Chapter 1 Introduction to International Business.

Chapter 1

Introduction to International

Business

1999 West Educational Publishing

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Managing the Risks of International Business

“THE MANAGEMENT OF INTERNATIONAL BUSINESS IS THE MANAGEMENT OF RISK”


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Managing Risk Market entry strategy Shifting the risk Using the contract to fix

responsibility, allocate risk and price accordingly

Payment and credit risk Managing distance and

communications


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Managing Risk Managing language and

cultural differences Managing currency and

exchange rate risk


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Managing Risk Political risk? Causes? How to handle? Foreign courts and foreign

law? See DIP SpA v. Commune di Bassano p.39 challenging Italian retail licensing requirements. What result?


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Managing Risks

Currency/Exchange Rate Risks Transaction Risks

* delivery risk

* marine risk

* litigation risk- Gaskin, p.34


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Political Risks

Managing political risk Managing risk of foreign law

and courts - choice of law and forum clauses

Risk of international hostilities


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Implications for International Business Political, economic, and legal environments of a

country influence attractiveness raise ethical Issues

Attractiveness balance long-term risks with short-term

benefits of doing business in a foreign country

benefits depend on: size, wealth, future economic growth

first mover advantages identify “star” future economies

costs are affected by: political payoffs economic sophistication (may be more

costly to operate in LDCs, no infrastructure) legal framework impact on costs


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Implications for International Business

Ethical Issues human rights adherence to same standards

abroad as at home product safety work safety environmental protection

bribes Foreign Corrupt Practices Act

(1977) what is unethical is not necessarily

illegal


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Legal Systems and International Business

Legal Systems and International Business property rights

use of a resource use made of income from resource enforcement issues Public vs private action violations

protection of Intellectual Property patent: inventors’ exclusive rights to manufacture,

use, sale an invention copyright: same for authors, composers, artists,

publishers trademarks: unique designs and names, often

officially registered Paris Convention for the Protection of Industrial

Property (96 countries) WTO/GATT


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Legal Systems and International Business

product safety and product liability criminal / civil liability

contract law document that specifies

conditions under which an exchange will happen

rights/obligations of parties differences based on legal tradition

common law system civil law system


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Forms of International Business Trade International licensing of

technology and intellectual property (trademarks, patents and copyrights)

Foreign direct investment


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External or “arms-length” Modes of Entry

Firm does business overseas without investing in owned assets and own human resources in target market Exporting

Sell “domestically” produced products into foreign markets through local independent agents or directly to customers

Turnkey projects Special case of exporting for firms that

set up production plants or build facilities for others

The “exporting firm” builds the facility overseas, starts it up, turns it over to the host country owner, and then departs

Oil firms, construction firms, manufacturers


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External or “arms-length” Modes (cont.)

Licensing Licensor grants rights to licensee for use of

intangible property over a specified period in return for a fee

Intangible property: patents, inventions, formulas, processes, designs, copyrights, trademarks

Licensing agreement likely allows licensor quality assurance rights over actual use of intangible asset

If licensee sells to consumers using the licensor’s brand name, the license may also give the licensor rights to strategic brand control

Franchising Franchisor, grants franchisee use of intangibles

under the condition that franchisee follow strict rules of operating the business

Mode of operation is part of the brand image International strategic alliances


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“Internal” Modes of Entry

These involve Foreign Direct Investment Wholly owned subsidiaries

Firms owned 100% by a company in a foreign country

International joint ventures Firms that are owned jointly by two

or more otherwise independent firms; most IJVs are between two firms

One (or more) parent firms are non-resident in the host market

Ownership % may vary from majority foreign owned, to 50%-50% owned, to minority owned by the foreign firm


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Trade

Exporting Importing Subject to government

controls over trade: Tariffs non tariff barriers

Trade in services - increasing


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Intellectual Property and Licensing

Intellectual Property Rights: Copyrights: legal rights to an artistic

or written work Trademarks: the legal right to use a

name or symbol; that identifies a firm or its product

Patents: governmental grants to inventors assuring them of the legal right to produce, use and sell their invention for a period of years


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International Licensing Agreements

International licensing agreements: contracts by which the holder of intellectual property will grant certain rights in that property to a foreign firm to use for a period of time under certain conditions in return for a licensing fee

Technology transfer Franchising Agreements : licenses

to use trademark and form of business operations


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Protecting Intellectual Property Importance of IP for US trade Difficulty of combating piracy


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Legal and Political Issues in Technology Transfer Agreements

Regulated by some governments generally in Asia, Latin America,

and the Middle East terms restricted to benefit the

developing country


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Foreign Direct Investment

Ownership and active control of ongoing business concerns including investment in manufacturing, mining, farming and other production facilities

Wholly owned foreign subsidiary

Joint venture Mergers and acquisitions


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The Legal Environment in Developing Countries

How different? Examples: foreign exchange,

controls on trade, licensing and investments

Bhopal discussion Reform and privatization Transition to market

economies


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Ethical Issues

“The law is a floor…but ethical codes and personal values call on us to exceed that which is required by law.”

Do you agree? Source of ethics?


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Ethical Issues Bribes? Child labor? Different working conditions

and wages? Corporate response?


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Conclusion

Global knowledge Trade, licensing and

investment How to manage risk? Good

research, understand risk, know the law and use contract to protect you and help you manage risk.


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

http://www.firstgov.gov/

http://www.ita.doc.gov/

http://www.ciber.bus.msu.edu/busres.htm

http://www.ustr.gov/

http://www.wto.org/

http://www.bea.doc.gov/

http://www.worldbank.org/


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First Flight v. Pro. Golf, p.15 Facts: Pro Golf negotiated with

Wynn to act as sales representative in Japan. Wynn incorporated FFA in Japan. ProGolf entered into an agreement where FFA could use First Flight trademark. FFA tried to sublicense the trademark.

Pro Golf Case


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Pro Golf Case

Progolf terminated the agreement. Pro Golf learned that they had not properly registered their trademark in Japan. FFA sued for breach of contract and Pro Golf counterclaimed for royalties.

Holding: Pro Golf was permitted to terminate its Japanese sales agency with FFA because it was terminable at will.


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Pro Golf Case (cont.)

However Pro Golf was not entitled to royalties because they had not perfected their rights to the trademark under Japanese law.


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Franchising Case

Raymond Dayan v. McDonald’s p. 18

Facts: Dayan had franchise to operate McDonald’s in Paris. There was a serious problem with QSC (quality, service and cleanliness standards. McDonald’s wanted to terminate the franchise but Dayan objected.


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Dayan v. McDonald’s Corp.

Holding: After much legal maneuvering on two continents, McDonald’s was able to terminate the franchise. Dayan was able to continue his restaurants under a different name.

What is the impact of this on the franchiser?


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DIP SpA v. Commune di Bassano

“…it is sufficient to observe that rules such as those contained in the Italian Act make no distinction according to the origin of the goods distributed by the businesses concerned, that their purpose is not to regulate trade in goods…


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DIP SpA v. Commune di Bassano

And that the restrictive effect which they might have on the free movement of goods are too uncertain and indirect for the obligation which they impose to be regarded as hindering trade between member states.”


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Gaskin v. Stumm Handel Facts: Issue: Is the forum selection clause

in the contract which had been written in German designating the courts of Germany enforceable thus precluding the plaintiff from proceeding in a U.S. Court?

Yes


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Gaskin v. Stumm Handel Why did the court rule for the

defendant? What circumstances might

have altered the result? What advice do you have for

the plaintiff for the future?

Chapter 1 Introduction to International Business.

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