1. 1 Chapter 2 - Trading and Investing in International Business International Business by Ball, McCulloch, Frantz, Geringer, and Minor

2. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-2 Chapter Objectives  Appreciate the magnitude of international trade.  Identify the direction of trade.  Explain the size, growth, and direction of U.S. foreign direct investment.  Understand the reasons for entering foreign markets.  Understand the international market entry methods.  Explain the many forms of strategic alliances.  Discuss channel members available to companies that export indirectly or directly.  Explain the structural trends in wholesaling and retailing.

3. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-3 Introduction  International Business Activities –International Trade includes exports and imports. –Foreign Direct Investment (FDI) International companies must make FDI to establish and expand their overseas operations. –Foreign Sourcing is the overseas procurement of raw materials, components, and products.

4. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-4 Volume of Trade  In 1990, –volume of international trade in goods and services surpassed $4 trillion.  In 1999, –international trade in goods and services reached $6.8 trillion. –One-fourth of everything grown or produced in the world is now exported.

5. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-5 Volume of Trade  Quadrupling of world exports in less than 30 years demonstrates –that the opportunity to increase sales by exporting is a viable growth strategy.

6. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-6 Direction of Trade  More than one-half of exports from developing nations go to developed countries. –However, proportion is declining.  Nearly three-fourths of exports from developed economies go to other industrialized countries. –Exceptions are Japan, U.S., Australia, and New Zealand.

7. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-7 Direction of Trade - The Exceptions  Reasons Japan exports more to developing nations –Japan established extensive distribution in developing nations since early 1900s. –Uses “sogo shosha” to import raw materials and components necessary for the Japanese industry, due to lack of local sources for raw materials.

8. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-8 Direction of Trade - The Exceptions  Reasons the United States exports more to developing nations –The U.S. has significantly more subsidiaries in developing countries than Japanese companies –Some customers prefer to buy from American firms

9. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-9 Major Trading Partners  Reasons to focus on major trading partners –The business climate in the importing nation is relatively favorable. –Export and import regulations are not insurmountable. –There are no strong cultural objections to buying that nation’s goods. –Satisfactory transportation facilities have already been established.

10. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-10 Major Trading Partners  Reasons to focus on major trading partners (cont’d) –Import channel members are experienced in handling import shipments from the export area. –Foreign exchange is available to pay for exports. –The government of a trading partner may apply pressure on importers to buy from countries that are good customers for that nation’s exports.

11. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-11 Major Trading Partners  Major U.S. Trading Partners –Mexico and Canada Share common border with the U.S. –Nations from East and Southeast Asia have become important trading partners. South Korea, Taiwan, Malaysia, Singapore, Thailand, and the Philippines are examples. These countries export electronic products and components and other labor intensive goods to the U.S.

12. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-12 Foreign Investment  Two components of foreign investment –Portfolio investment Purchase of stocks and bonds solely for the purpose of obtaining a return on the funds invested. –Direct investment Investors participate in the management of the firm in addition to receiving a return on their money. applies when investors equity participation ratio is 10 percent or more.

13. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-13 Using Foreign Production to Lower Costs  In-bond (maquiladora) industry –NAFTA related  Caribbean Basin Initiative  Andean Trade Preference Act  Growth Triangles  Export Processing Zones

14. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-14 Protecting Foreign Markets  Signs that an overseas market is being threatened –Lack of foreign exchange –Local production by competitors –Downstream markets –Protectionism

15. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-15 How to Enter Foreign Markets  Indirect Exporting –Exporting of goods and services through various types of home-based exporters Manufacturers’ export agents - sell for manufacturer Export commission agents - buy for overseas customers Export merchants - purchase and sell for own accounts International firms - use the goods overseas

16. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-16 How to Enter Foreign Markets  Costs associated with indirect exporting –Exporters pay a commission to manufacturers’ export agents, export commission agents, and export merchants. –Foreign business can be lost if the exporters decide to change their sources of supply. –Firms gain little experience from indirect exporting.

17. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-17 How to Enter Foreign Markets  Direct Exporting –The exporting of goods and services by the exporting firm. –Sales company A business established for the purpose of marketing goods and services, not production.

18. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-18 Foreign Manufacturing  Six distinct alternatives available for foreign manufacturing –Wholly owned subsidiary –Joint venture –Licensing agreement –Franchising –Contract manufacturing –Management contract

19. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-19 Wholly Owned Subsidiary  A company that wishes to own a foreign subsidiary outright may –start from the ground up by building a new plant. Historically the preference of American companies –acquire a going concern. Currently the preference of foreign investors –purchase its distributor, thus obtaining a distribution network familiar with its products.

20. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-20 Joint Ventures  A Joint Venture may be –a corporate entity formed by an international company and local owners. –a corporate entity formed by two international companies to do business in a third market. –a corporate entity formed by a government agency and an international firm. –a cooperative undertaking between two or more firms of a limited-duration project.

21. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-21 Joint Ventures  Reasons to joint venture –Attempt to lose strong foreign nationalistic sentiment –Acquire expertise, tax, and other benefits –Risk diversification  Disadvantage of joint ventures –Profits must be shared –May not have control if only 49 percent foreign ownership is the limit

22. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-22 Licensing Agreement –Firm will grant another firm the right to use any kind of expertise for one or more of the licensor’s products. –Licensee pays fixed sum when signing and pays royalties of 2%-5% of sales over the life of the contract. –Examples of companies that license Texas Instruments, Pierre Cardin, Coca-Cola, Cosmopolitan magazine

23. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-23 Franchising –Permits the franchisee to sell products or services under a highly publicized brand name and well- proven set of procedures with a carefully developed and controlled marketing strategy –Common types of franchises Hotels (Hilton) Business services (Manpower) Soft drinks (Coca-Cola) Automotive products (Midas)

24. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-24 Contract manufacturing –One firm contracts with another to produce products to its specifications but assumes responsibility for marketing. –Different methods to employ contract manufacturing As a means of entering a foreign market without investing in plant facilities. Subcontract assembly work or the production of parts to independent companies overseas. –This method also referred to as FDI without investment

25. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-25 Management Contract –Arrangement under which a company provides managerial know-how in some or all functional areas to another party for a fee. –Used in joint ventures Enables the global partner to control many aspects of a joint venture even when holding only a minority position. –Purchasing commission Receive commission for acting as a purchasing agent or imported raw materials and equipment.

26. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-26 Strategic Alliances –Partnerships between competitor, customers, or suppliers. –Also referred to as competitive alliances, competitive collaborations, or coopetition. –Reasons firms form strategic alliances Expanding global competition. The growing cost of research, product development, and marketing. The need to move faster in carrying out global strategies.

27. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-27 Multidomestic or Global Strategy –Seven Global Dimensions along which Management can Globalize Product Markets Promotion Where value is added to the product Competitive strategy Use of non-home-country personnel Extent of global ownership of the firm

28. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-28 Multidomestic or Global Strategy  Multidomestic Strategy –Zero standardization along the seven global dimensions.  Global Strategy –Complete standardization along the seven global dimensions.

29. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-29 International Channels of Distribution Members  Indirect Exporting Distribution Members –Exporters that sell for the manufacturer –Exporters that buy for their overseas customers –Exporters that buy and sell for their account –Exporters that purchase for foreign users

30. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-30 International Channels of Distribution Members  Indirect Exporting –Exporters that sell for the manufacturer Manufacturers’ export agents –Act as the international representatives for various noncompeting domestic manufacturers Export management companies –Act as the export department for noncompeting manufacturers International trading companies –Act as agents for some companies and as wholesaler for others

31. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-31 International Channels of Distribution Members  Indirect Exporting –International Trading Companies (cont’d) Sogo Shosha –The largest of the Japanese trading companies –Originally established by the zaibatsu (centralized, family-dominated economic groups) Korean general trading companies Export trading companies

32. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-32 International Channels of Distribution Members  Indirect Exporting –Exporters that buy for their overseas customers Export commission agents –Represent overseas purchasers, such as import firms and large industrial users. –These agents are paid a commission by the purchaser for acting as resident buyers in industrialized nations.

33. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-33 International Channels of Distribution Members  Indirect Exporting –Exporters that buy and sell for their own account Export merchants –Purchase products directly from the manufacturer and then sell, invoice, and ship them in their own names. Cooperative exporters –Established international manufacturers that sell the products of other companies in foreign markets along with their own. Webb-Pomerene Associations –Organizations of competing firms that have joined together for the sole purpose of export trade.

34. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-34 International Channels of Distribution Members  Indirect Exporting –Exporters that purchase for foreign users and middlemen Large foreign users –Buy for their own use overseas. Export resident buyers –Perform essentially the same functions as export commission agents.

35. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-35 International Channels of Distribution Members  Direct Exporting Distribution Members –Manufacturer’s agents –Distributors or wholesale importers –Retailers –Trading companies

36. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-36 International Channels of Distribution Members  Direct Exporting –Manufacturer’s agents Represent various noncompeting foreign suppliers, and take orders in those firm’s names. –Distributors or wholesale importers Independent merchants that buy for their own account.

37. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-37 International Channels of Distribution Members  Direct Exporting –Retailers Frequently direct importers. –Trading companies Develop trade and serve as intermediaries between foreign buyers and domestic sellers and vice versa.

38. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-38 Foreign Production  Wholesale Institutions –Diversity of wholesaling structures –Parallel importers and gray market goods Importer buys from a dealer in the home country. Unauthorized deal imports from the foreign subsidiary and competes in the home country. Unauthorized importer buys products overseas from the home office and competes with the local subsidiary. Goods are bought for export but are sold on the domestic market instead.

39. McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved 2-39 Retail Institution  Hypermarkets –Huge combination supermarket/discount houses with five or six acres of floor space where both soft goods and hard goods are sold.  Superstores –Name given to hypermarkets in Japan, some parts of Europe, and the United States.