I n t e r n a t i o n a l B u s i n e s s P a g e 1 2 nd

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1 I n t e r n a t i o n a l B u s i n e s s P a g e 1 Q. No. 1 NAFTA has produced significant net benefits for the Canadian, Mexican and U.S. economies. Discuss. The North American Free Trade Agreement (NAFTA) The free trade agreement between the United States, Canada, and Mexico became law January 1, Contents are: Abolition by 2004 of tariffs on 99 percent of the goods traded between Mexico, Canada, and the United States. Removal of most barriers on the cross-border flow of services, allowing financial institutions, for example, unrestricted access to the Mexican market by Protection of intellectual property rights. Removal of most restrictions on foreign direct investment between the three member countries, although special treatment (protection) will be given to Mexican energy and railway industries, American airline and radio communications industries, and Canadian culture. Application of national environmental standards provided such standards have a scientific basis. Lowering of standards to lure investment is described as being inappropriate. Establishment of two commissions with the power to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum wages, or child labor are ignored. On average, studies indicate that NAFTA's overall impact has been small but positive. From 1993 to 2005, trade between NAFTA's partners grew by 250 percent. Canada and Mexico are now the number one and two trade partners of the United States, suggesting the economies of the three NAFTA nations have become more closely integrated. In 1990, U.S. trade with Canada and Mexico accounted for about a quarter of total U.S. trade. By 2005, the figure was close to one third. Canada's trade with its NAFTA partners increased from about 70 percent to more than 80 percent of all Canadian foreign trade between 1993 and 2005, while Mexico's trade with NAFTA increased from 66 percent to 80 percent over the same period. All three countries also experienced strong productivity growth over this period. In Mexico, labor productivity has increased by 50 percent since 1993, and the passage of NAFTA may have contributed to this. Perhaps the most significant impact of NAFTA has not been economic, but political. Many observers credit NAFTA with helping to create the background for increased political stability in Mexico. Mexico is now viewed as a stable democratic nation with a steadily growing economy, something that is beneficial to the United States, which shares a 2,000-mile border with the country.

2 I n t e r n a t i o n a l B u s i n e s s P a g e 2 Q. No. 2 Elaborate the function of foreign exchange market. The foreign exchange market serves two main functions. The first is to convert the currency of one country into the currency of another. The second is to provide some insurance against foreign exchange risk, by which we mean the adverse consequences of unpredictable changes in exchange rates. 1. Currency Conversion: Within the borders of a particular country, one must use the national currency. A U.S. tourist cannot walk into a store in Edinburgh, Scotland, and use U.S. dollars to buy a bottle of Water. Dollars are not recognized as legal tender in Scotland; the tourist must use British pounds. When a tourist changes one currency into another, she is participating in the foreign exchange market. The exchange rate is the rate at which the market converts one currency into another. For example, an exchange rate of 1 = $1.30 specifies that one euro buys 1.30 U.S. dollars. The exchange rate allows us to compare the relative prices of goods and services in different countries. 2. Insuring Against Foreign Exchange Risk A second function of the foreign exchange market is to provide insurance against foreign exchange risk, which is the possibility that unpredicted changes in future exchange rates will have adverse consequences for the firm. When a firm insures itself against foreign exchange risk, we say that is it engaging in hedging. To explain how the market performs this function, we must first distinguish among spot exchange rates, forward exchange rates, and currency swaps. Spot Exchange Rates The spot exchange rate is the rate at which a foreign exchange dealer converts one currency into another currency on a particular day. Thus, when our U.S. tourist in Edinburgh goes to a bank to convert her dollars into pounds, the exchange rate is the spot rate for that day. Forward exchange rates A forward exchange occurs when two parties agree to exchange currency and execute the deal at some specific date in the future. Exchange rates governing such future transactions are referred to as forward exchange rates. For most major currencies, forward exchange rates are quoted for 30 days, 90 days, and 180 days into the future. Currency Swaps A currency swap is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates. Swaps are transacted between international businesses and their banks, between banks, and between governments when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk. A common kind of swap is spot against forward.

3 I n t e r n a t i o n a l B u s i n e s s P a g e 3 Q. No. 3 Determine the relative merits of fixed and floating exchange rate regimes. From the prospective of international business, what are the most important criteria in a choice between the systems? Which system is the more desirable for an international business? Merits: Advantages of floating exchange rates This puts downward pressure on the exchange rate and if depreciation occurs, the relative price of exports in overseas markets falls (making exports more competitive) whilst the relative price of imports in the home markets goes up (making imports appear more expensive). A second key advantage of floating exchange rates is that it gives the government / monetary authorities flexibility in determining interest rates. This is because interest rates do not have to be set to keep the value of the exchange rate within pre-determined bands. For example when the UK came out of the Exchange Rate Mechanism in September 1992, this allowed a sharp cut in interest rates which helped to drag the economy out of a prolonged recession. Advantages of Fixed Exchange Rates Fixed rates provide greater certainty for exporters and importers and under normally circumstances there is less speculative activity - although this depends on whether the dealers in the foreign exchange markets regard a given fixed exchange rate as appropriate and credible. Sterling came under intensive speculative attack in the autumn of 1992 because the markets perceived it to be overvalued and ripe for devaluation. Fixed exchange rates can exert a strong discipline on domestic firms and employees to keep their costs under control in order to remain competitive in international markets. Conclusion We do, however, know that a fixed exchange rate regime modeled along the lines of the Bretton Woods system will not work. Speculation ultimately broke the system, a phenomenon that advocates of fixed rate regimes claim is associated with floating exchange rates! Nevertheless, a different kind of fixed exchange rate system might be more enduring and might foster the stability that would facilitate more rapid growth in international trade and investment. In the real world the choice between alternative exchange rate systems is less extreme as there are varying degrees of government intervention in the foreign exchange markets.

4 I n t e r n a t i o n a l B u s i n e s s P a g e 4 Q. No. 4: In a world of zero transportation cost, no trade barriers and nontrivial differences between nations with regard to factor conditions, firms must expand their business internationally if they are to survive. Discuss. A company can increase its growth rate by taking goods or services developed at home and selling them internationally. Almost all multinationals started out doing just this. Procter and Gamble, for example, developed most of its best-selling products such as Pampers disposable diapers and Ivory soap in the United States and subsequently sold them around the world. Similarly, although Microsoft developed its software in the United States, from its earliest days the company has always focused on selling that software in international markets. The success of many multinational companies that expand in this manner is based not just upon the goods or services that they sell in foreign nations but also upon the core competencies that underlie the development, production, and marketing of those goods or services. The term core competence refers to skills within the firm that competitors cannot easily match or imitate. These skills may exist in any of the firm's value creation activities production, marketing, R&D, human resources, logistics, general management, and so on. Such skills are typically expressed in product offerings that other firms find difficult to match or imitate. Core competencies are the bedrock of a firm's competitive advantage. They enable a firm to reduce the costs of value creation and/or to create perceived value in such a way that premium pricing is possible. For example, Toyota has a core competence in the production of cars. It is able to produce high-quality, well-designed cars at a lower delivered cost than any other firm in the world. The competencies that enable Toyota to do this seem to reside primarily in the firm's production and logistics functions. We have seen how firms that expand globally can increase their profitability and profit growth by entering new markets where indigenous competitors lack similar competencies, by lowering costs and adding value to their product offering through the attainment of location economies, by exploiting experience curve effects, and by transferring valuable skills between their global networks of subsidiaries. Q. No. 5: What do see as the main organizational problems that are likely to be associated with implementation of a transnational strategy? Organizational structure and strategy are related because organizational strategy helps a company define and build its organizational structure. A company's organizational structure is based on the result of the analysis of organizational strategy. The company will use these results to determine its areas of concentration and how to position itself in order to succeed. Following organizational problems that are likely to be associated with implementation of a transnational strategy:

5 I n t e r n a t i o n a l B u s i n e s s P a g e 5 Establishing the divisional-corporate authority relationship Distortion of information Competition for resources Transfer pricing Short-term R&D focus Duplication of functional resources The relationship between organizational structure and strategy becomes clearer when the company's strategy is in place. With a clear focus of what it wants to achieve, the organization will proceed to align its structure in such a manner to best achieve this. According to some researchers, the answer is to pursue what has been called a transnational strategy. Two of these researchers, Christopher Bartlett and Sumantra Ghoshal, argue that in today's global environment, competitive conditions are so intense that to survive, firms must do all they can to respond to pressures for cost reductions and local responsiveness. They must try to realize location economies and experience effects, to leverage products internationally, to transfer core competencies and skills within the company, and to simultaneously pay attention to pressures for local responsiveness. Remember that the strategy must fit with the competitive environment of the firm and the organizational structure and control systems of the firm must be consistent with its strategy. Q. No. 6 Discuss the statement: An understanding of the causes and consequences of performance ambiguity is central to the issue of organizational design in multinational firms Organizational design creates interdependence, which may lead to performance ambiguities. Different organizational designs can remove performance ambiguities, shift them to a different level in the hierarchy, or create new performance ambiguities. It makes sense to analyze the cause of performance ambiguities as a part of the organizational design process. It also makes sense to analyze the opportunities for performance ambiguity that a new design might present. The combined impact of performance ambiguity and goal incongruence that arises for MNCs due to the increasing cultural distance, financial instability and political risk in targeted foreign countries during the 1990's has reduced control system options for these MNCs. The most challenging task for MNC managers will be defining control systems where all three major environmental variables present problems. Organizations seeking competitive advantage in countries with high cultural distance, high financial instability and high political risk are left with little but input control for their control system. Thus, the selection, staffing and ongoing learning processes become more salient for an MNC.

6 I n t e r n a t i o n a l B u s i n e s s P a g e 6 Subsequently, the decision regarding which managers to expatriate to these extreme environments becomes critical. When both the availability of output measures and the knowledge of the transformation process are high, an organization has the flexibility to use either output or behavior performance measurement systems. As output measures become less available, a firm must adopt more behavioral measures. Conversely, as the knowledge of the transformation process declines, an output measurement orientation is preferred. Finally, as both parameters simultaneously tend toward the negative extremes, a firm will tend to adopt ritual or clan control. This control form achieves efficiency under conditions of high performance and low opportunism and takes place when goal incongruence is high and performance ambiguity is low. Q. No. 7 Discuss how the need for control over foreign operations varies with firms strategies and core competencies. What are the implications for the choice of entry mode? Pressures for cost reductions and pressures to be locally responsive are the two competitive pressures facing companies competing in the global marketplace. Unfortunately for these companies, these two forces put conflicting demands on a company. There are for main strategies companies can take for operating on a global market. 1. Global Standardization: This strategy focuses on increasing profitability by reaping the cost reductions that come from economies of scale and location economies. These companies standardize their product or service in order to pursue a low-cost strategy on a global scale. Companies that face high pressure for cost reductions and low pressure for local responsiveness should pursue this strategy. 2. Localization: Companies that pursue this strategy focus on differentiating their product or service to uniquely match the tastes and preferences in their different national markets. Companies that face low pressure for cost reductions and high pressure for local responsiveness should pursue this strategy. 3. Transnational: This strategy looks to achieve the best of both Global Standardization and Localization simultaneously. That is both low costs and differentiation. Since these are competing goals, such a strategy is very difficult. Companies that face both high pressure for cost reductions and high pressure for local responsiveness should pursue this strategy. 4. International: Global companies that don't face competition and sell a product that serves a universal need or needs don't need to differentiate their product to local tastes and preferences or cut costs. Companies that face both low pressure for cost reductions and low pressure for local responsiveness should pursue this strategy.

7 I n t e r n a t i o n a l B u s i n e s s P a g e 7 Generally speaking as we go from 1 to 4, we get more expensive, but also get more control. For example exporting is appropriate for companies facing the most pressure to reduce cost while wholly owned subsidiaries are appropriate for companies that need tight control over production and face pressure to be locally responsive. Companies with distinctive competencies in technological know-how should avoid licensing and joint ventures, minimizing the risk of losing control of that technology. Technological know-how (core-competency) - Licensing and joint venture arrangements should be avoided if possible so that the risk of losing control over that technology is minimized. Management know-how (core-competency) - The risk of losing control over the management skills to franchisees or joint venture partners is not that great. Based on a sample of 432 foreign market entries by 118 non-diversified firms in the US manufacturing sector between 1991 and 1998, our findings indicate that greater equity ownership by institutional shareholders and inside directors is positively associated with a preference for fullcontrol entry modes. In addition, our results suggest that CEOs with a greater proportion of pay tied to firm long-term performance are more inclined to choose full-control entry modes over sharedcontrol modes. Q. No. 8: What are the different methods used to finance the imports and exports in international business? Methods of Payment in International Trade: Cash In Advance / Prepayments: With cash-in-advance payment terms, the exporter can avoid credit risk because payment is received before the ownership of the goods is transferred. Wire transfers and credit cards are the most commonly used cash-in-advance options available to exporters. However, requiring payment in advance is the least attractive option for the buyer, because it creates cash- flow problems. Foreign buyers are also concerned that the goods may not be sent if payment is made in advance. Thus, exporters who insist on this payment method as their sole manner of doing business may lose to competitors who offer more attractive payment terms. Letters of credit A letter of credit adds a bank's promise of paying the exporter to that of the foreign buyer when the exporter has complied with all the terms and conditions of the letter of credit. The foreign buyer applies for issuance of a letter of credit to the exporter and therefore is called the applicant; the exporter is called the beneficiary.

8 I n t e r n a t i o n a l B u s i n e s s P a g e 8 Payment under a documentary letter of credit is based on documents, not on the terms of sale or the condition of the goods sold. Before payment, the bank responsible for making payment verifies that all documents are exactly as required by the letter of credit. Documentary Collections/Drafts/Bills of Exchange) A documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of a payment to the remitting bank (exporter s bank), which sends documents to a collecting bank (importer s bank), along with instructions for payment. Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents. D/Cs involve using a draft that requires the importer to pay the face amount either at sight (document against payment) or on a specified date (document against acceptance). The draft gives instructions that specify the documents required for the transfer of title to the goods. Although banks do act as facilitators for their clients, D/Cs offers no verification process and limited recourse in the event of non-payment. Drafts are generally less expensive than LCs. Open Account In a foreign transaction, an open account is a convenient method of payment and may be satisfactory if the buyer is well established, has demonstrated a long and favorable payment record, or has been thoroughly checked for creditworthiness. Under open account, the exporter simply bills the customer, who is expected to pay under agreed terms at a future date. Some of the largest firms abroad make purchases only on open account. Q. No. 9 Explain how an efficient logistics function can help an international business compete more effectively in the global market Logistics: Bridge to Global Prosperity, at the June 8-9 Wharton Global Forum in Istanbul, moderator George Day described logistics as the connective tissue that makes the global economy work. Logistics, he said, can be a huge source of competitive advantage and help expand and launch new business models. Combined with information technology, he added, logistics can dramatically extend the geographic reach of both large and small organizations. Trends in Logistics Transition to a post-industrial society The logistics industry must specialize in niches, such as the textile industry whose players need to be very responsive to fashion trends. You cannot produce a million products in one place at one time. You have to produce them quickly, often in different parts of the world.

9 I n t e r n a t i o n a l B u s i n e s s P a g e 9 On-demand world We are a time-is-money society. We are moving to time-based competition. Speed is almost more important than a cheap price. You see that in micro electronics, with chips and game consuls. With PCs and phones, the term used is agility the ability to get to the market first. Demand is changing the logistics world. Environmental sensibility In Europe, we see that the trucks on highways are getting more restricted. Austria is banning some truck traffic on weekends. Rails are being used more often to transport goods because less energy is used. There is also more concern about noisy planes. Environmental concerns are shaping the industry. Shareholder value Logistics is moving to focus on core competencies. We have seen companies divest so they can concentrate on their core business. There is more outsourcing of the transport functions, which helps third party providers like DHL expand and also fuels the growth of specialized transport logistics companies. Newer communications technologies With the Internet, you can find out where your shipment is and contact your call center if the package is stuck. But now, you can also use mobile phones [to do that]. Tracking and tracing is becoming more available. Q. No. 10: What are the main advantages and disadvantages of ethnocentric, polycentric, and geocentric approaches to staffing policy? When is each approach appropriate? A firm s staffing policy is concerned with the selection of employees who have the skills required to perform a particular job. A staffing policy can be a tool for developing and promoting the firm s corporate culture (the organization s norms and value system). There are three main approaches to staffing policy within international businesses: 1. The ethnocentric approach An ethnocentric staffing policy is one in which key management positions are filled by parent country nationals.

10 The advantages of the ethnocentric approach are: I n t e r n a t i o n a l B u s i n e s s P a g e 10 a. Overcomes lack of qualified managers in host country, b. Unified culture, and c. Helps transfer core competencies. The disadvantages of the ethnocentric approach are: a. Produces resentment in host country, and b. Can lead to cultural myopia. An ethnocentric approach is typically appropriate for firms utilizing an international strategy. 2. The polycentric approach A polycentric staffing policy requires host country nationals to be recruited to manage subsidiaries, while parent country nations occupy key positions at corporate headquarters. The advantages of the polycentric approach are: a. Alleviates cultural myopia, and b. It is inexpensive to implement. The disadvantages of the polycentric approach are: a. Limits career mobility, and b. Isolates headquarters from foreign subsidiaries. A polycentric approach is typically appropriate for firms utilizing a multidomestic strategy. 3. The geocentric approach A geocentric staffing policy seeks the best people for key jobs throughout the organization, regardless of nationality. The advantages of a geocentric approach are: a. Uses human resources efficiently, b. Helps build strong culture and informal management network. The disadvantages of the geocentric staffing policy are: a. National immigration policies may limit implementation, and b. It is expensive to implement. A geocentric approach is typically appropriate for firms unitizing a global or transnational strategy.