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

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Chapter 2 - Trading and Investing in International Business

International Businessby Ball, McCulloch, Frantz,

Geringer, and Minor

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McGraw-Hill/Irwin ©2002 The McGraw-Hill Companies All Rights Reserved

Chapter Objectives Appreciate the magnitude of international trade. Identify the direction of trade. Explain the size, growth, and direction of U.S. foreign

direct investment. Understand the reasons for entering foreign markets. Understand the international market entry methods. Explain the many forms of strategic alliances. Discuss channel members available to companies that

export indirectly or directly. Explain the structural trends in wholesaling and retailing.

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Introduction International Business Activities

– International Trade• includes exports and imports.

– Foreign Direct Investment (FDI)• International companies must make FDI to establish

and expand their overseas operations.

– Foreign Sourcing• is the overseas procurement of raw materials,

components, and products.

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Volume of Trade

In 1990,– volume of international trade in goods and

services surpassed $4 trillion. In 1999,

– international trade in goods and services reached $6.8 trillion.

– One-fourth of everything grown or produced in the world is now exported.

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Volume of Trade

Quadrupling of world exports in less than 30 years demonstrates

– that the opportunity to increase sales by exporting is a viable growth strategy.

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Direction of Trade More than one-half of exports from

developing nations go to developed countries.

– However, proportion is declining.

Nearly three-fourths of exports from developed economies go to other industrialized countries.

– Exceptions are Japan, U.S., Australia, and New Zealand.

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Direction of Trade -The Exceptions

Reasons Japan exports more to developing nations

– Japan established extensive distribution in developing nations since early 1900s.

– Uses “sogo shosha” to import raw materials and components necessary for the Japanese industry, due to lack of local sources for raw materials.

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Direction of Trade -The Exceptions

Reasons the United States exports more to developing nations

– The U.S. has significantly more subsidiaries in developing countries than Japanese companies

– Some customers prefer to buy from American firms

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Major Trading Partners Reasons to focus on major trading partners

– The business climate in the importing nation is relatively favorable.

– Export and import regulations are not insurmountable.

– There are no strong cultural objections to buying that nation’s goods.

– Satisfactory transportation facilities have already been established.

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Major Trading Partners

Reasons to focus on major trading partners (cont’d)– Import channel members are experienced in

handling import shipments from the export area.

– Foreign exchange is available to pay for exports.

– The government of a trading partner may apply pressure on importers to buy from countries that are good customers for that nation’s exports.

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Major Trading Partners

Major U.S. Trading Partners– Mexico and Canada

• Share common border with the U.S.

– Nations from East and Southeast Asia have become important trading partners.

• South Korea, Taiwan, Malaysia, Singapore, Thailand, and the Philippines are examples.

• These countries export electronic products and components and other labor intensive goods to the U.S.

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Foreign Investment

Two components of foreign investment– Portfolio investment

• Purchase of stocks and bonds solely for the purpose of obtaining a return on the funds invested.

– Direct investment• Investors participate in the management of the firm

in addition to receiving a return on their money.

• applies when investors equity participation ratio is 10 percent or more.

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Using Foreign Production to Lower Costs

In-bond (maquiladora) industry– NAFTA related

Caribbean Basin Initiative Andean Trade Preference Act Growth Triangles Export Processing Zones

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Protecting Foreign Markets

Signs that an overseas market is being threatened

– Lack of foreign exchange

– Local production by competitors

– Downstream markets

– Protectionism

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How to Enter Foreign Markets

Indirect Exporting

– Exporting of goods and services through various types of home-based exporters

• Manufacturers’ export agents - sell for manufacturer

• Export commission agents - buy for overseas customers

• Export merchants - purchase and sell for own accounts

• International firms - use the goods overseas

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Costs associated with indirect exporting– Exporters pay a commission to manufacturers’

export agents, export commission agents, and export merchants.

– Foreign business can be lost if the exporters decide to change their sources of supply.

– Firms gain little experience from indirect exporting.

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Direct Exporting– The exporting of goods and services by

the exporting firm.

– Sales company• A business established for the purpose of

marketing goods and services, not production.

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Foreign Manufacturing

Six distinct alternatives available for foreign manufacturing– Wholly owned subsidiary

– Joint venture

– Licensing agreement

– Franchising

– Contract manufacturing

– Management contract

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Wholly Owned Subsidiary

A company that wishes to own a foreign subsidiary outright may– start from the ground up by building a new plant.

• Historically the preference of American companies

– acquire a going concern.• Currently the preference of foreign investors

– purchase its distributor, thus obtaining a distribution network familiar with its products.

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Joint Ventures A Joint Venture may be

– a corporate entity formed by an international company and local owners.

– a corporate entity formed by two international companies to do business in a third market.

– a corporate entity formed by a government agency and an international firm.

– a cooperative undertaking between two or more firms of a limited-duration project.

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Joint Ventures Reasons to joint venture

– Attempt to lose strong foreign nationalistic sentiment

– Acquire expertise, tax, and other benefits

– Risk diversification Disadvantage of joint ventures

– Profits must be shared

– May not have control if only 49 percent foreign ownership is the limit

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Licensing Agreement

– Firm will grant another firm the right to use any kind of expertise for one or more of the licensor’s products.

– Licensee pays fixed sum when signing and pays royalties of 2%-5% of sales over the life of the contract.

– Examples of companies that license• Texas Instruments, Pierre Cardin, Coca-Cola,

Cosmopolitan magazine

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Franchising– Permits the franchisee to sell products or services

under a highly publicized brand name and well-proven set of procedures with a carefully developed and controlled marketing strategy

– Common types of franchises• Hotels (Hilton)

• Business services (Manpower)

• Soft drinks (Coca-Cola)

• Automotive products (Midas)

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Contract manufacturing

– One firm contracts with another to produce products to its specifications but assumes responsibility for marketing.

– Different methods to employ contract manufacturing

• As a means of entering a foreign market without investing in plant facilities.

• Subcontract assembly work or the production of parts to independent companies overseas.

– This method also referred to as FDI without investment

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Management Contract

– Arrangement under which a company provides managerial know-how in some or all functional areas to another party for a fee.

– Used in joint ventures• Enables the global partner to control many aspects of a

joint venture even when holding only a minority position.

– Purchasing commission• Receive commission for acting as a purchasing agent or

imported raw materials and equipment.

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Strategic Alliances

– Partnerships between competitor, customers, or suppliers.

– Also referred to as competitive alliances, competitive collaborations, or coopetition.

– Reasons firms form strategic alliances• Expanding global competition.

• The growing cost of research, product development, and marketing.

• The need to move faster in carrying out global strategies.

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Multidomestic or Global Strategy

– Seven Global Dimensions along which Management can Globalize

• Product

• Markets

• Promotion

• Where value is added to the product

• Competitive strategy

• Use of non-home-country personnel

• Extent of global ownership of the firm

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Multidomestic or Global Strategy

Multidomestic Strategy

– Zero standardization along the seven global dimensions.

Global Strategy

– Complete standardization along the seven global dimensions.

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International Channels of Distribution Members

Indirect Exporting Distribution Members

– Exporters that sell for the manufacturer

– Exporters that buy for their overseas customers

– Exporters that buy and sell for their account

– Exporters that purchase for foreign users

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Indirect Exporting– Exporters that sell for the manufacturer

• Manufacturers’ export agents– Act as the international representatives for various

noncompeting domestic manufacturers

• Export management companies– Act as the export department for noncompeting manufacturers

• International trading companies– Act as agents for some companies and as wholesaler for others

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Indirect Exporting

– International Trading Companies (cont’d)

• Sogo Shosha

– The largest of the Japanese trading companies

– Originally established by the zaibatsu (centralized, family-dominated economic groups)

• Korean general trading companies

• Export trading companies

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Indirect Exporting– Exporters that buy for their overseas

customers

• Export commission agents

– Represent overseas purchasers, such as import firms and large industrial users.

– These agents are paid a commission by the purchaser for acting as resident buyers in industrialized nations.

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Indirect Exporting– Exporters that buy and sell for their own account

• Export merchants– Purchase products directly from the manufacturer and then sell,

invoice, and ship them in their own names.

• Cooperative exporters– Established international manufacturers that sell the products of

other companies in foreign markets along with their own.

• Webb-Pomerene Associations– Organizations of competing firms that have joined together for the

sole purpose of export trade.

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Indirect Exporting– Exporters that purchase for foreign users and

middlemen• Large foreign users

– Buy for their own use overseas.

• Export resident buyers– Perform essentially the same functions as export

commission agents.

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Direct Exporting Distribution Members

– Manufacturer’s agents

– Distributors or wholesale importers

– Retailers

– Trading companies

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Direct Exporting– Manufacturer’s agents

• Represent various noncompeting foreign suppliers, and take orders in those firm’s names.

– Distributors or wholesale importers• Independent merchants that buy for their own

account.

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Direct Exporting – Retailers

• Frequently direct importers.

– Trading companies• Develop trade and serve as intermediaries

between foreign buyers and domestic sellers and vice versa.

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Foreign Production Wholesale Institutions

– Diversity of wholesaling structures

– Parallel importers and gray market goods

• Importer buys from a dealer in the home country.

• Unauthorized deal imports from the foreign subsidiary and competes in the home country.

• Unauthorized importer buys products overseas from the home office and competes with the local subsidiary.

• Goods are bought for export but are sold on the domestic market instead.

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Retail Institution

Hypermarkets– Huge combination supermarket/discount

houses with five or six acres of floor space where both soft goods and hard goods are sold.

Superstores– Name given to hypermarkets in Japan,

some parts of Europe, and the United States.

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

Documents

mcgrawhill companies

direction of trade

volume of international

japanese companies

minor slide

rights reserv

developing nations

nations japan