Introduction to International Business Chapter 1

Managing the Risks of International Business “THE MANAGEMENT OF INTERNATIONAL BUSINESS IS THE MANAGEMENT OF RISK” 1999 West Educational Publishing

1999 West Educational Publishing Managing Risk Market entry strategy Shifting the risk Using the contract to fix responsibility, allocate risk and price accordingly Payment and credit risk Managing distance and communications 1999 West Educational Publishing

1999 West Educational Publishing Managing Risk Managing language and cultural differences Managing currency and exchange rate risk 1999 West Educational Publishing

1999 West Educational Publishing Managing Risk Political risk? Causes? How to handle? Foreign courts and foreign law? See DIP SpA v. Commune di Bassano p.39 challenging Italian retail licensing requirements. What result? 1999 West Educational Publishing

1999 West Educational Publishing Managing Risks Currency/Exchange Rate Risks Transaction Risks * delivery risk * marine risk * litigation risk- Gaskin, p.34 1999 West Educational Publishing

1999 West Educational Publishing Political Risks Managing political risk Managing risk of foreign law and courts - choice of law and forum clauses Risk of international hostilities 1999 West Educational Publishing

Implications for International Business Political, economic, and legal environments of a country influence attractiveness raise ethical Issues Attractiveness balance long-term risks with short-term benefits of doing business in a foreign country benefits depend on: size, wealth, future economic growth first mover advantages identify “star” future economies costs are affected by: political payoffs economic sophistication (may be more costly to operate in LDCs, no infrastructure) legal framework impact on costs 1999 West Educational Publishing

Implications for International Business Ethical Issues human rights adherence to same standards abroad as at home product safety work safety environmental protection bribes Foreign Corrupt Practices Act (1977) what is unethical is not necessarily illegal 1999 West Educational Publishing

Legal Systems and International Business property rights use of a resource use made of income from resource enforcement issues Public vs private action violations protection of Intellectual Property patent: inventors’ exclusive rights to manufacture, use, sale an invention copyright: same for authors, composers, artists, publishers trademarks: unique designs and names, often officially registered Paris Convention for the Protection of Industrial Property (96 countries) WTO/GATT 1999 West Educational Publishing

Legal Systems and International Business product safety and product liability criminal / civil liability contract law document that specifies conditions under which an exchange will happen rights/obligations of parties differences based on legal tradition common law system civil law system 1999 West Educational Publishing

Forms of International Business Trade International licensing of technology and intellectual property (trademarks, patents and copyrights) Foreign direct investment 1999 West Educational Publishing

External or “arms-length” Modes of Entry Firm does business overseas without investing in owned assets and own human resources in target market Exporting Sell “domestically” produced products into foreign markets through local independent agents or directly to customers Turnkey projects Special case of exporting for firms that set up production plants or build facilities for others The “exporting firm” builds the facility overseas, starts it up, turns it over to the host country owner, and then departs Oil firms, construction firms, manufacturers 1999 West Educational Publishing

External or “arms-length” Modes (cont.) Licensing Licensor grants rights to licensee for use of intangible property over a specified period in return for a fee Intangible property: patents, inventions, formulas, processes, designs, copyrights, trademarks Licensing agreement likely allows licensor quality assurance rights over actual use of intangible asset If licensee sells to consumers using the licensor’s brand name, the license may also give the licensor rights to strategic brand control Franchising Franchisor, grants franchisee use of intangibles under the condition that franchisee follow strict rules of operating the business Mode of operation is part of the brand image International strategic alliances 1999 West Educational Publishing

“Internal” Modes of Entry These involve Foreign Direct Investment Wholly owned subsidiaries Firms owned 100% by a company in a foreign country International joint ventures Firms that are owned jointly by two or more otherwise independent firms; most IJVs are between two firms One (or more) parent firms are non-resident in the host market Ownership % may vary from majority foreign owned, to 50%-50% owned, to minority owned by the foreign firm 1999 West Educational Publishing

1999 West Educational Publishing Trade Exporting Importing Subject to government controls over trade: Tariffs non tariff barriers Trade in services - increasing 1999 West Educational Publishing

Intellectual Property and Licensing Intellectual Property Rights: Copyrights: legal rights to an artistic or written work Trademarks: the legal right to use a name or symbol; that identifies a firm or its product Patents: governmental grants to inventors assuring them of the legal right to produce, use and sell their invention for a period of years 1999 West Educational Publishing

International Licensing Agreements International licensing agreements: contracts by which the holder of intellectual property will grant certain rights in that property to a foreign firm to use for a period of time under certain conditions in return for a licensing fee Technology transfer Franchising Agreements : licenses to use trademark and form of business operations 1999 West Educational Publishing

Protecting Intellectual Property Importance of IP for US trade Difficulty of combating piracy 1999 West Educational Publishing

Legal and Political Issues in Technology Transfer Agreements Regulated by some governments generally in Asia, Latin America, and the Middle East terms restricted to benefit the developing country 1999 West Educational Publishing

Foreign Direct Investment Ownership and active control of ongoing business concerns including investment in manufacturing, mining, farming and other production facilities Wholly owned foreign subsidiary Joint venture Mergers and acquisitions 1999 West Educational Publishing

The Legal Environment in Developing Countries How different? Examples: foreign exchange, controls on trade, licensing and investments Bhopal discussion Reform and privatization Transition to market economies 1999 West Educational Publishing

1999 West Educational Publishing Ethical Issues “The law is a floor…but ethical codes and personal values call on us to exceed that which is required by law.” Do you agree? Source of ethics? 1999 West Educational Publishing

1999 West Educational Publishing Ethical Issues Bribes? Child labor? Different working conditions and wages? Corporate response? 1999 West Educational Publishing

1999 West Educational Publishing Conclusion Global knowledge Trade, licensing and investment How to manage risk? Good research, understand risk, know the law and use contract to protect you and help you manage risk. 1999 West Educational Publishing

1999 West Educational Publishing Web Sites www.firstgov.gov www.ita.doc.gov/ www.ciber.bus.msu.edu/busres.htm www.ustr.gov www.wto.org www.bea.doc.gov www.worldbank.org 1999 West Educational Publishing

1999 West Educational Publishing Pro Golf Case First Flight v. Pro. Golf, p.15 Facts: Pro Golf negotiated with Wynn to act as sales representative in Japan. Wynn incorporated FFA in Japan. ProGolf entered into an agreement where FFA could use First Flight trademark. FFA tried to sublicense the trademark. 1999 West Educational Publishing

1999 West Educational Publishing Pro Golf Case Progolf terminated the agreement. Pro Golf learned that they had not properly registered their trademark in Japan. FFA sued for breach of contract and Pro Golf counterclaimed for royalties. Holding: Pro Golf was permitted to terminate its Japanese sales agency with FFA because it was terminable at will. 1999 West Educational Publishing

1999 West Educational Publishing Pro Golf Case (cont.) However Pro Golf was not entitled to royalties because they had not perfected their rights to the trademark under Japanese law. 1999 West Educational Publishing

1999 West Educational Publishing Franchising Case Raymond Dayan v. McDonald’s p. 18 Facts: Dayan had franchise to operate McDonald’s in Paris. There was a serious problem with QSC (quality, service and cleanliness standards. McDonald’s wanted to terminate the franchise but Dayan objected. 1999 West Educational Publishing

Dayan v. McDonald’s Corp. Holding: After much legal maneuvering on two continents, McDonald’s was able to terminate the franchise. Dayan was able to continue his restaurants under a different name. What is the impact of this on the franchiser? 1999 West Educational Publishing

DIP SpA v. Commune di Bassano “…it is sufficient to observe that rules such as those contained in the Italian Act make no distinction according to the origin of the goods distributed by the businesses concerned, that their purpose is not to regulate trade in goods… 1999 West Educational Publishing

DIP SpA v. Commune di Bassano And that the restrictive effect which they might have on the free movement of goods are too uncertain and indirect for the obligation which they impose to be regarded as hindering trade between member states.” 1999 West Educational Publishing

1999 West Educational Publishing Gaskin v. Stumm Handel Facts: Issue: Is the forum selection clause in the contract which had been written in German designating the courts of Germany enforceable thus precluding the plaintiff from proceeding in a U.S. Court? Yes 1999 West Educational Publishing

1999 West Educational Publishing Gaskin v. Stumm Handel Why did the court rule for the defendant? What circumstances might have altered the result? What advice do you have for the plaintiff for the future? 1999 West Educational Publishing