Final Flashcards
(24 cards)
1
Q
List some types of country risk produced by legal systems in a host country legal environment
A
- Foreign investment laws – affect the type of entry strategy chosen (e.g. Indonesia restricts foreign investment in certain industries, such as tourism and alcohol)
- Controls on operating forms/practices – e.g. in China, foreign telecommunication investors must seek joint ventures with local firms, cannot be operated alone
- Marketing and distribution laws – e.g. France prohibits cigarette advertising
- Laws on income repatriation – restricts the amount of net income that firms can bring back to their home country (common in countries experiencing a shortage of hard currencies)
- Environmental laws – preserve natural resource i.e. pollution, to ensure health/safety
- Contract laws – rights, duties, obligations
- Internet and e-commerce regulations – China developed legislation to ensure security/privacy to protect private data
- Inadequate or underdeveloped legal systems – In Russia, regulations to protect IP may exist on paper but not be properly enforced (another party can copy without paying the inventor)
2
Q
List some types of country risk produced by legal systems in a home country legal environment
A
- Extraterritoriality: application of home-country laws to persons or conduct outside national borders
1. The foreign corrupt practices Act (FCPA) – bans firms from offering bribes to foreign parties to secure or retain business
2. Accounting and reporting laws – when assigning value to stocks and other securities, most countries use the lower of cost or market value (Brazil encourages firms to adjust portfolio valuations because of historically high inflation, Canada uses historical costs, etc.)
3. Transparency in financial reporting – in the US, financial results are prepared each quarter, but in other countries, they are less often, and lack transparency - Transparency improves business decision making and the ability of citizens to hold companies accountable
- To avoid rigid financial requirements, some European banks are reducing their banking activities in the US
3
Q
List some types of managing country risk
A
- Proactive environmental scanning
- Anticipating country risk through advance resource, engaging in scanning to assess potential risks/threats to the firm (employees working in the host country are a valuable source of intelligence)
- Allows the firm to improve practice in ways that conform to local laws and political realities –> business success
- Strict adherence to ethical standards
- Alliances with qualified local partners
- Entering target markets in collaboration with a knowledgeable and reliable local partner - Protection through legal contracts
- Spells out the rights/obligations of each party
4
Q
Approaches for resolving international disputes
A
- Conciliation – formal process to resolve differences in a friendly manner
- Arbitration – neutral third party hears both sides, and decides on a resolution based on an objective assessment of facts
- Litigation – occurs when one party files a lawsuit against another to achieve desired ends
5
Q
What is protectionism, provide some examples.
A
- Protectionism: national economic policies designed to restrict free trade and protect domestic industries from foreign competition
> Tariff: tax imposed on imported products, increasing the cost of acquisition for the customer
> Non-tariff trade barrier: government policy, regulation or procedure that impedes trade (e.g. quotas – quantitative restriction on imports in a product category)
> Customs: the checkpoints at the ports of entry in each country, where govt. officials inspect imported products and levy tariffs
- Protectionist policies can lead to price inflation, as tariffs restrict the supply of a particular product, can also reduce choices available to buyers
6
Q
Some examples of Defensive rationale
A
Protection of the National Economy
- Protectionist demand trade barriers to curtail the import of low-priced products –> protects jobs and ensures higher wages
- Trade barriers interfere with country-specific specialisation of labour, blocking imports can reduce availability and increase costs of products sold
Protection of an Infant Industry
- Companies are often inexperienced and lack the latest technologies and know-how
- A very young industry may need temporary protection from foreign competitors –> govt. may impose temporary trade barriers on foreign imports to ensure that young firms gain a large share of the domestic market
- E.g. the US govt imposed tariffs on the import of inexpensive Chinese-made solar cells, to protect the emerging US solar power industry
National Security
- Countries impose trade restrictions on products viewed as critical to national defence/security (i.e. military technology)
- Countries can also impose export controls, intended to manage/prevent the export of certain products or trade with certain countries (e.g. exports of plutonium to North Korea as it can make nuclear weapons)
- E.g. The Russian govt. has strict legislation that limits foreign investment in sectors considered vital to Russia’s national interests
National Culture and Identity
- E.g. Eiffel tower in Paris cannot be moved elsewhere, or US opposed Japanese investors from purchasing the Seattle Mariners baseball team
7
Q
List some examples of offensive rationale
A
- National Strategic Priorities
- Govt. intervention can sometimes aim to encourage the development of industries that bolster the nation’s economy
- Proactive variation of the infant industry rationale
E.g. providing financing for high-tech of high value-adding industries (i.e. pharmaceuticals, car manufacturing etc.)
- Increasing employment
- Import barriers can protect employment in designated industries (e.g. Chinese govt. requires joint ventures in order to create jobs for Chinese workers)
8
Q
List some examples of Gov intervention
A
- High tariffs inhibit free trade and economic growth
Tariffs are based on weight, volume or surface area - Revenue tariffs are intended to raise money for the govt. (i.e. cigarettes)
- Protective tariffs aim to protect domestic industries from foreign competition
- Prohibitive tariff is one so high that no one can import any of the items
- However, tariffs can be detrimental, e.g. in Africa, half workers are employed in agriculture hindering imports of agricultural goods from Africa worsens severe poverty
9
Q
List some examples of Non-Tariff Barriers
A
- Govt. prefer non-tariff barriers as they are easier to hide from the WTO and other orgs.
- Local content requirements require manufacturers to include a minimum of local value added (i.e. production takes place locally)
- Government regulations and technical standards include safety regulations for motor vehicles and electrical equipment
10
Q
List some examples of Investment Barriers
A
- Restrictions on FDI and ownership hinder the ability of foreign firms to invest in some industry sectors or acquire local firms
- Common in industries that the govt. has major holdings (e.g. oil, key minerals)
- Currency controls – restrict the outflow of widely used currencies such as the dollar, euro, yen, etc. and occasionally the inflow of foreign currencies
- Some countries employ a system of dual official exchange rates – favourable rate for exporters to encourage exports, and vice versa
11
Q
How can firms respond to Gov Intervention?
A
- Research to gather knowledge/intelligence **
- Scan the business environment to identify the nature of government intervention, and plan market-entry strategies/host-country operations
- Review return-on-investment criteria to account for the increased cost/risk of trade and investment barriers
** Choose the most appropriate entry strategies **
- If high tariffs are present, managers may consider FDI, licensing and joint ventures that allow the firm to operate directly in the target market –> avoid import barriers
- Tariffs vary with the form of an imported product –> firms ship manufactured products as parts/components to avoid this
** Take advantage of foreign trade zones **
- Foreign free trade zone: area within a country that receives imported goods for assembly or other processing and subsequent re-export –> not subject to tariffs, taxes or quotas until entering the non-FTZ territory
- Maquiladoras: export-assembly plants in northern Mexico, produce components and typically finished products destined for the US on a tariff-free basis
- E.g. Japanese carmakers store vehicles at the port of Jacksonville, Florida, without having to pay duties until the cars are shipped to US dealerships
Seek favourable customs classifications for exported products
- Many products can be classified within two/more categories, each which may imply a different tariff
- Manufacturer should analyse the trade barriers on differing categories and ensure exported products are classified under the lowest tariff code
- Alternatively, the manufacturer may be able to modify the exported product in a way that helps minimise trade barriers
E.g. South Korea faced a quota on non-rubber footwear, so shifted manufacturing to rubber-soled shoes
Take advantage of investment incentives and other govt. support programs
- In Europe, Japan and the US, governments increasingly provide incentives to entice firms to set up shop within their borders
- Incentives also include reduced utility rates, employee training programs, tax holidays, etc.
**Lobby for freer trade and investment **
The efforts of firms to lobby domestic and foreign governments can lead to lower trade/investment barriers
12
Q
What is Regional integration and economic blocs?
A
Regional economic integration: occurs when two or more countries within a geographic region, form an alliance aimed at reducing barriers to trade and investment
13
Q
Advantages of regional integration and economic
A
- Increases economic activity and interdependence, makes doing business easier among the nations
- The countries in an economic bloc become parties to a “free trade agreement” (formal arrangement to reduce tariffs, quotas and other trade barriers)
- The EU is a more advanced bloc, that permits the free flow of capital, labour and technology among their member countries, harmonises monetary/fiscal policy
- More favourable than working toward a system of worldwide free trade as it is much easier to reach an agreement on free trade with a handful of countries
14
Q
What are some Advantages and Implications of Regional Integration
A
- Expand Market Size
- E.g. EU gives Belgium access to a total market of nearly 500 million buyers (even though they have a population of 10 million) - Achieve scale economies and enhanced productivity
- Increased market size allows firms to increase marketing/production scales –> increased efficiency
- More efficient resource usage can lead to greater productivity and lower prices for consumers - Attract direct investment from outside the bloc
- Foreign firms prefer to invest in countries that are part of an economic bloc –> factories can receive preferential treatment
- Establishing operations in a single EU country, firm gains free trade access to ensure EU market - Acquire stronger defensive and political posture
- EU is one way that Europe counterbalances power/international influence of the US
- Countries are more powerful operating together, than alone
15
Q
Assessing the true potential of an emerging market
A
- Per capita income
Using purchasing power parity to assess price difference, number of goods consumers can buy in their home country using their own currency
2. Size of the middle class Represent spending power, predicted to grow particularly in China
- Market potential indicators
E.g. GDP growth rate, income distribution, rate of urbanisation, unemployment rate
16
Q
Risks and Challenges of Emerging markets
A
- Political instability
- Weak IP protection
eg Unauthorised copying of a product - Bureaucracy, Red Tape and Lack of Transparency
eg Bribery
17
Q
List some Entry strategies
A
- Low-control over foreign operations – global sourcing, exporting/countertrade > Minimum control > Limited resource commitment > Maximum flexibility > Low risk > Not complex
- Moderate-control – licensing, franchising and other contractual strategies, project-based collaborative ventures
- High-control strategies – minority-owned equity venture, FDI (wholly owned subsidiary) > Substantial resource commitment > Minimum flexibility > High risk > Very complex
18
Q
What is the criteria for assessing the attractiveness of emerging markets
A
> Market size, growth rate – real GDP rate
Consumption capacity – income of the middle class
Commercial infrastructure – density of paved roads, number of personal computers, population per retail outlet etc.
Economic freedom – government intervention
Country risk – degree of political and macroeconomic risk
19
Q
What are some challenges of doing business in an emerging market?
A
- Political instability
- Weak IP protection
- Bureaucracy, red tape and lack of transparency
- Poor physical infrastructure (e.g. electrical utilities)
- Partner availabilities and qualifications (access to markets, supplier and distributor networks, key government contacts)
- Dominance and competition with family-owned conglomerates and state-owned enterprises
- Economies are often dominated by privately-owned local companies that are large, highly diversified and control suppliers/employment
- Common in South Korea, India, Turkey etc. whereby companies get a lot of support by the government
20
Q
What are some Essentials of successful global firms
A
- Strategy (need to get goals, have clear direction)
- Organisational structure (to facilitate the implementation of strategy and firm’s vision)
- Organisational processes
- Organisational culture
- Visionary leadership
21
Q
What is licensing
A
- Licensing – granting the right to others to use a legally protected property (name, trademark, logo, design, etc.) for a specific time period, in exchange for royalties/other compensation
> Requires neither substantial capital investment or involvement –> inexpensive way to establish a presence
> Usually 5-7 years, but is renewable if desired
> Royalty – a fee paid periodically to compensate a licensor for the temporary use of its IP
22
Q
What is franchising
A
Firm allows another the right to use an entire business system
23
Q
What is Intellectual property rights
A
ideas or works that individuals/firms create
Intellectual property rights – the legal claim through which the proprietary assets are protected from unauthorised use by other parties (safeguards IP)
24
Q
What are the 4 main types of countertrade?
A
- Barter – direct exchange of goods without money (single contract, short time span, less complicated)
- Compensation deals – payment in both goods and cash (e.g. half-half)
- Counter-purchase – requires two distinct contracts
1 – seller agrees to a set price for goods and receives cash from the buyer
2 - seller agrees to purchase goods from the buyer for the same cash amount as the first transaction, or a percentage of it If the two exchanges are not of equal value, the difference can be paid in cash - Buy-back agreement – seller agrees to supply technology/equipment to construct a facility, and receives payment in the form of goods the facility produces (e.g. tractor)
> May require several years to complete and therefore, entail substantial risk
