INTERNATIONAL BUSINESS QUESTIONS AND ANWER KEY FOR BK

EVENING MBA SEM 5

FROM
Prof. DR. RAJESH GANATRA

1. Discuss various forces driving globalization.

2. What is Political Risk? Which are different types of political risks?
3. Discuss in brief various indicators used by managers while undertaking
economic environment analysis.
4. Write a short note on “Balance of Payments”
5. Briefly explain different types of economic systems.
6. Explain economic rationales for governmental intervention in foreign
trade. Briefly discuss major foreign exchange markets.
7. In which ways, European Union affects competitive strategies of foreign
firms that choose to do business with it?
8. Explain the business implications of exchange rate changes.
9. Discuss various types of strategies firms use in International Business.
10.Discuss various control mechanisms used by MNCs to direct the activities of
individuals towards the achievement of organizational goals.
11.How might a company make strategic use of countertrade schemes to
generate export revenues? What are the risks associated with pursuing such
a strategy? Before selecting any country to do business with, which
information is scanned by managers?
12.Write a note on “Corporate Governance”
13.What is the link between an international business’s strategy and its human
resource management policies, particularly with regard to the use of
expatriate employees and their pay scale?
14.A firm has to decide whether to make a component part in-house, or to
contract it out to an independent supplier. Manufacturing the part requires a
non-recoverable investment in specialized assets. The most efficient
suppliers are located in countries with currencies that many foreign exchange
analysts expect to appreciate substantially on the foreign exchange market
over the next decade. What are the pros and cons of (a) manufacturing the
component in-house, and (b) outsourcing manufacture to an independent
supplier? Which option would you recommend? Why?
15.How can the finance function of an international business improve the
competitive position of the firm in the global market place?
 ANSWERS (KEY POINTS TO BE EXPLAINED)

Solution No. 1
Drivers to globalization (7 Marks, 1 mark for each point mentioned below)
1. Increase in and Expansion of Technology
2. Liberalization of Cross-Border Trade and Resource Movement
3. Development of Services That Support International Business
4. Growing Consumer Pressures
5. Increased Global Competition
6. Changing Political Situations
7. Expanded Cross-National Cooperation

Solution No. 2
Meaning of Political Risk (1 Mark)
Political risk is the possibility that political decisions, events, or conditions will
affect a country's business environment in ways that will cost investors some or all
of the value of their investment or force them to accept lower than projected rates
of return.
Types of Political Risks (6 Marks, 1.5 for each type of risk)
1. Systemic Political Risk. Systemic political risk creates risks that affect all
firms because of a change in public policy. However, such changes do not
necessarily reduce potential profits.
2. Procedural Political Risk. Procedural political risk reflects the costs of
getting things done because of such problems as government corruption,
labor disputes, and/or a partisan judicial system.
3. Distributive Political Risk. Distributive political risk reflects revisions in
such items as tax codes, regulatory structure, and monetary policy imposed
by governments in order to capture greater benefits from the activities of
foreign firms.
4. Catastrophic Political Risk. Catastrophic political risk includes those random
political developments that adversely affect the operations of all firms in a
country.

Solution 3
Economic Indicators used by managers while undergoing economic environment
analysis are: (Out of following points, answer must have 7 points, 1 mark for each
point)
1. Gross National Income
2. Inflation
3. Unemployment
4. Debt
5. Income Distribution
6. Poverty
7. Labor Costs
8. Productivity
9. The Balance of Payments
Solution 4
Introduction to Balance of Payments (1 Mark)
The balance of payments (BOP), officially known as the Statement of Inter-
national Transactions, records a country's international transactions among
companies, governments, and/or individuals. It reports the total of all money
flowing into a country less all money flowing out of that country to any other
country during a given period.
Current and Capital Accounts. (3 marks, 1.5 marks for each type of account)
The two primary accounts are: (a) the current account, which tracks all trade
activity in merchandise and services, and (b) the capital account, which tracks both
loans given to foreigners and loans received by citizens. Also included in the
current account are income and compensation receipts and payments as well as
unilateral transfers, which reflect both government and private relief grants and
income transferred abroad. Whereas a trade surplus indicates that the value of
exports exceeds the value of imports, a trade deficit indicates'that the value of
imports exceeds the value of exports. The statistical discrepancy reflects the
difference between the sums of the credits and debits.
BOP and Economic Stability. (2 mark) Managers use the BOP to assess a
country's economic stability. By measuring a country's transactions with the rest of
the world, the BOP estimates a country's financial stability.
BOP and Company Strategy. (1 mark) Monitoring trends in BOP gives managers
more date in order to chart strategic choices.

Solution 5
Introduction to Economic Systems (1 Mark)
An economic system is the set of structures and processes that guides the allocation
of scarce resources and shapes the conduct of business activities in a nation. The
spectrum of systems is anchored on one end by capitalism and on the other by
communism. Free-market (capitalistic) economies are built upon the private
ownership and control of the factors of production.
Types of Economic Systems (6 marks, 2 marks for each point)
Market Economy. A market economy describes the system where individuals,
rather than government, make the majority of economic decisions. Key factors
include consumer sovereignty, the freedom of market entry and exit, and the
determination of prices according to the laws of supply and demand. Credited to
Adam Smith, the laissez-faire principle, i.e., nonintervention by government in a
country's economic activity, states that producers are driven by the profit motive,
while consumers determine the relationship between price and quantity demanded.
Thus, scarce resources are allocated efficiently and effectively.
Command Economy. Also known as centrally-planned economies, command
economies are built upon the government ownership and control of the factors of
production. Central planning authorities determine what products will be produced
in what quantities and the prices at which they will be sold. Most often, the
totalitarian aims of communism gave the highest priority to industrial investments
and military spending at enormous expense to the consumer sector.
Mixed Economy. Mixed economies fall between the extremes of market and
command economies. While economic decisions are largely market-driven and
ownership is largely private, government nonetheless intervenes in many economic
decisions. The extent and nature of such intervention may take the form of
government ownership of certain factors of production, the granting of subsidies,
the taxation of certain economic activities, and/or the redistribution of income and
wealth.

Solution 6
Introduction to Economic rationales for governmental intervention in foreign
trade (1 mark)
Governmental intervention in the trade process may be either economic or
noneconomic in nature.
1. Fighting Unemployment (1.5 mark)
2. Protecting "Infant Industries" (1.5 mark)
3. Developing an Industrial Base (1.5 mark)
4. Economic Relationships with Other Countries (1.5 marks)
a. 'Balance-of-Trade Adjustments.
b. Comparable Access or "Fairness."
c. Restrictions as a Bargaining Tool.
d. Price-Control Objectives
Introduction (1 mark)
Major foreign exchange markets:
The Spot Market (1.5 marks)
The spot market consists of players who conduct those foreign-exchange
transactions that occur "on the spot," or technically, within two business days
following the date of agreement to trade. Foreign-exchange traders always
quote a bid (buy) and offer (sell) rate. The bid is the rate at which traders buy
foreign exchange; the offer is the rate at which traders sell foreign exchange.
The spread is the difference between the bid and offer rates, i.e., it is the profit
margin of the trade.
a. Direct and Indirect Quotes. Exchanges can be quoted in American terms,
i.e., a direct quote that gives the value in dollars of a unit of foreign currency,
or. European terms, i.e., an indirect quote that gives the value in foreign
currency of one U.S. dollar. The base currency, or the denominator, is the
quoted, underlying, or fixed currency; the terms currency is the numerator.
Most large newspapers quote exchange rates daily, listing both spot and
forward rates. The spot rates listed are usually the selling rates for interbank
transactions (transactions between banks) of $1 million or more.
The Forward Market (1.5 marks)
The forward market consists of those players who conduct foreign-exchange
transactions that occur at a set rate beyond two business days following the
date of agreement to trade. The forward rate is the rate quoted today for the
future delivery of a foreign currency. A forward contract is entered into
whereby the customer agrees to buy (or sell) over the counter a specified
amount of a specific currency at a specified price on a specific date in the
future.
a. Forward Discounts and Premiums. The difference between the spot and
forward rates is either the forward discount (the forward rate, i.e., the future
delivery price, is lower than the spot rate) or the forward premium (the forward
rate is higher than the spot rate).
Options (1.5 marks)
An option is a foreign-exchange instrument that guarantees the right, but does
not impose an obligation, to buy or sell a foreign currency within a certain time
period or on a specific date at a specific exchange rate (called the strike price).
Options can be purchased over the counter from a commercial or investment
bank or on an exchange. The writer of the option will charge a fee, known as
the premium. An option is more flexible, but also more expensive, than a
forward contract.
Futures (1.5 marks)
A foreign currency future resembles a forward contract because it specifies an
exchange rate sometime in advance of the actual exchange of the currency.
However, a future is traded on an exchange, not OTC. While a forward contract
is tailored to the amount and time frame the customer needs, futures contracts
have preset amounts and maturity dates. The futures contract is less valuable to
a firm than a forward contract, but it may be useful for small transactions or
speculation preset amounts and maturity dates. The futures contract is less
valuable to a firm than a forward contract, but it may be useful for small
transactions or speculation.

Solution 7
Ways in which European Union affects competitive strategies of foreign
firms are:
Introduction (0.5 marks)
First, they must determine their production site location(s) on the basis of total
costs that include labor, transportation, and other strategic factors. (2 marks)
Second, foreign firms must decide upon an entry strategy, i.e., new
investments, expanding existing investments, or joint ventures and mergers. (2
marks)
Third, firms must be sensitive to essential national differences, particularly in
areas such as economic growth rates and cultural traditions. In addition, the
trade-offs between the advantages of pan-European strategies and more
localized strategies must be continually examined. (2 marks)
Conclusion (0.5 marks)

Solution 8
IMPLICATIONS OF EXCHANGE-RATE CHANGES
Introduction (0.5 marks)
Exchange-rate fluctuations can affect all areas of a company's operations.
Marketing Decisions (2 marks)
Exchange-rate changes can affect demand for a firm's products, both at home
and abroad. For instance, the strengthening of a country's currency could create
price competitiveness problems for exporters; on the other hand, importers
would favor that situation.
Production Decisions (2 marks)
Firms may choose to locate production operations in a country whose currency
is weak because initial investment there is relatively inexpensive; it could also
be a good base for exporting the firm's output. Exchange-rate differentials
contribute to this situation across industrialized nations, as well from
industrialized to developing nations.
Financial Decisions (2 marks)
Exchange-rate fluctuations can affect financial decisions in the areas of
sourcing funds, (both debt and equity), the cross-border remittance of funds,
and the reporting of financial results.
Conclusion (0.5 marks)

Solution 9
TYPES OF STRATEGY
Introduction (1 mark)
Generally, MNEs choose from four basic strategies to guide how they will
enter and compete in the international environment. These strategies
correspond to the relative demands for global integration and national
responsiveness and include the international, multidomestic, global, and
transnational strategies.
International Strategy (1.5 marks). The international strategy emphasizes
the transfer of core competencies from the domestic operation to foreign
subsidiaries. It allows for limited local customization. Examples of companies
using this strategy include McDonald's, Kellogg, Google, Yahoo!, Haier, Wal-
Mart, and Microsoft. Some subsidiaries may have latitude to adapt products to
local conditions, but ultimate control resides in the home office.
Multidomestic Strategy (1.5 marks). Firms following a multidomestic strategy
adjust products, services, and business practices to meet the needs of individual
countries and regions.
Global Strategy (1.5 marks). 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 (1.5 marks)
Transnational strategy aims to simultaneously exploit location economies,
leverage core competencies, and pay attention to local responsiveness. It is
arguably the most direct response to the growing globalization of business.
Capabilities and contributions are differentiated from country to country, with
an emphasis on learning from various environments and then integrating and
diffusing this knowledge throughout global operations.

Solution 10
Control Mechanisms
Introduction (1 mark)
MNEs use a range of control mechanisms to direct the activities of individuals
toward the achievement of organizational goals.
Reports. (l mark) Decisions on how to allocate capital, personnel, and
technology continue without interruption, so reports must be timely, accurate
and informative. Written reports are crucial for international operations because
subsidiary managers so 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. The primary
emphasis of an operations report is to evaluate a subsidiary's performance.
Visits to Subsidiaries. (1 mark) 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.
Management Performance Evaluations. (1 mark) MNEs should evaluate a
subsidiary manager separately from the subsidiary's performance so as not to
penalize or reward managers for conditions beyond their control. That said,-
precisely what is within their control is frequently a matter for disagreement.
Cost and Accounting Comparisons. (1 mark) Headquarters needs to use
considerable discretion in interpreting the data it uses to evaluate and change
subsidiary performance, especially if it is comparing a subsidiary's
performance with competitors from other countries whose currencies and
accounting methods are different from its own.
Evaluative Measurements. (1 mark) A system that relies on a combination
of measurements 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.
Information Systems. (1 mark) With ever-expanding computer and global
telecommunications links, managers can share information more quickly and
easily than ever before. In fact, information technology can facilitate both the
centralization and the decentralization of operations. The primary problems
associated with information systems concern the cost of information relative
to its value, its redundancy, and its irrelevance.

Solution 11
Countertrade can be used as a way to finance trade into environments where'
foreign exchange isn't readily accessible. (1 mark) So countertrade could support
an export strategy in developing nations and nations facing monetary crises. It
could be used to show loyalty and commitment to meeting the import needs of
clients/customers.(3 marks) The disadvantages of countertrade have to do with the
increased cost of selling the goods received, but that is minimal, and the danger that
the goods will not be saleable or will be damaged.(3 marks)
Managers should consider country conditions that could significantly affect
success or failure. These conditions should reveal both opportunities and risks.
Opportunities (3 marks)
The section on opportunities is divided into two parts—sales expansion and risk
acquisition—although some conditions may affect both, given the relationship
between decisions of where to sell and where to produce. Sales Expansion. And
Resource Acquisition.
Risks (4 marks)
Is it ever rational for a firm to invest in a country with high economic and political
risk ratings? Such questions must be carefully weighed when making international
capital-investment decisions.
Factors to Consider in Analyzing Risk. There are a number of factors to consider
when analyzing risk: 1) companies and managers differ on risk perception,
tolerance for risk, and the expected returns; 2) one company's risk is another
company's opportunity; 3) there are means available for reducing risk other than
avoiding locations; 4) there are trade-offs between risk and return.
Political Risk. Political risk reflects the expectation the political climate in a given
country will change in such a way that a firm's operating position will deteriorate.
It relates to changes in political leaders' opinions and policies, civil disorder, and
animosity between a home and host country. When evaluating political risk,
decision makers refer to past patterns in a given country, expert opinions, and
country analysts. They also look for economic and social conditions that could lead
to political instability, but there is no consensus as to what constitutes dangerous
instability or how it can be predicted.
Monetary Risk. Companies may be affected by either changes in exchange rates
or ability to move funds out of a country.
Competitive Risk. The comparison of likely success among countries is largely
contingent on competitors' actions.

Solution 12
Corporate governance refers to the combination of external and internal
mechanisms implemented to safeguard the assets of a company and protect the
rights of stockholders. (2 marks)
External Control Mechanisms: The Legal System (2 marks)
An important external mechanism in corporate governance is the legal system of a
country. Countries with strong legal systems generally have laws to protect
shareholders, where in underdeveloped countries, few such laws exist.
Internal Control Mechanisms (2 marks)
Internal mechanisms refer to management and ownership structures of the firm,
and the role of the Board of Directors in overseeing the operations of the firm.
Conclusion (1 mark)

Solution 13
In firms pursuing a multi domestic strategy, a polycentric staffing approach is most
common, (1 mark) and there are relatively few expatriates or the associated pay
issues. Expatriates are more common in firms with international strategies, and an
ethnocentric staffing approach is often followed. (2 marks) In this situation the pay
is often based on home country levels, with adjustments as required for living costs
and taxes as outlined by the balance sheet approach. (2 marks) Firms pursuing
global or transnational strategies most often use a geocentric approach to staffing,
where the best individuals (regardless of nationality) are chosen fill positions in
any country. Here the pay issues for expatiates can become particularly complex,
as allowances must be made for home country norms, host country costs and
expectations, and global norms across the company. This is increasingly an issue
with global teams that may work virtually most of the time but also include foreign
assignments to foster integration. (2 marks)

Solution 14
Manufacturing in-house: (3 marks)
 reduces risk of currency appreciation
 rising costs from independent suppliers specialized asset investment makes
firm dependent on specific suppliers
 protects technological know-how
 improves scheduling
Outsourcing: (3 marks)
 If the product using the component fails in the market, the supplier will bear
the Cost of the non-recoverable investment
 Preserves flexibility in case a better component can be designed or bought
  Lowers organizational and coordination costs
Based on what we know, the firm should slightly prefer manufacturing in house,
but other information could tip the decision the other way. (1 mark)

Solution 15
Good financial management can be an important source of competitive advantage.
(1 mark) While this is true in a purely domestic business, due to the added
complexity of the international marketplace, good financial management is even
more important in the case of an international business. (1 mark) The Value Chain
Analysis described about how creating a competitive advantage requires the firm to
lower the costs of value creation and/or add value by improving customer service.
(1 mark) Good financial management can help the firm both to lower the costs of
value creation and to add value by improving customer service. (1 marks) By
lowering the firm's cost of capital, eliminating foreign exchange losses, minimizing
the firm's tax burden, minimizing the firm's exposure to unduly risky activities, and
managing the firm's cash flows and reserves efficiently, the finance function in an
international business can lower the costs of value creation. (3 marks)
INTERNATIONAL BUSINESS QUESTIONS AND ANWER KEY FOR
BK EVENING MBA SEM 5
FROM
Prof. DR. RAJESH GANATRA

16.Explain Globalization of Production?

17.Explain Matrix structure of an MNC?
18.Explain Ethical dilemmas in International Business?
19.Why is it beneficial for a country to indulge in International trade?
Explain by drawing inputs from various International Trade Theories
20.You are the International manager of a Japan business that has just
developed a revolutionary new digital camera that can perform the
same functions as existing digital camera but costs only half as much
to manufacture. Several patents protect the unique design of this
Camera. Your CEO has asked you to formulate a recommendation for
how to expand into U.S market. Your options are:
21.To export from Japan,
22.To license a U.S firm to manufacture & market the digital camera in
U.S and
23.To set up a wholly owned subsidiary in U.S. Evaluate the pros & cons
of each alternative & suggest a course of action for your CEO.
24.“Failure to perceive subtle distinctions in culturally determined
behavior can result in misunderstandings in international dealings.”
Discuss with help of suitable examples.
25.What are the different instruments of trade policy that governments
use to intervene in international trade?
26.What are the main advantages & disadvantages of the ethnocentric,
polycentric, & geocentric approaches to international staffing policy?
27.What is an IR Grid? How does it shape an MNC’s decision of when to
use which type of strategy while entering and competing in the
international environment?
28.Has globalization done more harm than led benefits to India? Give
suitable examples supporting your argument.
29.Why might an accounting based control system provide headquarters
with biased information about performance of its subsidiary? How
can these biases be corrected?
30.ABC, a multinational automobile firm has to decide whether to make
a component part in-house or to contract it out to an independent
supplier. Manufacturing that component requires a non-recoverable
investment in specialized assets. The most efficient suppliers are
located in countries with currencies that many foreign exchange
analysts expect to appreciate over the next decade. What are the pros
and cons of manufacturing the component in-house Outsourcing
 manufacturing to an independent supplier? Which option would you
recommend & why?
31.Differentiate between the following: Individualism Vs Collectivism
and Political risk Vs Economic risk
32.Write short notes on the following: FX Swap and WTO.
33.Export veterans often recount that selling abroad often comes with
many challenges. Discuss in brief those challenges
34.Discuss the three types of economic systems. Give advantages &
disadvantages of each.

Solution 16
The globalization of production refers to the sourcing of goods and
services from locations around the globe to take advantage of national
differences in the cost and quality of factors of production (such as labor,
energy, land, and capital). i.e. the sourcing of goods and services around the
globe and to take advantage of national differences. The reasons of global
production are lowering cost, improving quality, competing effectively and
having best suppliers

Solution 17
Matrix Structure of MNC
A matrix structure is a structure designed to give functional, product and/or
geographic groups a common focus. It is based on the theory that the groups
will become interdependent and thus will more readily exchange information
and resources with each other. However, the dual reporting/oversight
responsibilities can also create conflicts across groups with differing
objectives. Advantages and Disadvantages. Product groups, functional
groups, and geographic groups must all compete among themselves to
obtain the resources others hold in the matrix. Consequently, the matrix
structure is a useful compromise when managers face great difficulty
integrating or separating foreign operations. The matrix structure also has
drawbacks. It requires that groups compete for scare resources and it is
likely that disputes among lower-level managers will develop, requiring
higher-level management intervention

Solution 18
Ethical dilemmas in International Business
Sometimes ethical are industry specific, such as the pharmaceutical industry.
Other times the dilemmas are not exactly industry specific but deal with
issues that cross industries, such as with labor conditions in developing
countries.
Ethical Dilemmas and the Pharmaceutical Industry. How can
pharmaceutical MNEs such as GlaxoSmithKline generate sufficient revenues
to create new products, their major source of competitive advantage, while
being responsive to the very real health problems of developing countries?
Most research-based pharmaceutical firms sell products at high prices so long
as those products are covered by patents.
Tiered Pricing and Other Price-Related Issues. Many firms also used
tiered pricing schemes whereby consumers in industrial countries pay
market prices for products, but consumers in developing countries pay lower
(subsidized) prices. Legal generic products comply with patents while
allowing for the purchase of drugs at lower costs; unauthorized (illegal)
generic drugs may or may not be reliable.
Taking TRIPS for What It’s Worth. The WTO Agreement on Trade-
Related Aspects of Intellectual Property (TRIPS) provides a mechanism for
poor countries facing health crises (such as AIDS in Africa) to either
produce or import generic products.
R&D and the Bottom Line. Governments and private foundations enable
countries to issues bonds to generate the funds needed to purchase vaccines
via the International Finance Facility for Immunization. In addition,
governments are pressured to reduce tariffs and other barriers that
disadvantage their own people

Solution 19
The explanatory power of the theories of absolute and comparative
advantage is limited to the demonstration of how economic growth can
occur via specialization and trade. These theories do not deal with issues
such as how much a country will depend on trade if it follows a free trade
policy, which types of products countries will export and import, and with
which partners countries will primarily trade.
How Much Does a Country Trade?
Apart from non tradable goods, i.e., goods and services that are impractical
to export, country size helps to explain why some countries are more
dependent on trade than others and why some account for larger portions of
world trade than others.
Theory of Country Size. The theory of country size holds that large
countries tend to export a smaller portion of their output and import a
smaller portion of their consumption. Large countries are more apt to have
varied climates and a greater assortment of natural resources than smaller
economies, thus making the large countries more self-sufficient. Further,
given the same types of terrain and modes of transportation, the greater the
distance, the higher the associated transport costs. Thus, firms in large
countries often face higher transportation costs in terms of sourcing inputs
from and delivering output to distant foreign markets than do their closer
foreign competitors.
Size of the Economy. Counties can be compared on the basis of their
economic size, using indicators that include the value and share of world
trade. Ten of the world’s top trading nations are high-income countries.
Despite its low per capita income, China also has a large economy because
of its very large population. Together, the top ten nations account for more
than one-half of all of the world’s trade.
What Types of Products Does a Country Trade?
The composition of a country’s trade depends on both its natural and
acquired advantages. With respect to the latter, both production and product
technology can be very important.
Factor-Proportions Theory. Developed by Eli Heckscher and Bertil Ohlin,
the factor-proportions theory holds that (i) differences in a country’s relative
endowments of land, labor, and capital explain differences in the cost of
production factors and (ii) a country will tend to export products that utilize
relatively abundant factors of production because they are relatively cheaper
than scarce factors; e.g., countries with rich and abundant land tend to be
large exporters of agricultural products, whereas countries with capital-
intensive production lines tend to be large exporters of manufactured goods.
Nonetheless, production factors are not homogenous, and variations
(particularly in labor) have led to international specialization by task; e.g.,
countries with less skilled and lower paid workers tend to export products
that embody a higher intensity of labor. Factor proportions analysis becomes
more complicated when the same product can be produced by different
methods, such as different mixes of labor and capital. The optimum location
will depend on comparisons of the production cost in each potential locale.
Although larger nations tend to depend more on longer production runs,
companies may locate long-run production facilities in small countries if
export barriers to other markets are relatively low. In addition, firms tend to
locate longer-run production facilities in just a few countries. However,
when long runs are less important, there is a greater tendency to scatter
production units around the world in a way that will minimize the
transportation cost associated with exports.
Product Technology. While manufacturing comprises the largest sector of
world trade, commercial services is the fastest-growing sector. Because
manufacturing depends on acquired advantages (largely technology) plus
large amounts of capital investment, most new products tends to be
developed in high-income countries. On the other hand, lower-income
countries depend more on the production of primary products, which in turn
depend more on natural advantages.
With Whom Do Countries Trade?
High-income countries trade primarily with each other, and emerging
economies primarily export primary and labor-intensive products.
Nonetheless, it is also true that economic and cultural similarities, political
interests, and distance affect the determination of trading partners.
1. Country-Similarity Theory. The country-similarity theory states
that when a firm develops a new product in response to observed conditions
in its home market, it is likely to turn to those foreign markets that are most
similar to its domestic market when commencing its initial international
expansion activities. So much trade takes place among industrialized
countries because of the growing importance of acquired advantages, i.e.,
skills and technology. In addition, markets in most industrialized countries
are large enough to support new product introductions and the subsequent
variants across the product life cycle. At the same time, trade in
differentiated products occurs because over time firms in different countries
develop product variants for particular market segments. Cultural similarity
also facilitates trade. In particular, a common language and a common
religion represent two major facilitators of the international trade and
investment process. Historical and political relationships, as well as
economic agreements, may encourage or discourage trade with particular
countries.
2. The Effects of Distance. Countries that are near to one another enjoy
relatively lower transportation costs than those that are more distant. While
the disadvantages of distance can often be overcome through innovative
technology and marketing methods, such gains are difficult to maintain in
the long run.

Solution 20 to 23
In considering expansion into Japan, an international manager might
consider three options: FDI, licensing, and export. With export, assuming
there are no trade barriers, the key considerations would likely be transport
costs and localization. While transport costs may be quite low for a
relatively light and high value product like a camera, localization can present
some difficulties. Power requirements and preferences in models all vary
from country to country. It may be difficult to fully address these
localization issues from the US, but not impossible. Since there are many
camera manufacturers and distributors in Japan, there are likely to be a
number of potential licensees. But by signing up licensees, valuable
technological information may have to be disclosed, and the competitive
advantage may be lost if the licensees use or disseminate this proprietary
knowledge. FDI (setting up a wholly owned subsidiary) is clearly the most
costly and time consuming approach, but the one that best guarantees that
critical knowledge will not be disseminated and that localization can be done
effectively. FDI will also place you in the market into which you want to sell
and allow you to be near the consumer. Given the fast pace of change in the
camera industry, it is difficult to say how long this revolutionary new camera
will retain its competitive advantage. If the firm can protect its advantage for
a period of time, FDI may pay off and help assure that critical knowledge is
not lost. If the innovation is not core and can be easily copied, then licensing
would allow the firm to get the quickest large scale entry into Japan and
make as much as it can before losing advantage.

Solution 24
Once a company identifies cultural differences in the foreign countries in
which it operates, must it alter its customary practices? Can individuals
overcome adjustment problems when working abroad?
Accommodation: If products and operations do not run counter to deep-
seated attitudes, or if the host country is willing to accept foreign customs as
a trade-off for other advantages, significant adjustments may not be
required.
Cultural Distance: Usefulness and Limitations: Cultural distance
represents the degree of similarity between two societies. Countries may be
relatively similar to one another because they share the same language,
religion, geographical location, ethnicity, and/or level of economic
development. Generally, a firm should have to make fewer adjustments
when moving within a culturally similar cluster than when it moves from
one distinct cultural cluster to another. Nonetheless, a manager must not
assume that seemingly similar countries are more alike than they really are
and be lulled into a complacency that overlooks critical subtleties.
Culture Shock: Culture shock represents the trauma one experiences in a
new and different culture because of having to learn to cope with a vast
array of new cues and expectations. Reverse culture shock occurs when
people return home, having accepted the culture encountered abroad and
discovering that things at home have changed during their absence.
Company and Management Orientations:
Whether and to what extent a firm and its managers adapt to foreign cultures
depends not only on the conditions within those cultures but also on the
policies of the company and the attitudes of its managers.
1. Polycentrism. Polycentrism represents a managerial approach
in which foreign operations are granted a significant degree of
autonomy, in order to be responsive to the uniqueness of local
cultures and other conditions.
2. Ethnocentrism. Ethnocentrism represents a belief that one’s
own culture is superior to others, and that what works at home
should work abroad. Excessive ethnocentrism may lead to costly
business failures.
3. Geocentrism. Geocentrism represents a managerial approach in
which foreign operations are based on an informed knowledge of
both home and host country needs, capabilities, and constraints.
Solution 25
Governments use many rationales and seek a range of outcomes when they
try to influence the international trade process. The choice of instrument(s)
is crucial because each type of control may incite different responses from
both domestic and foreign groups. While some instruments directly limit the
amount that can be traded, others indirectly affect the amount traded by
directly influencing prices, i.e., while tariff barriers directly affect prices and
subsequently the quantity demanded, nontariff barriers may directly affect
price and/or quantity.
Tariffs
A tariff (also called a duty) is a tax levied on (internationally) traded
products. Export tariffs are levied by the country of origin on exported
products; a transit tariff is levied by a country through which goods pass en
route to their final destination; import tariffs are levied by the country of
destination on imported products. A tariff increases the delivered price of a
product, and, at the higher price, the quantity demanded will be less.
Import Tariffs. Unless they are optimum tariffs, import tariffs raise the
price of imported goods by placing a tax on them that is not placed on
domestic goods, thereby giving domestically produced goods a relative price
advantage. Tariffs may also serve as a major source of revenue in
developing countries. A specific duty is a tariff that is assessed on a per unit
basis; an ad valorem tariff is assessed as a percentage of the value of an
item. If both a specific duty and an ad valorem tariff are assessed on the
same product, it is known as a compound duty. A tariff controversy
concerns the treatment of manufactured exports to industrialized nations.
While raw materials frequently enter industrial countries tariff-free, when an
ad valorem tariff is applied to manufactured goods, it is generally applied to
the total value of the product. Critics argue that the effective tariff on the
manufactured portion, i.e., the value-added portion, is higher than the
published tariff.
B. Nontariff Barriers: Direct Price Influences
Nontariff barriers (NTBs) represent administrative regulations, policies, and
procedures, i.e., quantitative and qualitative barriers that directly or
indirectly impede international trade.
Subsidies. Subsidies consist of direct or indirect financial assistance from
governments to their domestic firms to help them overcome market
imperfections and thus make them more competitive in the marketplace. One
of the most popular forms of government subsidy can be seen in the
agriculture industry. From the standpoint of market efficiency, subsidies are
more justifiable than tariffs because they seek to overcome, rather than
create, market imperfections. However, many international frictions result
from disagreements about the definition of a subsidy.
Aid and Loans. Governments may give aid and loans to other countries but
require that the recipient spend the funds in the donor country; this is known
as tied aid or tied loans. In this way some donor products that might
otherwise be noncompetitive may find limited international markets.
However, there is growing skepticism about the value of tied aid because it
can slow down the development of local suppliers in developing countries
and shield suppliers in the donor countries from competition.
Customs Valuation. Because of the temptation to declare a low invoice
price in order to pay a lower ad valorem tariff, it is sometimes difficult to
determine the true value of traded products. Due to the many different
products traded and the differences being minute in some cases, it is easy to
misclassify a product and receive a lower tariff. First, customs officials
should use the declared invoice price. If there is none, or if the authenticity
of the value is in doubt, then customs agents may assess the shipment on the
basis of the value of identical (preferable) or similar (acceptable) goods
arriving at about the same time. Further, because countries often impose
different import barriers on products sourced from different countries,
customs officials must also determine a product’s true origin.
Other Direct Price Influences. Other means that countries may use to
affect prices include establishing special fees for consular and customs
clearance and documentation, requirements that customs deposits be made in
advance of shipment, and minimum price levels at which products can be
sold after they receive customs clearance.
Nontariff Barriers: Quantity Controls
Governments use a variety of nontariff barriers to directly affect the quantity
of imports and exports. When the quantity of imports is limited, the
resulting shift in the supply curve means that the equilibrium price will then
be higher.
1. Quotas. A quota represents a numerical limit on the quantity of a
product that may be imported or exported in a given period of time.
(Because of the increase in the equilibrium price, quotas may increase per
unit revenues for firms that participate in the market.) Voluntary export
restraints (VERs) are negotiated limitations of exports from one country to
another and, as in the case of a quota, may result in higher prices to
customers. An embargo represents an outright ban on imports from or
exports to a particular country.
2. “Buy Local” Legislation. Buy local legislation represents laws that are
intended to favor the purchase of domestically sourced products over
imported products, particularly with respect to government procurement.
Local content requirements, i.e., costs incurred within the local country
(usually measured as a percentage of total costs), fall within this category.
3. Standards and Labels. The professed purpose of standards is to protect
the safety or health of the domestic population. However, countries may
also devise classification, labeling, and testing standards that facilitate the
sale of domestic products but obstruct the sale of foreign-sourced products
4. Specific Permission Requirements. An import (or export) license
requires that firms secure permission from government authorities before
conducting trade transactions. Such procedures directly restrict trade when
permission is denied and indirectly restrict trade because of the cost, time,
and uncertainty involved in the process. A foreign exchange control
requires an importer of a given product to apply to a government agency to
secure the foreign currency to pay for the product.
5. Administrative Delays. Intentional administrative delays create
uncertainty and increase the cost of carrying inventory. However,
competitive pressures can motivate countries to improve inefficient
administrative systems.
6. Reciprocal Requirements. Governments may require that foreign
suppliers accept products in lieu of money. Offsets and countertrade (are
reciprocal requirements that are made between countries with ample access
to foreign currency that want to secure jobs or technology as part of the
transaction.
7. Restrictions on Services. Countries restrict trade in services such as
transportation, insurance, advertising, consulting, and banking for reasons of
essentiality, standards, and immigration.
Essentiality. Countries consider certain services industries to be essential
because they serve strategic purposes or provide social assistance to citizens.
Private companies of any sort may be prohibited, and in other cases, price
controls may be imposed by the government; government-owned operations
are often subsidized.
Not-for-Profit Services. Mail, education, and hospital health services are
often not-for-profit services and governments may preclude foreign firms
from competing in these areas.
Standards. Governments may limit foreign entry into particular service
professions in order to assure that practitioners are qualified. Licensing
standards vary by country and extend to a wide variety of occupations.
Prerequisites for taking certification examinations may be lengthy.
d. Immigration. Government regulations often require that an organization,
whether domestic or foreign, demonstrate that the skills needed for a
particular job are not available locally before hiring a foreigner.
Solution 26
Developing Staffing Policies
Staffing policy is the process by which the company assigns the most
appropriate candidate to a particular job. For most of these companies,
staffing policy revolves around the decision of whether to run international
operations with local workers in the host nation, expatriates sent from the
home country, or third-country nationals.
Ethnocentric Approach. An ethnocentric staffing approach fills all key
management positions with home-country nationals.
Advantages of the Ethnocentric Approach.
Transferring Core Competencies. People transferred from headquarters are
more likely to have a thorough understanding of the company’s core
competencies and values. The leading reasons to staff foreign operations
with expatriates include maintaining command and control consistent with
headquarters’ policy, filling local talent gaps, using international
assignments as a mechanism for social integration, safeguarding intellectual
property in joint ventures, transferring best practices from other locations,
counteracting high turnover among local employees, and as a management
development tool to help managers develop a global outlook
Countering Cognitive Dissonance. Companies often use an ethnocentric
staffing approach to reduce the degree of cognitive dissonance, or the
incompatibility between home-country and host-country attitudes. Relying
on people familiar with proven workplace methods and labor procedures
helps companies cope with the stress of foreign situations.
Drawbacks of the Ethnocentric Approach. This approach can,however,
lead the company to adopt a narrow perspective in foreign markets and
blinds the company to the benefit of exposure to different, and possibly
better, ways of doing things. Ethnocentric staffing policies can leave local
managers and workers unmotivated and demoralized. Local employees will
likely resent someone coming from a foreign country who they see as no
more qualified than they are.
Polycentric Approach. A polycentric staffing policy uses host-country
nationals to manage local subsidiaries and helps local motivation and
morale.
Advantages of the Polycentric Approach. A polycentric approach is used
to control costs, to cater to host-country nationalism, to develop local
management talent, to boost employee morale, to counteract high expatriate
failure rates, and to maximize local adaptations for particular products.
Political Considerations. Hiring local managers may be an astute political
choice in that they may be seen as "better citizens," improve employee
morale, and be the preferred choice of employees of the local company.
Economic Considerations. The high cost of sending someone to work
overseas makes the choice of a local manager in many cases a better
economic decision. Considerations of Efficiency and Effectiveness. Local
managers should be able to perform better, sooner, given their understanding
of local customers, markets, and institutions.
Drawbacks to the Polycentric Approach. This approach can, however,
result in problems of accountability and allegiance if a gap develops between
headquarters and local operations. Compounding the situation is the subtle
drawback of a polycentric staffing problem is the potential disengagement of
local staff from the parent company.
Geocentric Approach. A geocentric staffing policy seeks the best people
for key jobs throughout the organization, regardless of their nationality.
Advantages: Geocentric Staffing and Core Competencies. This policy is
instrumental to companies pursuing a global and, especially, a transnational
strategy. Both types of strategies rely on learning opportunities around the
world to generate ideas that enhance their core competencies.
Drawbacks to the Geocentric Approach. This approach is hard to develop,
costly to maintain, and can be complicated by economic factors, decision
making routines, and legal contingencies. In some cases, such an approach
may be practically impossible due to immigration laws and/or workplace
regulations that push MNEs toward local staffing.
Determining an Approach: Pros and Cons. Each of the three staffing
approaches has its merits and drawbacks. Broadly speaking, an ethnocentric
approach is congruent with an international strategy, a polycentric approach
is congruent with a multidomestic strategy, and a geocentric approach is
congruent with global and transnational strategies. Although companies may
use elements of each staffing policy, they tend to champion the policy that is
most congruent with their current standard of value creation

Solution 27
A grid can be used to make country comparisons according to a wide variety
of relevant factors, such as ownership rules, potential returns, and perceived
risk. Variables can be ranked and weighted according to specific criteria that
reflect a firm’s situation and objectives. Although useful for establishing
minimum scores and for ranking countries, grids often obscure
interrelationships among countries.
A firm may take different paths en route to gaining a sizable presence in
most countries. At one end of the spectrum is a diversification strategy,
whereby a firm moves rapidly into many foreign countries and then
gradually builds its presence in each. At the other end of the spectrum is a
concentration strategy, whereby a firm moves into a limited number of
countries and develops a strong competitive position there before moving
into others. When deciding which strategy, or perhaps some hybrid of the
two, is desirable, a firm must consider a number of variables.
Once a firm makes an initial investment, it will then need to decide whether
to continue investing in that operation or to harvest the earnings (and
possibly divest the assets) and use them elsewhere.
Reinvestment Decisions. Reinvestment refers to the use of retained earnings
to replace depreciated assets or to add to a firm’s existing stock of capital.
Aside from competitive factors, a company may need several years of
almost total reinvestment (and often allocation of additional funds) in order
to realize its objectives at a given location.
Harvesting. Harvesting or divesting refers to the reduction in the amount of
an investment; a firm may choose to simply harvest the earnings of an
operation or divest the assets there as well. If an operation no longer fits a
company’s overall strategy, or if better opportunities exist elsewhere, it must
determine how to exit that operation. When selling or closing facilities, firms
must consider possible government performance contracts as well as
potential adverse publicity, plus the possible difficulty in re-establishing
operations in that country in the future.

Solution 28
India operated under a mixed economic system, with many state-owned
enterprises, centralized planning and subsidies. Today India is moving
towards a market economy. They have made progress in privatizing state
owned enterprises, but there has been political resistance at local levels due
to fear of the effect of imports on employment. India’s labor laws are also
quite restrictive on employers—it is quite difficult to terminate a worker.
Poverty is also a huge impediment to development. Over 40% of India’s
population earns less than $1.00 per day.
(b) Public ownership of business reduces efficiency; government regulations
hamper private initiatives. Such forms of ownership and regulation would
reduce the rate individuals assumed the risk of setting up their own
companies. Such reduced rates of business formation would slow rates of
economic growth.
(c) Privatization, deregulation, and the removal of barriers to foreign direct
investment would all stimulate business formation and increase efficiency.
(d) IT and pharmaceuticals have high levels of demand in developed
economies such as the U.S. and the EU, so they have a ready export market,
or in the case of IT, an import market (IT services are outsourced from
developed nations). These are both areas on which India could focus
education and training efforts. The growth of these industries could generate
growth in other sectors of the Indian economy through increased wage levels
and increased consumption.
(e) India represent an attractive target for inward investment in consumer
products because a middle class is developing, there is relative political
stability, and the government has become more open in its attitude toward
foreign investment.

Solution 29
There are three primary reasons why accounting based control systems may
provide headquarters management with biased information about the
performance of a subsidiary: exchange rate changes, transfer prices, and
general economic conditions. Because exchange rates can change over the
course of a budget, translated financial data can be misleading - an increase
in domestic sales could actually show up as a decrease after translation due
to home currency appreciation. By using a common exchange rate for
budget setting and evaluation (i.e. the initial rate or a forecast rate), this
problem can be addressed. Since multinational firms often have significant
intra-firm transactions, prices have to be set on these transactions. Due both
to the difficulty of setting such prices fairly, and the incentives to set prices
in order to minimize tax or import duties, profitability of units can be
distorted by unrealistic transfer prices. Since it can be impossible and
inefficient to use only fair transfer prices, the effects of transfer prices have
to be taken into consideration when evaluating the performance of a
subsidiary. Lastly, different foreign subsidiaries may be operating in vastly
different business environments. The subsidiary that is growing and barely
showing a profit in an economy that is in recession is clearly doing better
than one that is growing quickly and profitable, but in country where the
GDP is growing twice as fast as the subsidiary. Thus when comparing the
results of separate subsidiaries, the economic environment in which they are
operating must be considered.

Solution 30
Manufacturing in-house: reduces risk of currency appreciation, rising costs
from independent suppliers specialized asset investment makes firm
dependent on specific suppliers, protects technological know-how and
improves scheduling. Outsourcing: If the product using the component fails
in the market, the supplier will bear the Cost of the non-recoverable
investment Preserves flexibility in case a better component can be designed
or bought Lowers organizational and coordination costs. Based on what we
know, the firm should slightly prefer manufacturing in house, but other
information could tip the decision the other way.

Solution 31
Individualism versus Collectivism
It is useful to profile the similarities and differences among political systems
according to the general orientation within a society about the primacy of
the rights and role of the individual versus that of the larger community.
Under an individualistic paradigm (e.g., the United States), political officials
and agencies play a limited role in society. The relationship between
government and business tends to be adversarial; government may intervene
in the economy to deal with market defects, but generally it promotes
marketplace competition. Under a collectivist paradigm, the government
defines economic needs and priorities, and it partners with business in major
ways. Government is highly connected to and interdependent with business;
the relationship is cooperative.
Political risk versus Economic Risk.
It is the possibility that political decisions, events, or conditions will affect a
country's business environment in ways that will cost investors some or all
of the value of their investment or force them to accept lower than projected
rates of return. Leading sources of political risk are: expropriation or
nationalization, international war or civil strife, unilateral breach of contract,
destructive government actions, harmful actions against people, restrictions
on the repatriation of profits, differing points of view, and discriminatory
taxation policies.
Economic risks can endanger the ability of a seller to get payment for goods
or services in many ways. This type of risk can sometimes be forecast but is
often completely out of the control of either the buyer or seller. Purchasing
transaction insurance is essential for a buyer to minimize economic risk.
Elements of economic risk include but are not limited to:
 convertibility risk
 foreign exchange risk
 translation risk
 central bank activities (interest rate fluctuation, availability of funds)
 economic indicator movement (GDP, unemployment, purchasing
power, inflation, etc.)

Solution 31
FX Swap
A Foreign Exchange Swap transaction allows you to utilize the funds you
have in one currency to fund obligations denominated in a different
currency, without incurring foreign exchange risk. It is an effective and
efficient cash management tool for companies that have assets and liabilities
denominated in different currencies. On the near date, you swap one
currency for another at an agreed foreign exchange rate and agree to swap
the currencies back again on a future (far) date at a price agreed upon at the
inception of the swap. In most cases, currencies are initially swapped at the
spot rate and the future (far) rate is calculated by adjusting the spot price by
the forward points for the length of time the swap transaction runs for.
Solution 32
WTO
The World Trade Organization (WTO) was founded in 1995 as a permanent
world trade body for the purposes of (i) facilitating reciprocal trade
negotiations and (ii) enforcing trade agreements between or among member
nations. The WTO adopted the principles and agreements reached under the
auspices of the GATT, but it expanded its mission to include trade in
services, investment, intellectual property, sanitary measures, plant health,
agriculture, textiles, and technical barriers to trade. Currently the 150
member countries of the WTO collectively account for more than 97 percent
of the value of world trade. Major decision-making units include: the
Ministerial Conference, the General Council, the Council for Trade in
Goods, the Council for Trade in Services, and the Council for Trade-Related
Intellectual Property Rights (TRIPS).
Solution 33
Export veterans often recount that selling abroad often comes with many
challenges. Discuss in brief those challenges? They are: Dealing with
Financial Management. Exchange-rate changes and transactions require
more advanced financial management skills. Foreign customers may also
expect help with the financing of the goods they are importing. Dealing
with Customer Demand. Customers around the world are increasingly
demanding a greater range of services from their vendors. Customers may
require the installation and set up of equipment which may require service
engineers in the foreign market. Dealing with Communications Technology.
Before the Internet, exports were customarily arm's-length, ship-it-and-
forget-it transactions. Now the ease of contacting vendors via email or
inexpensive voiceover Internet protocol plans spurs customers to seek
greater real-time involvement in transactions.

Solution 34
Introduction to Economic Systems An economic system is the set of
structures and processes that guides the allocation of scarce resources and
shapes the conduct of business activities in a nation. The spectrum of
systems is anchored on one end by capitalism and on the other by
communism. Free-market (capitalistic) economies are built upon the private
ownership and control of the factors of production.
Types of Economic Systems
Market Economy. A market economy describes the system where
individuals, rather than government, make the majority of economic
decisions. Key factors include consumer sovereignty, the freedom of market
entry and exit, and the determination of prices according to the laws of
supply and demand. Credited to Adam Smith, the laissez-faire principle, i.e.,
nonintervention by government in a country's economic activity, states that
producers are driven by the profit motive, while consumers determine the
relationship between price and quantity demanded. Thus, scarce resources
are allocated efficiently and effectively.
Command Economy. Also known as centrally-planned economies,
command economies are built upon the government ownership and control
of the factors of production. Central planning authorities determine what
products will be produced in what quantities and the prices at which they
will be sold. Most often, the totalitarian aims of communism gave the
highest priority to industrial investments and military spending at enormous
expense to the consumer sector.
Mixed Economy. Mixed economies fall between the extremes of market
and command economies. While economic decisions are largely market-
driven and ownership is largely private, government nonetheless intervenes
in many economic decisions. The extent and nature of such intervention may
take the form of government ownership of certain factors of production, the
granting of subsidies, the taxation of certain economic activities, and/or the
redistribution of income and wealth.