to Moscow; every other city now seems to have a decent hotel, an Italian restaurant and a Hugo Boss store.”
“Russia’s economy started rebounding 18 months before Putin became president. Behind it lay three factors: a revival of private initiative, oil prices that have risen fourfold during his presidency and macroeconomic stability. Only the third can be credited to Mr. Putin. The economy is now more dependent on oil than ever. And the outlook is bleaker: a slowing world economy means that oil prices may not rise further, and could even fall.”
27. Compare and contrast China and Japan regarding the factors of production.
|Factors of production |China |Japan |
|Land |plenty |scarce and expensive |
|Natural resources |has some |lacks |
|Population |young and growing |stable and aging; about to start shrinking |
|Capital |needs investment |has it |
|Technology |needs it |has advanced technology |
28. What is more likely to happen: that China and Japan closely cooperate or that they remain distant and compete against one another? Why?
Stay distant and compete, because of the history of military oppression – the ignorance of Japanese of the atrocities that their army committed against Chinese civilians and the awareness of contemporary Chinese of the atrocities.
29. In the long term economic competition between China and Japan, which country probably has the natural advantage and why?
China probably has the natural advantage because of its young and growing population. Japan is heading towards a crisis with its aging population, because the number of working people that pay taxes into the retirement system is shrinking, whereas the number of people that live on the retirement system is increasing. Also, since people live longer, it turns out that they live on welfare longer than was ever originally planned for. This is one of the biggest crises facing the entire industrialized world and is a major initiative at OECD. (Example: my grandfather worked and paid taxes for 62 – 16 = 46 years, then he retired and collected from the retirement system for 95 – 62 = 33 years!)
30. What are the 5 weaknesses of China?
a) still in a period of transition to a capitalist economy; they cannot change all at once, it would be a catastrophe. In China, there is such a thing as “too much, too fast”.
b) regional disparities (uneven distribution of wealth) – the rich Southern coast vs. the poor interior;
c) probability that the rich Southern coast may demand local autonomy;
d) a tradition of local warlords, whenever the central government gets weak;
e) a tradition of civil bloodshed (Ex: Tiananmen square in 1989) – problems are not solved peacefully, but through resort to violence.
* 2010 – 2015 envisioned as a critical time of potential social unrest
31. What are two weaknesses of Japan in dealing with its neighbors?
a) ignorance of WWII atrocities committed by Japanese troops against unarmed civilians – this part of Japanese history is intentionally concealed and not taught in JP schools;
b) superiority complex towards neighbor nations. JP is a model of public order and public cleanliness, the rest of Asia is not so as much as JP is.
GLOBALIZATION
32. What is globalization? – the shift to an integrated and interdependent world economy
33. What is globalization of markets?
Globalization of markets is the merging of historically distinct and separate national markets into one huge global marketplace; creation of a one-world market, which enables companies to buy from, and sell to the whole world; this also implies a standardization of products (Ex: consumer electronics).
34. What is globalization of production?
Globalization of production is the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (labor, energy, land and capital); the goal is to cut costs and boost profits while minimizing risks.
35. Identify the two drivers of globalization. See # 9.
a) Governments have changed their laws and policies to free trade policies to stimulate international trade and investment; tariffs are decreasing and have been equalized all around the world among WTO members;
b) Technological innovation – especially the improvements in transportation and communications (I-net), which has enabled global sourcing.
36. What is the benefit of globalization to consumers? - A huge selection of high-quality goods at reasonable prices.
Note: who gains when an iPod is sold in America for $299? Only $4 stays in China with the firms that assemble the devices. $160 goes to American companies that design, transport and retail iPods. A similar pattern holds for many European products. Source: University of California study cited by EU trade commissioner Peter Mandelson, in a recent speech defending globalization. The Economist, 1 March 2008, p.35.
37. What are the 5 negative effects of globalization?
a) threat to national sovereignty
b) impact on worker safety laws Produce where regulation is less
c) impact on environment protection laws
d) threat to wage levels and job safety of uneducated workers in rich countries
e) threat to non-world-class-competitive domestic companies (small and middle-sized enterprises – SMEs)
38. The 10 largest MNCs have revenue greater than 2/3 of the national governments of the world?
39. Of the 100 largest treasuries in the world, how many belong to national governments and how many to MNCs?
60 – national governments; 40 – MNCs
POLITICAL ECONOMY & CULTURE’S IMPACT ON INTL. BUSINESS
40. Define the term “political economy”.
Political economy means the political, economic and legal systems of a country. These are separate systems but in reality they have to be looked at the same time. These three are interdependent. Political economy is a combination of 3 systems – holistic approach.
41. What two forces create the entire national environment in which every business operates?
1) political economy and 2) national culture - these two are interdependent.
42. What is meant by the term liberal democracy?
Liberal democracy is a democratic system where the state’s power is limited, in modern times usually by a constitution. Individual citizens have certain rights that can never be violated by the government.
43. Identify and describe 3 features of a country’s legal system of great interest to businessmen.
a) contract law: does the country have a well-developed, transparent and enforced contract law (what good is a contract if you cannot enforce it in court?);
b) property rights (including intellectual property): does the country’s legal system adequately protect private property rights;
c) product safety & product liability concerns: how tough are the laws and how severe are the penalties?
44. What features of the American legal system cause great concern to international businessmen?
There is unlimited product liability in the US, plus the amount of damages is awarded by the jury. The juries are notoriously liberal with damage awards. Example: in 1994, a New Mexico jury awarded $2.86 M to a customer who suffered third degree burns on her inner thighs as a result of hot spilt coffee from a McDonald’s restaurant. (Judge reduced it to $640,000, compensation plus punitive damages, i.e., 3 times compensatory damages). See Liebeck v. McDonald’s Restaurants. Eddie Holl’s mother’s slip & fall case, the “8 days in the garage” case, the thrown drink slip and fall case, the driverless Winnebago case.
45. What is the nature of the relationship between a country’s political economy and its economic progress?
Liberal democracy + free market economy seems to lead to economic progress. Exceptions: South Korea and Taiwan - until recently they were not liberal democracies but still achieved considerable economic progress. They had free market economies with strong protection of private contractual and property rights.
46. What impact does geography have on a country’s economic development?
Coastal countries have higher economic growth on average than inland countries; and countries in the temperate zones have higher economic growth on average than countries in the tropical zone.
47. What impact does education have on a country’s economic development?
Countries with a better educated, skilled work force will tend to have higher economic growth rates and will develop faster than countries with a poorly educated, unskilled work force. Example: what Ireland did with its EU money for education.
48. Describe Samuel Huntington’s “civilizational” theory and its four implications for international business.
Source: Samuel Huntington, („The Clash of Civilizations“ article in Foreign Affairs journal in 1993, book published in 1996).
Most national cultures can be grouped into related cultural clusters. As the basis for the cultural cluster, there is an underlying, common cultural heritage which Huntington calls the “civilizational” level. At this level, the cluster derives its basic common ideas of right and wrong, just and unjust, and even basic ideas of protocol. In most cases, there is one predominant religion or set of spiritual values which provides the civilization with these values.
1) Western Christian
2) Eastern Christian
3) Islamic
4) Jewish
5) African
6) Hindu
7) Buddhist
8) Confucian (China)
9) Japanese
10) Latin American
Some civilizations seem to be naturally antagonistic with each other, e.g., Western vs. Islamic, and western vs. Confucian.
Four implications for international business:
1) Selection of our international representatives. The business has to carefully select a person with the right character and temperament who is very flexible, adaptable and non-judgmental. 2) The business must spend extra time and money training its intl reps in cross-cultural situations. 3) The negotiations may take significantly longer than would the same transaction at home. 4) Knowing that certain civilizations seem to be naturally antagonistic with each other, then that factor will affect certain business decisions, such as where to open a representative office, or where to open an active FDI.
49. What implications for business does the social class system of Britain present? See G&P, p. 88 (G&P 5th ed., p. 84).
Their system is quite rigid. You are basically born into a particular social class and their society is not very forgiving about letting you rise up (low social mobility). Certain jobs are associated with certain classes. If you try to promote a working class “bloke” (guy) into an upper management position, then it may turn into a complete failure when no one accepts him in the new position. You are not free to hire the most competent person for the job. You must also take social class factors into consideration. This is an inefficiency introduced into British business and it affects their management/workers relationship (usually very badly). Their system is slowly changing and becoming more socially mobile, but the change is slow.
50. When crossing one’s legs in the Arab world or in Thailand, what must we be careful to avoid doing?
Pointing the bottom of your shoe at a person there is considered to be an insult. Even if you accidentally do it and mean no offence, this could cause your conversation partner to subconsciously conclude that you don’t like him and that could kill the deal.
51. True or false: All cultures have rules regarding the proper amount of body space and distance between people while conversing. These rules are the same around the world. See G&P, p. 93 (G&P 5th ed., p. 91)..
False. All cultures have some feeling for the “right” amount of distance between people, but the distance varies culture to culture. For example, Middle Eastern and Latin American men will stand much closer to each other than is comfortable for Anglo-Saxon men. People discussing business at a party: in U.S., typically stand 51 cm (20 in) apart, in Saudi Arabia it’s 23 – 25 cm (9 – 10 in).
52. True or false: There is universal agreement on the right amount of touching allowed between people in public.
False. In northwestern Europe and in many parts of Asia, kissing and even hugging in public is frowned upon. 2 important resources in life: love & money.
53. What is the impact of silence during negotiations with a typical North American? With a typical Japanese business person? See G&P, p. 94 (G&P, 5th ed., p. 91).
Silence can cause great embarrassment and discomfort for the typical North American, whereas it has no impact whatsoever on the typical Japanese. Remember when the Americans were first talking business with the Japanese? The American would make an offer, expecting a response from the Japanese. But the Japanese said nothing, because to him, there was no need to respond. He was either simply considering the offer or nothing further need be said (don’t upset social harmony, “wa”). The American took this badly, and immediately sweetened the deal! The Japanese must have thought the American was crazy! Also, discuss “can’t say no” cultures. BG example among friends.
Remember I earned an extra thousand dollars in a salary negotiation because I kept silent for probably 4 seconds and made the offeror so uncomfortable that she raised her offer.
54. Both the Arabs and the Japanese have a custom of exchanging gifts with their business partners. In one culture, the gifts are opened in front of everyone to display the generosity of the giver. In the other culture, the gifts are opened later in private, with no one else around, to avoid embarrassment if someone’s gift was either too inexpensive or too expensive. Which culture has which practice? See G&P, p. 94 (G&P, 5th ed., p. 92).
In certain countries of the Arabic world, such as the Kingdom of Saudi Arabia, gifts are opened in front of everyone (in the Hashemite Kingdom of Jordan, however, this is not the custom). In Japan, they are never opened in front of the others. Story: maids at the Watergate Hotel in Washington, D.C.
55. What two spiritual belief systems seem to best give advantages to their societies regarding economic growth and why? See G&P, pg. 94.
Protestantism, prevalent in northwestern Europe and the English-speaking countries, and Confucianism, prevalent in East Asia.
Protestantism stresses that work itself has spiritual value (the famous “Protestant work ethic”). Even a rich man is disrespected behind his back if he is lazy. This attitude facilitates the creation of wealth. Also, the quality of your work is important. To do less than your best is to shame yourself.
The second attitude is thrift, that one should not unnecessarily spend money. A rich man who “wastes” his money on a lavish feast is a fool if just a simple hamburger would do to stop hunger. This attitude leads to the accumulation of wealth which is then available for investing in business enterprises.
Confucianism has 3 attitudes which facilitate the growth of business:
1) Honesty. Once the businessperson gives his word, then he is honor bound to not break it. This means contracts are respected and cuts costs caused by breach of contract and by distrust of others.
2) Loyalty. Every person owes loyalty to his family and to his country. This attitude carries over into the workplace. They feel that they “owe” loyalty to their employer.
3) Reciprocal obligations. In the workplace, it is understood and respected by both sides that each side owes to each other. The workers must work hard and be honest and loyal. In return , management and the owners owe respect and other “benefits” back to their workers.
56. If you were to give a sales presentation to a potential Arab customer, should you expect the meeting to begin promptly at the appointed time? See G&P, pg. 98 (G&P 5th ed., p. 97).
Absolutely not. The Americans like to say that everyone is on “island time” in the Middle East. Western style, rigid punctuality is not expected. Be flexible and patient. DE, JP: punctuality is critical. Examples: 7:30 start in Dresden, enforced by administrator. K for IT services in JP embassy in Bratislava. (But 8:30 start in Munich).
57. Describe the connection between culture and national competitive advantage.
Cultures differ in many ways such as customs and attitudes towards different things in life. Some attitudes are more beneficial to efficiency in business and thereby give a competitive advantage to the culture with the “more efficient” attitude.
58. Writing the company policies and procedures book is a task involving cultural-based factors. How does writing a book for British, Canadian or U.S. companies differ from writing such a book for German, French or Italian companies? See G&P, pp. 107 – 109 (G&P 5th ed., pp. 105-107).
This question goes to the idea of uncertainty avoidance. Remember some societies have a relatively lower reaction to uncertainty and accept it better than other cultures wherein clearly defined rules are expected. English-speaking societies are relatively uncertainty-tolerant. The workers expect the rules to establish the general policy and then they are expected to fill in the details using their own intelligence and initiative.
The opposite attitude can be seen in the latter countries. There, the workers expect to be told not only WHAT to do, but also exactly HOW to do it. They want to be told every last detail so they do not have to make any decisions themselves. That way they are safe. If something goes wrong, they are not to blame as long as they did WHAT they were told to do, and they did it HOW they were told to do it.
You can cause great offence in either type of culture by breaking this unwritten rule! DE teachers cannot say “I don’t know” in the classroom.
Geert Hofstede’s research. Book on BG cultural dimensions: Mihail Minkov (2002). Zashto sme razlichni. sales@
59.How do Japan and West Africa differ regarding planning for the future? See G&P, p. 110 (G&P 5th ed., p. 108).
IN JP, 100-year plans are not uncommon for corporations. JP has 100-year loans to buy real estate. In West Africa, it is not uncommon for the workers to walk off the job if they are not paid every hour! They cannot execute even an 8-hour plan.
60. If you were to give a sales presentation to a potential customer in Japan, would you probably speak to a small or a large group? During the presentation, should you focus only on the more senior managers in the room?
A large group, of course. Remember that in JP, decisions are made consensus style, by the entire team, including the most junior members. Therefore, you better make sure you pay attention to everyone in the group, including the junior members. Japanese senior management will never agree to anything until junior management also agrees. Example; finding new location for JP embassy in Bratislava.
61. During the presentation to the Arab customer, is it normal for unexpected and uninvited guests to join in? Is it normal for unexpected interruptions to occur during the meeting?
Yes, don’t be surprised if uninvited persons unknown to you wander into your meeting and sit down and expect you to continue your meeting. Yes, it is normal for unexpected interruptions to occur. The Arabs pride themselves on their gracious hospitality and do not exclude a newly arriving guest just because of a business meeting. After all, they reason, you would want to do business with such a generous person, wouldn’t you? That is a completely different attitude than the typical westerner would take.
62. Is it advisable to bring your attorney along for the first several times you meet your new Japanese business partner?
NO!!! The Japanese may very well take that as a sign that you do not trust them and lead them to conclude that therefore you are untrustworthy and this misunderstanding can kill the relationship.
63. True or false: All cultures agree that it is normal to bring a spouse along on a company social function (for example, a company-sponsored dinner in a restaurant at night)
False. It would be considered completely unusual, for example, in Japan.
THEORIES EXPLAINING TRADE AND INVESTMENT
64. What is the basic idea of mercantilism? See p. 26, G&P p. 148.
To increase the wealth of the king by allowing him to hoard the gold. How? By discouraging imports and encouraging exports. We will be glad to sell to the foreigner and take his money, but we don’t want our people buying from the foreigner and letting him take money out of our country. This theory has instinctive appeal to patriotism but Adam Smith (see below) proved that mercantilism, in the long run, makes the people in a country (versus the king) poorer.
65. What is the basic idea of Adam Smith’s 1776 theory of absolute advantage? See p. 24, G&P p. 149.
This theory was revolutionary and it is a direct challenge to mercantilism. “On the Nature of the Wealth of Nations”, the “Bible” of capitalism. The basic idea is that each country should specialize in the production of whatever product or service it can produce more efficiently than other countries. Then it can trade with the other countries for goods they specialize in, and in that way, both countries can consume more of both products than otherwise possible. For example, why should England insist on growing its own oranges in expensive English hothouses, on expensive English land, employing expensive English hothouse workers, when it can buy more of naturally better quality oranges cheaper from Spain?
66. What concept does David Ricardo’s 1817 theory of comparative advantage use which distinguishes it from the theory of absolute advantage? See p. 28, G&P p. 150.
The concept of opportunity cost. Remember that the highly competent brain surgeon who does every task as efficiently as possible will still hire the lazy teenage boy next door to cut his grass, even though the surgeon could cut the grass more efficiently. Why? Every hour the surgeon wastes cutting the grass is one hour he is not available for much better paid brain surgery.
67. Describe how the product life cycle theory explains in which countries a product will be made during its various phases of existence. See G&P, p. 155 (5th ed. 156-158).
New products are normally introduced in one of the wealthy nations. They are first made there because that is where the R&D facilities are, and we want to be near the customers because the final design is not yet finalized. Marketing has to poll the customers about what they like and don’t like about the new product, and we must change the features of the product to satisfy the market. In this phase, we compete with quality and design features.
Once the final design of the product is finalized, then we can move the production to low cost locations like China and then compete on price.
WARNING: Don’t you dare outsource the production until the design is final! See handout “Impact of Customer’s Request for Design Change after Production Has Begun”, dated 1 April 2006, by J. S. Caldwell, J.D.
NOTE: outsourcing production to low cost locations like China works best with high volume, “build to print” manufacturing runs. However, for more sophisticated or complex, low volume products, outsourcing production to a domestic firm may make sense, especially “if they are able to add value to the product through innovation, design input or other services which benefit the customer. Manufacturing which has remained in the UK, for example, is generally higher technology and lower volume. These are the areas where collaboration between original equipment manufacturers (OEMs) and outsource production contractors needs to be at its closest. These areas are where IP protection, close cultural match, common language, physical proximity and personal contact are key to satisfying the customer.” Wilks, S. (April 2008). Electronics Weekly. “Is overseas production still best for manufacturers?”.
68. Explain the theory of national economics.
A country should employ whatever economic policy best serves its own economic self interest. For example, a developing country may find protectionism to be a good policy to build up its own industrial base, and then shift to a free trade policy once its domestic industry has matured and can survive the worldwide competition. Example: Russia chose to wait before joining the WTO. Heavy equipment mfg not cost competitive with JP.
69. Optional for test. Basic R&D and design of laptop computers requires a pool of highly skilled and educated workers with backgrounds in microelectronics. Which countries have a comparative advantage in basic microelectronics R&D and design?
Japan and the United States.
70. Optional for test. The manufacture of standard electronic components is a capital-intensive process requiring semiskilled labor, and cost pressures are intense. Which countries offer the best locations today for such activities?
South Korea, Taiwan, Malaysia and Mexico. Idea for discussion: How about your country’s potential for Europe?
71. Optional for test. The manufacture of advanced electronic components such as microprocessors and display screens is a capital-intensive process requiring skilled labor. What countries offer the comparative advantage in this kind of activity?
Countries where skilled labor is available at reasonable labor rates. V-4, RO, BG? Siemens selected BG as the location for its new microprocessor plant.
72. Final assembly of computers is a relatively labor-intensive operation requiring only low-skilled labor. Which country would offer a comparative advantage in this kind of activity?
China.
FOREIGN DIRECT INVESTMENT (FDI)
73. FDI can generate 6 benefits for a host country. What are they? Know at least 4 for test.
1. Creation of new jobs (Note: EU and Swiss firms employ some 3.5m workers in America. The Economist, 1 March 2008, p. 35.)
2. FDI pays taxes. Ex.: Toyota in Georgetown KY, pays ¼ of town’s budget.
3. FDI may bring in new technology (particularly crucial to raising labor productivity). SK vs. EU: only 50% as productive.
4. To the extent its production is exported, FDI helps host country’s balance of trade
5. Customer mobility: a large FDI may attract its suppliers to also locate nearby. Latest news: 14 May 2008, Nitra Invest announces that 2 unnamed suppliers to Sony in Nitra plan to create 1,000 new jobs in the same industrial park as Sony. Will be second biggest investment in the park after Sony itself. The Japanese electronic giant has already attracted to Nitra 4 firms: Meiki, Farquell, Daidong and Ryoka. Sony is keen to see the arrival of the suppliers in the park, since it has already been cooperating with them for 35 years. Source: The Slovak Spectator (May 19-25, 2008), p. 4. Ex.: Auto factory using JIT, supplier must be no farther than 60 minutes by truck from factory.
6. Transfer of know how and new, productivity-enhancing practices and policies. Ex.: JIT and quality circles from JP.
74. FDI can generate 5 disadvantages for a host country. What are they? Know at least 4 for test.
1. Potential threat to domestic firms. Competition for factors of production, even if not for customers: labor, suppliers, capital.
2. Loss of independence. VW was the 800 pound gorilla for a while in SK. Out-of-town decision maker.
3. Political power
4. Negative cultural influence. US influence on JP’s labor force mobility. JP massage parlor in Georgetown, KY!
5. Unless FDI exports enough, it can cause a negative effect on host country’s balance of trade
75. What 12 factors induce FDI (what investors want)? Know at least 4 for test.
1. Need to “rationalize” (i.e., lower) production costs
2. Access to natural resources. Neusiedler buys Ružomberok paper plant, near SK trees.
3. Logistics. Maquiladoras in MX on US border.
4. Access to key technology
5. Access to market. GM bought Daewoo to enter KR market. Only 1.6% of cars sold in KR are imports.
6. Marketing advantages. Coca Cola made in market.
7. Customer mobility: don’t lose a key account to a competitor! Industries which use JIT: auto mfg, electronics, appliances.
8. Internalization advantages (vs. licensing)
9. Shared borders
10. Cultural similarity
11. Avoidance of trade barriers
12. Economic development incentives. Tax holidays, infrastructure improvements, training of work force, preferential access to and rates for utilities, subsidies. Infrastructure and the labor force are the two most important criteria for investors. Incentives are in fourth place. Source: The Slovak Spectator (May 12-18, 2008), p. 4.
76. What 13 factors discourage FDI (what investors don’t like)? Know at least 4 for test.
1. Political risk: instability or arbitrary change in laws & policies. ”Grandfathering in” existing businesses when the rules change.
2. Excessive “red tape” & delays
3. Overregulation (e.g., price controls, excessively inflexible labor market, restrictions on transferability of govt-issued licenses)
4. Excessively high taxes. Note: German investors declare SK most attractive in CEE b/c of its low tax burden and transparent and simple tax system. Slovak-German Chamber of Commerce and Industry in Bratislava, reported in The Slovak Spectator (April 21-27, 2008), p. 9.
5. Excessively high interest rates
6. Bribery & corruption
7. Xenophobia & racism among host country’s population
8. When ministers ignore visiting potential investors
9. Limitations or prohibitions on repatriating profits or royalties
10. Limitations on ownership
11. Legal requirements for “local” participation
12. Insufficient or unenforced protection of I/P rights
13. Political risk: possibility of war, insurrection, confiscation of property
77. A comparison of corporate income tax rates among several nations, from highest to lowest:
US at 15 - 35%, CH from 8.5% to 33.5%, DE at 30 - 33% (effective), IT at 31.4%, GB at 28%, AT, GR & UA at 25%, CZ & TR at 20%, PL & SK at 19%, HU & RO at 16%, IE at 12.5%, BG & RS at 10%.
78. A comparison of individual income tax rates among the same nations, from highest to lowest:
AT from 21% to 50%, DE from 15% to 45%, IT 23 – 43%, IE from 20% to 41%, CH up to 40%, FR 5.5 – 40%, GB & GR from 0 to 40%, HU at either 18% or 36%, TR from 15% to 35%, US from 15 to 35%, FR at 33.33%, PL 18 or 32%, RS at 10 – 20%, SK at 19%, RO at 16%, CZ at 15% (but is misleading, effective rate is more like 21%), UA at 15%, BG at 10%.
79. A comparison of VAT rates among the same nations, from highest to lowest:
PL at 22%, IE at 21.5%, AT, BG, HU, IT & UA at 20%, FR at 19.6%, CZ, DE, GR, RO & SK at 19%, RS & TR at 18%, GB at 15%, CH at 7.6%. US has no national VAT, but states and municipalities can and do impose VAT at varying rates. For example, State of Maryland charges 6%, District of Columbia charges 7%.
SOURCE for ## 77 – 79: “Tax Rates Around the World”, accessed on 23 February 2009 at the following website:
worldwide-
80. All other factors being equal, does corruption tend to attract or discourage investment, and why?
Although corruption may make obtaining licenses and permits easier in the beginning, corruption does tend to discourage investment because the costs of bribes are an unknown amount. We can try to “guesstimate” the costs, but the numbers are always soft (uncertain) numbers in the cost equation. Therefore, it increases risk and business people want to reduce risk, not increase it. Remember, who says the politicians (or mafia) will go away after we bribe them once? They will come back for more, of course.
81. How does BG compare with its neighbors regarding the perceived level of corruption among government? See Transparency International’s Corruption Perception Index 2008, at .
10.0 is perfect score, meaning no perceived corruption among a country’s government officials. Least corrupt nations: DK, SE, NZ at 9.3.
Most corrupt: Somalia at 1.0 .
Least corrupt European nations: DK, SE at 9.3
Least corrupt Asia/Pacific nation: NZ at 9.3
Least corrupt North American nation: CA at 8.7
Least corrupt South American nation: Chile at 6.9
Least corrupt Middle Eastern nation: Qatar at 6.5
Least corrupt African nation: Botswana at 5.8
Huntingtonian “civilizational” comparison:
Least corrupt Western nations: DK, NZ & SE at 9.3
Least corrupt Confucian nation: Singapore at 9.2 (CN at 3.6)
Japan at 7.3
Least corrupt Latin American nations: Chile & Uruguay at 6.9
Least corrupt Islamic nation: Qatar at 6.5
Least corrupt Byzantine nation: Cyprus at 6.4
Israel at 6.0
Least corrupt sub-Saharan nation: Botswana at 5.8
Thailand at 3.5
Least corrupt Indic nation: Mauritius at 5.5 (IN at 3.4)
Most corrupt nations in the EU: LT (Lithuania) & PL at 4.6, RO at 3.8, BG at 3.6
The neighbors (and US): CH 9.0, CA 8.7, AT 8.1, DE 7.9, IE & GB 7.7, BE, JP & US 7.3, FR 6.9, SI 6.7, ES 6.5, TW 5.7, KR 5.6, CZ 5.2, HU 5.1, SK 5.0, IT 4.8, GR 4.7, PL & TR 4.6, RO 3.8, BG, CN, MK, MX, 3.6, BR 3.5, IN & RS 3.4, MD 2.9, ID 2.6, UA 2.5, RU 2.1.
Increasing in corruption between 2007 and 2008: GB fell 0.7: 8.4 > 7.7, BG fell 0.5: 4.1 > 3.6, FR 7.3 > 6.9, IT 5.2 > 4.8, JP 7.5 > 7.3, ES 6.7 > 6.5, HU 5.3 > 5.1, UA 2.7 > 2.5, RU 2.3 > 2.1, IN 3.5 > 3.4.
Decreasing in corruption between 2007 and 2008: KR & TR each up 0.5: KR 5.1 > 5.6, TR 4.1 > 4.6, PL up 0.4: PL 4.2 > 4.6,DE 7.8 > 7.9, US 7.2 > 7.3, SI 6.6 > 6.7, SK 4.9 > 5.0, GR 4.6 > 4.7, RO 3.7 > 3.8, CN 3.5 > 3.6, MX 3.5 > 3.6, MK 3.3 > 3.6, MD 2.8 > 2.9, ID 2.3 > 2.6.
82. What are the 9 criteria commonly used when a government evaluates a proposed FDI project? Know at least 4 for test.
1. Assistance in generating economic development
2. Number of workers to be employed
3. Effect on domestic businesses
4. Effect on balance of payments, i.e., extent to which production is exported
5. Use of domestic materials and parts
6. Financing obtained from abroad
7. Contributions of advanced technology
8. Location of plant in designated development zones. Note: As of 1 May 2008, firms that settle in the Košice, Prešov, Banská Bystrica and Žilina regions are eligible for state incentives equaling as much as half of the planned investment. Those that choose the Bratislava region will receive only one tenth of their investment. Source: The Slovak Spectator (May 12-18, 2008), p.4.
9. Establishment of R&D facilities in host country
83. Of the 9 criteria a government uses to evaluate the attractiveness of a proposed FDI project, which two factors seem to be the most important?
Govts really like it when the foreign investor 1) buys most or all of his material needs from domestic sources, and 2) sells most or all of his production abroad (thereby helping the host country’s balance of trade). We summarize this as “buy locally, sell globally”.
84. Why does a host country like to have a balanced mix of investor countries?
A host country wants to avoid economic dependency on any one country. For example, if all of the FDI in my country comes from Germany, than Germany has an inordinately large influence in my country and this is a potential threat to my country’s sovereignty. I want to have the FDI in my country come from a large mix of countries and to be well balanced between them. Smaller European countries therefore should especially welcome Asian and North American investment to counterbalance the natural investment from their larger European neighbors.
85. Identify some features of the least attractive FDI project.
Low tech, low value-added versus high tech, high value-added. For example, which is better, a McDonald’s restaurant or a microchip factory? A wood mill or a furniture factory?
It is not attractive when the foreign investor imports all of his material needs and sells all of his production locally.
It is not attractive when the foreign investor finances the entire cost of the investment by borrowing from local banks.
It is not attractive when the foreign investor competes with domestic companies and is so successful that he drives the locals into bankruptcy.
CURRENCIES
86. Describe how George Soros speculated on foreign currency exchange rate fluctuation. See G&P, p. 193 (G&P 5th ed., p. 196).
He borrowed money in a currency he thought would drop significantly in value over the next 6 months or so. As soon as he got the money, he converted it to a stable currency. If he gambled right, it then cost significantly less in the second currency to buy enough of the first currency to pay the loan back. He pocketed the rest of the money as profit.
But he had to guess 3 things right: which currency will drop, it must drop enough to make money even after paying currency conversion fees and the interest on the loan, and the value of the borrowed currency must drop between when he takes out the loan and the loan repayment date.
87. What is a “gold standard”? See p. 450, G&P p. 179.
When the value of a currency is fixed to an exact amount of gold, that is called a gold standard.
88. What four items were agreed upon at the 1944 Bretton Woods conference? P. 423, G&P p. 182 (G&P 5th ed., p. 180). The poetry of English: good, God, gold.
A. modified gold standard: 1 ounce (oz.) of gold = $35
B. other major currencies were pegged (fixed) in value to the dollar
C. establishment of International Bank for Reconstruction and Development (IBRD), the “World Bank”. Purpose: lends money to govts for economic development projects. Headquarters: Washington, D.C.
D. establishment of the International Monetary Fund (IMF). Purpose: to coordinate and stabilize the world monetary system. It discourages competitive devaluations of currencies, informs the world’s central banks of the exchange policies of each central bank, and provides loans to govts to correct maladjustments in their balance of payments. Headquarters: Washington, D.C.
89. Of the four items agreed upon at Bretton Woods, which two are still in existence?
The World Bank and the IMF still exist. The peg between the dollar and gold has been abolished and the other major currencies now float in value against each other.
90. What is a spot exchange rate? See p. 283; G&P p. 219.
It is the rate quoted for a foreign currency exchange to be done immediately, i.e., within two business days..
91. What is a forward exchange rate? See p. 283; G&P p. 219.
It is the rate that two parties agree to use in an exchange that will be executed on specific date in the future.
92. What impact does a rising interest rate tend to have on domestic spending?
It tends to discourage spending because it becomes more expensive to borrow money.
93. What impact does a rising interest rate tend to have on the demand for the currency in the forex market?
That tends to increase the value of the currency. People like to buy the currency so they can invest in accounts and instruments denominated in that currency and thereby earn the higher interest.
94. How does a fixed rate exchange system tend to control inflation?
A central bank can only issue as much of its own currency as it can back up with the reference currency. For example, the Bulgarian lev is fixed to the euro. This means that the Bulgarian currency board, that controls the money supply, cannot issue more levs than it can redeem in euros. There is a ceiling on the amount of levs it can issue, thereby providing a built-in protection against inflation.
95. Does a fixed rate of exchange eliminate all risk of currency fluctuation?
No. The market can begin to distrust the fixed value of a currency and everyone starts to sell the currency (to “dump” it) because no one wants to be stuck holding it when its value finally does fall. Sooner or later the central bank has to drop its policy under pressure (it cannot spend all of its reserves). When a central bank abandons its fixed rate policy, we can see an average immediate drop of about 20% in the value of the currency. It can be even worse.
96. If a central bank wants to fix the value of its currency against another currency, what must it hold in its reserves?
The other currency. Example: Argentina fixed the value of its peso to the U.S. dollar. It had a 1:1 exchange policy. So it had to hold U.S. dollars in order to back up its pledge that one peso was equal to one dollar. Every time someone wanted to exchange one peso for one dollar, the central bank had to have dollars available to execute the transaction. Did Argentina need permission from the U.S. in order to have such a policy? No. Argentina can unilaterally adopt this policy, but it has to have the dollars to back up its promise.
When BG fixed the lev to the DEM, the Bulgarian National Bank had to hold sufficient quantities of DEM in order to back up its promise that one lev equals one Deutsche mark.
97. What four factors can cause depreciation of a currency in the forex market?
a) BOP trade deficits, b) high public debt, c) high inflation rate, d) low interest rates (short term effect, long term effect could be opposite because low interest rates may encourage growth)
98. A rising inflation rate tends to have what impact on the value of a currency?
It tends to decrease the value of the currency. Why would any one want to hold a currency that is worth less each day?
99. An increasing BOP trade deficit tends to have what impact on the value of a currency?
It tends to decrease the value of the currency. For example, the U.S. has a huge trade deficit. That means at some point all those dollars being spent by Americans are exchanged for foreign currency as the foreign producers have to pay their local expenses in their local currency. So people are selling dollars and buying the foreign currency. All those dollars being offered for sale naturally starts to decrease the value of the currency since the supply relative to demand is so great.
100. What three factors can cause appreciation of a currency in the forex market?
a) BOP trade surpluses, b) low inflation rate, c) high interest rates
101. If a currency is beginning to appreciate and we think it will continue to appreciate, what three things should we consider doing?
a) Buy it! Increase our holdings of assets denominated in that currency. b) Pay bills in that currency now, not later. Decrease liabilities denominated in that currency. c) Lend in that currency.
102. If a currency is beginning to depreciate, and we think it will continue to depreciate, what three things should we consider doing?
a) Sell it! Reduce our exposure to that currency (reduce holdings of assets in that currency). b) Pay bills in that currency later, not now. c) Borrow in that currency.
103. What action could the Bush administration take if it wanted to strengthen the value of the dollar against the euro?
The U.S. Treasury Department could intervene in the world’s foreign currency (forex) markets by buying dollars. The Treasury would spend euros to buy dollars, thereby creating demand for dollars which would force the value of the dollar up. The same action increases the supply of euros thereby decreasing the value of the euro.
104. What two actions could the U.S. Federal Reserve Bank take if it wanted to strengthen the dollar against the euro?
A. Same as above – spend euros to buy dollars.
B. Raise interest rates, thereby increasing demand for dollars.
105. How could the U.S. exporters benefit from a weak dollar?
It makes U.S. products more attractive in the world marketplace because the price drops for people holding other currencies.
106. What are the five most popularly traded currencies (and also the five most popular currencies to be held as a reserve currency)?
USD, EUR, JPY, GBP, and CHF.
Free forex trading course, “School of Pipsology”, at school. Websites offering demo and live accounts: , .
GOVERNMENT INTERVENTION IN THE ECONOMY
107. What is the national defense argument to justify import barriers? See p. 241 (G&P 5th ed. p. 239).
The national defense argument is used when we want to protect a domestic supplier from foreign competition because the domestic supplier is a vital part of the nation’s industrial base from a military point of view. In other words, the supplier supplies something which is vital for the country’s military. For example, the U.S. protects by law both its domestic shipping and shipbuilding industries from foreign competition precisely for military preparedness reasons.
108. What is the infant industry argument to justify import barriers? See p. 186; G&P p. 242 (G&P 5th ed. p. 240).
The theory is to protect our domestic suppliers from foreign competition while they are still in their “infant” phase, i.e., before they have achieved competitive levels of efficiency. The idea is to remove the protection once they have achieved a competitive level of efficiency. Example: native AU car?
109. What is a tariff? See p. 132; G&P p. 249 (G&P 5th ed. p. 246).
A tariff is a tax levied on the international sale of goods or services. There are import tariffs, export tariffs, and transit tariffs, e.g., oil pipeline operators must pay a transit tariff to the host country for permission to let the oil pass over their territory. CU had to pay EUR 250 to Serbian authorities in autumn 2004 for permission to drive its van full of books and other property across Serbian territory from Hungary to Bulgaria.
110. What is a subsidy? See pp. 168-169; G&P p. 258 (G&P 5th ed. p. 254).
A subsidy is any financial support provided to a producer or service provider to give him a competitive advantage over his competitors. Govts will do this to help their domestic suppliers compete in the world market. It can take the form of actual cash transfers, preferentially lower taxes for certain industries, govt-paid training programs for workers, preferentially lower utilities rates, or govt-paid infrastructure improvements.
111. What is an import quota? See p. 157; G&P p. 252 (G&P 5th ed. p. 248).
An import quota is a form of import barrier. An import quota is a quantitative limit on the amount of a certain product or service that may be imported into the country establishing the quota. The wealthy nations traditionally maintained import quotas on textiles and clothing in order to protect their domestic industry from much cheaper imports from the poor countries.
112. Discriminatory pricing is a form of dumping. Describe discriminatory pricing. See pp. 203-204; G&P p. 261 (G&P 5th ed. p. 257).
Discriminatory pricing occurs when a supplier provides lower prices to foreign buyers than to domestic customers. It is done intentionally to gain market share in the foreign market.
113. Predatory pricing is a form of dumping. Describe predatory pricing. See p. 190; G&P p. 261 (G&P 5th ed. p. 257).
Predatory pricing occurs when a supplier purposefully sells product at below cost in order to drive his competitors into bankruptcy or at least out of the business.
114. In order to find a case of dumping, we have to measure or compare prices at what level? See G&P p. 261 (G&P 5th ed. p. 257).
At the “factory door”, i.e., we compare the EXW (ex works) prices. It is not correct to compare the retail prices of goods in one country with those in another because there are many non-dumping related reasons why retail prices can vary widely.
For example, some Japanese-made cars are cheaper to buy in Baltimore (U.S.) than they are in Tokyo. Does this automatically mean dumping is occurring? No. American liability insurance is very high compared to Japanese liability insurance, for example. Also, the car dealership must pay rent to its landlord. Rents are a lot cheaper in most U.S. cities than they are in Tokyo.
115. What role does each of the players in the economy have in an industry targeted for development by Japan’s national industrial policy?
The academics at the prestigious Japanese universities and the experts at MITI (the Ministry of International Trade and Industry) identify an industry with great potential for Japanese domination. The Government then offers a loan guarantee program to Japanese banks to encourage low interest loans with flexible repayment terms (“sweetheart” loans) to Japanese investors in the target industry. The Govt also offers preferential tax treatment for investment in the target industry. The investors then invest in the industry with a long term growth strategy. They are expected and willing to make little profit for up to 10 years in order to drive out competitors and capture overwhelmingly dominant market share. The labor unions agree to not strike in return for stable employment in the industry.
This remarkable system is known as “Japan, Inc.” If you try to compete with a Japanese company in such a targeted industry, then you are fighting a very formidable team. The Japanese firm knows how to beat you. They will simply outlast you. They have a lot of patience.
116. At the end of WW II, the Western world leaders decided it was important to promote world trade. Why?
At the end of WW II, the allied leaders decided it was time to get serious about world peace, because now there are weapons of mass destruction like nuclear weapons. They decided we cannot have another world war. They asked the historians what was the chain of causes that led to the war. The historians said that WW II was caused by extreme political solutions (e.g., Nazism). Solutions to what? The extreme economic crisis known as the Great Depression. What caused the Great Depression? Competitive devaluations of currencies and restrictive tariffs to discourage imports directly caused the Great Depression.
So if discouraging world trade causes war, then encouraging world trade may lead to peace. This is the basic thinking behind GATT. It is true that trade tends to discourage war. Countries which trade with each other have financial incentives to not go to war with each other. Note: FDI has an even stronger anti-war effect. Countries that invest with each other tend to not go to war against each other. For example, it is extremely unlikely that the U.S. and Germany would go to war with each other. If the U.S. bombed Germany, they would be bombing American-owned businesses!
So the opponents of globalization may not understand the whole picture. Since WW II, we have encouraged global trade and investment in order to prevent another great depression, which we found led to a world war. The world leaders must be doing something right because we have not had another great depression since we adopted this policy.
117. Compare the monthly value of total imports between 1929 and 1933. What happened and why? See G&P p. 182.
Almost 80% of world trade was wiped out. Mercantilist fever swept the industrialized nations in the 1920s and each country tried to optimize its own position by competitive devaluations of its own currency to stimulate exports and by erecting high tariff walls to discourage imports. The trouble was that each country did it and then that started a series of retaliatory actions. The net result was to destroy world trade.
118. Describe the WTO in the simplest terms. See p. 196; G&P p. 271 (G&P 5th ed. p. 267).
The World Trade Organization (WTO) is a club of nations who have chosen to join together to form a trading club. They agree to give each other “most favored nation” status. It acts as the “referee” in world trade disputes, when one member accuses another of unfair trade practices.
119. What does “most favored nation” status mean? See p. 188; G&P p. 272 (G&P 5th ed. p. 266).
“MFN” status means that one country will give another its best trade treatment. It does not mean tariff free trade. It does mean that one member will offer the other member the lowest tariffs it has on the second member’s products.
120. What is the ultimate goal of GATT? See G&P p. 271 (G&P 5th ed. p. 265).
The ultimate goal of GATT is free world trade, i.e., international trade free of any tariffs or other non-tariff barriers (NTBs) to trade. Quotas are an example of an NTB to trade. In practice, no nation has completely free trade.
121. What is GATT? What is its function? See G&P p. 271 (G&P 5th ed. p. 264 et seq.).
The 1947 General Agreement on Tariffs and Trade (GATT) is the basis for the modern world trading system. The agreement provides the rules for fair world trade and a procedure to further liberalize trade regulation, as well as an enforcement mechanism against countries which break the rules.
122. The cumulative effect of the GATT’s eight completed rounds has been a substantial reduction in tariffs. Compare the average tariffs imposed by developed countries in 1948 to those in 2003. See G&P p. 272 (G&P 5th ed. p. 266).
1948: average tariff was more than 40%. 2003: average tariff is approximately 3%.
123. Which organization enforces GATT rules? See G&P p. 274 (G&P 5th ed. 267 et seq.).
The World Trade Organization (WTO) administers and enforces the GATT rules. The organization is headquartered in Geneva, Switzerland. There are 153 member states as of 23 July 2008 (latest members to join: UA and Cape Verde). UA joined on 16 May 2008. Confirmed on 23 February 2009 at .
What is the largest economy not yet a member? Russia. But it has plans to join, eventually. RU’s problem: Its domestic manufacturing is not up to world standards. Some RU-made machinery is superior quality but costs more than the JP competitor’s! With their market protected against foreign imports, the Russian manufacturer is not cost competitive. Biggest exports: oil & gas.
RU and RS have observer status, meaning they are obligated to begin accession talks within 5 years after becoming an observer.
Dates when the countries joined: AT, BR, CA, CZ, DE, FR, GB, GR, HU, IE, IN, IT, JP, KR, MX, RO, SK, US: 1 January 1995; TR: 26 March 1995; CH, PL: 1 July 1995; BG: 1 December 1996; MD: 26 July 2001; CN, TW: 11 December 2001; MK: 4 April 2003; UA: 16 May 2008. Source: .
124. What can the WTO do to enforce GATT rules against a member country who breaks them? See pp. 196-197; G&P p. 276 (G&P 5th ed. p. 269).
The WTO has a procedure to authorize member states to impose punitive trade sanctions on the offending member. These sanctions can be imposed on a member against its will.
125. What was the famous bargain made in the 1995 Uruguay Round between the rich, industrialized countries and the poor, developing nations?
The poor countries agreed to start protecting intellectual property rights of investors, which was a huge concern of the rich countries, in return for the rich countries’ opening their markets to the products of the poor countries, particularly agriculture and textiles and clothing. Beginning on 1 January 2005, barriers against the import of clothing and textiles were liberalized in most members of WTO.
126. Describe and compare the five forms of regional economic integration, from the lowest degree of economic integration to the highest degree. See p. 207; G&P p. 279 (G&P 5th ed. p. 272).
1) Lowest degree of economic integration: Free Trade Area. Members remove tariffs and other barriers to international trade among themselves; however, each member may establish its own trade policies with nonmember countries. Exanple: NAFTA.
2) Customs Union: free trade area policy + members also adopt common trade policies toward nonmember countries. Example: C/U between Russia, Belarus and Ukraine; Mercosur in South America (Argentina, Brazil, Paraguay, and Uruguay).
3) Common Market: Customs union policy + members also eliminate barriers that restrict movement of factors of production among themselves. Example: European Economic Area = EU-27 + IS, LI, NO.
4) Economic Union: Common market policy + members more fully integrate their economies by coordinating their economic policies. Use of single currency is perfect example.
5) Political Union: By encompassing both political and economic integration, the union effectively transforms itself into one country. Example: USA.
THE EUROPEAN UNION
127. Which institution is the most powerful decision-making body of the European Union? See G&P p. 282 (G&P 5th ed. p. 274).
The Council of the European Union (sometimes called the Council of Ministers).
128. Which interests are the members of the Council of the European Union supposed to pursue: those of their home governments or those of the EU itself as an organization? See G&P p. 282 (G&P 5th ed. p. 274).
Those of their home governments. The Council acts very much like a meeting of ambassadors.
129. Which interests are the members of the European Commission supposed to pursue: those of their home governments or those of the EU itself? See G&P p. 282 (G&P 5th ed. p. 274).
Those of the EU itself. So the Commission is the supranational authority that will enforce EU law against a member state who violates EU law.
130. Which EU institution enforces EU laws against member states? The European Commission.
131. Which EU institution acts the administrative branch of the EU and where is it headquartered? See G&P p. 282 (G&P 5th ed. p. 275).
The Commission. Its HQ are in Brussels.
132. Which EU institution administers the EU’s permanent bureaucracy (about 24,000 employees, popularly known as “Eurocrats”)? See G&P p. 282. The Commission.
133. How many members does the European Parliament have?
785 members. What is the minimum guaranteed to each member state? 5 MEPS. What is the largest amount a member can have? 99 MEPS (the size of Germany’s delegation).
DE: 99, GB: 78, PL: 54, RO: 35, CZ, GR, HU: 24, AT, BG: 18, SK: 14, IE: 13. Source: europarl.europa.eu, retrieved on 23 February 2009.
The Treaty of Lisbon (also known as the Reform Treaty, signed on 13 December 2007) reallocates the seats for the next elections, in June 2009. Number of MEPS will be reduced to 751, allocated as follows: DE: 96, GB: 73, PL: 51, RO: 33, CZ, GR, HU: 22, AT: 19, BG: 18, SK: 13, IE: 12. The maximum number a member state can have will be 96 (like DE). The minimum will be 6. Source: europarl.europa.eu, retrieved on 23 February 2009.
Why know this? A certain number of “Eurocrat” jobs will be reserved for citizens of each member state. So many applicants for so few jobs. There is a test to eliminate most of the candidates. The successful applicant will be an expert on the EU and its institutions. You have to know every little detail, like how many members are there in the Euro Parliament.
134. In which city does the European Parliament normally meet? See G&P p. 282 (5th ed. 273).
It normally meets in Strasbourg, France.
135. Of the EU’s governing bodies, which one was originally the weakest? See G&P p. 283 (5th ed. 275). The European Parliament.
136. What was the European parliament’s original role in the EU policy making process? See G&P p. 283 (5th ed. 275). Originally, it had only a consultative role in the process.
137. What is the co-decision procedure in the EU policy making process? See G&P p. 284 (5th ed. 276). Parliament has the power to reject a proposal of the Council by an absolute majority, in which case the proposal fails.
138. In what areas is the co-decision procedure used? See G&P p. 283 (5th ed. 276). The co-decision procedure is now by far the most common legislative process in the EU. It applies to the vast majority of policy areas, specifically including asylum and immigration, consumer protection, culture, education, employment, health, the environment, the free movement of workers, the internal market, the right to move and reside (this includes the Schengen rules), and transport.
139. What is the role of the European Court of Justice and in which city does it sit? See G&P p. 283 (5th ed. 275). It serves as the highest appeals court interpreting EU law. It sits in Luxembourg.
140. What is the most important aspect of the 1993 Maastricht Treaty? See p. 217; G&P p. 287 (5th ed. 280). Without a doubt, the most important aspect of the Maastricht Treaty is the establishment of the economic and monetary union. The major task was to create the single currency, the euro.
141. If a country adopts the euro, it loses control over what three economic forces? See G&P p. 288 (5th ed. 280). It loses control over money supply, interest rates, and inflation.
142. What institution gains control over the first two forces and indirectly influences the third factor, and in which city is it headquartered? The European Central Bank, headquartered in Frankfurt (DE). G&P 5th ed.: See p. 280.
INTERNATIONAL STRATEGY
143. In formulating an international strategy, we perform a SWOT analysis. What is a SWOT analysis? See G&P p. 322 (5th ed. 313). An assessment of the firm’s external and internal environments to identify strengths, weaknesses, opportunities, and threats.
144. After the SWOT analysis is complete, we set strategic goals to handle the various SWOT elements we have discovered. We try to develop our firm’s strengths, fix or neutralize our firm’s weaknesses, exploit our opportunities and avoid our theats (or better yet, turn them into opportunities).
145. Strategic goals should be measurable, feasible, and time-limited? What does this mean? See G&P p. 324 (5th ed. 315). Strategic goals are the major objectives the firm wants to accomplish through pursuing a particular course of action. They should answer the questions “how much, how, and by when?”.
146. What is a single-business strategy? See G&P p. 325 (5th ed. 316). When the firm relies on a single business, product or service for all of its revenue. When the firm concentrates on its core competency.
147. What is related diversification? See G&P p. 325 (5th ed. 316). When a firm operates in several different but fundamentally related businesses, industries or markets at the same time. It is the most common corporate strategy. Hopefully, sales of one product will help boost sales of another, related product.
148. What is unrelated diversification? See G&P p. 326 (5th ed. 317). When a firm operates in several unrelated industries and markets. Allows diversification of risk and greater stability of profits.
149. What is a differentiation strategy? See G&P p. 327 (5th ed. p. 318). When a firm attempts to establish and maintain an image (either real or perceived) that its products or services are fundamentally unique from other products or services in the same market segment. Many firms use quality as a differentiating factor. Others adopt value as their differentiating factor.
150. What is a cost leadership strategy? See G&P p. 328 (5th ed. 319). When a firm uses lowest price as a distinguishing factor. It makes its profit on volume, not per unit.
151. What is a focus strategy? See G&P p. 328 (5th ed. 319). When a firm targets a specific product for a certain customer group or region with a strong sense of self-identity. Example: a firm hires a famous black entertainer to sell a product to black Americans.
152. Discuss how firms analyze foreign markets. See G&P p. 337 (5th ed. 326). Firms normally follow a three step process: (1) assess alternative markets, (2) evaluate the respective costs, benefits, and risks of entering each, and (3) select those markets that offer the most potential for entry or expansion.
In assessing alternative markets, a firm should consider: (1) size of the market, both current and future, (2) the purchasing power in the market, both current and future, (3) the level of competition in the market: high or low? What about first mover advantage? (4) the market’s legal and political environments: high or low barriers to entry? Degree of political risk: high or low? Taxation? Degree of government regulation? Does legal system have adequately developed, transparent and enforceable contract law? Does legal system adequately protect private property rights? What are the product safety and product liability laws? How strict are they and how severe are the penalties for infraction? (5) Sociocultural influences: how similar or different to the firm’s home culture? Differences in target market consumers’ preferences and tastes. How to motivate employees in the target market (this differs country to country).
153. What 3 factors tend to increase the costs of doing business in a country?
1) political costs – corruption, bribery (pay government, mafia); taxes.
2) economic costs – development of infrastructure & suppliers (train suppliers to comply with specific requirements); 3) legal costs – product safety laws, product liability, labor protection, environmental protection, contract law, property rights.
154. The benefits of doing business in a country are the function of what 3 factors?
a) size of the market;
b) present purchasing power (money available);
c) likely purchasing power, which is a function of free market economy and strong property rights protection (Ex: China’s likely purchasing power is expected to grow rapidly).
155. What 3 factors tend to increase the risks of doing business in a country?
1) political risk – how stable is the political system - risk of nationalization (confiscation of private property);
2) economic risk – how well does the government manage macroeconomic factors (inflation, unemployment, interest rates);
3) legal risk – product safety laws, product liability, labor protection, environmental protection, contract law, property rights.
156. What is the proper way to privatize in order to maximize the interest of the people (the owners)? It’s the same procedure a firm should use to sell surplus property.
1) Public tender: competitive sealed bidding, whoever submits the highest bid wins;
2) the competition has to be publicly announced long enough in advance for all bidders to have reasonably adequate time to arrange financing to prepare a bid, and the announcement should reach as many potential bidders as possible;
(Example: US law requires a minimum of 30 days advance notice, sometimes longer in certain big sales, such as real estate).
157. Outline the process by which firms choose their mode of entry into a foreign market. See G&P p. 342 (5th ed. 331).
Mode of entry: exporting vs. licensing vs. FDI.
a) First preference is generally exporting, because it is the least risky form.
b) However, if either transport costs or import barriers are high, then we may consider whether to license or to do an FDI.
c) Two issues to consider:
i) Protection of intellectual property: Is licensing adequate to protect our I/P? If yes, then license. If no, then FDI.
ii) Need for tight coordination between HQ and overseas operations, e.g., to coordinate worldwide marketing activities. If yes, then FDI. If no, then license.
158.What are three disadvantages of exporting? See G&P p. 347 (5th ed. p. 334).
a) Vulnerability to tariffs and NTBs (non-tariff barriers). If we are so successful in exporting, then the target countries may try to limit the import of our products. If they do, then we have to consider making our product in the target country, either through licensing or by FDI.
b) Logistical complexities. Exporters have to be ready to arrange and pay for the transport of their products to the target market, clearing the goods through customs in both countries, and for storage once it gets there until the importer takes over responsibility.
c) Potential conflicts with distributors. The importer/distributor is the independent customer of the exporter. The exporter cannot control the importer/distributor’s decisions regarding pricing or promotion of the brands. Examples of conflicts: The importer may want higher price, higher profit, whereas the exporter may want lower price, higher market share (short-term profit strategy vs. long-term growth strategy). Another one: The importer may want to concentrate on promoting one brand over another, and the exporter disagrees with the importer’s choice.
HOW TO FIND AND SUCCESSFULLY SELL TO U.S. IMPORTERS, seminar by Mr. Phillip W. Byrd, Director General of the American Importers Association (17 & 19 March 2008). AIA has 13,000 member buyers and import agents.
• Consumer Confidence Index (CCI). A survey measuring Americans’ mood to buy. 95 or above: green light. 85 – 95: yellow. Below 85: red. January 2009: 37.7, an all time low (1985 = 100). Down from 38.6 in December 2008. Source: The “Consumer Confidence Press Release”, from The Conference Board, New York, NY (US). See economics/consumerConfidence.cfm, retrieved on 23 February 2009.
• Retail sales: See . Measures actual money spent on retail sales.
• Importers still like sales letters, not phone calls, not e-mail, not SMSs.
• Purpose of sales letter: to get reader to open your website. 7 seconds rule. You have 7 seconds to convince your reader to keep reading. Importer wants 4 paragraphs in letter. 1st paragraph: how can product benefit importer? What you sell, who you are. Keep 2nd and 3rd paras. short. They don’t read them. 4th para.: put your website address at end of 4th para.
•Free e-addresses and websites, e.g., yahoo, hotmail, msn, are not acceptable. Not respectable enough. U.S. buyers will not buy from a supplier who does not have a website.
• Website – you are responsible for content, not website designer. Should be well designed but not too complex. Website designers love complexity.
• Home page of website (first page we look at). Should not take too long to download. No music, no animation, no movies. KISS – keep it simple and short.
• “About us” page, the second page. 10 – 15% of internet sites are bogus, fraudsters. Not real cos. Buyers are always looking for the cheaters. The about us page tells buyer that you are real and honest. It is your burden to prove you are genuine to the buyer. Provide physical address, no mail boxes. Telephone, fax numbers and internet mail address. What city or district is firm licensed by? License number? Photo of the building with firm’s name on it, or at least a truck or something. Any association memberships, like Chambers of Commerce? Quality control certificates don’t mean a lot, standards too different country to country.
• Products page, 3rd page. Pictures of and data re products. What used to be in your sales brochures. NO PRICES! Give buyer enough info to make him curious enough to contact you. But not so much info he doesn’t feel he has to call you.
• Quality control page, 4th page. Chinese are having a serious problem with quality. Product must be both quality and cheaply priced. High value product. Good quality/price ratio. Buyers want to see 3 pictures: wide angle picture of QC department, second picture is a close up of employee inspecting product (wearing lab coat), passport type picture of QC manager. Why? Buyer knows you care enough quality that you have a QC manager, and buyer knows who to contact if there is a quality problem.
• Contact us page, 5th & last page. Function of website is to motivate buyer to contact seller, to convince buyer to send an e-mail to seller. Buyer sends e-mail: “Give me your best price for 10,000 widgets, CIF New York”. Sellers: Build in 10% on top of your best price. U.S. buyer will not accept first quote. He expects a discount. Then everyone is happy. Seller gets his real price, plus buyer thinks he got a discount.
• Payment terms. U.S. buyers are willing to obtain irrevocable L/Cs for payment of 75% of price after proof of shipment, but want 25% credit withheld until after 30 – 60 days as security against any quality problems.
• Booths at trade fair: 1) give brochure to visitors when they start to leave, not when they enter, 2) put products or samples in back of booth, so only the most interested visitors will walk in to touch the samples, 3) provide a place to sit down and refreshments to serious customers (you can tell by their questions, e.g., “Can you deliver 10,000 of these?” Plus, they want pricing and delivery info.).
159. What is a keiretsu? See G&P p. 353 (5th ed. 343-344).
A group of interrelated companies which have interlocking boards of directors. A typical kind of business organization in Japan. Usually centered around a large bank, who provides financing to the member companies.
160. What is a chaebol?
Same thing in South Korea, chaebol is the Korean word for keiretsu.
161. Do member firms in a keiretsu try to make huge profits off each other? If not, from where do they try to maximize their profits? See G&P p. 354 (5th ed. 343).
No, members of the keiretsu charge each other prices with minimal profit. The main target for huge profits are outside customers.
162. What is a sogo sosha and what is its role? See G&P p. 353 (5th ed. 343).
The international trading company within a keiretsu. An international trading company is a firm engaged in importing and exporting a wide variety of goods for its own account. Its role is to find customers (and suppliers, if necessary) for all of the sister companies in the keiretsu. The Japanese sogo sosha have become some of the most important international trading companies in the world thanks to the inherent advantages they enjoy as a member of a keiretsu (ready financing by the mother bank, automatic customers in its sister companies, enabling it to reap economies of scale in its transportation and information-gathering roles. This allows it a low cost structure and international expertise. Outside firms are attracted to do business with the sogo sosha because of this.
163. What are four disadvantages of licensing? See G&P p. 347 (5th ed. 334).
a) Limited market opportunities/profits. Most licensees will demand that the licensor agree not to compete with the licensee in the licensee’s market. So the licensor is unable to learn the market in case one day he would like to exploit it himself without the licensee. Of course, the two parties share the profits as they are both independent parties, each expecting a share of the profits.
b) Dependency on the licensee. This is related to the above point. The licensee becomes our agent in his market and we cannot operate independently from him there.
c) Potential conflicts with the licensee. Among these conflicts are the same ones we can have with our importer (see #158 (c) above). But there are also new ones: The licensor wants to protect the value of the trademark so he wants minimum quality standards enforceable against the licensee. What if the licensee tries to maximize profit by buying cheaper quality materials and potentially threatens the market’s perception about the quality of the products? The licensee can harm or destroy the value of the licensor’s trademark.
d) Possibility of creating a future competitor. Who says the licensor will want to extend the license upon expiration of its term? He may wish to enter the market himself and compete directly with his former licensee. But the licensee will learn the licensor’s trade secrets (know-how) during the licensing relationship and will be strengthened by this advantage.
164. What are four disadvantages of FDI? See G&P p. 347 (5th ed. 334).
a) High financial and managerial investment. The amount of time, energy and money an FDI project can draw during the initial period can sap the home office. It almost always takes more than expected. Often double what was planned! Therefore, there are opportunity costs. Exploiting one FDI opportunity may result in precluding consideration of other subsequent and possibly more lucrative opportunities.
b) Higher exposure to political risk. Losing a wholly-owned asset by expropriation can cost a lot more than being forced to close a representative sales office.
c) Vulnerability to restrictions on foreign investment. FDI is subject to the national laws of the host country with all the possible restrictions available. Competent legal counsel in the host country should be consulted before making the investment.
d) Greater managerial complexity. The investor has no one but himself to make all the decisions in the host country. This factor is related to (a) above. Partnership with a local entity is available but then this route can also cause monumental problems when the partner decides to cause difficulties.
165. Describe Heineken’s previous strategy for global expansion. See G&P p. 364 (5th ed. 356).
First, H. tries exporting to a new market. They open a representative office and hire locals to market the beer. If that is successful, then they consider licensing a local brewery to make the product in country. If that is successful, then they consider offering to buy all or part of the local brewer, or forming a joint venture with him . The local brand(s) is/are usually maintained as the budget mark(s), and the Heineken brand is promoted as the premium brand. (Note: the local brewer is often offered either partner or consultant status if he wishes to stay involved.) Note: Now, Heineken no longer licenses local brewers, they go straight from exporting to FDI.
166. What is the difference between a greenfield and a brownfield investment? See G&P p. 361 (5th ed. 352).
A greenfield investment is creating and building a completely new business entity. A brownfield investment is buying an already existing business or entity.
167. What is a primary cause of failure of strategic alliances between firms? See G&P p. 382 (5th ed. 376).
Incompatibility among the partners of a strategic alliance is a primary cause of the failure of such arrangements. Example: Siemens (engineering-dominated house) vs. UK’s General Electric Corporation (a finance-dominated house).
168. Describe how distribution of earnings can become a contentious issue between partners in a strategic alliance. See G&P p. 384 (5th ed. 377).
The age old tension between a long term growth strategy and a short term profit strategy will shape the decision on what to do with earnings: distribute them to the partners or reinvest them back into the business? Ideally, this issue should be addressed at the outset and resolved in the partnership or alliance agreement.
169. If a Japanese company enters into a strategic alliance with your company, what implications are likely? See p. G&P 384 (5th ed. “Loss of Autonomy” on p. 377).
“Drive before buy”. The Japanese like to first work in a strategic relationship with a potential intended target for acquisition before they actually offer to buy the target. They want to see how the target organization actually works to see if it would be a good decision to buy it. One study concluded that the Japanese partner wound up buying its foreign partner over 75% of the time! So if your company begins a strategic alliance with a Japanese firm, be nice to the visiting Japanese manager. One day, he could be your boss!
170. What is the first crisis of organizing which organizations go through as they grow and what is the usual solution?
At first, the owner can make all the decisions himself. But then the organization grows and the owner cannot handle all responsibility himself. He must accept the fact that it is time to delegate decision-making authority to functional experts (e.g., finance, marketing, operations, human resources, etc.). A functional pattern of departmentalization is established.
171. What is the first pattern of departmentalization usually employed in an organization? The functional pattern. See G&P p. 399 (5th ed. 388).
172. Describe the functional pattern of departmentalization. See G&P p. 398 (5th ed. 388).
The company is divided into departments based on corporate functions, i.e., experts in different specialities, like finance, operations, marketing, R&D, human resources. It is appropriate when a firm has relatively narrow or similar product lines.
173. What are weaknesses of the functional pattern? See G&P p. 398 (5th ed. 391).
a) The design is practical only when a firm has relatively few products or customers.
b) Coordination between departments can become a problem if each starts pushing its own goals to the detriment of the whole.
174. What is one of the most common patterns of departmentalization used in diversified firms? See G&P p. 394 .
The most common form of organization design adopted by MNCs is the product design.
175. What is the product pattern of departmentalization? See G&P p. 394 (5th ed. 386).
When the company’s internal departments are organized along separate products or product lines.
176. What is the biggest weakness of the product pattern? See 5th ed. 387.
Duplication of resources can occur if each department hires its own expert when a single expert could have served all departments well.
Also, employees can become myopic, more loyal to their division than to the whle company. Example: GM and its divisions.
177. What is a particularly useful organizational design for firms which customize their products or services for each foreign market they serve? See G&P p. 396 (5th ed. 387).
The area or geographic design, wherein departments are organized along geographic area or market.
178. Describe the geographic pattern of departmentalization. See G&P p. 396 (5th ed. 387).
The area or geographic design, wherein departments are organized along geographic area or market.
179. What organizational design is useful if a firm sells to very different customers or customer groups whose needs are so diverse as to require totally distinct marketing approaches? See G&P p. 398 (5th ed. 391).
The customer design.
180. What is the customer design? See G&P p. 398 (5th ed. 391).
When each kind of customer or customer group gets its own department or division of the company.
181. Describe a matrix organization. See G&P p. 400 (5th ed. 392).
It is when one form of design is superimposed upon another form.
182. What is the most likely conflict you will encounter on a day-to-day basis working in a matrix organization?
Conflict between your two bosses, each one giving you contradictory orders. In that case, you are advised to have the two bosses negotiate directly with each other to decide your priorities. Don’t decide that question yourself. You have a 50% chance of making the wrong decision.
183. According to one study from 1989, which factory workers were likely to be more satisfied with their jobs, American or Japanese? See G&P p. 427 (5th ed. 419, “Job Satisfaction”).
Contrary to what many people believe, the American workers are in general more satisfied with their jobs than their Japanese counterparts.
184. What is “management by objectives”?
MBO is a popular management practice which MNCs are adopting. The practice is now filtering down to smaller enterprises here in Europe. The basic idea is to get the employee to feel “ownership” of his goals or targets because he helped set them with his manager. The manager and the employee meet together and they negotiate and mutually agree on what targets will be set for the employee. These are the targets by which his performance will be measured in his annual performance review. MBO also includes periodic reviews between the manager and the employee to assess the employee’s performance and allow for in-course adjustment as needed. The drawback to MBO is the amount of time which must be dedicated to all of these meetings and performance reviews.
185. Do the same factors motivate workers in all countries? Describe some differences, if any. See G&P p. 432 (5th ed. 423).
No. Research and experience shows that different things are important to workers in different countries. For example, Americans in general show a distinct desire to take greater risk in order to improve their salary or job, whereas other cultures value job security and stability more. American workers tend to want the opportunity to make extra money. Working longer hours to do it doesn’t bother them, whereas the number one priority for German workers is the chance to get more paid time off from work. A huge percentage of American employees receive only 2 weeks of vacation each year, whereas in Germany the law requires that all employees get 6 weeks off every year!
186. Describe the conflict between standardization and customization in international marketing. See G&P p. 463 (5th ed. 451).
Standardization (having one standard design of the product with the same features to be sold all over the world) obviously reduces design and manufacturing costs with the economies of scale which can be achieved through mass production. However, the risk is that we could be losing sales because our product doesn’t fit a particular market’s desires as well as if the product were customized for each market, or at least for the major markets. Customization allows for catering to each market’s tastes, but this entails extra costs for the market research, design and manufacturing tailored for each separate market.
187. What are four ways to transfer capital between the parent company and a subsidiary? See p. G&P 539 (5th ed. 525).
a) Adjusted transfer pricing (prices charged between parent and subsidiary or between related subsidiaries, i.e., not “arm’s length” transactions).
b) Equity (ownership).
c) Loans.
d) Dividends, royalties, licensing fees.
188. Capital markets can affect national accounting standards. Explain the difference between the U.S. and the German system for raising investment capital and how this impacts their respective national accounting standards. See G&P p. 553 (5th ed. 538).
US: initial investment capital tends to come from venture capitalists who become part owners in the company in which they invest (equity financing). They plan to eventually sell their shares for a profit, so they prefer liberal evaluation of assets. DE: initial investment capital tends to come from lenders such as banks (debt financing). The lenders prefer conservative evaluation of assets.
189. Show how we can use transfer pricing to lower our corporate income tax liability. Instructor will provide illustration during lecture.
190. What arguments can we make to justify offering lower prices to our wholly-owned subsidiary than to unrelated, “arm’s length” customers?
a) Have the subsidiary buy in wholesale lots. Wholesale prices can be legitimately significantly lower than retail prices.
b) Payment terms: Have subsidiary pay cash in advance. Customers who pay cash in advance deserve lower prices than customers who buy on credit.
191. What is a common difference between taxation of a foreign branch’s income versus taxation of a foreign subsidiary’s income? See G&P p. 567 (5th ed. 552-553).
Subsidiary = a legally separate entity from the parent, branch = not legally separate, it is a part of the parent.
a) If you are allowed the option by the host country’s laws, then initially open your foreign operations as a branch (assuming it will generate losses for some initial period). The parent can then use these losses to shelter profit on its income statement.
b) Once the branch becomes profitable, then it’s time to spin it off on its own as a legally separate subsidiary, with its own income tax liability.
192. A foreign, especially overseas, assignment is valuable on a C.V. because it demonstrates the employee’s adaptability and flexibility. What are two concerns every employee should discuss with his/her firm before accepting a foreign assignment?
a) What will happen to me after my foreign assignment? Will there be a job for me back home? Any guarantees?
b) What is the company’s plan for getting me out of jail if I am arrested for political reasons?
193. What is culture shock? See G&P p. 585 (5th ed. 572).
Inability to adjust to foreign culture.
194. What is reverse culture shock?
When a worker returns home after a foreign assignment and s/he has trouble readjusting to life back home.
195. What is expatriate failure? See G&P p. 584 (5th ed. 570).
When an expat (one who lives outside his native country) cannot complete his assigned term overseas for a variety of reasons, particularly culture shock. Expat failure is at least embarrassing to the organization before its customers and can be very costly. Why? All that time the expat spent trying to learn his new job and assignment was wasted and we have to start all over with a new person. This could be worth months of expensive salaries! The company winds up paying twice for the same service.
196. Compare expat failure rates for EU, US and Japanese firms.
A study was done comparing the 3 kinds of firms above with respect to their experiences with expat failure. The question asked was “has your firm experienced significant expat failure”, significant being defined as failure in 10% of assignments or more. The expat failure rate for EU firms was 3%.
For Japanese firms it was 14%. One big issue for Japanese expats is the education of their children. Learning to read and write the Japanese can take even natives 11 years, and studies have showed that Japanese children who grow up outside of Japan take longer to master their written language This places them at a competitive disadvantage when applying for university and the Japanese are famous for their ferocious competitiveness in this matter.
But Americans are the least adaptable, apparently. Over 76% of US firms report significant expat failure rate. Americans do not seem to transplant well. Perhaps they expect the rest of the world to adopt American ways and they should not be expected to adapt to the local ways!
197. The compensation package for an expat usually protects the financial interests of the employee in what way? See G&P p. 590 (5th ed. 577).
a) If an employee is moved to a country with higher pay (and prices), the employee’s compensation is usually raised to a comparable level to match the local compensation.
b) If an employee goes to a country with lower compensation (and prices), his salary is not lowered to local standards.
198. What is codetermination in the context of international labor relations? See G&P p. 599 (5th ed. 584).
When a country’s laws require that labor be represented on the governing board of supervisors and have a say in how the company is run. Germany is the most famous example.
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