What Is Globalization?

The Globalization of Markets

The merging of historically distinct and separate national markets into one huge global
marketplace.
• Falling barriers to cross-border trade and investment.
• Global tastes.
• Benefits small and large companies.
• Significant differences between national markets.
• Products that serve universal needs are global, such as oil.
• Competitors may not change among nations.

Globalization of Production
Sourcing goods to take advantage of differences in cost and quality of factors of production
Early outsourcing was confined to manufacturing.
global products:
Impediments prevent optimal dispersion of activities:
• Formal and informal barriers to trade.
• Barriers to foreign direct investment.
• Transportation costs.
• Political and economic risk.
• Challenge of coordinating globally dispersed supply chain.

Global Institutions
-GATT
-WTO: Polices the world trading system
-IMF: Established to maintain order in the international monetary system
-UN: Promotes peace through international cooperation and collective security
UN Charter has four basic purposes:
• Maintain international peace and security.
• Develop friendly relations among nations.
• Cooperate in solving international problems and in
promoting respect for human rights.
• Be a center for harmonizing the actions of nations
World Bank: Promotes economic development.
• Focused on making low-interest loans to cash-strapped governments in poor nations that
wish to undertake significant infrastructure investments.
What Is Culture?
Culture
• A system of values and norms shared among a group of people and
that when taken together constitute a design for living.
Values
• Ideas about what a group believes to be good, right, and desirable.
Norms
• Social rules and guidelines that prescribe appropriate behavior in
particular situations.
Society
• A group of people sharing a common set of values and norms.

Values:
• Provide the context within which a society’s norms are established and justified
•They are invested with emotional significance.
• Reflected in the economic systems of a society
Norms:
• Social rules that govern people’s actions toward one another.
• Folkways are routine conventions of everyday life.
• Examples: appropriate dress code, good social manners.
• Include rituals and symbolic behavior.
• Mores are norms seen as central to functioning of society.
• Example: laws against theft.
• Have greater moral significance than other norms.

Culture, Society, and the Nation-State

The relationship between a society and a nation-state is not strictly one-to-one.
• Nation-states are political creations.
• A nation can have several cultures, and a culture can embrace several nations.
• Can be different levels of culture within a country.
Determinants of Culture
The values and norms of a culture evolve over time.
• Religion.
• Political philosophy.
• Economic philosophy.
• Education.
• Language.
• Social structure.
Social Structure
Refers to the basic social organization of a society.
Two dimensions help explain differences among cultures:
1. The degree to which the basic unit of social organization is the
individual, as opposed to the group.
2. The degree to which a society is stratified into classes or castes

Social Stratification
Social strata are hierarchical social categories often based on family background, occupation,
and income.
• Individuals born into a particular stratum, which affects life chances.
Four basic principles:
• Is a trait of society.
• Carries over into next generation.
• Is generally universal but variable.
• Involves not just inequality but also beliefs.

Social mobility:
• Extent to which individuals can move out of the strata into which they
are born.
• Varies among societies.
• Caste system is a closed system where social position is determined by family and change
is usually not possible.
• India has four main castes.
• Class system is less rigid, and position can be changed through achievement and luck.

Significance:
• Can affect business operations.
• Class consciousness is a tendency for individuals to perceive themselves in terms of their
class background.
• Makes it difficult to establish a competitive advantage in a global
economy.

360° View: Managerial Implications

Cultural Literacy and Competitive Advantage
Cross-cultural literacy:
• Companies must be informed about the culture of another nation when conducting
international business.
• Ethnocentrism is the belief in the superiority of one’s own ethnic group or culture.
Culture and competitive advantage:
• Values and norms influence costs of doing business and the costs of doing business
influence ability to establish competitive advantage.
• Some say culture of modern Japan lowers the cost of doing business relative to Western
nations.

HRM
• Strong link with profitability.
• Has a critical impact on the people, culture, incentive, and control system elements of the
firm’s organizational architecture.
• Tends to be weak in multinational organizations.
• Must be congruent with the firm’s strategy.
Staffing Policy
Selecting individuals who have the skills required to do particular jobs.
Tool for developing and promoting the desired corporate culture of the firm.
• Corporate culture can help firm implement its strategy.

Types of Staffing Policies

Expatriate Managers:
Used by ethnocentric and geocentric staffing policies Inpatriates
Expatriate Failure Rates.
• Results in premature return from a foreign posting and high resignation rates.
• High costs.
• Reasons for U.S. manager’s failure (Tung):
1. Inability of spouse to adjust.
2. Manager’s inability to adjust.
3. Other family problems.
4. Manager’s personal or emotional maturity.
5. Inability to cope with larger overseas responsibilities.

Expatriate Selection.
• Reduce expatriate failures by improving selection
procedures.
• Four dimensions that predict success (Mendenhall and Oddou):
• Self-orientation.
• Others-orientation.
• Perceptual ability.
• Cultural toughness.

Training versus Development

Training gives expatriate managers skills for the foreign posting.
Development is intended to develop the manager’s skills over his or her career with the firm.
• New emphasis on general management development programs.
• Now seen as strategic tool.

Training for Expatriate Managers

Cultural Training.
• Seeks to foster an appreciation for the host country’s culture,
history, politics, economy, religion, and social and business
practices.
• Familiarization trip to the host country to ease culture shock.

Language Training.
• Exclusive reliance on English diminishes an expatriate
manager’s ability to interact with host-country nationals.
• Willingness to communicate in language of host country improves effectiveness.
Practical Training.
• Aimed at helping expatriate manager and family ease themselves into day-to-day life in the
host country.
• Support network of friends; often an expatriate community.

Repatriation of Expatriates
Should be seen as the final link in integrated process.
• They often face challenges at the home organization, including not having a job that uses
their new skills.
• HRM should develop good programs for reintegrating expatriates back into work life within
their home-country organization.

Management Development and Strategy

• Ongoing management education.
• Rotations of managers through number of jobs within the firm to give them varied
experiences.
• Increasingly used as a strategic tool.
• Helps build informal management network in firm.

Performance Appraisal
Performance Appraisal Problems
Unintentional bias.
• Both host-nation managers and home-office manager subject to bias.
-Distance and lack of experience working abroad by home-country managers.
Home-office managers are often not aware of what is going on in a foreign operation.
• Tend to rely on hard data in evaluating performance.

Guidelines for Performance Appraisal

Reducing bias.
• Give more weight to an onsite manager’s appraisal than to an offsite manager’s appraisal.
• Home-office managers should be consulted before an onsite manager completes a formal
termination evaluation.

Compensation
National Differences in Compensation
Should the firm pay executives in different countries according to the prevailing standards in
each country, or should it equalize pay on a global basis?
• More of a problem in geocentric staffing.
Many firms now moving toward consistent global standards.

Expatriate Pay
Balance sheet approach.
• Includes base salary, a foreign service premium, allowances of various types, tax
differentials, and benefits.
• Attempts to provide expatriates with the same standard of living in their host countries as
they enjoy at home plus a financial inducement.
Base Salary.
• Same range as the base salary for a similar position in the
home country.
• Normally paid in either the home-country currency or in the
local currency.
Foreign Service Premium.
• Extra pay the expatriate receives for working outside their
country of origin.
• Inducement to accept foreign postings.

Allowances:
• Hardship.
• Housing.
• Cost of living.
• Education.
Taxation.
• May have to pay income tax to both home- and host-country governments.
Benefits.
• Same level of medical and pension benefits abroad as at home.

Reasons a Diverse Workforce May Improve Performance

1. Diverse talents bring insights into the needs of a diverse customer base.
2. An enterprise with a homogenous employee base is underutilizing talent found among
women and minorities.
3. Customers may appreciate interacting with an enterprise whose employees look like
them, and therefore, have a better understanding of their needs, tastes, and preference.
4. May improve the brand image of an enterprise.
5. Increases employee satisfaction, which results in higher productivity.
Steps to Take
1. Understand that diversity efforts represent a type of organizational change and should be
driven from the top.
2. Top managers must create a clear value proposition that identifies the benefits of building
a diverse and inclusive culture.
3. Managers must set clear goals (not quotas) for what they would like to achieve, identify
the gap between the current situation and the desired state, and measure performance
improvements over time.
4. Managers should be held accountable for attaining global diversity goals and reward those
who hit or exceed goals.
5. Hiring and promoting should include people from diverse backgrounds.

Diversity Workshops
Overcome the subconscious biases and stereotyping that may lead to discrimination against
minority employees.
• Role playing.
• Reminding people about biases.
• Helping people focus on differences to reduce stereotyping.
Recruit all genders and minority groups.
Adjust work policies to foster more diverse workforce.

Free Trade
• Occurs when governments do not attempt to restrict what citizens can buy from another
country or what they can sell to another country.
• Nations nominally committed to free trade but intervene to protect interests of politically
important groups.
• Modern international trading system is based on General
Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO).

Import Tariffs
• Taxes levied on imports.
• Specific tariffs are levied as a fixed charge for each unit of imported good.
• Ad valorem tariffs are levied as a proportion of the value of an imported good.
• Are paid by the importer.
Governments get an increase in revenue.
Domestic producers gain protection form foreign competitors.
Consumers pay more for certain imports.
Economic impact:
• Are pro-producer and anti-consumer.
• Reduce overall efficiency of the world economy.

Export tariff is a tax placed on the export of a good.

• Goal is to discriminate against exporting in order to ensure that there is sufficient supply of
a good within a country.
Export ban is a policy that partially or entirely restricts the export of a good

Subsidies
Government payment to a domestic producer.
1. Cash grants.
2. Low-interest loans.
3. Tax breaks.
4. Government equity participation.
Help domestic producers compete against foreign imports and gain export markets.
Domestic producers gain while consumers typically absorb the costs.

Import Quotas and Voluntary Export Restraints

• Import quotas are direct restrictions on quantity of some good that may be imported.
• Tariff rate quotas provide a lower tariff rate to imports within the quota than those over
the quota.
• Voluntary export restraint (VER) is a quota on trade imposed by the exporting country.
• Quota rent refers to the extra profit producers make when supply is artificially limited by
an import quota.

Local Content Requirements (LCR)

• Some fraction of a good must be produced locally.
• Expressed in either physical or value terms.
• Protects domestic producers.
• Consumers face higher prices.

Administrative Policies
• Bureaucratic rules designed to make it difficult for imports to enter a country.
• Hurt consumers by limiting choice.
Antidumping Policies
Dumping occurs when companies sell goods in a foreign market at below their costs of
production or below their “fair” market value.
• A way to unload excess production.
Antidumping policies punish foreign firms that engage in dumping, protecting domestic
producers from unfair foreign competition.
• Also known as countervailing duties.

Political Arguments for Intervention

Protecting jobs and industries:
• Most common political reason for government intervention.
• Critics say claims of unfair competition are overstated for political reasons.

Protecting national security:

• Certain industries, like defense-related ones, must be protected.

Retaliating:
• Government should use threat of intervention as
bargaining tool to open foreign markets.
• May liberalize trade and result in economic gains.
• Risky strategy.

Protecting consumers:
• Protect from unsafe products.
• Indirect effect is to limit or ban imports.

Furthering foreign policy objectives:

• Government may grant preferential trade terms to a country where it wants to build strong
relations.
• Trade policy can be used to punish “rogue states.”

Protecting human rights:

• Government trade policy used to improve human rights policies of trading partners
Economic Arguments for Intervention
The infant industry argument:
• Governments should temporarily support new industries until they have grown strong
enough to meet international competition.
• Support comes through tariffs, import quotas, subsidies.
• Two criticisms:
1. Protection of manufacturing from foreign competition does
no good unless it helps make the industry efficient.
2. Assumes firms are unable to make efficient long-term
investments by borrowing money from the domestic or
international capital market.

Strategic trade policy:

• Government can help raise national income when a domestic firm gains first-mover
advantages.
• Might pay for a government to intervene in an industry by helping domestic firms
overcome the barriers to entry created by foreign firms that have already reaped first-mover
advantages.
• Both arguments support government intervention in international trade.

Retaliation and Trade War

Strategic trade policies aimed at establishing domestic firms in a dominant position in a
global industry boost national income at the expense of other countries.
• Will probably provoke retaliation.
• Help establish antidumping policies and rules that minimize trade-distorting subsidies

Domestic Policies
• Governments don’t always act in the national interest.
• Political interest groups may influence policy.
•Strategic trade policy is almost certain to be captured by special-interest groups, which will
distort it to their own ends.

1947 to 1979: GATT, Trade Liberalization, and Economic Growth

Following the Great Depression, U.S. embraced free trade. GATT was a multilateral
agreement designed to liberalize trade by eliminating tariffs, subsidies, import quotas, etc.
• Tariff reduction was spread over eight rounds with great success.

1980 to 1993: Protectionist Trends

Three reasons for increased protectionism:
• Japan’s perceived protectionist (neo-mercantilist) policies created intense political
pressures in other countries.
• Persistent trade deficits in the U.S. and resulting unemployment.
• Use of non-tariff barriers increased (VERs).
The Uruguay Round and the World Trade Organization
Uruguay Round sought to:
• Extend GATT rules to cover trade in services.
• Develop rules on intellectual property.
• Reduce agricultural subsidies.
• Strengthen GATT’s monitoring and enforcement.

The World Trade Organization:

• Encompasses GATT and two other groups:
• General Agreement on Trade in Services (G ATS).
• Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

WTO: Unresolved Issues and the Doha Round

• The current agenda of the WTO focuses on:
1. The rise of anti-dumping policies.
2. The high level of protectionism in agriculture.
3. The lack of strong protection for intellectual property rights in many nations.
4. Continued high tariffs on nonagricultural goods and services in many nations.

Antidumping actions:
• Vague definition of what constitutes “dumping;” many countries exploiting loophole.
• Concentrated in certain sectors: metal industries, chemicals, plastics, and machinery and
electrical equipment.
• WTO pushing members to strengthen regulations governing antidumping duties.

Protection of intellectual property:

• TRIPS agreement obliges WTO members to grant and enforce patents lasting at least 20
years and copyrights lasting 50 years.
• Inadequate protections would reduce the incentive for innovation, resulting in less
economic growth.

A new round of talks: Doha.

• Have been ongoing since 2001, currently stalled.
• Agenda includes:
• Cut tariffs on industrial goods and services.
• Phase out subsidies to agricultural producers.
• Reduce barriers to cross-border investment.
• Limit use of antidumping laws
Multilateral and Bilateral Trade Agreements
• Reciprocal trade agreements between two or more partners.
• Created in response to failed Doha Round progress.
• Designed to capture gain from trade beyond WTO treaties.

Trade Barriers, Firm Strategy, and Policy Implications

Trade barriers and firm strategy:
• Trade barriers raise the cost of exports, creating a competitive disadvantage.
• Quotas may limit a firm’s ability to serve a country from locations outside the country.
• Local content requirements might raise costs.
• Firms might locate production activities in another country to reduce threat of future trade
barriers.
• Threat of antidumping action limits firm’s ability to use aggressive pricing to gain market
share.

Policy implications:
• Three drawbacks to government intervention:
• Tends to protect the inefficient rather than help firms become efficient global competitors.
• Might invite retaliation and trigger a trade war.
• Unlikely to be well executed, given the opportunity for it to be captured by special-interest
groups

International firms must consider:

1. The decision of which foreign markets to enter, when to enter them, and on what scale.
2. The choice of entry mode.
3. The role of strategic alliances.

Basic Entry Decisions

Which Foreign Markets?
Choice based on assessment of a nation’s long-run profit potential.
• Size of the market.
• Present and likely future wealth of consumers.
• Costs and risks.
The value an international business can create in a foreign market depends on suitability of
its products to that market and the nature of indigenous competition.
Six Different Entry Modes
• Exporting.
Sale of products produced in one country to residents of another country.

• Turnkey projects.
Contractor agrees to handle every detail of the project for a foreign client, including the
training of operating personnel.
• Means of exporting technology to other countries.
• Licensing.
Licensor grants rights to intangible property to another entity: patents, inventions, formulas,
processes, designs, copyrights, and trademarks.

• Franchising.
Franchiser sells intangible property (normally a trademark) to the franchisee and insists that
the franchisee agree to abide by strict rules as to how it does business.
• Joint ventures.
Cooperative undertaking between two or more firms.
• 50-50 ventures are most common.

Wholly Owned Subsidiaries

Firm owns 100 percent of the subsidiary.
• Greenfield venture – set up a new operation in host country.
• Acquisition – acquire an established firm in a host nation.
Selecting an Entry Mode
Core Competencies and Entry Mode
Technological Know-How.
• Often shared through a wholly owned subsidiary.
• Licensing and joint-venture arrangements should be avoided unless the technological
advantage is transitory.
Management Know-How.
• Less risk for franchises or joint ventures

Pressures for Cost Reductions and Entry Mode

• The greater the pressures for cost reductions, the more likely a firm will want to pursue
some combination of exporting and wholly owned subsidiaries.
• Wholly owned marketing subsidiaries give firm tight control that might be required for
coordinating a globally dispersed value chain*.
• Also gives firm ability to use profits generated in one market to improve its competitive
position in another market.
Pros of Acquisitions
• Quick to execute.
• May help preempt competitors.
• May be less risky than greenfield ventures.
• Acquisitions often produce disappointing results.

Cons of Acquisitions
Overpaying.
• Hubris hypothesis of why acquisitions fail.
• Culture clash.
• Integrating the operations of the acquired and acquiring entities often run into roadblocks
and take much longer than forecast.
• Inadequate pre-acquisition screening.

Reducing the Risks of Failure.

• Detailed audit of operations, financial position, and management culture.
• Reduce unwanted management attrition.
• Put integration plan quickly in place.
Gives firm a much greater ability to build the kind of subsidiary company it wants.
• Slower to establish.
• Risky, but less risky than acquisitions.
• Preemption possible by more aggressive global competitors.

Greenfield Venture or Acquisition?

Acquisition when:
• The firm is seeking to enter a market where there are already well-established incumbent
enterprises.
• Global competitors are also interested in establishing a presence.
Greenfield when:
• There are no incumbent competitors to be acquired.
• The competitive advantage of the firm is based on the transfer of organizationally
embedded competencies, skills, routines, and culture

Making Alliances Work

Partner Selection.
A good partner:
• Helps the firm achieve its strategic goals.
• Has capabilities the firm lacks.
• Is unlikely to try to opportunistically exploit its partner.
Choosing a partner:
• Collect as much pertinent, publicly available information on potential allies as possible.
• Gather data from informed third parties.
• Get to know potential partner as well as possible before committing to an alliance.

Alliance Structure.
• Reduce the risk of giving away too much to the partner.
• Contractual safeguards guard against risk of opportunism by a partner.
• Agree in advance to swap skills and technologies that the other covets, thereby ensuring a
chance for equitable gain.
• Cross-licensing agreements.
• Extract a significant credible commitment from the partner in advance.
Managing the Alliance.
• Be sensitive to cultural differences.
• Build trust.
• Build relational capital.
• Learn from the alliance partner and apply the knowledge within one’s own organization
Political Economy and Entry Choices continued
Two recent trends:
• Declining trade barriers have made exporting more attractive as entry mode.
• Countries have mostly become more welcoming to foreign investment and more willing to
allow foreign enterprises to establish wholly owned entities in their nations.

Foreign Direct Investment (FDI)

When a firm invests directly in new facilities to produce or market a good or service in a
foreign country.
• 10 percent or greater interest.
Once a firm undertakes FDI, it becomes a multinational enterprise..

Flow of FDI—the amount of FDI undertaken over a given time period.

• Stock of FDI—total accumulated value of foreign-owned assets at a given time.
• Outflows―flows of FDI out of a country.
• Inflows―flows of FDI into a country.
Trends in FDI
Increase in both flow and stock of FDI over past 30 years.
Growing more rapidly than world trade and world output.
• A way to circumvent trade barriers.
• Driven by political and economic changes.
• Shift toward democratic political institutions and free market economies.
• Globalization has had a positive effect.

The Direction of FDI

Historically, mostly directed at developed nations.
U.S. has been a target for FDI inflows:
• Large and wealthy domestic markets.
• Dynamic and stable economy.
• Favorable political environment and openness to FDI.
Inflows directed at developing nations and transition economies over the past decade.
• Growing importance of China as recipient of FDI.

The Source of FDI

• U.S. largest source since WWII.
• Six countries (U.S., U.K., France, Germany, Japan, and the Netherlands) account for 60
percent of all FDI outflows from 2000 to 2020.
• China became a major foreign investor around 2005, especially in less developed nations.
The Form of FDI: Acquisitions versus Greenfield Investments
Greenfield investment establishes a new operation in a foreign country.
Acquire or merge with an existing company.
• Quicker to execute.
• Can acquire valuable strategic assets.
• Can increase the efficiency of the acquired unit by transferring capital, technology, or
management skills.

Two alternatives to FDI:

• Exporting: producing goods at home and shipping to receiving country for sale.
• Licensing: granting a foreign entity the right to produce and sell a firm’s product in return
for a royalty fee.
FDI is expensive and risky compared with exporting and licensing.

Limitations of exporting:
• Transportation costs and trade barriers.
• By limiting imports through quotas and tariffs, governments increase the cost of exporting
and boost the attractiveness of FDI and licensing.

Limitations of licensing:
• Internalization theory used to explain why firms prefer FDI gives three major drawbacks to
licensing:
• Licensing may result in a firm’s giving away valuable technological know-how to a potential
foreign competitor.
• Licensing does not give a firm the tight control over production, marketing, and strategy in
a foreign country that may be required to maximize its profitability.
• The firm’s competitive advantage is based on the management, marketing, and
manufacturing capabilities, which are not amenable to licensing.
Advantages of foreign direct investment:FDI
• When transportation costs or trade barriers make exporting unattractive.
• When firms want to maintain control over technological know-how, operations, or
business strategy.
• When the firm’s capabilities are not amenable to licensing.

The Pattern of Foreign Direct Investment

Strategic behaviour:
• Knickerbocker examined relationship between FDI and rivalry in oligopolistic industries.
• Oligopoly is an industry with a limited number of large firms.
• Interdependence between firms leads to imitative behaviour.
• Imitative behaviour also occurs in FDI. (E.g., Toyota, Nissan, Honda in US and Europe)

The Eclectic Paradigm

• Championed by British economist John Dunning.
• Location-specific advantages explain rationale for FDI.
• Difficult for a firm to license its own unique capabilities and know-how to “outsiders”;,
therefore...
• Combining location-specific assets or resource endowments with the firm’s own unique
capabilities often requires foreign direct investment (e.g. Silicon Valley).
• Firms can benefit from “externalities”* by locating close to their source.

The Radical View

Roots in Marxist political and economic theory.
Multinational enterprises (MNEs) are an instrument of imperialist domination.
Influential view from 1945 to 1980s, but no longer widely accepted.
• Collapse of communism in eastern Europe.
• Abysmal economic performance of those countries that embraced the radical position.
• Strong economic performance of those developing countries that embraced capitalism.

The Free Market View

• Roots in classical economic theory and trade theories of Adam Smith and David Ricardo.
• International production should be distributed among countries according to the theory of
comparative advantage.
• FDI benefits both the source country and host country.

Pragmatic Nationalism
FDI has both benefits and costs.
Pursue policies designed to maximize the national benefits and minimize the national costs.
Tendency to aggressively court FDI believed to be in the national interest. (E.g., IBM & T.I. in
Japan; UK’s 3 Japanese car brands’ assembly plants).
• Individual states within USA compete with each other to attract FDIs,...
• Through tax breaks or grants.

Benefits and Costs of FDI

Host-Country Benefits
Resource-transfer effects:
• Supplies capital, technology, and management resources.
Employment effects:
• Brings jobs to host country that would otherwise not be created there (technology boosts
productivity)
• Indirect employment effects create jobs in support industries
• E.g., Japanese automobile MNE and jobs created by this FDI may be offset (i.e.,
substitution effect) by loss of jobs in US-owned auto companies which lost market share as a
result of Japanese competition.
Effect on competition and economic growth:
• Greenfield investment creates new enterprise.
• Increases number of players in a market and thus consumer choices.
• Particularly important for services, like telecommunication, retailing, and many financial
services:
• Increases competition, stimulates investment, and lowers prices.

Host-Country Costs
Adverse effects on competition:
• Subsidiaries of foreign MNEs may have greater economic power than indigenous
competitors.
• Greenfield investments should increase competition, but not as clear with an acquisition.
• Effect on competition may be neutral because there is no net increase in the number of
players in the market; and hence, it...
• Could create a monopoly power for the foreign firm; reduces choices and raises price, etc.

Home-Country Benefits (to home, source country)

1. Balance of payments benefits from the inward flow of foreign earnings made from
business activities in that host (destination-) country .
2. Positive employment effects by creating demand for home (source-) country exports of
capital equipment, intermediate goods and complementary products, and the like..
3. Reverse resource-transfer effect.
• Home country MNE learns valuable skills from foreign markets that can be transferred
back to the home country, helping its economic growth rate.

Home-Country Costs
Main concerns are balance-of-payments effects suffer in three ways:
• From the initial capital outflow needed to finance FDI.
• Current account suffers if FDI is a substitute for direct exports.
• Current account suffers if the purpose of foreign investment is to serve the home market
from a low-cost production location.
Employment effects suffer when FDI is a substitute for domestic production; esp. if home
unemployment is now low

International Trade Theory and FDI

The term offshore production is FDI undertaken to serve the home market
FDI May actually stimulate economic growth in home country by freeing home-country
resources to focus on activities where HC has a comparative advantage;
• HC benefits if the price of the products actually falls as a result of FDI;
• Also, if a HC company were prohibited from making such FDIs on the grounds of negative
employment effects while its international competitors reaped the benefits of low-cost
production locations, the home country company would undoubtedly lose market share to
its international competitors

Home-Country Policies
Encouraging outward FDI:
• Government-backed insurance programs, insuring againstexpropriation, war losses and
inability to transfer profit back home
• Government loans.
• Elimination of double taxation of foreign income.
• HC political influence to persuade host countries relaxing restrictions on FDI

Restricting outward FDI:

• Limit capital outflows, to improve a country’s own balance of payments.
• Occasionally manipulate tax rules to try to encourage firms to invest at home.
• Prohibit investment for political reasons

Host-Country Policies
Encouraging inward FDI:
• Incentives are motivated by a desire to gain from the resource-transfer and employment
effects of inward FDI
• Incentives such as tax concessions, low-interest loans, grants, or subsidies.
Restricting inward FDI:
• Ownership restraints (restricted ownership to 25% or less in specific fields like natural
resources, airlines or media)
• Performance requirements, more common in less developed countries; (in local contents,
exports, technology transfer and local participation in top management).
Amongst these 3 : Exporting, FDI and Licensing,
• Licensing not a good option in three types of industries:
• High-technology in which protecting firm-specific expertise is paramount and licensing is
hazardous;
• Global oligopolies require firms maintain tight control over foreign operations so they can
launch coordinated attacks against global competitors;
• Industries facing intense cost pressures to minimize costs via tight cost controls and
disperse productions around global locations where factor cots are most favourable.
• Licensing is better in fragmented, low-technology service- industries; e.g., franchising used
by McDonald’s in which globally dispersed manufacturing is not an option.

Exporting
Large revenue and profit opportunities in foreign markets for most firms.
Economies of scale.
Large firms tend to be proactive about exporting; medium sized and small firms reactive*.
• Unfamiliar or intimidated by foreign market opportunities, etc.
• Initial efforts may run into problems, sours companies on future ventures

Challenges to Exporting
Voluminous paperwork.
Complex formalities.
Potential delays and errors.
Time and costs are daunting to inexperienced exporters.
• Documentary compliance*.
• Border compliance

International Comparisons
One big impediment to exporting is the simple lack of knowledge of the opportunities
available.
• Need to collect information on how different countries operate.
• Other countries may have more experience in trade.
• U.S. has not yet created an institutional structure for promoting exports similar to that of
Germany or Japan.

Service Providers
Freight forwarders.
• Combine smaller shipments into a single large shipment to minimize the shipping cost.
• Documentation, payment, and carrier selection.
Export management companies.
• Acts as an export marketing department for client firms.
Export trading companies.
• Provide comprehensive exporting services, including export documentation, logistics, and
transportation

Export packaging companies.

• Advise companies on appropriate design and materials for the packaging of their items.
• Assist companies in minimizing packaging to maximize the number of items to be shipped.
Customs brokers.
• Offer a complete package of services essential in dealing with potential pitfalls when a firm
is exporting to many countries.
Confirming houses (buying agents)*.
Represent foreign companies that want to buy your products.

Export agents, merchants and remarketers.

• Buy products directly from the manufacturer and package and relabel the products.
Piggyback marketing.
• One firm distributes another firm’s products.
• Usually requires complementary products and the same target market of customers.
Export processing zones.
• Include foreign trade zones (FTZs), special economic zones, bonded warehouses, free
ports, and customs zones.

Export Strategy
1. Hire an EMC or at least an experienced export consultant to identify opportunities and
navigate the paperwork and regulations in exporting.
2. Initially focus on one market or a handful of markets.
3. Enter a foreign market on a small scale to reduce the costs of any subsequent failure.
4. Recognize the time and managerial commitment involved in building export sales and hire
additional personnel to oversee this activity.

5. Devote attention to building strong and enduring relationships with local distributors
and/or customers.
6. Hire local personnel to help the firm establish itself in a foreign market.
7. Be proactive about seeking export opportunities.
8. Retain the option of local production*.

Lack of Trust
Firms engaged in international trade have to trust someone:
• They may have never seen.
• Who lives in a different country.
• Who speaks a different language.
• Who abides by (or does not abide by) a different legal system.
• Who could be very difficult to track down if he or she defaults on an obligation.

Letter of Credit
• States that the bank will pay a specified sum to a beneficiary, normally the exporter, upon
presentation of specified documents.
• Issued by a bank at the request of the importer.
• Companies are likely to trust reputable banks.
• The importer must pay a fee

Draft (Bill of Exchange)

Normally used in international commerce to effect payment.
Indicates specified amount of money to be paid at a specified time.
Used to settle trade transactions.
• In domestic transactions, the buyer can often obtain possession of the merchandise
without signing a formal document acknowledging his or her obligation to pay.
• In international transactions, payment or a formal promise to pay is required before the
buyer can obtain the merchandise.
Sight draft: payable on presentation to the drawee.
Time draft: promise to pay by the accepting party at some future date.
• When a time draft is drawn on and accepted by a bank, it is called a banker’s acceptance.
• When it is drawn on and accepted by a business firm, it is called a trade acceptance.
• Negotiable instruments
Bill of Lading
• The bill of lading is issued to the exporter by the common carrier transporting the
merchandise.
• Three purposes: a receipt, a contract, and a document of title.
• Can also function as collateral against which funds may be advanced to the exporter by its
local bank before or during shipment and before final payment by the importer.

Countertrade
• Trade of goods and services for other goods and services.
• Alternative means of structuring an international sale when conventional means of
payment are difficult, costly, or nonexistent.
• Barterlike agreements.

Popularity: Popular among developing nations that lack the foreign

exchange reserves required to purchase necessary imports.
• World trade covered by some sort of countertrade agreement range grew from 2 to 10
percent a decade ago to about 20 to 25 percent today

Types of Countertrade
• Barter: direct exchange of goods and/or services between two parties without a cash
transaction.
• Counterpurchase: reciprocal buying agreement.
• Offset: an agreement to purchase goods and services with a specified percentage of
proceeds from an original sale in that country from any firm in the country
• Switch trading: the use of a specialized third-party trading house in a countertrade
arrangement.
• Compensation or buybacks*: an agreement to accept a percentage of a plant’s output as
payment for contract to build a plant.
*A buyback occurs when a firm builds a plant in a country—or supplies technology,
equipment, training, or other services to the country—and agrees to take a certain
percentage of the plant’s output as partial payment for the contract.

Pros of Countertrade
• Can give a firm a way to finance an export deal when other means are not available.
• A countertrade agreement may be required by the government of a country to which a
firm is exporting goods or services.
Can become a strategic marketing weapon.
Cons:
• Firms would normally prefer to be paid in hard currency.
• May involve the exchange of unusable or poor-quality goods that the firm cannot dispose
of profitably.

Countertrade is most attractive to large, diverse multinational enterprises that can use their
worldwide network of contacts to dispose of goods acquired in countertrading.