MGMK 4710

INTERNATIONAL BUSINESS

UNIT 3: ORGANIZATIONAL STRATEGIES AND OPERATIONS

ESSAY QUESTIONS 3.1.

JAPAN

Alyssa Parsley

Instructions:

· In D2L, click Content/Unit 3/Unit 3 Study Guides, and read chapters 12, 16, 17, 18, 19, and 20.

· Questions: In D2L, click Content/Unit 3, then Unit 3 Essay Questions. Go to the Essay Questions.

· The title must look like the one above. Write your country’s name and your group members’ names.

· Write the question # (e.g., Question 1), provide your answer, then delete all the instructions.

· Break each answer into two or more paragraphs. Single-space answers.

· When explaining your answers, provide specifics related to your country (that is, do not be generic).

· Each answer must show that you have understood the concepts from Study Guides posted to D2L.

· Data is found everywhere online. Give the references of your sources.

· I have provided a few links in D2L under Content. Click Useful Online Links.

QUESTION 1:

In one sentence, give the name of
ONE Multinational Enterprise (MNE) from your country
that has manufacturing operations in one or more foreign countries (
NOTE: Use the same MNE for all Essay Questions 3.1.
). In one sentence, give the name of
ONE
international entry strategy the MNE you have chosen used to enter
ONE
of those foreign countries (please identify that country by name and use that country for all Essay Questions 3.1.). Explain your answer in five to seven sentences.

QUESTION 2:

In one sentence, give the name of
ONE
international competitive strategy the MNE you have chosen is using to compete in the foreign country you have named above. Explain your answer in five to seven sentences.

QUESTION 3:

In one sentence, state whether, for its operations in the foreign country, the MNE should make its parts and components (a strategy called vertical integration) or buy them from independent suppliers (a strategy called outsourcing). Explain your answer in five to seven sentences.

MGMT 4710

INTERNATIONAL BUSINESS

USEFUL INTERNET LINKS

Here is the list of a few online links you can use to find data on your country. Data for some factors can be in more than one link. There are other links that you can search on your own if you google (or yahoo or Firefox, etc.). You can also use Wikipedia, but for academic research, it is not a reliable resource.

1. The GlobalEconomy.com.
Country indicators
.

www.theglobaleconomy.com/indicators_list.php

– Click Indicators

– Click on the indicator that you are looking for

– The ranking of countries is given

– Click on a country for an explanation of the indicator (at the bottom of the page)

This is a worldwide online educational resource that compiles data from several sources, including the World Bank, the International Monetary Fund, the United Nations, and the World Economic Forum.

2. United Nations Conference on Trade and Development (UNCTAD)

http://unctadstat.unctad.org/wds/ReportFolders/reportFolders.aspx?sCS_ChosenLang=en

3. The Heritage Foundation.
Index of Economic Freedom
.
www.heritage.org/index

– Click About The Index

– Scroll down to Frequently Asked Questions for explanation of economic freedom

– Click Country Rankings (upper left) for the ranking of countries

4. International Monetary Fund (World Economic Outlook Databases)

https://www.imf.org/en/Publications/SPROLLS/world-economic-outlook-databases#sort=%40imfdate%20descending

5. The World Bank Group.
Ease of Doing Business
.

www.doingbusiness.org

– Click Reports

– Click About Doing Business

– Go to Table 2.1 that provides 11 areas of business regulation

– Click Rankings

6. Trade competitiveness map

http://tradecompetitivenessmap.intracen.org/RS_TP_CI.aspx

– Select a country, a year, and exports, imports, or both

– Data for all industries (i.e. all products) and by product is given

– Click on the + sign that follows All industries to get data for trading partners

7. Global capital market

https://www.youtube.com/watch?v=VEq04xjxfyY

8. Will China rule the world?

https://www.youtube.com/watch?v=gVF7u_vcm7k

9. Automobile production (OICA)

http://www.oica.net/production-statistics/

MGMK 4710

INTERNATIONAL BUSINESS

Chapter 12. Strategy of International Business

https://www.youtube.com/watch?v=DhHHmUd6xfo
McDonald’s

https://www.youtube.com/watch?v=59lAz0-KpSo
McDonald’s in China is different

I. INTRODUCTION

This chapter shifts the focus from external factors that exert influence on the international business to internal decision-making that helps determine how effectively a given firm competes in its industry. First, the chapter will discuss how an MNE can create the most value in order to compete in international markets. Then it will examine the strategies that MNEs can adopt to be competitive in the global marketplace.

II.
VALUE CHAIN ANALYSIS

When competing, firms need to address the question of how to create value so customers can buy its products. A framework developed to discuss how firms can create value is called value chain analysis.

A. Value creation:

Value refers to either low cost or differentiation. Firms create low cost value by making their products for a lower cost than any other firm in their industry. Firms create differentiation value by making products with distinctive characteristics that consumers want (when customers value differentiation, they must be willing to pay a premium price).

B. Value Chain:

The value chain is a representation of the firm as a series of discrete value creating activities. Value chain is comprised of primary activities and support activities. Primary activities are involved in the physical movement of raw materials and finished products, the production of goods and services, marketing and subsequent services of the outputs of the business. Performing primary activities requires the general infrastructure of a firm. This infrastructure is composed of support activities such as procurement, technology and system development, human resource management, and firm infrastructure.

C. Value chain analysis:

To be successful, a firm needs to create the most value (compared to competitors). Value chain analysis is a framework used to determine how a firm can effectively create the most value. Managers should focus their efforts in performing the activities in which the firm has the expertise (core competencies) to either reduce costs (low cost value) or develop distinctive features (differentiation value). The activities where the firm lacks expertise should be outsourced, that is, purchased from independent suppliers.

Configuration of the value chain refers to the process of dispersing value chain activities to those locations around the globe where the MNE can maximize value. Every MNE looks to establish elements of its value chain in the best location in the world. Location economies arise when MNEs locate activities in the optimal location for that activity, wherever in the world that may be. Because MNEs’ activities are dispersed around the world, coordination is necessary.

Coordination of the value chain describes the process of integrating dispersed activities into a cohesive, coherent whole. The task of coordinating the different activities that go into making and moving a product around the world has emerged as the basis of the superior performance that separates good from great MNEs.

III.
TYPES OF MNEs STRATEGIES

After the identification of the value customers prefer (either low cost or differentiation), and the determination of how to create the most value, MNEs’ managers are in a position to decide the strategies to use in order to achieve above-average performance. To determine the types of international strategies, MNEs’ need to make two sets of international strategic choices: choices about how to enter foreign markets (international entry strategies), and choices about how to compete in foreign markets (international competitive strategies).

A. International entry strategies

MNEs have a wider choice of entry strategies, some of them involving collaboration.

1. Exporting: An international entry strategy whereby an MNE makes goods in its

home country and then sells them to foreign markets. This is usually the first entry strategy. As

the exporting MNE is not yet familiar with foreign environments, it minimizes risks by simply

shipping goods to foreign importers

2. Entry strategies involving collaboration:

a. Licensing: Under a licensing agreement, an MNE (the licensor) grants rights to intangible property to a foreign firm (the licensee) to use in a specified geographic area for a specified period of time; in exchange, the licensee ordinarily pays a royalty to the licensor. Intangible property may include patents, inventions, formulas, brand names, methods, procedures. Licensor’s motives include faster start-up, lower costs. Licensee’s motives are no product development costs.

b. Franchising: Franchising represents a special form of licensing in which the

franchisor not only sells an independent franchisee the use of the intangible property essential to

the franchisee’s business, but also operationally assists and exercises control over the

franchisee.

c. Management Contracts: A management contract represents an arrangement in

which an MNE provides management personnel to perform general or specialized functions to

another firm for a fee. A firm usually pursues such contracts when it believes a partner can

manage certain operations more efficiently and effectively than it can itself.

d. Turnkey Operations: Turnkey operations represent a type of collaborative

arrangement in which an MNE contracts with a foreign entity to build complete, ready-to-operate facilities. Usually, the MNE is an industrial-equipment and construction company. Often, the foreign entity is a government agency or a large MNE

e. Joint Ventures: A joint venture represents a direct investment in which two or more firms share ownership of a new company in a foreign country. Forms of joint ventures include

two firms from one country joining together in a foreign market, a foreign firm joining with a local firm, companies from two or more countries establishing a joint venture in a third country, a private firm and a local government forming a joint venture, a private firm joining a government-owned firm in a third country.

f. Equity Alliances: An equity alliance represents a collaborative arrangement in which

at least one of the collaborating firms takes an ownership position (usually a minority) in the other(s).

3. Wholly owned subsidiaries (no collaboration is involved): The MNE owns 100% of its foreign operations. This entry strategy can be accomplished in two ways: acquisitions, or greenfield investments.

B. International competitive strategies

To make the choice of which international competitive strategy to adopt, MNEs need to look at the types of pressures they are facing in foreign markets

1. Global integration versus local responsiveness pressures

Two types of pressures that challenge how an MNE configures and coordinates its value chain activities: pressures for global integration (also known as pressures for cost reduction), and pressures for local responsiveness.

Pressures for global integration:

There is a general trend toward rapid economic integration, which in turn increases pressures for global integration. Although many factors can explain this trend, the two primary factors behind pressures for global integration are the globalization of markets and the efficiency gains of standardization:

Globalization of markets: Global buying patterns and firm strategies suggest that consumers seek and accept standardized global products. Consumers are searching for products that meet their needs and provide superior value, regardless of where they originate. As communication and transportation infrastructures have become more integrated across borders, consumer preferences have begun to homogenize and companies’ abilities to meet those preferences on a global scale have increased. The resulting economies of scale translate to lower prices.

Standardization and efficiency: Standardization is the process of increasing the uniformity of a product or service by decreasing the extent of variation. Worldwide standardization of an MNE’s products, purchases, methods, and policies can significantly reduce the costs of its operations. Standardization is also a powerful means to exploit local economies, since value chain activities can be placed in optimal locations for global production and distribution.

Pressures for local responsiveness:

MNEs also face several pressures to tailor their operations to local market conditions. Consumer divergence and host-government policies are two of the major forces contributing to pressures for local responsiveness:

Consumer divergence: Contrary to the globalization of markets thesis, some argue that differences in consumer tastes and preferences across countries emerge and endure due to cultural predisposition, historical legacy, emergent nationalism, economic prosperity, and other factors. In some industries, like food production, products are unsuitable for standardization and local preferences remain strong.

Host-government policies: Differences in policies among host-country governments contribute to great variability in political, legal, and economic situations in various markets. Policies such as trade protectionism, local content rules, and national product standards require some degree of local responsiveness.

2. Types of international competitive strategies

Pressures for global integration and pressures for local responsiveness are the two dimensions used to derive the strategy an MNE can choose from. Based on whether those pressures are high or low, four strategies emerge: global strategy, multidomestic strategy, home replication strategy, and transnational strategy.

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Pressures for local responsiveness

Home replication strategy: The home replication strategy emphasizes the transfer of core competencies from the domestic operation to foreign subsidiaries. This strategy works well when industry conditions do not push the firm to improve its cost controls or to respond to local demand.

Multidomestic strategy: Firms following a multidomestic strategy adjust products, services, and business practices to meet the needs of individual countries and regions. Because pressures for local responsiveness are high, this strategy allows each of its foreign-country operations to act fairly independently. Management that chooses the multidomestic strategy believes in responding to the unique conditions prevailing in different markets.

Global strategy: A global strategy requires worldwide consistency and standardization in order to be effective. Firms that choose the global strategy face strong pressures for cost reductions but weak pressure for local responsiveness. Operationally, MNEs that adopt a global strategy usually are or aim to become the low-cost player in their industry. This generally requires global-scale production facilities in a few low-cost locations.

Transnational strategy: Transnational strategy aims to simultaneously exploit location economies, leverage core competencies, and pay attention to local responsiveness. It is arguably the most challenging strategy because MNEs face high pressures for both global integration and local responsiveness.

MGMK 4710

INTERNATIONAL BUSINESS

Chapter 16. THE ORGANIZATION OF INTERNATIONAL BUSINESS

I. INTRODUCTION

It is challenging to organize operations that are located in multiple countries. MNEs’ managers must design structures, systems, and a culture that will contribute to an effective implementation of their company’s strategies around the world. Implementing an MNE’s international strategy involve such key issues as structure, coordination and control, and culture.

II.
ORGANIZATION STRUCTURE

https://www.youtube.com/watch?v=wO_-MtWejRM&index=2&list=RDxcTtQ0hiHbE

https://www.youtube.com/watch?v=f60dheI4ARg&index=7&list=RDxcTtQ0hiHbE

Organization structure is the formal arrangement of roles, responsibilities, and relationships within an organization. Organization structure is a powerful tool with which to implement MNEs’ strategies. An MNE’s choice of structure depends on many factors, including the configuration of its value chain in terms of the location and type of foreign facilities, and the impact of international operations on total corporate performance. Two central issues in organization structure are vertical and horizontal differentiation.

A. Vertical Differentiation: Centralization versus Decentralization

Vertical differentiation refers to where the authority to make decisions stands in the

hierarchy of an MNE. How decision-making is distributed in the hierarchy raises the question

of centralization versus decentralization of decision-making authority.

Centralization
is the degree to which high-level managers, usually above the country level,

make important decisions and pass them down to lower levels for implementation. Centralized

decision making is usually associated with a home replication or global strategy (most decisions

are made at the corporate headquarters). Decentralized decision making is associated with a

multidomestic strategy (more decisions are made at the subsidiary’s level). A combination of

centralized and decentralized decision making is associated with a transnational strategy.

B.
Horizontal Differentiation: The Design of the Formal Structure

Horizontal differentiation describes the division of labor (how tasks are grouped

into departments, divisions and subsidiaries throughout the MNE. There are several types of

horizontal structures for MNEs:

1.
International Division Structure. An international division groups all international

activities into a single division within a firm. This is usually the case when foreign operations

represent a small percentage of an MNE’s total revenues. The MNE will have several domestic

departments or divisions, and an international division. This type of structure is more

appropriate for MNEs that have adopted the home replication strategy.

2. Product Division Structure. A product division structure groups an MNE’s worldwide

operations by products. This type of structure is more appropriate for MNEs that have adopted

the global strategy. Each division coordinate worldwide operations for a particular product.

3. Geographic Division Structure. A geographic division structure groups activities on a

regional basis. It is used when a firm has extensive foreign operations that are not dominated by

a single country or region. This structure is more appropriate for MNEs that have adopted the

multidomestic strategy.

4. Matrix Structure. A matrix structure is a structure designed to give functional, product,

and/or geographic groups a common focus. This type of structure is more appropriate for MNEs

that have adopted the transnational strategy. This structure is referred to as a matrix structure

because the MNE will address two conflicting demands, pressures for local responsiveness and

pressures for global integration (cost reduction).

III. COORDINATION AND CONTROL SYSTEMS

MNEs have operations in several countries. Therefore, complex systems of coordination

and control must be developed. There are several coordination and control tools MNEs can

choose from.

A.
Coordination Systems

Coordination systems are integration mechanisms that link various activities of an

MNE. Worldwide coordination is needed to counteract the tendency of different groups of

managers and employees to develop different concerns and orientations based on their location

and immediate responsibilities. MNEs’ managers can choose among several approaches to the

coordination of worldwide units. Approaches include coordination by standardization, by

plans, and by mutual adjustment.

1. Coordination by Standardization. Firms with widely dispersed operations often

standardize the ways that employees do their jobs and deal with customers. Standardization sets

universal rules and procedures that apply worldwide and enforces consistency in performance

of activities in geographically dispersed units. Rules and procedures about how employees

interact (also called formalization) aim to reduce workplace uncertainty and simplify the

exchange of ideas & resources.

2. Coordination by Plan. This type of coordination requires interdependent units to meet common deadlines and objectives. MNEs following a multidomestic strategy may opt to establish objectives and schedules that give interdependent units greater discretion in developing coordination systems. This process is often complicated by the difficulties imposed by distance and cultural differences. Greater expense, time, and possibility of error are inherent in planning across national boundaries.

3. Coordination by Mutual Adjustment. Coordination by mutual adjustment requires managers to interact with counterparts to enable flexible coordination mechanisms, largely informally. MNEs that opt to encourage mutual adjustment also adopt a formal structure and install standardization and planning systems, but they see great value in engaging an adaptable approach to coordination that involves creating more opportunity and incentive for parties to work with one another.

B.
Control Systems

Control systems are mechanisms put in place to ensure that people are doing what they are supposed to do. Every MNE must clarify what its employees can and cannot do in order to avoid spinning out of control. Several control mechanisms are used to direct the activities of individuals toward the achievement of organizational goals.

1. Reports. Reports must be timely, accurate, and informative. Written reports are crucial for

international operations because subsidiary’s managers often lack substantive personal contact

with corporate staff. To permit comparisons across operations, most MNEs use reports for

foreign subsidiaries that resemble those they use domestically.

2. Visits to Subsidiaries. Within many MNEs certain members of the corporate staff spend

considerable time visiting foreign subsidiaries in order to collect information and offer advice

and directives related to corrective actions (if needed).

3. Evaluative Metrics. A system that relies on a combination of metrics is more reliable than

one that does not. The most important criteria tend to be budget-compared-with-profit and

budget-compared-with-sales-value. Other non-financial criteria such as market share, quality

control, and host government relations are also important.

4. Information Systems. With ever-expanding computer and global telecommunications links,

managers can monitor dispersed units more quickly and easily than ever before.

IV.
ORGANIZATION CULTURE

https://www.youtube.com/watch?v=zDV-LCjq_D0

Organization culture is a system of shared values about what is important and beliefs about how the world works. As such, it is an important part of how an MNE is organized.

1. Culture and Values. Key features of organizational culture include values and principles of management, work climate and atmosphere, patterns of “how we do things around here,” traditions, and ethical standards. The shared values that make up organization culture influence what employees perceive, how they interpret, and what they do to respond to their world.

2. Culture’s Increasing Importance. Studies have shown that there is a significant link between organization culture and financial performance. A firm culture often shapes the strategic moves an MNE will consider or reject, and it can dramatically influence the success of corporate initiatives. It is therefore crucial for the corporate headquarters to develop a strong culture that is shared by most organizational members

3. Building an Organizational Culture. Normally, firms develop and manage their cultures, rather than allowing them to emerge naturally. For MNEs however, this is challenging because managers from different countries often have different values than those of their MNE. Convergent values ease the exchange of ideas between people from different countries, while divergent values tend to create boundaries and barriers. To overcome these challenges, many MNEs promote closer contact among managers from different countries by rotating managers among operations in their various locations. Besides spreading best practices throughout the organization, rotating managers improves their understanding of the company’s culture.

MGMK 4710

INTERNATIONAL BUSINESS

Chapter 17. Global marketing

I. INTRODUCTION

Although basic marketing principles may be the same in both domestic and foreign markets, differences often require those principles be applied in different ways. This raises the issue of whether to standardize or adapt marketing strategies.

https://www.youtube.com/watch?v=4va_DtpAMHo

https://www.youtube.com/watch?v=U48nmKPJclA

II.
MARKETING STRATEGIES

Marketing strategies are often known as the 4Ps (product, pricing, promotion, place). In international business, a fifth variable, branding, is added. Overall international marketing strategies should depend on the company’s marketing orientation and target market.

A.
Marketing Orientations

1. Production Orientation. A production orientation indicates a firm is more concerned about production factors such as efficiency, quality, and/or capacity than it is about marketing. Firms assume customers want lower prices and/or higher quality.

2. Sales Orientation. A sales orientation indicates a firm assumes global customers are reasonably similar and it can therefore sell abroad the same product it sells at home. A firm will be aided in this approach when there is also a spillover of product information from one country to another.

3. Customer Orientation. A customer orientation indicates a firm is sensitive to customer

Needs. Firms therefore try to identify & serve the specific needs of the customer.

4. Strategic Marketing Orientation. A strategic marketing orientation indicates a firm is

committed to continuously serving foreign target markets and to making incremental product

adaptations to satisfy local customers.

5. Societal Marketing Orientation. The societal marketing orientation indicates a firm recognizes it must do business in a way that preserves or enhances the well-being of all its stakeholders, i.e., as it serves the needs of its customers it must also address the environmental, health, social, and work-related problems that may arise when or marketing its products abroad.

B.
Segmenting and Targeting Markets

The most common way of identifying market segments within a country is through

demographic factors such as income, age, gender, ethnicity, and religion.

1. Approaches to Segmentation. When targeting and segmenting markets, firms have three

basic alternatives including segmenting by country, by global segment, or by multiple criteria.

– By Country. A firm may choose to segment its market by selecting a single country to enter.

There is little opportunity of gaining economies through standardization with this approach.

– By Global Segment. A company may identify some segments globally, such as segments

based primarily on income. Thus, each country may have some people within the same segment.

– By Multiple Criteria. A company can combine these approaches by looking first at countries

as segments, second by identifying segments within each country, and third by comparing these

within-country segments with those of other countries.

2. Mass Markets versus Niche Markets. Companies must decide when introducing their

products abroad to enter it with a mass market or niche market strategy. Because the percentage

of people that fall into any segment may vary substantially among countries, a niche market in

one country may be a mass market in another.

III.
PRODUCT POLICIES

A key product policy consideration is whether to standardize product offerings or to adapt to

local requirements. Another factor to consider is the product mix to market in a foreign market.

A.
Product Adaptation

Usually firms will choose to standardize basic components while adapting critical end-use characteristics. The primary reasons behind the tendency of firms to adapt their products to meet local conditions are legal, cultural, and/or economic in nature.

1. Legal Considerations. Explicit product-related legal requirements vary widely by country but are usually meant to protect customers, the environment, or both.

– Packaging Requirements. One of the more cumbersome product alterations for companies is adjusting to different laws on packaging and warning labels.

– Environmental-Protection Regulations. Some countries prohibit certain types of containers, others restrict the volume of packaging materials, and some have mandates on container reusability.

– Indirect Legal Considerations. Marketing managers must also watch for indirect legal

requirements such as higher taxes on heavy automobiles that may shift demand to lighter ones.

– Issues of Standardization. A recurring issue is the need to arrive at international product standards and eliminate some of the wasteful product requirements for alterations among countries.

2. Cultural Considerations. Cultural factors affecting demand may or may not be easily discerned. While religious beliefs may offer clear guidelines regarding product acceptability, other factors such as color, design, and artistic preferences may be much subtler.

3. Economic Considerations. Levels of income, differences in income distribution, and the extent and condition of available infrastructure can all affect demand for a particular product. Often, price-reducing alterations are required if a firm wishes to participate in a particular country market. Poor infrastructure may also require alterations as companies must deal with rough terrain, etc.

B. The Product Line: Extent and Mix

Although most firms produce multiple products, it is doubtful that all of these products could generate sufficient sales in a given foreign market to justify the cost of penetrating that market.

1.
Sales and Cost Considerations. When making product line decisions, managers must consider the cost and effect on sales of offering just one or a few products internationally as opposed to an entire family of products. Whereas narrowing a product line allows for the concentration of effort and resources, the broadening of a product line may lead to distribution economies.

2.
Product Life Cycle Considerations. Differences will likely exist across countries in both the shape and the length of a product’s life cycle. A product facing declining sales in one country may have growing or sustained sales in another.

IV.
PRICING STRATEGIES

Price represents the value asked for a product. In the international arena, the determination of the prices to adopt can be extremely complex, for a number of reasons:

A. Government Intervention.

One way or another, every country has laws that either directly or indirectly affect prices. Price controls may set either maximum or minimum prices for designated products. The WTO permits a government to establish restrictions against any imports that enter the country at a price below the price charged to customers in the exporting country (dumping). However, a firm may charge different prices in different countries because of competitive and demand factors (e.g., a firm may choose to exclude fixed costs in the price calculation of products exported to developing countries in order to be price competitive in those markets.)

B. Market Diversity.

Country variations lead to many ways of segmenting the market. Consumers in some

countries simply like certain products more and are willing to pay more for them. Depending

upon market conditions, a firm may adopt any of the following pricing strategies:

– A skimming strategy sets a high price for a new product, which is aimed at market innovators.

Over time, the price will be progressively lowered in response to demand and supply conditions,

i.e., the presence of additional competitors.

– A penetration strategy
sets an aggressively low price to attract a maximum number of

customers (some of whom may switch from other brands) and to discourage competition.

– A simple cost-plus strategy sets the price at a desired margin over cost. Cash versus credit

buying also affects demand.

C. Export Price Escalation.

In foreign markets, lengthening the channels or adding other expenses somewhere within the

network will further increase the delivered price of the product. Common reasons for price

escalation in export sales are tariffs and the often-greater distance to the market. To compete in

export markets, a firm may have to sell its products to intermediaries at a reduced price in order

to lessen the amount of price escalation.

D. Fluctuations in Currency Value.

Pricing in the case of highly volatile currencies can be extremely difficult, especially under

conditions of high inflation. This may result in the need for frequent price adjustments. Further,

currency fluctuations also affect pricing decisions for any product that faces foreign competition.

When a currency is strong, producers may have to accept a lower profit margin if they wish to be

price competitive.

E. Fixed versus Variable Pricing.

MNEs often negotiate export prices, while small companies frequently give price

concessions too quickly. This limits small companies’ ability to negotiate on a range of

marketing factors that affect their costs such as discounts for quantity or repeat orders, deadlines

that increase production or transportation costs, credit and payment terms, supply of promotional

materials, or training of sales personnel or customers.

The extent to which firms set prices at the retail level varies substantially by country. There

is also substantial variation in whether, where, and for what products customers prefer or expect

to negotiate an agreed-upon price. Local laws and customs may limit firms’ abilities to set prices.

In many cultures, prices are simply the starting point in the bargaining process.

V.
PROMOTION STRATEGIES

Promotion consists of the messages intended to help sell a product or service. The types and direction of messages and the method of presentation may be extremely diverse, depending on the company, product, and country of operation.

A. The Push-Pull Mix

Promotion strategies may be categorized as push (uses direct selling techniques) or pull (which relies on mass media). Most firms use a combination of both. The factors that will determine the mix of push and pull strategies include the type of distribution system, the cost and availability of media, customer attitudes toward sources of information, and the relative price of the product as compared to disposable income. Push is more likely when self service is not predominant, advertising is restricted, and product price is a high portion of income.

B. Some Problems in International Promotion

One key question is whether to standardize promotion. Standardization can result in cost

savings and in better quality of advertising by preventing the confusion associated with different

national messages. For certain reasons, it is difficult to completely standardize promotion:

1. Translation. When a media transmission spans multiple countries, there is no opportunity to translate a message into other local languages. When messages are translated, numerous difficulties can be encountered with both language (content and meaning) and images.

2. Legality. What is deemed to be legal advertising in one country may in fact be illegal elsewhere. Differences result mainly from varying national views on consumer protection, competitive protection, standards of morality, and nationalism.

3. Message Needs. An advertising theme may not be appropriate everywhere because of national differences in how well consumers know a product, how they perceive it, who makes the purchasing decision, and what features are most important.

VI.
BRANDING STRATEGIES

A brand is a name, term, sign, symbol and/or design that is intended to identify a product or product line and differentiate it in the marketplace. MNEs need to decide about whether to adopt either a worldwide brand or a variety of brands for different local markets.

1. Advantages of Worldwide Brands. A global image assists in the marketing to international

travelers and creates an international identity as a global player.

2. Problems with Uniform Brands. A number of problems are inherent in trying to use uniform

brands internationally:

– Language. Both the translation and pronunciation of brand names pose potential problems in

many markets. Often the problems are obvious, but other times they are quite subtle, yet critical.

In addition, brand symbols (shapes and colors) are culturally sensitive in many societies.

– Brand Acquisition. When an MNE acquires a (foreign) firm, it automatically acquires its

brands. In some cases, those brands will be kept; in others they are folded into a larger brand in

order to capture economies of scale & promote regional/global brand recognition.

– Country-of-Origin Image. Firms must determine whether to promote a local or foreign image

for their products. The products of some countries may be perceived as being particularly

desirable and of higher quality than products from other countries. A firm may be able to

enhance its competitiveness by effectively exploiting this perception.

– Generic and Near-Generic Names. While firms want their brand names to become household

words, they do not want those names to become so common they are considered to be generic

(e.g., Kleenex and Xerox). Generic names may either stimulate or frustrate the sales of the firm

from whom the name was expropriated.

VII. DISTRIBUTION STRATEGIES

Distribution refers to the physical and legal path that products follow from the point of production to the point of consumption. In the 4Ps, distribution is referred to as place.

B. Deciding Whether to Standardize

Distribution is often the marketing mix variable that firms find the most difficult to standardize. This is because each country has its own national distribution system that is historically intertwined with its cultural, economic, and legal environments. Other factors that influence standardization of distribution include restrictions on the size of stores and their hours of operation, the financial ability to carry large inventories, and the efficacy of the national postal system.

C. Choosing Distributors and Channels

Just as in the case of production, a firm may choose to handle the distribution function internally or outsource it to a specialized provider. When sales volume is low, it is usually more cost effective for a firm to contract with an external distributor. On the other hand, distribution may be handled internally when sales volume is high, when the firm has sufficient human, capital and financial resources, and when after-sales service is extensive and complex.

When a firm choose to contract with an external distributor, criteria for selecting distributors include financial strength, good relationships with their customers, the state of a distributor’s equipment, facilities and personnel, and trustworthiness.

C.
Distribution Challenges

Distributors choose the products and firms they wish to represent and emphasize. A new

entrant must therefore convince a desired distributor of the viability of both its products and the

company itself. To do so it may need to provide extra incentives or be willing to enter into

exclusive arrangements provided a competitor does not already occupy that position.

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Chapter 18. Global Manufacturing and Supply Chain Management

https://www.youtube.com/watch?v=SRq-U1m2dwg
Subway

www.youtube.com/watch?v=m2kJgpNWCrU
Nike

I. INTRODUCTION

https://www.youtube.com/watch?v=yZC4neLax5o
Walmart Supply Chain

The supply chain function encompasses the sourcing and coordination of materials, information and funds from the initial raw material supplier to the final customer. It concerns the management of the value-added process from the supplier to the customer. An important part of the supply chain function is logistics (aka
materials management), which encompasses the planning, implementation and control of the efficient and effective flow and storage of products and information from the point of origin to the final customer.

II.
MANUFACTURING CONFIGURATION

https://www.youtube.com/watch?v=ltOf4-1jq0I Location of manufacturing

Where to locate manufacturing facilities is crucial to MNEs’ success. The factors that play a

key role in manufacturing configuration strategies include location-specific advantage, firm

-specific assets, and internalization (in-house manufacturing as opposed to outsourcing). To

develop manufacturing strategies, MNEs need to consider three basic configurations:

a.
Centralized Manufacturing Strategy. Centralized manufacturing in a single country (basically a manufacture and export strategy).

b.
Regional Manufacturing Strategy. Regionalized manufacturing in the specific regions served (a regionalized marketing and manufacturing approach).

c.
Multidomestic Manufacturing Strategy. Local manufacturing in each country market served (multidomestic marketing and manufacturing approach) using country-specific manufacturing facilities to meet local demand.

Once an MNE has adopted a specific manufacturing configuration, it needs to then

coordinate and control its manufacturing facilities. Coordination represents the linking or

integrating of all manufacturing facilities around the world into a unified system. Control

embraces systems, such as organizational structure and performance measurement, which are

designed to help ensure strategies are implemented, monitored, and revised, when appropriate.

III.
INFORMATION TECHNOLOGY AND SUPPLY CHAIN MANAGEMENT

https://www.youtube.com/watch?v=s5FXLUHsKOE

Global supply chain management concerns the sourcing and coordination of materials, information and funds from the initial raw material supplier to the final customer. The key to making a global information system work effectively is a good information system. MNEs now rely more and more on information technology (IT) for an effective management of their supply chain. IT helps supply chain management in several ways:

1. Electronic Data Interchange (EDI). It refers to the electronic movement of money and information via computers and telecommunications equipment in a way that effectively links suppliers, customers & third-party intermediaries, & ultimately enhances customer value.

2. Enterprise Resource Planning/Materials Resource Planning: It refers to the use of software to link information flows from different parts of a business and from different parts of the world. An extension of ERP is material requirements planning (MRP), a computerized information system that addresses complex inventory situations and calculates the demand for parts from the production schedules of the companies that use the parts.

3. Radio Frequency ID (RFID): It is a system that labels products with an electronic tag that stores and transmits information regarding the product’s origin, destination, and quantity.

4. E-Commerce: It refers to the use of the Internet to link suppliers with firms and firms with customers. Linkages are done through intranets and extranets. An intranet can be used to help automate and speed up internal processes in a company. The term extranet refers to using the Internet to link a company with external constituencies. Private Technology Exchange (PTX) refers to an online collaboration model that brings manufacturers, distributors, resellers, and customers together to execute trade transactions and to share information regarding demand, production, availability, etc.

IV.
QUALITY

Quality refers to product features that meet or exceed customers’ expectations. More

specifically, it incorporates conformance to specifications, value enhancement, fitness for use, after-sales support, and psychological impressions. There are several approaches to quality:

A. Zero Defects versus Acceptable Quality Level

Acceptable quality level (AQL) is a premise that allows for a tolerable (negotiable) level of defects that can be corrected through repair and service warranties (U.S.). Zero defects describe the refusal to tolerate defects of any kind (Japan).

B.
Total Quality Management (TQM)

Total quality management (TQM) stresses three principles: (i) customer satisfaction, (ii) employee involvement, and (iii) continuous improvements at every level of the organization. The goal of TQM is to eliminate all defects. It focuses on benchmarking world-class standards, product and service design, process design, and purchasing practices. Kaizen represents the Japanese process of continuous improvement, which requires identifying problems and enlisting employees at all levels of the organization to help eliminate the problems.

C. Six Sigma

Six Sigma is a highly focused quality-control system designed to scrutinize a firm’s entire production system to eliminate defects, slash product cycle time, and cut costs across the board.

D. Levels of Quality Standards

Quality standards have three levels: general level, industry-specific level, and firm level.

1.
General-Level Standards. The International Organization for Standardization (ISO) was created to facilitate the international coordination and unification of industrial standards. It represents a network of standard setters in 158 countries around the world.

2.
Industry-Specific Standards. Industry-specific standards represent the quality-related requirements expected of suppliers.

3.
Firm-Specific Standards. Individual companies also set their own standards for suppliers to meet if they are going to continue to supply them.

V. SOURCING

Sourcing
is the path a firm pursues in obtaining materials, components and final products either in-house (vertical integration) or outside of the firm (outsourcing), and from either home country or foreign locations (offshoring). Global sourcing represents the first step in the process of global materials management.

A. Global Sourcing.

https://www.youtube.com/watch?v=ykYgVz75JGc&t=119s

Sourcing in the home country avoids such problems as lengthy supply chains and foreign currency risk. However, there are instances where domestic sources are too expensive.

1.
Global Sourcing: Benefits of global sourcing include cost reduction, improved quality, increased exposure to worldwide technology, establishing a presence in a foreign market.

2.
Problems with Global Sourcing. Quality, safety, and other concerns come with global sourcing. Countries with the cheapest products often lack adequate regulations, enforcement, and logistical infrastructure, leaving it up to the purchasing firms to ensure quality and safety.

B. Major Sourcing Configurations

1. Vertical Integration. The MNE owns the entire supplier network, or at least some part of it.

2. Industrial Clusters. Buyers and suppliers locate in close proximity to facilitate doing business. A good example is the Japanese Keiretsu.
A Keiretsu is a group of independent firms that work together to manage the flow of goods & services along the value chain.

C. The Make or Buy Decision

https://www.youtube.com/watch?v=ofVM5XYCwV0

In determining whether to make (vertical integration) or buy (outsourcing), MNEs should focus on making those parts and performing those processes critical to a product and in which they have a distinctive advantage. Other activities should be potentially be outsourced.

D. The Purchasing Function

The global purchasing function normally progresses in four phases: (1) Domestic purchasing only, (2) Foreign buying based on need, (3) Foreign buying as a part of procurement strategy, and then (4) Integration of global procurement strategy. The last phase is reached when a firm realizes the benefits of purchasing on a global basis.

VI.
INVENTORY MANAGEMENT

https://www.youtube.com/watch?v=sl5zEPRkp0U

Whether a firm decides to source from inside or outside the company or from domestic or foreign suppliers, it needs to manage the flow and storage of inventory. However, the distance, time, and uncertainty associated with foreign sourcing can complicate the inventory process.

A. Lean Manufacturing and Just-in-Time Systems

Lean manufacturing is a productive system that focuses on optimizing processes and reducing waste. One method of reducing costs is lowering inventory levels. A just-in-time (JIT) manufacturing system reduces inventory costs by having raw materials and components delivered just as they are needed in the production process. JIT typically implies sole sourcing for specific parts in order to get the supplier to commit to the stringent delivery and quality requirements inherent in the system. A company’s inventory management strategy determines the desired frequency and size of shipments and whether JIT will be used.

The risk of using JIT in foreign sourcing is supply interruptions that can cause major production problems (stoppage). This risk can be the result of the complications involved in international transportation. Complications include documentation, choice of carrier (air, land or ocean), and the decision of whether to outsource the foreign sourcing function to a third-party intermediary or to establish internal transportation capabilities.

B. Foreign Trade Zones

Foreign trade zones (FTZs) are government-designated areas in which goods can be stored, inspected, and/or manufactured without being subject to formal customs procedures until they actually leave the zones. FTZs often serve as a site to store inputs until they are needed at a particular production site.

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Chapter 19. International finance & Accounting

INTERNATIONAL FINANCE

I. INTRODUCTION

MNEs need funds to finance their activities. The focus of the finance function is to acquire financial resources (financing) and to allocate those resources (investment) to activities and projects. Financial resources come from a mix of debt and equity (capital structure). Financial resources can be raised through external as well as internal sources of funds. Other international finance issues of interest are foreign-exchange risks, and taxation of income earned abroad.

https://www.youtube.com/watch?v=3I-RVVa6mKc

II.
EXTERNAL SOURCES OF FUNDS

Companies can raise funds from global capital markets and/or offshore financial centers:

A.
Global capital markets

Global capital markets include Eurocurrency market, international bonds, and Euro equity market:

1. Eurocurrency Market

A Eurocurrency is any currency banked outside its country of origin. There are four major sources of Eurocurrencies: foreign governments or individuals who want to hold dollars outside the U.S., MNEs that have excessive cash, European banks with excessive currency, and countries with large balance-of-trade surpluses.

A Eurocurrency market is where MNEs can raise Eurocurrencies. This market is a wholesale market, with very large transactions, typically consisting of short to medium term loans. As a source of funding, Eurocurrency market is more attractive because of low interest rates. The global financial crisis forced central banks all over the world to drop interest rates to stimulate economic growth.

2. International Bonds

Many companies have active bond markets available to domestic and foreign investors. There are two types of international bonds: foreign bonds, and Eurobonds. A foreign Bond is a title (bond) sold outside the country of the borrower, but denominated in the currency of the country of issue. A Eurobond is a title sold in a currency other than that of the country of origin.

3. Euro equity Market.

In the Euro equity market, MNEs issue stocks on one or more foreign exchanges. They therefore take ownership positions in return for shares of stock.

B. Offshore financial centers

MNEs can raise debt or equity funds offshore. Offshore financing

is the provision of financial services by banks and other agents to nonresidents of a country. Offshore financial centers (OFC) are cities or countries that provide large amounts of funds in currencies other than their own and are used as locations in which to raise and accumulate cash. Generally, OFCs provide a more flexible and less expensive source of funding for MNEs. Also, they exhibit several characteristics, including a large foreign-currency (Eurocurrency) market for deposits and loans, a large net supplier of funds to the world financial markets, economic and political stability, an efficient and experienced financial community, good communications and supportive services, and an official regulatory climate that is favorable to the financial industry.

Offshore financial centers (OFC) can be operational centers, with extensive banking activities involving short-term financial transactions (e.g., London). They can also be booking centers, with little actual banking activities and where transactions are recorded to take advantage of secrecy laws and/or low or no tax rates (e.g., Cayman Islands). Booking centers are often seen as “tax haven” centers.

III.
INTERNAL SOURCES OF FUNDS

Internal sources of funds include loans, investment through equity capital, interfirm receivables and payables and dividends. Intrafirm financial links become extremely important as MNEs grow in size and complexity. Funds can flow from parent to subsidiary, subsidiary to parent and/or subsidiary to subsidiary. Goods, services, and funds all can move within an MNE, thus creating receivables and payables. Entities may choose to pay quickly (a leading strategy) or to defer payment (a lagging strategy).

Another source of internal funds is transfer pricing (prices of transactions between related entities). Transfer prices can be used to adjust the size of a payment. One entity (e.g. a subsidiary or parent company) can sell parts at below or above market prices to finance or get funds from another entity within an MNE.

IV. FOREIGN-EXCHANGE RISK MANAGEMENT

MNEs’ financial strategy is to protect against the foreign-exchange risk (or exposure) of investing abroad. Strategies to protect against such risks include the internal movement of funds, and the use of foreign-exchange instruments such as options and forward contracts.

A.
Types of Exposure

There are three types of foreign-exchange exposure:

1. Translation Exposure: It is the foreign-exchange risk that occurs because a parent firm must

translate foreign-currency financial statements into the reporting currency of the parent, i.e., the

value of the exposed asset/liability changes as the exchange rate varies.

2. Transaction Exposure: It is the foreign-exchange risk that arises because a firm has

outstanding accounts receivable or payable that are denominated in a foreign currency, i.e., the

receivable or payable changes in value as the relevant exchange rate changes.

3. Economic Exposure: It is the foreign-exchange risk that arises from effects of exchange-rate

changes on future cash flows, the sourcing of parts and components, the location of

investments, and the competitive position of the company in different markets.

B.
Strategies for managing foreign-exchange risks

MNEs can devise a number of strategies to protect assets from exchange-rate risk. MNEs can hedge their position by adopting operational and/or financial strategies, each with cost/benefit and operational implications.

1. Operational Hedging Strategies. Firms may choose to balance local assets with local debt

by borrowing funds locally, because that helps avoid the foreign-exchange risk associated with

borrowing in a foreign currency. They may also choose to take advantage of leads and lags for

interfirm payments. A lead strategy means collecting foreign-currency receivables before they

are due when the currency is expected to weaken, or paying foreign-currency payables before

they are due when a currency is expected to strengthen. A lag strategy means delaying

collection of foreign-currency receivables if the currency is expected to strengthen, or delaying

payment of foreign-currency payables when the currency is expected to weaken.

2. Using Derivatives to Hedge Foreign-Exchange Risk. An MNE can also hedge exposure

through forward contracts and options, which establish fixed exchange rates for future

transactions and currency options, i.e., derivatives, which assure access to a foreign currency at

a fixed exchange rate for a specific period of time. A foreign-currency option is more flexible

than a forward contract because it gives the purchaser the right, but does not impose the

obligation, to buy or sell a certain amount of foreign currency at a set exchange rate within a

specified amount of time.

V.
TAXATION OF FOREIGN-SOURCE INCOME

https://www.youtube.com/watch?v=TLSYwkWCIzA

Taxes can profoundly affect profitability and cash flow, especially in international business. Taxation has a strong impact on several choices, including location of operations, method of financing (internal or external sourcing, debt or equity), and method of setting transfer prices.

A.
International Tax Practices

1. Differences in Tax Practices: Countries differ in terms of the types of taxes they have, the tax rates applied to income, the determination of taxable income, and the treatment of foreign income. A major factor that affects international tax practices is differences in generally accepted accounting principles (GAAP). Variations among countries in GAAP can lead to differences in the determination of taxable income.

2. Two Approaches to Corporate Taxation:

– Separate Entity Approach. Each separate entity, company, or
individual is taxed when it receives income.

– Integrated System Approach. Avoids double taxation. When shareholders report the dividends in their taxable income, they also get a
credit for taxes paid on that income by the company that issued the dividend.

B.
Taxing Branches and Subsidiaries

To illustrate the complexities of taxing foreign-source income, it is useful to examine how U.S.-based companies tax earnings from a foreign branch and a foreign subsidiary.

1. The Foreign Branch. Since a foreign branch is an extension of the parent company, any foreign branch income (or loss) is directly included in the parent’s taxable income.

2. The Foreign Subsidiary. A foreign corporation is an independent legal entity set up in a country according to the laws of incorporation of that country. When an MNE purchases or establishes such an entity, it is called a subsidiary. Subsidiary income is either taxable to the parent or tax deferred (not taxed until it is submitted as a dividend to the parent).

C.
Transfer Prices

Transfer pricing applies to transactions between related entities and is not usually an arm’s length price (price between two unrelated entities). MNEs establish arbitrary transfer

prices primarily because of differences in taxation between countries. MNEs manipulate transfer prices in order to minimize tax liability.

D. Double Taxation and Tax Credit

In the United States, the IRS allows a tax credit for corporate income tax for tax that U.S. firms pay to another country in order to avoid double taxation. A tax credit is a dollar-for-dollar reduction of tax liability and must coincide with the recognition of income. Some countries have sign tax treaties to eliminate double taxation or to provide remedies when it occurs.

International Accounting

https://www.youtube.com/watch?v=pWTjllNg7qE

I. INTRODUCTION

Accounting is defined as a service activity whose function is to provide quantitative information which will be useful in making strategic decisions and reasoned choices among alternative courses of action. The accounting and finance functions are closely related as the data generated by accountants (controllers) is primarily financial in nature.

II.
INTERNATIONAL DIFFERENCES IN ACCOUNTING

Accounting origins and traditions have resulted in financial statements that are presented differently both in form (format) and in content (substance). This presents challenges for MNEs as they must produce financial statements using the standards of their host countries. This poses challenges for MNEs as they will have to consolidate all their statements.

A.
Users of accounting information

In the United States, financial accounting standards are established by the Financial Accounting Standards Board (FASB). The FASB states that the users of financial information provided by accounting are potential investors, lenders, and other creditors. For worldwide use, financial accounting standards are set by the International Accounting Standards Board (IASB). For the IASB, users of accounting information are investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies, and the public.

B.
Factors in International Accounting Practices

Equity markets are influential on accounting standards in the U.S. and the U.K. Banks play a key role in Switzerland and Germany. Taxation is a major influence in France and Japan. International accounting firms have a significant impact. Differences in accounting practices around the world have resulted in a move toward convergence—the process of bringing different generally accepted accounting principles into line with IFRS issued by the IASB.

C.
Cultural Differences in Accounting

Culture impacts measurement practices (how firms value assets) and disclosure practices (how and what information firms provide and discuss). The secrecy-transparency/optimism-conservatism matrix illustrates the impact of culture on accounting practices. Secrecy and transparency refer to the degree to which corporations disclose information to the public. Optimism

and conservatism refer to the degree of caution that companies exhibit in valuing assets and recognizing income. Anglo-Saxon countries such as the U.K. and the U.S. have accounting systems that tend to be transparent and optimistic, while countries such as Germany, Japan and Switzerland, among others, tend to be secretive and conservative.

D.
Classifying Accounting Systems

Accounting systems can be classified according to common characteristics:

1. From Macro-Uniform to Micro-Based Systems. Some countries’ accounting standards are based on macro-uniform accounting systems that are shaped more by government influences (strong, codified, tax-based legal systems). Other countries’ standards are shaped by micro-based accounting systems that rely on pragmatic business practices.

2. Differences in Financial Statements: Financial statements differ from one country to

another because of four key factors:

– Language Differences. English tends to be the first choice of companies choosing to raise capital abroad. Many companies provide their financial statements in different languages.

– Currency Differences. MNEs prepare their
financial statements in different currencies.

– Differences in Types of Statements. Financial statement format can be confusing for a reader when accustomed to a different format. The use of accounting footnotes also differs greatly.

– GAAP Usage Differences. A major hurdle in raising capital in
different countries is dealing with widely varying accounting and disclosure requirements.

E. Mutual Recognition versus Reconciliation

There are two approaches to dealing with accounting and reporting differences. In mutual recognition, a foreign registrant need only provide information prepared according to the GAAPs of the home country. In reconciliation to the local GAAPs, a foreign registrant reconciles its home-country financial statement with the local GAAPs), and recasting financial statements in terms of local GAAPs.

F.
Efforts toward global convergence in accounting standards

Forces encouraging the harmonization of national accounting standards include: investors, global integration of capital markets, the need for MNEs to raise foreign capital, regional political and economic harmonization, MNEs’ desire to reduce their accounting and reporting costs, and convergence efforts of standard-setting bodies such as the International Accounting Standards Committee (IASC) which issued a set of International Accounting Standards (IAS).

III.
TRANSACTIONS IN FOREIGN CURRENCIES

In addition to minimizing or eliminating foreign-exchange risk, firms must concern themselves with the proper recording and subsequent accounting of transactions resulting from the purchase or sale of products and the borrowing or lending of foreign currency.

1. Recording Transactions: When accounting for assets, liabilities, revenues and expenses, foreign-currency receivables and payables result in gains and losses whenever the relevant exchange rate changes. Such transaction gains and losses must be included on the income statement in the accounting period in which they arise.

2. Correct Procedures for U.S. Companies: The Financial Accounting Standards Board

Statement (FASB) requires U.S. firms to report foreign-currency transactions at the original

spot exchange rate in effect on the initial transaction date and to report receivables and

payables at the subsequent balance sheet date at the spot exchange rate on those dates. Any

foreign-exchange gains and losses associated with carrying receivables or payables are taken

directly to the income statement.

IV.
TRANSLATING FOREIGN-CURRENCY FINANCIAL STATEMENTS

An MNE must eventually develop one set of financial statements in its home-country currency. Translation involves the process of restating foreign-currency financial statements. Consolidation is the process of combining the translated financial statements of a parent and its subsidiaries into a single set. In the U.S., translation is a two-step process: first, statements are recast according to U.S. GAAPs; then foreign currency amounts are translated into U.S. dollars.

There are two translation methods, the current-rate method, and the temporal method. The

method the firm chooses depends on the functional currency of the foreign operation, which is

the currency of the primary economic environment in which the entity operates.

1. Current-Rate method: If the functional currency is that of the local operating environment, the firm must use the current-rate method, which provides that all assets and liabilities be translated at the current exchange rate (the spot exchange rate on the balance sheet date). All income statement items are translated at the average exchange rate, and owner’s equity is translated at the rates in effect when the firm issued capital stock and accumulated retained earnings.

2. Temporal method: If the functional currency is the parent’s currency, then the firm must use the temporal method, which provides that only monetary assets such as cash, marketable securities and receivables and liabilities be translated at the current exchange rate. Inventory and property, plant and equipment are all translated at the historical exchange rates in effect when the assets were acquired. In general, income statement accounts are translated at the average exchange rate, but cost of goods sold and depreciation expenses are reported at the appropriate historical exchange rates (not an average for the period).

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Chapter 20. INTERNATIONAL Human Resource MANAGEMENT

I. INTRODUCTION

Human resource management (HRM) refers to the activities that a company takes to staff its organization. International human resource management is more complex and poses challenges to MNEs because of environmental differences among countries. This chapter discusses various aspects of human resource management as they apply to MNEs’ managers.

II.
STAFFING FRAMEWORKS

https://www.youtube.com/watch?v=BjSX3FVAkgw

There is a powerful relationship between HRM processes, management productivity, and firm performance. Thus, an effective HRM can be a source of competitive advantage. The function of HRM is to hire the right person in the right job in the right place for the right salary.

International HRM involves hiring the right person who can be either a local (from the host country) or an expatriate (from the home country or a third country). The decision of the country of origin of managers will depend on the staffing policy (or framework) adopted. MNEs can adopt either the ethnocentric policy, the polycentric policy, or the geocentric policy.

A. Ethnocentric policy:

An ethnocentric policy is a staffing framework adopted by MNEs that fill management positions with home-country nationals. This policy has advantages and disadvantages:

1. Advantages: MNEs use the ethnocentric policy:

– To maintain command and control consistent with headquarters’ policy

– To fill local talent shortcomings by transferring best practices from headquarters

– If the MNE has adopted the home replication strategy

– Safeguard intellectual property in joint ventures

– Counteract high turnover among local employees

– Help managers develop a global outlook.

2. Disadvantages: Filling key management position with home-country nationals can:

– Lead the company to adopt a narrow perspective in foreign markets

– Limit MNEs’ exposure to different and possibly better ways of doing things

– Leave local managers and workers unmotivated and demoralized.

B. Polycentric policy:

A polycentric policy is a staffing framework adopted by MNEs that fill management positions with host-country nationals (locals). This policy has advantages and disadvantages:

1. Advantages: MNEs use the polycentric policy:

– To control costs (compared to sending someone to work abroad)

– To better deal with host-country nationalism and be seen as better citizen

– To develop local management talent and therefore boost employee morale

– If the MNE has adopted the multidomestic strategy

– Benefit from host-country nationals’ understanding of local stakeholders and environments

2. Disadvantages: Drawbacks of the polycentric policy include:

– Potential disengagement of local staff from the parent company

– Problems of accountability and allegiance to parent company

– Development of gaps between headquarters and local operations

C. Geocentric policy:

A geocentric policy is a staffing framework adopted by MNEs that fill management positions with the best people regardless of their nationality. This policy has advantages and disadvantages

1. Advantages: MNEs use the geocentric policy when:

– The MNE has adopted the global strategy or the transnational strategy

– The MNE needs to generate new ideas through worldwide learning opportunities

2. Disadvantages: Drawbacks of the geocentric policy include:

– High costs of identifying, developing and keeping world-class talents

– Having to deal with legal contingencies such as immigration and workplace regulations

III. MANAGING EXPATRIATES

https://www.youtube.com/watch?v=_0rvZexhViU

An expatriate is a person who is sent temporarily to work in a country other than his or her country of legal residence. Expatriates can be home-country nationals or third-country nationals. Home-country nationals are citizens of the country in which the company is headquartered. Third-country nationals are citizens of neither the host country nor the home country. Key issues involved in managing expatriates include expatriate selection, expatriate failure, expatriate preparation, expatriate compensation, and expatriate repatriation.

A. Expatriate selection:

The process of expatriate selection involves screening executives to find those with the greatest inclination and highest potential for a foreign assignment. Screening can be done in terms of technical competence, adaptiveness, and leadership ability:

1. Technical competence: Technical competence (usually indicated by past performance) is a

significant determinant of success in foreign assignments. The foreign subsidiary manager must

understand both the technical necessities of a position and also the unique conditions of foreign

environments such as scaled-down plant and equipment, varying productivity standards, and less

efficient national infrastructure

2. Adaptiveness: Three types of adaptive characteristics influence an expatriate’s success when

entering a new culture:

– Self-maintenance: An expatriate needs qualities such as personal resourcefulness because things do not always go as planned in a foreign environment

– Satisfactory relationships with host nationals: An expatriate needs to have the ability to successfully interact with new and different people (host-country nationals or locals)

– Sensitivity to host environments: An expatriate needs to effectively interpret how colleagues, customers, and competitors in the local market see events

3. Leadership ability: Leadership ability is key to an expatriate’s success since expatriates often assume a greater breadth and depth of leadership responsibility on a foreign assignment than they likely would in the home country. To be successful, an expatriate should demonstrate communication skills, motivation, self-reliance, courage, risk-taking, experience, and diplomacy.

B. Expatriate failure:

https://www.youtube.com/watch?v=KgH73elCLvM

Expatriate failure occurs when a manager returns prematurely home from a foreign

assignment. The causes of expatriate failure include poor job performance, and the inability of

the expatriate and/or a spouse to adapt to the host nation’s environments. In the 1980s, research

reported that between 16–40% of Americans sent abroad to developed countries returned early,

while nearly 70% sent to less developed countries returned home early.

The average cost of an expatriate failure can be as high as three times the annual domestic

salary plus the cost of relocation. In addition, there are additional personal, family, and career

costs to expatriate failure. MNEs may try to reduce failure rates through improved training and

better selection procedures.

C. Expatriate preparation:

A number of issues should be part of a good preparation program:

1. General country understanding. The most common predeparture training is an informative

briefing about the way things work in the host country. Topics generally include things like

politics, economics, features of the workplace, and lifestyle.

2. Cultural sensitivity. Cultural training tries to preempt the effects of culture shock by helping

employees to take an open mind to the different ideas, attitudes, beliefs and norms they are likely

to encounter in the host culture

3. Practical skills. This training attempts to familiarize the expatriate and his or her family with

the routines of life in the host country. Issues such as schooling, socializing, and shopping are

to be clearly addressed.

D. Expatriate compensation

https://www.youtube.com/watch?v=_UEGOv_UAts

The amount and type of compensation needed to entice an individual to accept a foreign assignment may vary widely by person and locale. Company practices also vary in terms of compensation for differences. The most common approach to expatriate pay is the balance sheet compensation plan, which aims to develop a salary structure that equalizes purchasing power across countries so expatriates have the same standard of living in their foreign assignment as they had at home. Components of expatriate compensation:

1. Base salary: It usually falls in the same range as the base salary for the comparable job in the home country and is paid in either home-country currency or local currency

2. Foreign service premium: This is an extra pay given to expatriates for working outside the home country. This is to reward expatriates for living far from family/friends, facing a new culture, language, & workplace

3. Fringe benefits: Firms typically provide the same level of medical and retirement benefits abroad as they would at home, and may expand benefits to deal with local contingencies such as transferring ill employees or family members to out-of-country medical facilities

4. Tax differentials: Firms may adjust compensation even higher in high tax rate countries in order to make sure that expatriates have an equivalent after-tax income in the new location. In cases of double taxation, the MNE pays the expatriate’s tax bill in the host country

5. Allowances: MNEs adjust the total compensation package with a variety of allowances that help reduce the difficulties the executive and his family face. These allowances may include:

– Cost-of-living allowances: Companies usually pay for differences in cost-of-living for more expensive locations so that expatriates can enjoy the same living standards abroad as they would at home

– Housing allowances: Housing allowances ensure that expatriates will duplicate their customary quality of housing

– Spouse allowances: A spouse allowance compensates for a spouse to find work and offsets the loss in income due to a spouse forsaking his or her job

– Hardship allowances: A hardship allowance is paid to expatriates assigned to dangerous or especially difficult locations. Companies may also need to purchase ransom insurance, provide safety training, pay for home alarm systems and security guards, and assess their legal liability regarding employee safety for employees working in remote or dangerous areas

– Other allowances: MNEs may also include travel allowances to pay for visits back to the home country, and education allowances pay for the cost of children’s schooling.

E. Expatriate repatriation

https://www.youtube.com/watch?v=QS5n2R9wtmo

Repatriation is the process of returning the expatriate to his or her home country once the foreign assignment is completed. Unfortunately, problems may arise with repatriation:

1. Work readjustment: Returning home can be difficult in a work sense in that others may have been promoted, the returning manager is no longer a “big fish in a little pond,” and a job may not be ready upon their return

2. Personal readjustment: Expatriates may experience reverse culture shock when returning home. They may find that they have to relearn things they took for granted

3. Changes in personal finances: Most expatriates enjoy a rich lifestyle and returning home with fewer benefits and perks may be difficult.

There are ways to ease repatriation problems. Effective human resource practices for soothing re-entry includes placement in jobs that build on foreign experiences, a reorientation program and a corporate mentor who looks after expatriates’ interests while they are abroad.