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msmarco_v2.1_doc_00_11055002#4_15929227
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http://2012books.lardbucket.org/books/challenges-and-opportunities-in-international-business/s06-01-what-is-international-trade-th.html
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What Is International Trade Theory?
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2.1
What Is International Trade Theory?
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
|
Why They Triumphed,” Wall Street Journal, May 22, 2010, accessed December 20, 2010, http://online.wsj.com/article/SB10001424052748703691804575254533386933138.html. In more recent centuries, economists have focused on trying to understand and explain these trade patterns. Chapter 1 "Introduction", Section 1.4 "The Globalization Debate" discussed how Thomas Friedman’s flat-world approach segments history into three stages: Globalization 1.0 from 1492 to 1800, 2.0 from 1800 to 2000, and 3.0 from 2000 to the present. In Globalization 1.0, nations dominated global expansion. In Globalization 2.0, multinational companies ascended and pushed global development. Today, technology drives Globalization 3.0. To better understand how modern global trade has evolved, it’s important to understand how countries traded with one another historically. Over time, economists have developed theories to explain the mechanisms of global trade. The main historical theories are called classical and are from the perspective of a country, or country-based.
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http://2012books.lardbucket.org/books/challenges-and-opportunities-in-international-business/s06-01-what-is-international-trade-th.html
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What Is International Trade Theory?
|
2.1
What Is International Trade Theory?
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
|
In Globalization 2.0, multinational companies ascended and pushed global development. Today, technology drives Globalization 3.0. To better understand how modern global trade has evolved, it’s important to understand how countries traded with one another historically. Over time, economists have developed theories to explain the mechanisms of global trade. The main historical theories are called classical and are from the perspective of a country, or country-based. By the mid-twentieth century, the theories began to shift to explain trade from a firm, rather than a country, perspective. These theories are referred to as modern and are firm-based or company-based. Both of these categories, classical and modern, consist of several international theories. Classical or Country-Based Trade Theories
Mercantilism
Developed in the sixteenth century, mercantilism
A classical, country-based international trade theory that states that a country’s wealth is determined by its holdings of gold and silver. was one of the earliest efforts to develop an economic theory.
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http://2012books.lardbucket.org/books/challenges-and-opportunities-in-international-business/s06-01-what-is-international-trade-th.html
|
What Is International Trade Theory?
|
2.1
What Is International Trade Theory?
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
|
By the mid-twentieth century, the theories began to shift to explain trade from a firm, rather than a country, perspective. These theories are referred to as modern and are firm-based or company-based. Both of these categories, classical and modern, consist of several international theories. Classical or Country-Based Trade Theories
Mercantilism
Developed in the sixteenth century, mercantilism
A classical, country-based international trade theory that states that a country’s wealth is determined by its holdings of gold and silver. was one of the earliest efforts to develop an economic theory. This theory stated that a country’s wealth was determined by the amount of its gold and silver holdings. In it’s simplest sense, mercantilists believed that a country should increase its holdings of gold and silver by promoting exports and discouraging imports. In other words, if people in other countries buy more from you (exports) than they sell to you (imports), then they have to pay you the difference in gold and silver. The objective of each country was to have a trade surplus
When the value of exports is greater than the value of imports. , or a situation where the value of exports are greater than the value of imports, and to avoid a trade deficit
When the value of imports is greater than the value of exports.
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http://2012books.lardbucket.org/books/challenges-and-opportunities-in-international-business/s06-01-what-is-international-trade-th.html
|
What Is International Trade Theory?
|
2.1
What Is International Trade Theory?
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
|
This theory stated that a country’s wealth was determined by the amount of its gold and silver holdings. In it’s simplest sense, mercantilists believed that a country should increase its holdings of gold and silver by promoting exports and discouraging imports. In other words, if people in other countries buy more from you (exports) than they sell to you (imports), then they have to pay you the difference in gold and silver. The objective of each country was to have a trade surplus
When the value of exports is greater than the value of imports. , or a situation where the value of exports are greater than the value of imports, and to avoid a trade deficit
When the value of imports is greater than the value of exports. , or a situation where the value of imports is greater than the value of exports. A closer look at world history from the 1500s to the late 1800s helps explain why mercantilism flourished. The 1500s marked the rise of new nation-states, whose rulers wanted to strengthen their nations by building larger armies and national institutions. By increasing exports and trade, these rulers were able to amass more gold and wealth for their countries. One way that many of these new nations promoted exports was to impose restrictions on imports.
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http://2012books.lardbucket.org/books/challenges-and-opportunities-in-international-business/s06-01-what-is-international-trade-th.html
|
What Is International Trade Theory?
|
2.1
What Is International Trade Theory?
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
|
, or a situation where the value of imports is greater than the value of exports. A closer look at world history from the 1500s to the late 1800s helps explain why mercantilism flourished. The 1500s marked the rise of new nation-states, whose rulers wanted to strengthen their nations by building larger armies and national institutions. By increasing exports and trade, these rulers were able to amass more gold and wealth for their countries. One way that many of these new nations promoted exports was to impose restrictions on imports. This strategy is called protectionism
The practice of imposing restrictions on imports and protecting domestic industry. and is still used today. Nations expanded their wealth by using their colonies around the world in an effort to control more trade and amass more riches. The British colonial empire was one of the more successful examples; it sought to increase its wealth by using raw materials from places ranging from what are now the Americas and India.
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http://2012books.lardbucket.org/books/challenges-and-opportunities-in-international-business/s06-01-what-is-international-trade-th.html
|
What Is International Trade Theory?
|
2.1
What Is International Trade Theory?
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
|
This strategy is called protectionism
The practice of imposing restrictions on imports and protecting domestic industry. and is still used today. Nations expanded their wealth by using their colonies around the world in an effort to control more trade and amass more riches. The British colonial empire was one of the more successful examples; it sought to increase its wealth by using raw materials from places ranging from what are now the Americas and India. France, the Netherlands, Portugal, and Spain were also successful in building large colonial empires that generated extensive wealth for their governing nations. Although mercantilism is one of the oldest trade theories, it remains part of modern thinking. Countries such as Japan, China, Singapore, Taiwan, and even Germany still favor exports and discourage imports through a form of neo-mercantilism in which the countries promote a combination of protectionist policies and restrictions and domestic-industry subsidies. Nearly every country, at one point or another, has implemented some form of protectionist policy to guard key industries in its economy. While export-oriented companies usually support protectionist policies that favor their industries or firms, other companies and consumers are hurt by protectionism.
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http://2012books.lardbucket.org/books/challenges-and-opportunities-in-international-business/s06-01-what-is-international-trade-th.html
|
What Is International Trade Theory?
|
2.1
What Is International Trade Theory?
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
|
France, the Netherlands, Portugal, and Spain were also successful in building large colonial empires that generated extensive wealth for their governing nations. Although mercantilism is one of the oldest trade theories, it remains part of modern thinking. Countries such as Japan, China, Singapore, Taiwan, and even Germany still favor exports and discourage imports through a form of neo-mercantilism in which the countries promote a combination of protectionist policies and restrictions and domestic-industry subsidies. Nearly every country, at one point or another, has implemented some form of protectionist policy to guard key industries in its economy. While export-oriented companies usually support protectionist policies that favor their industries or firms, other companies and consumers are hurt by protectionism. Taxpayers pay for government subsidies of select exports in the form of higher taxes. Import restrictions lead to higher prices for consumers, who pay more for foreign-made goods or services. Free-trade advocates highlight how free trade benefits all members of the global community, while mercantilism’s protectionist policies only benefit select industries, at the expense of both consumers and other companies, within and outside of the industry. Absolute Advantage
In 1776, Adam Smith questioned the leading mercantile theory of the time in The Wealth of Nations. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (London:
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What Is International Trade Theory?
|
2.1
What Is International Trade Theory?
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
|
Taxpayers pay for government subsidies of select exports in the form of higher taxes. Import restrictions lead to higher prices for consumers, who pay more for foreign-made goods or services. Free-trade advocates highlight how free trade benefits all members of the global community, while mercantilism’s protectionist policies only benefit select industries, at the expense of both consumers and other companies, within and outside of the industry. Absolute Advantage
In 1776, Adam Smith questioned the leading mercantile theory of the time in The Wealth of Nations. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (London: W. Strahan and T. Cadell, 1776). Recent versions have been edited by scholars and economists. Smith offered a new trade theory called absolute advantage
The ability of a country to produce a good more efficiently than another nation. , which focused on the ability of a country to produce a good more efficiently than another nation. Smith reasoned that trade between countries shouldn’t be regulated or restricted by government policy or intervention.
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http://2012books.lardbucket.org/books/challenges-and-opportunities-in-international-business/s06-01-what-is-international-trade-th.html
|
What Is International Trade Theory?
|
2.1
What Is International Trade Theory?
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
|
W. Strahan and T. Cadell, 1776). Recent versions have been edited by scholars and economists. Smith offered a new trade theory called absolute advantage
The ability of a country to produce a good more efficiently than another nation. , which focused on the ability of a country to produce a good more efficiently than another nation. Smith reasoned that trade between countries shouldn’t be regulated or restricted by government policy or intervention. He stated that trade should flow naturally according to market forces. In a hypothetical two-country world, if Country A could produce a good cheaper or faster (or both) than Country B, then Country A had the advantage and could focus on specializing on producing that good. Similarly, if Country B was better at producing another good, it could focus on specialization as well. By specialization, countries would generate efficiencies, because their labor force would become more skilled by doing the same tasks. Production would also become more efficient, because there would be an incentive to create faster and better production methods to increase the specialization.
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http://2012books.lardbucket.org/books/challenges-and-opportunities-in-international-business/s06-01-what-is-international-trade-th.html
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What Is International Trade Theory?
|
2.1
What Is International Trade Theory?
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
|
He stated that trade should flow naturally according to market forces. In a hypothetical two-country world, if Country A could produce a good cheaper or faster (or both) than Country B, then Country A had the advantage and could focus on specializing on producing that good. Similarly, if Country B was better at producing another good, it could focus on specialization as well. By specialization, countries would generate efficiencies, because their labor force would become more skilled by doing the same tasks. Production would also become more efficient, because there would be an incentive to create faster and better production methods to increase the specialization. Smith’s theory reasoned that with increased efficiencies, people in both countries would benefit and trade should be encouraged. His theory stated that a nation’s wealth shouldn’t be judged by how much gold and silver it had but rather by the living standards of its people. Comparative Advantage
The challenge to the absolute advantage theory was that some countries may be better at producing both goods and, therefore, have an advantage in many areas. In contrast, another country may not have any useful absolute advantages. To answer this challenge, David Ricardo, an English economist, introduced the theory of comparative advantage in 1817.
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http://2012books.lardbucket.org/books/challenges-and-opportunities-in-international-business/s06-01-what-is-international-trade-th.html
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What Is International Trade Theory?
|
2.1
What Is International Trade Theory?
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
|
Smith’s theory reasoned that with increased efficiencies, people in both countries would benefit and trade should be encouraged. His theory stated that a nation’s wealth shouldn’t be judged by how much gold and silver it had but rather by the living standards of its people. Comparative Advantage
The challenge to the absolute advantage theory was that some countries may be better at producing both goods and, therefore, have an advantage in many areas. In contrast, another country may not have any useful absolute advantages. To answer this challenge, David Ricardo, an English economist, introduced the theory of comparative advantage in 1817. Ricardo reasoned that even if Country A had the absolute advantage in the production of both products, specialization and trade could still occur between two countries. Comparative advantage
The situation in which a country cannot produce a product more efficiently than another country; however, it does produce that product better and more efficiently than it does another good. occurs when a country cannot produce a product more efficiently than the other country; however, it can produce that product better and more efficiently than it does other goods.
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http://2012books.lardbucket.org/books/challenges-and-opportunities-in-international-business/s06-01-what-is-international-trade-th.html
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What Is International Trade Theory?
|
2.1
What Is International Trade Theory?
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
|
Ricardo reasoned that even if Country A had the absolute advantage in the production of both products, specialization and trade could still occur between two countries. Comparative advantage
The situation in which a country cannot produce a product more efficiently than another country; however, it does produce that product better and more efficiently than it does another good. occurs when a country cannot produce a product more efficiently than the other country; however, it can produce that product better and more efficiently than it does other goods. The difference between these two theories is subtle. Comparative advantage focuses on the relative productivity differences, whereas absolute advantage looks at the absolute productivity. Let’s look at a simplified hypothetical example to illustrate the subtle difference between these principles. Miranda is a Wall Street lawyer who charges $500 per hour for her legal services. It turns out that Miranda can also type faster than the administrative assistants in her office, who are paid $40 per hour.
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http://2012books.lardbucket.org/books/challenges-and-opportunities-in-international-business/s06-01-what-is-international-trade-th.html
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What Is International Trade Theory?
|
2.1
What Is International Trade Theory?
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
|
The difference between these two theories is subtle. Comparative advantage focuses on the relative productivity differences, whereas absolute advantage looks at the absolute productivity. Let’s look at a simplified hypothetical example to illustrate the subtle difference between these principles. Miranda is a Wall Street lawyer who charges $500 per hour for her legal services. It turns out that Miranda can also type faster than the administrative assistants in her office, who are paid $40 per hour. Even though Miranda clearly has the absolute advantage in both skill sets, should she do both jobs? No. For every hour Miranda decides to type instead of do legal work, she would be giving up $460 in income. Her productivity and income will be highest if she specializes in the higher-paid legal services and hires the most qualifie
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International Trade and Foreign Direct Investment
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Chapter 2
International Trade and Foreign Direct Investment
Chapter 2 International Trade and Foreign Direct Investment
What’s in It for Me?
Opening Case: China in Africa
Opening Case Exercises
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
2.2 Political and Legal Factors That Impact International Trade
Learning Objectives
What Are the Different Political Systems?
Did You Know?
What Are the Different Legal Systems?
Government—Business Trade Relations: The Impact of Political and Legal Factors on International Trade
Why Do Governments Intervene in Trade?
Did You Know?
How Do Governments Intervene in Trade?
Did You Know?
Key Takeaways
Exercises
2.3 Foreign Direct Investment
Learning Objectives
Understand the Types of International Investments
Factors That Influence a Company’s Decision to Invest
Why and How Governments Encourage FDI
How Governments Discourage or Restrict FDI
How Governments Encourage FDI
Ethics in Action
Did You Know?
Key Takeaways
Exercises
2.4 Tips in Your Entrepreneurial Walkabout Toolkit
Attracting Trade and Investment
Quick Facts
2.5 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
International Trade and Foreign Direct Investment
Chapter 2 International Trade and Foreign Direct Investment
© 2003–2011, Atma Global Inc. Reprinted with permission. What’s in It for Me? What is international trade theory? How do political and legal factors impact international trade? What is foreign direct investment? It’s easy to think that trade is just about business interests in each country. But global trade is much more. There’s a convergence and, at times, a conflict of the interests of the different stakeholders—from businesses to governments to local citizens. In recent years, advancements in technology, a renewed enthusiasm for entrepreneurship, and a global sentiment that favors free trade have further connected people, businesses, and markets—all flatteners that are helping expand global trade and investment. An essential part of international business is understanding the history of international trade and what motivates countries to encourage or discourage trade within their borders.
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International Trade and Foreign Direct Investment
|
Chapter 2
International Trade and Foreign Direct Investment
Chapter 2 International Trade and Foreign Direct Investment
What’s in It for Me?
Opening Case: China in Africa
Opening Case Exercises
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
2.2 Political and Legal Factors That Impact International Trade
Learning Objectives
What Are the Different Political Systems?
Did You Know?
What Are the Different Legal Systems?
Government—Business Trade Relations: The Impact of Political and Legal Factors on International Trade
Why Do Governments Intervene in Trade?
Did You Know?
How Do Governments Intervene in Trade?
Did You Know?
Key Takeaways
Exercises
2.3 Foreign Direct Investment
Learning Objectives
Understand the Types of International Investments
Factors That Influence a Company’s Decision to Invest
Why and How Governments Encourage FDI
How Governments Discourage or Restrict FDI
How Governments Encourage FDI
Ethics in Action
Did You Know?
Key Takeaways
Exercises
2.4 Tips in Your Entrepreneurial Walkabout Toolkit
Attracting Trade and Investment
Quick Facts
2.5 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
It’s easy to think that trade is just about business interests in each country. But global trade is much more. There’s a convergence and, at times, a conflict of the interests of the different stakeholders—from businesses to governments to local citizens. In recent years, advancements in technology, a renewed enthusiasm for entrepreneurship, and a global sentiment that favors free trade have further connected people, businesses, and markets—all flatteners that are helping expand global trade and investment. An essential part of international business is understanding the history of international trade and what motivates countries to encourage or discourage trade within their borders. In this chapter we’ll look at the evolution of international trade theory to our modern time. We’ll explore the political and legal factors impacting international trade. This chapter will provide an introduction to the concept and role of foreign direct investment, which can take many forms of incentives, regulations, and policies. Companies react to these business incentives and regulations as they evaluate with which countries to do business and in which to invest. Governments often encourage foreign investment in their own country or in another country by providing loans and incentives to businesses in their home country as well as businesses in the recipient country in order to pave the way for investment and trade in the country.
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International Trade and Foreign Direct Investment
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Chapter 2
International Trade and Foreign Direct Investment
Chapter 2 International Trade and Foreign Direct Investment
What’s in It for Me?
Opening Case: China in Africa
Opening Case Exercises
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
2.2 Political and Legal Factors That Impact International Trade
Learning Objectives
What Are the Different Political Systems?
Did You Know?
What Are the Different Legal Systems?
Government—Business Trade Relations: The Impact of Political and Legal Factors on International Trade
Why Do Governments Intervene in Trade?
Did You Know?
How Do Governments Intervene in Trade?
Did You Know?
Key Takeaways
Exercises
2.3 Foreign Direct Investment
Learning Objectives
Understand the Types of International Investments
Factors That Influence a Company’s Decision to Invest
Why and How Governments Encourage FDI
How Governments Discourage or Restrict FDI
How Governments Encourage FDI
Ethics in Action
Did You Know?
Key Takeaways
Exercises
2.4 Tips in Your Entrepreneurial Walkabout Toolkit
Attracting Trade and Investment
Quick Facts
2.5 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
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In this chapter we’ll look at the evolution of international trade theory to our modern time. We’ll explore the political and legal factors impacting international trade. This chapter will provide an introduction to the concept and role of foreign direct investment, which can take many forms of incentives, regulations, and policies. Companies react to these business incentives and regulations as they evaluate with which countries to do business and in which to invest. Governments often encourage foreign investment in their own country or in another country by providing loans and incentives to businesses in their home country as well as businesses in the recipient country in order to pave the way for investment and trade in the country. The opening case study shows how and why China is investing in the continent of Africa. Opening Case: China in Africa
Foreign companies have been doing business in Africa for centuries. Much of the trade history of past centuries has been colored by European colonial powers promoting and preserving their economic interests throughout the African continent. Martin Meredith, The Fate of Africa (New York:
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International Trade and Foreign Direct Investment
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Chapter 2
International Trade and Foreign Direct Investment
Chapter 2 International Trade and Foreign Direct Investment
What’s in It for Me?
Opening Case: China in Africa
Opening Case Exercises
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
2.2 Political and Legal Factors That Impact International Trade
Learning Objectives
What Are the Different Political Systems?
Did You Know?
What Are the Different Legal Systems?
Government—Business Trade Relations: The Impact of Political and Legal Factors on International Trade
Why Do Governments Intervene in Trade?
Did You Know?
How Do Governments Intervene in Trade?
Did You Know?
Key Takeaways
Exercises
2.3 Foreign Direct Investment
Learning Objectives
Understand the Types of International Investments
Factors That Influence a Company’s Decision to Invest
Why and How Governments Encourage FDI
How Governments Discourage or Restrict FDI
How Governments Encourage FDI
Ethics in Action
Did You Know?
Key Takeaways
Exercises
2.4 Tips in Your Entrepreneurial Walkabout Toolkit
Attracting Trade and Investment
Quick Facts
2.5 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
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The opening case study shows how and why China is investing in the continent of Africa. Opening Case: China in Africa
Foreign companies have been doing business in Africa for centuries. Much of the trade history of past centuries has been colored by European colonial powers promoting and preserving their economic interests throughout the African continent. Martin Meredith, The Fate of Africa (New York: Public Affairs, 2005). After World War II and since independence for many African nations, the continent has not fared as well as other former colonial countries in Asia. Africa remains a continent plagued by a continued combination of factors, including competing colonial political and economic interests; poor and corrupt local leadership; war, famine, and disease;
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International Trade and Foreign Direct Investment
|
Chapter 2
International Trade and Foreign Direct Investment
Chapter 2 International Trade and Foreign Direct Investment
What’s in It for Me?
Opening Case: China in Africa
Opening Case Exercises
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
2.2 Political and Legal Factors That Impact International Trade
Learning Objectives
What Are the Different Political Systems?
Did You Know?
What Are the Different Legal Systems?
Government—Business Trade Relations: The Impact of Political and Legal Factors on International Trade
Why Do Governments Intervene in Trade?
Did You Know?
How Do Governments Intervene in Trade?
Did You Know?
Key Takeaways
Exercises
2.3 Foreign Direct Investment
Learning Objectives
Understand the Types of International Investments
Factors That Influence a Company’s Decision to Invest
Why and How Governments Encourage FDI
How Governments Discourage or Restrict FDI
How Governments Encourage FDI
Ethics in Action
Did You Know?
Key Takeaways
Exercises
2.4 Tips in Your Entrepreneurial Walkabout Toolkit
Attracting Trade and Investment
Quick Facts
2.5 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
Public Affairs, 2005). After World War II and since independence for many African nations, the continent has not fared as well as other former colonial countries in Asia. Africa remains a continent plagued by a continued combination of factors, including competing colonial political and economic interests; poor and corrupt local leadership; war, famine, and disease; and a chronic shortage of resources, infrastructure, and political, economic, and social will. “ Why Africa Is Poor: Ghana Beats Up on Its Biggest Foreign Investors,” Wall Street Journal, February 18, 2010, accessed February 16, 2011, http://online.wsj.com/article/SB10001424052748704804204575069511746613890.html. And yet, through the bleak assessments, progress is emerging, led in large part by the successful emergence of a free and locally powerful South Africa. The continent generates a lot of interest on both the corporate and humanitarian levels, as well as from other countries.
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International Trade and Foreign Direct Investment
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Chapter 2
International Trade and Foreign Direct Investment
Chapter 2 International Trade and Foreign Direct Investment
What’s in It for Me?
Opening Case: China in Africa
Opening Case Exercises
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
2.2 Political and Legal Factors That Impact International Trade
Learning Objectives
What Are the Different Political Systems?
Did You Know?
What Are the Different Legal Systems?
Government—Business Trade Relations: The Impact of Political and Legal Factors on International Trade
Why Do Governments Intervene in Trade?
Did You Know?
How Do Governments Intervene in Trade?
Did You Know?
Key Takeaways
Exercises
2.3 Foreign Direct Investment
Learning Objectives
Understand the Types of International Investments
Factors That Influence a Company’s Decision to Invest
Why and How Governments Encourage FDI
How Governments Discourage or Restrict FDI
How Governments Encourage FDI
Ethics in Action
Did You Know?
Key Takeaways
Exercises
2.4 Tips in Your Entrepreneurial Walkabout Toolkit
Attracting Trade and Investment
Quick Facts
2.5 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
and a chronic shortage of resources, infrastructure, and political, economic, and social will. “ Why Africa Is Poor: Ghana Beats Up on Its Biggest Foreign Investors,” Wall Street Journal, February 18, 2010, accessed February 16, 2011, http://online.wsj.com/article/SB10001424052748704804204575069511746613890.html. And yet, through the bleak assessments, progress is emerging, led in large part by the successful emergence of a free and locally powerful South Africa. The continent generates a lot of interest on both the corporate and humanitarian levels, as well as from other countries. In particular in the past decade, Africa has caught the interest of the world’s second largest economy, China. Andrew Rice, “Why Is Africa Still Poor?,” The Nation, October 24, 2005, accessed December 20, 2010, http://www.thenation.com/article/why-africa-still-poor?page=0,1. At home, over the past few decades, China has undergone its own miracle, managing to move hundreds of millions of its people out of poverty by combining state intervention with economic incentives to attract private investment. Today, China is involved in economic engagement, bringing its success story to the continent of Africa.
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International Trade and Foreign Direct Investment
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Chapter 2
International Trade and Foreign Direct Investment
Chapter 2 International Trade and Foreign Direct Investment
What’s in It for Me?
Opening Case: China in Africa
Opening Case Exercises
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
2.2 Political and Legal Factors That Impact International Trade
Learning Objectives
What Are the Different Political Systems?
Did You Know?
What Are the Different Legal Systems?
Government—Business Trade Relations: The Impact of Political and Legal Factors on International Trade
Why Do Governments Intervene in Trade?
Did You Know?
How Do Governments Intervene in Trade?
Did You Know?
Key Takeaways
Exercises
2.3 Foreign Direct Investment
Learning Objectives
Understand the Types of International Investments
Factors That Influence a Company’s Decision to Invest
Why and How Governments Encourage FDI
How Governments Discourage or Restrict FDI
How Governments Encourage FDI
Ethics in Action
Did You Know?
Key Takeaways
Exercises
2.4 Tips in Your Entrepreneurial Walkabout Toolkit
Attracting Trade and Investment
Quick Facts
2.5 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
In particular in the past decade, Africa has caught the interest of the world’s second largest economy, China. Andrew Rice, “Why Is Africa Still Poor?,” The Nation, October 24, 2005, accessed December 20, 2010, http://www.thenation.com/article/why-africa-still-poor?page=0,1. At home, over the past few decades, China has undergone its own miracle, managing to move hundreds of millions of its people out of poverty by combining state intervention with economic incentives to attract private investment. Today, China is involved in economic engagement, bringing its success story to the continent of Africa. As professor and author Deborah Brautigam notes, China’s “current experiment in Africa mixes a hard-nosed but clear-eyed self-interest with the lessons of China's own successful development and of decades of its failed aid projects in Africa.” Deborah Brautigam, “Africa’s Eastern Promise: What the West Can Learn from Chinese Investment in Africa,” Foreign Affairs, January 5, 2010, accessed December 20, 2010, http://www.foreignaffairs.com/articles/65916/deborah-brautigam/africa%E2%80%99s-eastern-promise. According to CNN, “China has increasingly turned to resource-rich Africa as China's booming economy has demanded more and more oil and raw materials.” “ China:
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International Trade and Foreign Direct Investment
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Chapter 2
International Trade and Foreign Direct Investment
Chapter 2 International Trade and Foreign Direct Investment
What’s in It for Me?
Opening Case: China in Africa
Opening Case Exercises
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
2.2 Political and Legal Factors That Impact International Trade
Learning Objectives
What Are the Different Political Systems?
Did You Know?
What Are the Different Legal Systems?
Government—Business Trade Relations: The Impact of Political and Legal Factors on International Trade
Why Do Governments Intervene in Trade?
Did You Know?
How Do Governments Intervene in Trade?
Did You Know?
Key Takeaways
Exercises
2.3 Foreign Direct Investment
Learning Objectives
Understand the Types of International Investments
Factors That Influence a Company’s Decision to Invest
Why and How Governments Encourage FDI
How Governments Discourage or Restrict FDI
How Governments Encourage FDI
Ethics in Action
Did You Know?
Key Takeaways
Exercises
2.4 Tips in Your Entrepreneurial Walkabout Toolkit
Attracting Trade and Investment
Quick Facts
2.5 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
As professor and author Deborah Brautigam notes, China’s “current experiment in Africa mixes a hard-nosed but clear-eyed self-interest with the lessons of China's own successful development and of decades of its failed aid projects in Africa.” Deborah Brautigam, “Africa’s Eastern Promise: What the West Can Learn from Chinese Investment in Africa,” Foreign Affairs, January 5, 2010, accessed December 20, 2010, http://www.foreignaffairs.com/articles/65916/deborah-brautigam/africa%E2%80%99s-eastern-promise. According to CNN, “China has increasingly turned to resource-rich Africa as China's booming economy has demanded more and more oil and raw materials.” “ China: Trade with Africa on Track to New Record,” CNN, October 15, 2010, accessed April 23, 2011, http://articles.cnn.com/2010-10-15/world/china.africa.trade_1_china-and-africa-link-trade-largest-trade-partner?_s=PM:WORLD. Trade between the African continent and China reached $106.8 billion in 2008, and over the past decade, Chinese investments and the country’s development aid to Africa have been increasing steadily. “ China-Africa Trade up 45 percent in 2008 to $107 Billion,” China Daily, February 11, 2009, accessed April 23, 2011, http://www.chinadaily.com.cn/china/2009-02/11/content_7467460.htm. “ Chinese activities in Africa are highly diverse, ranging from government to government relations and large state owned companies (SOE) investing in Africa financed by China’s policy banks, to private entrepreneurs entering African countries at their own initiative to pursue commercial activities.” Tracy Hon, Johanna Jansson, Garth Shelton, Liu Haifang, Christopher Burke, and Carine Kiala, Evaluating China’s FOCAC Commitments to Africa and Mapping the Way Ahead (Stellenbosch, South Africa:
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International Trade and Foreign Direct Investment
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Chapter 2
International Trade and Foreign Direct Investment
Chapter 2 International Trade and Foreign Direct Investment
What’s in It for Me?
Opening Case: China in Africa
Opening Case Exercises
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
2.2 Political and Legal Factors That Impact International Trade
Learning Objectives
What Are the Different Political Systems?
Did You Know?
What Are the Different Legal Systems?
Government—Business Trade Relations: The Impact of Political and Legal Factors on International Trade
Why Do Governments Intervene in Trade?
Did You Know?
How Do Governments Intervene in Trade?
Did You Know?
Key Takeaways
Exercises
2.3 Foreign Direct Investment
Learning Objectives
Understand the Types of International Investments
Factors That Influence a Company’s Decision to Invest
Why and How Governments Encourage FDI
How Governments Discourage or Restrict FDI
How Governments Encourage FDI
Ethics in Action
Did You Know?
Key Takeaways
Exercises
2.4 Tips in Your Entrepreneurial Walkabout Toolkit
Attracting Trade and Investment
Quick Facts
2.5 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
Trade with Africa on Track to New Record,” CNN, October 15, 2010, accessed April 23, 2011, http://articles.cnn.com/2010-10-15/world/china.africa.trade_1_china-and-africa-link-trade-largest-trade-partner?_s=PM:WORLD. Trade between the African continent and China reached $106.8 billion in 2008, and over the past decade, Chinese investments and the country’s development aid to Africa have been increasing steadily. “ China-Africa Trade up 45 percent in 2008 to $107 Billion,” China Daily, February 11, 2009, accessed April 23, 2011, http://www.chinadaily.com.cn/china/2009-02/11/content_7467460.htm. “ Chinese activities in Africa are highly diverse, ranging from government to government relations and large state owned companies (SOE) investing in Africa financed by China’s policy banks, to private entrepreneurs entering African countries at their own initiative to pursue commercial activities.” Tracy Hon, Johanna Jansson, Garth Shelton, Liu Haifang, Christopher Burke, and Carine Kiala, Evaluating China’s FOCAC Commitments to Africa and Mapping the Way Ahead (Stellenbosch, South Africa: Centre for Chinese Studies, University of Stellenbosch, 2010), 1, accessed December 20, 2010, http://www.ccs.org.za/wp-content/uploads/2010/03/ENGLISH-Evaluating-Chinas-FOCAC-commitments-to-Africa-2010.pdf. Since 2004, eager for access to resources, oil, diamonds, minerals, and commodities, China has entered into arrangements with resource-rich countries in Africa for a total of nearly $14 billion in resource deals alone. In one example with Angola, China provided loans to the country secured by oil. With this investment, Angola hired Chinese companies to build much-needed roads, railways, hospitals, schools, and water systems. Similarly, China provided nearby Nigeria with oil-backed loans to finance projects that use gas to generate electricity.
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International Trade and Foreign Direct Investment
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Chapter 2
International Trade and Foreign Direct Investment
Chapter 2 International Trade and Foreign Direct Investment
What’s in It for Me?
Opening Case: China in Africa
Opening Case Exercises
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
2.2 Political and Legal Factors That Impact International Trade
Learning Objectives
What Are the Different Political Systems?
Did You Know?
What Are the Different Legal Systems?
Government—Business Trade Relations: The Impact of Political and Legal Factors on International Trade
Why Do Governments Intervene in Trade?
Did You Know?
How Do Governments Intervene in Trade?
Did You Know?
Key Takeaways
Exercises
2.3 Foreign Direct Investment
Learning Objectives
Understand the Types of International Investments
Factors That Influence a Company’s Decision to Invest
Why and How Governments Encourage FDI
How Governments Discourage or Restrict FDI
How Governments Encourage FDI
Ethics in Action
Did You Know?
Key Takeaways
Exercises
2.4 Tips in Your Entrepreneurial Walkabout Toolkit
Attracting Trade and Investment
Quick Facts
2.5 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
Centre for Chinese Studies, University of Stellenbosch, 2010), 1, accessed December 20, 2010, http://www.ccs.org.za/wp-content/uploads/2010/03/ENGLISH-Evaluating-Chinas-FOCAC-commitments-to-Africa-2010.pdf. Since 2004, eager for access to resources, oil, diamonds, minerals, and commodities, China has entered into arrangements with resource-rich countries in Africa for a total of nearly $14 billion in resource deals alone. In one example with Angola, China provided loans to the country secured by oil. With this investment, Angola hired Chinese companies to build much-needed roads, railways, hospitals, schools, and water systems. Similarly, China provided nearby Nigeria with oil-backed loans to finance projects that use gas to generate electricity. In the Republic of the Congo, Chinese teams are building a hydropower project funded by a Chinese government loan, which will be repaid in oil. In Ghana, a Chinese government loan will be repaid in cocoa beans. Deborah Brautigam, “Africa’s Eastern Promise: What the West Can Learn from Chinese Investment in Africa,” Foreign Affairs, January 5, 2010, accessed December 20, 2010, http://www.foreignaffairs.com/articles/65916/deborah-brautigam/africa%E2%80%99s-eastern-promise. The Export-Import Bank of China (Ex-Im Bank of China) has funded and has provided these loans at market rates, rather than as foreign aid.
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International Trade and Foreign Direct Investment
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Chapter 2
International Trade and Foreign Direct Investment
Chapter 2 International Trade and Foreign Direct Investment
What’s in It for Me?
Opening Case: China in Africa
Opening Case Exercises
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
2.2 Political and Legal Factors That Impact International Trade
Learning Objectives
What Are the Different Political Systems?
Did You Know?
What Are the Different Legal Systems?
Government—Business Trade Relations: The Impact of Political and Legal Factors on International Trade
Why Do Governments Intervene in Trade?
Did You Know?
How Do Governments Intervene in Trade?
Did You Know?
Key Takeaways
Exercises
2.3 Foreign Direct Investment
Learning Objectives
Understand the Types of International Investments
Factors That Influence a Company’s Decision to Invest
Why and How Governments Encourage FDI
How Governments Discourage or Restrict FDI
How Governments Encourage FDI
Ethics in Action
Did You Know?
Key Takeaways
Exercises
2.4 Tips in Your Entrepreneurial Walkabout Toolkit
Attracting Trade and Investment
Quick Facts
2.5 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
In the Republic of the Congo, Chinese teams are building a hydropower project funded by a Chinese government loan, which will be repaid in oil. In Ghana, a Chinese government loan will be repaid in cocoa beans. Deborah Brautigam, “Africa’s Eastern Promise: What the West Can Learn from Chinese Investment in Africa,” Foreign Affairs, January 5, 2010, accessed December 20, 2010, http://www.foreignaffairs.com/articles/65916/deborah-brautigam/africa%E2%80%99s-eastern-promise. The Export-Import Bank of China (Ex-Im Bank of China) has funded and has provided these loans at market rates, rather than as foreign aid. While these loans certainly promote development, the risk for the local countries is that the Chinese bids to provide the work aren’t competitive. Furthermore, the benefit to local workers may be diminished as Chinese companies bring in some of their own workers, keeping local wages and working standards low. In 2007, the UNCTAD (United Nations Conference on Trade and Development) Press Office noted the following: Over the past few years, China has become one of Africa´s important partners for trade and economic cooperation. Trade (exports and imports) between Africa and China increased from US$11 billion in 2000 to US$56 billion in 2006….with Chinese companies present in 48 African countries, although Africa still accounts for only 3 percent of China´s outward FDI [foreign direct investment].
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International Trade and Foreign Direct Investment
|
Chapter 2
International Trade and Foreign Direct Investment
Chapter 2 International Trade and Foreign Direct Investment
What’s in It for Me?
Opening Case: China in Africa
Opening Case Exercises
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
2.2 Political and Legal Factors That Impact International Trade
Learning Objectives
What Are the Different Political Systems?
Did You Know?
What Are the Different Legal Systems?
Government—Business Trade Relations: The Impact of Political and Legal Factors on International Trade
Why Do Governments Intervene in Trade?
Did You Know?
How Do Governments Intervene in Trade?
Did You Know?
Key Takeaways
Exercises
2.3 Foreign Direct Investment
Learning Objectives
Understand the Types of International Investments
Factors That Influence a Company’s Decision to Invest
Why and How Governments Encourage FDI
How Governments Discourage or Restrict FDI
How Governments Encourage FDI
Ethics in Action
Did You Know?
Key Takeaways
Exercises
2.4 Tips in Your Entrepreneurial Walkabout Toolkit
Attracting Trade and Investment
Quick Facts
2.5 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
While these loans certainly promote development, the risk for the local countries is that the Chinese bids to provide the work aren’t competitive. Furthermore, the benefit to local workers may be diminished as Chinese companies bring in some of their own workers, keeping local wages and working standards low. In 2007, the UNCTAD (United Nations Conference on Trade and Development) Press Office noted the following: Over the past few years, China has become one of Africa´s important partners for trade and economic cooperation. Trade (exports and imports) between Africa and China increased from US$11 billion in 2000 to US$56 billion in 2006….with Chinese companies present in 48 African countries, although Africa still accounts for only 3 percent of China´s outward FDI [foreign direct investment]. A few African countries have attracted the bulk of China´s FDI in Africa: Sudan is the largest recipient (and the 9th largest recipient of Chinese FDI worldwide), followed by Algeria (18th) and Zambia (19th). United Nations Conference on Trade and Development, “Asian Foreign Direct Investment in Africa: United Nations Report Points to a New Era of Cooperation among Developing Countries,” press release, March 27, 2007, accessed December 20, 2010, http://www.unctad.org/Templates/Webflyer.asp?docID=8172&intItemID=3971&lang=1. Observers note that African governments can learn from the development history of China and many Asian countries, which now enjoy high economic growth and upgraded industrial activity.
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International Trade and Foreign Direct Investment
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Chapter 2
International Trade and Foreign Direct Investment
Chapter 2 International Trade and Foreign Direct Investment
What’s in It for Me?
Opening Case: China in Africa
Opening Case Exercises
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
2.2 Political and Legal Factors That Impact International Trade
Learning Objectives
What Are the Different Political Systems?
Did You Know?
What Are the Different Legal Systems?
Government—Business Trade Relations: The Impact of Political and Legal Factors on International Trade
Why Do Governments Intervene in Trade?
Did You Know?
How Do Governments Intervene in Trade?
Did You Know?
Key Takeaways
Exercises
2.3 Foreign Direct Investment
Learning Objectives
Understand the Types of International Investments
Factors That Influence a Company’s Decision to Invest
Why and How Governments Encourage FDI
How Governments Discourage or Restrict FDI
How Governments Encourage FDI
Ethics in Action
Did You Know?
Key Takeaways
Exercises
2.4 Tips in Your Entrepreneurial Walkabout Toolkit
Attracting Trade and Investment
Quick Facts
2.5 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
A few African countries have attracted the bulk of China´s FDI in Africa: Sudan is the largest recipient (and the 9th largest recipient of Chinese FDI worldwide), followed by Algeria (18th) and Zambia (19th). United Nations Conference on Trade and Development, “Asian Foreign Direct Investment in Africa: United Nations Report Points to a New Era of Cooperation among Developing Countries,” press release, March 27, 2007, accessed December 20, 2010, http://www.unctad.org/Templates/Webflyer.asp?docID=8172&intItemID=3971&lang=1. Observers note that African governments can learn from the development history of China and many Asian countries, which now enjoy high economic growth and upgraded industrial activity. These Asian countries made strategic investments in education and infrastructure that were crucial not only for promoting economic development in general but also for attracting and benefiting from efficiency-seeking and export-oriented FDI. United Nations Conference on Trade and Development, “Foreign Direct Investment in Africa Remains Buoyant, Sustained by Interest in Natural Resources,” press release, September 29, 2005, accessed December 20, 2010, http://news.bbc.co.uk/2/hi/africa/7086777.stm. Source: “ China in Africa: Developing Ties,” BBC News, last updated November 26, 2007, accessed June 3, 2011, http://news.bbc.co.uk/2/hi/africa/7086777.stm.
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International Trade and Foreign Direct Investment
|
Chapter 2
International Trade and Foreign Direct Investment
Chapter 2 International Trade and Foreign Direct Investment
What’s in It for Me?
Opening Case: China in Africa
Opening Case Exercises
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
2.2 Political and Legal Factors That Impact International Trade
Learning Objectives
What Are the Different Political Systems?
Did You Know?
What Are the Different Legal Systems?
Government—Business Trade Relations: The Impact of Political and Legal Factors on International Trade
Why Do Governments Intervene in Trade?
Did You Know?
How Do Governments Intervene in Trade?
Did You Know?
Key Takeaways
Exercises
2.3 Foreign Direct Investment
Learning Objectives
Understand the Types of International Investments
Factors That Influence a Company’s Decision to Invest
Why and How Governments Encourage FDI
How Governments Discourage or Restrict FDI
How Governments Encourage FDI
Ethics in Action
Did You Know?
Key Takeaways
Exercises
2.4 Tips in Your Entrepreneurial Walkabout Toolkit
Attracting Trade and Investment
Quick Facts
2.5 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
These Asian countries made strategic investments in education and infrastructure that were crucial not only for promoting economic development in general but also for attracting and benefiting from efficiency-seeking and export-oriented FDI. United Nations Conference on Trade and Development, “Foreign Direct Investment in Africa Remains Buoyant, Sustained by Interest in Natural Resources,” press release, September 29, 2005, accessed December 20, 2010, http://news.bbc.co.uk/2/hi/africa/7086777.stm. Source: “ China in Africa: Developing Ties,” BBC News, last updated November 26, 2007, accessed June 3, 2011, http://news.bbc.co.uk/2/hi/africa/7086777.stm. Criticized by some and applauded by others, it’s clear that China’s investment is encouraging development in Africa. China is accused by some of ignoring human rights crises in the continent and doing business with repressive regimes. China’s success in Africa is due in large part to the local political environment in each country, where either one or a small handful of leaders often control the power and decision making. While the countries often open bids to many foreign investors, Chinese firms are able to provide low-cost options thanks in large part to their government’s project support. The ability to forge a government-level partnership has enabled Chinese businesses to have long-term investment perspectives in the region.
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International Trade and Foreign Direct Investment
|
Chapter 2
International Trade and Foreign Direct Investment
Chapter 2 International Trade and Foreign Direct Investment
What’s in It for Me?
Opening Case: China in Africa
Opening Case Exercises
2.1 What Is International Trade Theory?
Learning Objectives
What Is International Trade?
What Are the Different International Trade Theories?
Classical or Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Ohlin Theory (Factor Proportions Theory)
Leontief Paradox
Modern or Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porter’s National Competitive Advantage Theory
Which Trade Theory Is Dominant Today?
Key Takeaways
Exercises
2.2 Political and Legal Factors That Impact International Trade
Learning Objectives
What Are the Different Political Systems?
Did You Know?
What Are the Different Legal Systems?
Government—Business Trade Relations: The Impact of Political and Legal Factors on International Trade
Why Do Governments Intervene in Trade?
Did You Know?
How Do Governments Intervene in Trade?
Did You Know?
Key Takeaways
Exercises
2.3 Foreign Direct Investment
Learning Objectives
Understand the Types of International Investments
Factors That Influence a Company’s Decision to Invest
Why and How Governments Encourage FDI
How Governments Discourage or Restrict FDI
How Governments Encourage FDI
Ethics in Action
Did You Know?
Key Takeaways
Exercises
2.4 Tips in Your Entrepreneurial Walkabout Toolkit
Attracting Trade and Investment
Quick Facts
2.5 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
Criticized by some and applauded by others, it’s clear that China’s investment is encouraging development in Africa. China is accused by some of ignoring human rights crises in the continent and doing business with repressive regimes. China’s success in Africa is due in large part to the local political environment in each country, where either one or a small handful of leaders often control the power and decision making. While the countries often open bids to many foreign investors, Chinese firms are able to provide low-cost options thanks in large part to their government’s project support. The ability to forge a government-level partnership has enabled Chinese businesses to have long-term investment perspectives in the region. China even hosted a summit in 2006 for African leaders, pledging to increase trade, investment, and aid over the coming decade. “ Summit Shows China’s Africa Clout,” BBC News, November 6, 2006, accessed December 20,
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What Is the Role of the IMF and the World Bank?
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6.2
What Is the Role of the IMF and the World Bank?
6.2 What Is the Role of the IMF and the World Bank?
Learning Objectives
International Monetary Fund
History and Purpose
Special Drawing Rights (SDRs)
The IMF’s Current Role and Major Challenges and Opportunities
Criticism and Challenging Areas for the IMF
Opportunities and Future Outlook for the IMF
The World Bank and the World Bank Group
History and Purpose
What Are the World Bank’s Current Role and Major Challenges and Opportunities?
Opportunities and Future Outlook for the World Bank
Key Takeaways
Exercises
|
What Is the Role of the IMF and the World Bank? 6.2 What Is the Role of the IMF and the World Bank? Learning Objectives
Understand the history and purpose of the IMF. Describe the IMF’s current role and major challenges and opportunities. Understand the history and purpose of the World Bank. Describe the World Bank’s current role and major challenges and opportunities. Section 6.1 "What Is the International Monetary System?" discusses how, during the 1930s, the Great Depression resulted in failing economies. The fall of the gold standard led countries to raise trade barriers, devalue their currencies to compete against one another for export markets and curtail usage of foreign exchange by their citizens. All these factors led to declining world trade, high unemployment, and plummeting living standards in many countries.
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What Is the Role of the IMF and the World Bank?
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6.2
What Is the Role of the IMF and the World Bank?
6.2 What Is the Role of the IMF and the World Bank?
Learning Objectives
International Monetary Fund
History and Purpose
Special Drawing Rights (SDRs)
The IMF’s Current Role and Major Challenges and Opportunities
Criticism and Challenging Areas for the IMF
Opportunities and Future Outlook for the IMF
The World Bank and the World Bank Group
History and Purpose
What Are the World Bank’s Current Role and Major Challenges and Opportunities?
Opportunities and Future Outlook for the World Bank
Key Takeaways
Exercises
|
Describe the World Bank’s current role and major challenges and opportunities. Section 6.1 "What Is the International Monetary System?" discusses how, during the 1930s, the Great Depression resulted in failing economies. The fall of the gold standard led countries to raise trade barriers, devalue their currencies to compete against one another for export markets and curtail usage of foreign exchange by their citizens. All these factors led to declining world trade, high unemployment, and plummeting living standards in many countries. In 1944, the Bretton Woods Agreement established a new international monetary system. The creation of the International Monetary Fund (IMF) and the World Bank were two of its most enduring legacies. The World Bank and the IMF, often called the Bretton Woods Institutions, are twin intergovernmental pillars supporting the structure of the world’s economic and financial order. Both have taken on expanding roles, and there have been renewed calls for additional expansion of their responsibilities, particularly in the continuing absence of a single global monetary agreement. The two institutions may seem to have confusing or overlapping functions.
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What Is the Role of the IMF and the World Bank?
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6.2
What Is the Role of the IMF and the World Bank?
6.2 What Is the Role of the IMF and the World Bank?
Learning Objectives
International Monetary Fund
History and Purpose
Special Drawing Rights (SDRs)
The IMF’s Current Role and Major Challenges and Opportunities
Criticism and Challenging Areas for the IMF
Opportunities and Future Outlook for the IMF
The World Bank and the World Bank Group
History and Purpose
What Are the World Bank’s Current Role and Major Challenges and Opportunities?
Opportunities and Future Outlook for the World Bank
Key Takeaways
Exercises
|
In 1944, the Bretton Woods Agreement established a new international monetary system. The creation of the International Monetary Fund (IMF) and the World Bank were two of its most enduring legacies. The World Bank and the IMF, often called the Bretton Woods Institutions, are twin intergovernmental pillars supporting the structure of the world’s economic and financial order. Both have taken on expanding roles, and there have been renewed calls for additional expansion of their responsibilities, particularly in the continuing absence of a single global monetary agreement. The two institutions may seem to have confusing or overlapping functions. However, while some similarities exist (see the following figure), they are two distinct organizations with different roles. “Despite these and other similarities, however, the Bank and the IMF remain distinct. The fundamental difference is this: the Bank is primarily a development institution; the IMF is a cooperative institution that seeks to maintain an orderly system of payments and receipts between nations.
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What Is the Role of the IMF and the World Bank?
|
6.2
What Is the Role of the IMF and the World Bank?
6.2 What Is the Role of the IMF and the World Bank?
Learning Objectives
International Monetary Fund
History and Purpose
Special Drawing Rights (SDRs)
The IMF’s Current Role and Major Challenges and Opportunities
Criticism and Challenging Areas for the IMF
Opportunities and Future Outlook for the IMF
The World Bank and the World Bank Group
History and Purpose
What Are the World Bank’s Current Role and Major Challenges and Opportunities?
Opportunities and Future Outlook for the World Bank
Key Takeaways
Exercises
|
However, while some similarities exist (see the following figure), they are two distinct organizations with different roles. “Despite these and other similarities, however, the Bank and the IMF remain distinct. The fundamental difference is this: the Bank is primarily a development institution; the IMF is a cooperative institution that seeks to maintain an orderly system of payments and receipts between nations. Each has a different purpose, a distinct structure, receives its funding from different sources, assists different categories of members, and strives to achieve distinct goals through methods peculiar to itself.” David D. Driscoll, “The IMF and the World Bank: How Do They Differ?,” International Monetary Fund, last updated August 1996, accessed February 9, 2011, http://www.imf.org/external/pubs/ft/exrp/differ/differ.htm (emphasis added). This section explores both of these institutions and how they have evolved in the almost seventy years since their creation.
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What Is the Role of the IMF and the World Bank?
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6.2
What Is the Role of the IMF and the World Bank?
6.2 What Is the Role of the IMF and the World Bank?
Learning Objectives
International Monetary Fund
History and Purpose
Special Drawing Rights (SDRs)
The IMF’s Current Role and Major Challenges and Opportunities
Criticism and Challenging Areas for the IMF
Opportunities and Future Outlook for the IMF
The World Bank and the World Bank Group
History and Purpose
What Are the World Bank’s Current Role and Major Challenges and Opportunities?
Opportunities and Future Outlook for the World Bank
Key Takeaways
Exercises
|
Each has a different purpose, a distinct structure, receives its funding from different sources, assists different categories of members, and strives to achieve distinct goals through methods peculiar to itself.” David D. Driscoll, “The IMF and the World Bank: How Do They Differ?,” International Monetary Fund, last updated August 1996, accessed February 9, 2011, http://www.imf.org/external/pubs/ft/exrp/differ/differ.htm (emphasis added). This section explores both of these institutions and how they have evolved in the almost seventy years since their creation. International Monetary Fund
History and Purpose
Figure 6.1 IMF Headquarters in Washington, DC
Source: International Monetary Fund, 2011. The architects of the Bretton Woods Agreement, John Maynard Keynes and Harry Dexter White, envisioned an institution that would oversee the international monetary system, exchange rates, and international payments to enable countries and their citizens to buy goods and services from each other. They expected that this new global entity would ensure exchange rate stability and encourage its member countries to eliminate the exchange restrictions that hindered trade. Officially, the IMF came into existence in December 1945 with twenty-nine member countries. (
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What Is the Role of the IMF and the World Bank?
|
6.2
What Is the Role of the IMF and the World Bank?
6.2 What Is the Role of the IMF and the World Bank?
Learning Objectives
International Monetary Fund
History and Purpose
Special Drawing Rights (SDRs)
The IMF’s Current Role and Major Challenges and Opportunities
Criticism and Challenging Areas for the IMF
Opportunities and Future Outlook for the IMF
The World Bank and the World Bank Group
History and Purpose
What Are the World Bank’s Current Role and Major Challenges and Opportunities?
Opportunities and Future Outlook for the World Bank
Key Takeaways
Exercises
|
International Monetary Fund
History and Purpose
Figure 6.1 IMF Headquarters in Washington, DC
Source: International Monetary Fund, 2011. The architects of the Bretton Woods Agreement, John Maynard Keynes and Harry Dexter White, envisioned an institution that would oversee the international monetary system, exchange rates, and international payments to enable countries and their citizens to buy goods and services from each other. They expected that this new global entity would ensure exchange rate stability and encourage its member countries to eliminate the exchange restrictions that hindered trade. Officially, the IMF came into existence in December 1945 with twenty-nine member countries. ( The Soviets, who were at Bretton Woods, refused to join the IMF.) In 1947, the institution’s first formal year of operations, the French became the first nation to borrow from the IMF. Over the next thirty years, more countries joined the IMF, including some African countries in the 1960s. The Soviet bloc nations remained the exception and were not part of the IMF until the fall of the Berlin Wall in 1989. The IMF experienced another large increase in members in the 1990s with the addition of Russia;
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What Is the Role of the IMF and the World Bank?
|
6.2
What Is the Role of the IMF and the World Bank?
6.2 What Is the Role of the IMF and the World Bank?
Learning Objectives
International Monetary Fund
History and Purpose
Special Drawing Rights (SDRs)
The IMF’s Current Role and Major Challenges and Opportunities
Criticism and Challenging Areas for the IMF
Opportunities and Future Outlook for the IMF
The World Bank and the World Bank Group
History and Purpose
What Are the World Bank’s Current Role and Major Challenges and Opportunities?
Opportunities and Future Outlook for the World Bank
Key Takeaways
Exercises
|
The Soviets, who were at Bretton Woods, refused to join the IMF.) In 1947, the institution’s first formal year of operations, the French became the first nation to borrow from the IMF. Over the next thirty years, more countries joined the IMF, including some African countries in the 1960s. The Soviet bloc nations remained the exception and were not part of the IMF until the fall of the Berlin Wall in 1989. The IMF experienced another large increase in members in the 1990s with the addition of Russia; Russia was also placed on the IMF’s executive committee. Today, 187 countries are members of the IMF; twenty-four of those countries or groups of countries are represented on the executive board. The purposes of the International Monetary Fund are as follows: To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.
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What Is the Role of the IMF and the World Bank?
|
6.2
What Is the Role of the IMF and the World Bank?
6.2 What Is the Role of the IMF and the World Bank?
Learning Objectives
International Monetary Fund
History and Purpose
Special Drawing Rights (SDRs)
The IMF’s Current Role and Major Challenges and Opportunities
Criticism and Challenging Areas for the IMF
Opportunities and Future Outlook for the IMF
The World Bank and the World Bank Group
History and Purpose
What Are the World Bank’s Current Role and Major Challenges and Opportunities?
Opportunities and Future Outlook for the World Bank
Key Takeaways
Exercises
|
Russia was also placed on the IMF’s executive committee. Today, 187 countries are members of the IMF; twenty-four of those countries or groups of countries are represented on the executive board. The purposes of the International Monetary Fund are as follows: To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems. To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy. To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation. To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade. To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity. In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members. “
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What Is the Role of the IMF and the World Bank?
|
6.2
What Is the Role of the IMF and the World Bank?
6.2 What Is the Role of the IMF and the World Bank?
Learning Objectives
International Monetary Fund
History and Purpose
Special Drawing Rights (SDRs)
The IMF’s Current Role and Major Challenges and Opportunities
Criticism and Challenging Areas for the IMF
Opportunities and Future Outlook for the IMF
The World Bank and the World Bank Group
History and Purpose
What Are the World Bank’s Current Role and Major Challenges and Opportunities?
Opportunities and Future Outlook for the World Bank
Key Takeaways
Exercises
|
To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy. To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation. To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade. To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity. In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members. “ Articles of Agreement: Article I—Purposes,” International Monetary Fund, accessed May 23, 2011, http://www.imf.org/external/pubs/ft/aa/aa01.htm. In addition to financial assistance, the IMF also provides member countries with technical assistance to create and implement effective policies, particularly economic, monetary, and banking policy and regulations. Special Drawing Rights (SDRs)
A Special Drawing Right (SDR)
An international monetary reserve asset of the IMF. is basically an international monetary reserve asset.
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What Is the Role of the IMF and the World Bank?
|
6.2
What Is the Role of the IMF and the World Bank?
6.2 What Is the Role of the IMF and the World Bank?
Learning Objectives
International Monetary Fund
History and Purpose
Special Drawing Rights (SDRs)
The IMF’s Current Role and Major Challenges and Opportunities
Criticism and Challenging Areas for the IMF
Opportunities and Future Outlook for the IMF
The World Bank and the World Bank Group
History and Purpose
What Are the World Bank’s Current Role and Major Challenges and Opportunities?
Opportunities and Future Outlook for the World Bank
Key Takeaways
Exercises
|
Articles of Agreement: Article I—Purposes,” International Monetary Fund, accessed May 23, 2011, http://www.imf.org/external/pubs/ft/aa/aa01.htm. In addition to financial assistance, the IMF also provides member countries with technical assistance to create and implement effective policies, particularly economic, monetary, and banking policy and regulations. Special Drawing Rights (SDRs)
A Special Drawing Right (SDR)
An international monetary reserve asset of the IMF. is basically an international monetary reserve asset. SDRs were created in 1969 by the IMF in response to the Triffin Paradox. The Triffin Paradox stated that the more US dollars were used as a base reserve currency, the less faith that countries had in the ability of the US government to convert those dollars to gold. The world was still using the Bretton Woods system, and the initial expectation was that SDRs would replace the US dollar as the global monetary reserve currency, thus solving the Triffin Paradox. Bretton Woods collapsed a few years later, but the concept of an SDR solidified. Today the value of an SDR consists of the value of four of the IMF’s biggest members’ currencies—the US dollar, the British pound, the Japanese yen, and the euro—but the currencies do not hold equal weight.
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What Is the Role of the IMF and the World Bank?
|
6.2
What Is the Role of the IMF and the World Bank?
6.2 What Is the Role of the IMF and the World Bank?
Learning Objectives
International Monetary Fund
History and Purpose
Special Drawing Rights (SDRs)
The IMF’s Current Role and Major Challenges and Opportunities
Criticism and Challenging Areas for the IMF
Opportunities and Future Outlook for the IMF
The World Bank and the World Bank Group
History and Purpose
What Are the World Bank’s Current Role and Major Challenges and Opportunities?
Opportunities and Future Outlook for the World Bank
Key Takeaways
Exercises
|
SDRs were created in 1969 by the IMF in response to the Triffin Paradox. The Triffin Paradox stated that the more US dollars were used as a base reserve currency, the less faith that countries had in the ability of the US government to convert those dollars to gold. The world was still using the Bretton Woods system, and the initial expectation was that SDRs would replace the US dollar as the global monetary reserve currency, thus solving the Triffin Paradox. Bretton Woods collapsed a few years later, but the concept of an SDR solidified. Today the value of an SDR consists of the value of four of the IMF’s biggest members’ currencies—the US dollar, the British pound, the Japanese yen, and the euro—but the currencies do not hold equal weight. SDRs are quoted in terms of US dollars. The basket, or group of currencies, is reviewed every five years by the IMF executive board and is based on the currency’s role in international trade and finance. The following chart shows the current valuation in percentages of the four currencies. Currency
Weighting
US dollar
44 percent
Euro
34 percent
Japanese yen
11 percent
British pound
11 percent
The SDR is not a currency, but some refer to it as a form of IMF currency. It does not constitute a claim on the IMF, which only serves to provide a mechanism for buying, selling, and exchanging SDRs.
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What Is the Role of the IMF and the World Bank?
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6.2
What Is the Role of the IMF and the World Bank?
6.2 What Is the Role of the IMF and the World Bank?
Learning Objectives
International Monetary Fund
History and Purpose
Special Drawing Rights (SDRs)
The IMF’s Current Role and Major Challenges and Opportunities
Criticism and Challenging Areas for the IMF
Opportunities and Future Outlook for the IMF
The World Bank and the World Bank Group
History and Purpose
What Are the World Bank’s Current Role and Major Challenges and Opportunities?
Opportunities and Future Outlook for the World Bank
Key Takeaways
Exercises
|
SDRs are quoted in terms of US dollars. The basket, or group of currencies, is reviewed every five years by the IMF executive board and is based on the currency’s role in international trade and finance. The following chart shows the current valuation in percentages of the four currencies. Currency
Weighting
US dollar
44 percent
Euro
34 percent
Japanese yen
11 percent
British pound
11 percent
The SDR is not a currency, but some refer to it as a form of IMF currency. It does not constitute a claim on the IMF, which only serves to provide a mechanism for buying, selling, and exchanging SDRs. Countries are allocated SDRs, which are included in the member country’s reserves. SDRs can be exchanged between countries along with currencies. The SDR serves as the unit of account of the IMF and some other international organizations, and countries borrow from the IMF in SDRs in times of economic need. The IMF’s Current Role and Major Challenges and Opportunities
Criticism and Challenging Areas for the IMF
The IMF supports many developing nations by helping them overcome monetary challenges and to maintain a stable international financial system. Despite this clearly defined purpose, the execution of its work can be very complicated and can have wide repercussions for the recipient nations.
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What Is the Role of the IMF and the World Bank?
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6.2
What Is the Role of the IMF and the World Bank?
6.2 What Is the Role of the IMF and the World Bank?
Learning Objectives
International Monetary Fund
History and Purpose
Special Drawing Rights (SDRs)
The IMF’s Current Role and Major Challenges and Opportunities
Criticism and Challenging Areas for the IMF
Opportunities and Future Outlook for the IMF
The World Bank and the World Bank Group
History and Purpose
What Are the World Bank’s Current Role and Major Challenges and Opportunities?
Opportunities and Future Outlook for the World Bank
Key Takeaways
Exercises
|
Countries are allocated SDRs, which are included in the member country’s reserves. SDRs can be exchanged between countries along with currencies. The SDR serves as the unit of account of the IMF and some other international organizations, and countries borrow from the IMF in SDRs in times of economic need. The IMF’s Current Role and Major Challenges and Opportunities
Criticism and Challenging Areas for the IMF
The IMF supports many developing nations by helping them overcome monetary challenges and to maintain a stable international financial system. Despite this clearly defined purpose, the execution of its work can be very complicated and can have wide repercussions for the recipient nations. As a result, the IMF has both its critics and its supporters. The challenges for organizations like the the IMF and the World Bank center not only on some of their operating deficiencies but also on the global political environment in which they operate. The IMF has been subject to a range of criticisms that are generally focused on the conditions of its loans, its lack of accountability, and its willingness to lend to countries with bad human rights records. David N. Balaam and Michael Veseth, Introduction to International Political Economy, 4th ed. ( Upper Saddle River, NJ:
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What Is the Role of the IMF and the World Bank?
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6.2
What Is the Role of the IMF and the World Bank?
6.2 What Is the Role of the IMF and the World Bank?
Learning Objectives
International Monetary Fund
History and Purpose
Special Drawing Rights (SDRs)
The IMF’s Current Role and Major Challenges and Opportunities
Criticism and Challenging Areas for the IMF
Opportunities and Future Outlook for the IMF
The World Bank and the World Bank Group
History and Purpose
What Are the World Bank’s Current Role and Major Challenges and Opportunities?
Opportunities and Future Outlook for the World Bank
Key Takeaways
Exercises
|
As a result, the IMF has both its critics and its supporters. The challenges for organizations like the the IMF and the World Bank center not only on some of their operating deficiencies but also on the global political environment in which they operate. The IMF has been subject to a range of criticisms that are generally focused on the conditions of its loans, its lack of accountability, and its willingness to lend to countries with bad human rights records. David N. Balaam and Michael Veseth, Introduction to International Political Economy, 4th ed. ( Upper Saddle River, NJ: Pearson Education International/Prentice Hall), 2005. These criticisms include the following: Conditions for loans. The IMF makes the loan given to countries conditional on the implementation of certain economic policies, which typically include the following: Reducing government borrowing (higher taxes and lower spending)
Higher interest rates to stabilize the currency
Allowing failing firms to go bankrupt
Structural adjustment (privatization, deregulation, reducing corruption and bureaucracy) “Criticism of IMF,” Economics Help, accessed June 28, 2010, http://www.economicshelp.org/dictionary/i/imf-criticism.html.
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What Is the Role of the IMF and the World Bank?
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6.2
What Is the Role of the IMF and the World Bank?
6.2 What Is the Role of the IMF and the World Bank?
Learning Objectives
International Monetary Fund
History and Purpose
Special Drawing Rights (SDRs)
The IMF’s Current Role and Major Challenges and Opportunities
Criticism and Challenging Areas for the IMF
Opportunities and Future Outlook for the IMF
The World Bank and the World Bank Group
History and Purpose
What Are the World Bank’s Current Role and Major Challenges and Opportunities?
Opportunities and Future Outlook for the World Bank
Key Takeaways
Exercises
|
Pearson Education International/Prentice Hall), 2005. These criticisms include the following: Conditions for loans. The IMF makes the loan given to countries conditional on the implementation of certain economic policies, which typically include the following: Reducing government borrowing (higher taxes and lower spending)
Higher interest rates to stabilize the currency
Allowing failing firms to go bankrupt
Structural adjustment (privatization, deregulation, reducing corruption and bureaucracy) “Criticism of IMF,” Economics Help, accessed June 28, 2010, http://www.economicshelp.org/dictionary/i/imf-criticism.html. The austere policies have worked at times but always extract a political toll as the impact on average citizens is usually quite harsh. The opening case in Chapter 2 "International Trade and Foreign Direct Investment" presents the current impact of IMF policies on Greece. Some suggest that the loan conditions are “based on what is termed the ‘Washington Consensus,’ focusing on liberalisation—of trade, investment and the financial sector—, deregulation and privatisation of nationalised industries. Often the conditionalities are attached without due regard for the borrower countries’ individual circumstances and the prescriptive recommendations by the World Bank and IMF fail to resolve the economic problems within the countries. IMF conditionalities may additionally result in the loss of a state’s authority to govern its own economy as national economic policies are predetermined under IMF packages.” “
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What Is the Role of the IMF and the World Bank?
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6.2
What Is the Role of the IMF and the World Bank?
6.2 What Is the Role of the IMF and the World Bank?
Learning Objectives
International Monetary Fund
History and Purpose
Special Drawing Rights (SDRs)
The IMF’s Current Role and Major Challenges and Opportunities
Criticism and Challenging Areas for the IMF
Opportunities and Future Outlook for the IMF
The World Bank and the World Bank Group
History and Purpose
What Are the World Bank’s Current Role and Major Challenges and Opportunities?
Opportunities and Future Outlook for the World Bank
Key Takeaways
Exercises
|
The austere policies have worked at times but always extract a political toll as the impact on average citizens is usually quite harsh. The opening case in Chapter 2 "International Trade and Foreign Direct Investment" presents the current impact of IMF policies on Greece. Some suggest that the loan conditions are “based on what is termed the ‘Washington Consensus,’ focusing on liberalisation—of trade, investment and the financial sector—, deregulation and privatisation of nationalised industries. Often the conditionalities are attached without due regard for the borrower countries’ individual circumstances and the prescriptive recommendations by the World Bank and IMF fail to resolve the economic problems within the countries. IMF conditionalities may additionally result in the loss of a state’s authority to govern its own economy as national economic policies are predetermined under IMF packages.” “ What Are the Main Concerns and Criticism about the World Bank and IMF?,” Bretton Woods Project, January
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What Do We Mean by Currency and Foreign Exchange?
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7.1
What Do We Mean by Currency and Foreign Exchange?
7.1 What Do We Mean by Currency and Foreign Exchange?
Learning Objectives
What Are Currency and Foreign Exchange?
What Is the Purpose of the Foreign Exchange Market?
Currency Conversion
Currency Hedging
Currency Arbitrage
Currency Speculation
Understand How to Determine Exchange Rates
How to Quote a Currency
Direct Currency Quote and Indirect Currency Quote
Spot Rates
Cross Rates
Forward Rates
Swaps, Options, and Futures
Exchange-Traded and Standardized Terms
Settlement and Delivery
Maturity
Key Takeaways
Exercises
|
What Do We Mean by Currency and Foreign Exchange? 7.1 What Do We Mean by Currency and Foreign Exchange? Learning Objectives
Understand what is meant by currency and foreign exchange. Explore the purpose of the foreign exchange market. Understand how to determine exchange rates. What Are Currency and Foreign Exchange? In order to understand the global financial environment, how capital markets work, and their impact on global business, we need to first understand how currencies and foreign exchange rates work. Briefly, currency
Any form of money in general circulation in a country. is any form of money in general circulation in a country. What exactly is a foreign exchange?
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What Do We Mean by Currency and Foreign Exchange?
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7.1
What Do We Mean by Currency and Foreign Exchange?
7.1 What Do We Mean by Currency and Foreign Exchange?
Learning Objectives
What Are Currency and Foreign Exchange?
What Is the Purpose of the Foreign Exchange Market?
Currency Conversion
Currency Hedging
Currency Arbitrage
Currency Speculation
Understand How to Determine Exchange Rates
How to Quote a Currency
Direct Currency Quote and Indirect Currency Quote
Spot Rates
Cross Rates
Forward Rates
Swaps, Options, and Futures
Exchange-Traded and Standardized Terms
Settlement and Delivery
Maturity
Key Takeaways
Exercises
|
What Are Currency and Foreign Exchange? In order to understand the global financial environment, how capital markets work, and their impact on global business, we need to first understand how currencies and foreign exchange rates work. Briefly, currency
Any form of money in general circulation in a country. is any form of money in general circulation in a country. What exactly is a foreign exchange? In essence, foreign exchange
Money denominated in the currency of another country. Money can also be denominated in the currency of a group of countries, such as the euro. is money denominated in the currency of another country or—now with the euro—a group of countries. Simply put, an exchange rate
The rate at which the market converts one currency into another. is defined as the rate at which the market converts one currency into another.
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What Do We Mean by Currency and Foreign Exchange?
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7.1
What Do We Mean by Currency and Foreign Exchange?
7.1 What Do We Mean by Currency and Foreign Exchange?
Learning Objectives
What Are Currency and Foreign Exchange?
What Is the Purpose of the Foreign Exchange Market?
Currency Conversion
Currency Hedging
Currency Arbitrage
Currency Speculation
Understand How to Determine Exchange Rates
How to Quote a Currency
Direct Currency Quote and Indirect Currency Quote
Spot Rates
Cross Rates
Forward Rates
Swaps, Options, and Futures
Exchange-Traded and Standardized Terms
Settlement and Delivery
Maturity
Key Takeaways
Exercises
|
In essence, foreign exchange
Money denominated in the currency of another country. Money can also be denominated in the currency of a group of countries, such as the euro. is money denominated in the currency of another country or—now with the euro—a group of countries. Simply put, an exchange rate
The rate at which the market converts one currency into another. is defined as the rate at which the market converts one currency into another. Any company operating globally must deal in foreign currencies. It has to pay suppliers in other countries with a currency different from its home country’s currency. The home country is where a company is headquartered. The firm is likely to be paid or have profits in a different currency and will want to exchange it for its home currency. Even if a company expects to be paid in its own currency, it must assess the risk that the buyer may not be able to pay the full amount due to currency fluctuations.
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What Do We Mean by Currency and Foreign Exchange?
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7.1
What Do We Mean by Currency and Foreign Exchange?
7.1 What Do We Mean by Currency and Foreign Exchange?
Learning Objectives
What Are Currency and Foreign Exchange?
What Is the Purpose of the Foreign Exchange Market?
Currency Conversion
Currency Hedging
Currency Arbitrage
Currency Speculation
Understand How to Determine Exchange Rates
How to Quote a Currency
Direct Currency Quote and Indirect Currency Quote
Spot Rates
Cross Rates
Forward Rates
Swaps, Options, and Futures
Exchange-Traded and Standardized Terms
Settlement and Delivery
Maturity
Key Takeaways
Exercises
|
Any company operating globally must deal in foreign currencies. It has to pay suppliers in other countries with a currency different from its home country’s currency. The home country is where a company is headquartered. The firm is likely to be paid or have profits in a different currency and will want to exchange it for its home currency. Even if a company expects to be paid in its own currency, it must assess the risk that the buyer may not be able to pay the full amount due to currency fluctuations. If you have traveled outside of your home country, you may have experienced the currency market—for example, when you tried to determine your hotel bill or tried to determine if an item was cheaper in one country versus another. In fact, when you land at an airport in another country, you’re likely to see boards indicating the foreign exchange rates for major currencies. These rates include two numbers: the bid and the offer. The bid (or buy)
The price at which a bank or financial service firm is willing to buy a specific currency.
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What Do We Mean by Currency and Foreign Exchange?
|
7.1
What Do We Mean by Currency and Foreign Exchange?
7.1 What Do We Mean by Currency and Foreign Exchange?
Learning Objectives
What Are Currency and Foreign Exchange?
What Is the Purpose of the Foreign Exchange Market?
Currency Conversion
Currency Hedging
Currency Arbitrage
Currency Speculation
Understand How to Determine Exchange Rates
How to Quote a Currency
Direct Currency Quote and Indirect Currency Quote
Spot Rates
Cross Rates
Forward Rates
Swaps, Options, and Futures
Exchange-Traded and Standardized Terms
Settlement and Delivery
Maturity
Key Takeaways
Exercises
|
If you have traveled outside of your home country, you may have experienced the currency market—for example, when you tried to determine your hotel bill or tried to determine if an item was cheaper in one country versus another. In fact, when you land at an airport in another country, you’re likely to see boards indicating the foreign exchange rates for major currencies. These rates include two numbers: the bid and the offer. The bid (or buy)
The price at which a bank or financial service firm is willing to buy a specific currency. is the price at which a bank or financial services firm is willing to buy a specific currency. The ask (or the offer or sell)
Quote that refers to the price at which a bank or financial services firm is willing to sell that currency. , refers to the price at which a bank or financial services firm is willing to sell that currency. Typically, the bid or the buy is always cheaper than the sell; banks make a profit on the transaction from that difference.
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What Do We Mean by Currency and Foreign Exchange?
|
7.1
What Do We Mean by Currency and Foreign Exchange?
7.1 What Do We Mean by Currency and Foreign Exchange?
Learning Objectives
What Are Currency and Foreign Exchange?
What Is the Purpose of the Foreign Exchange Market?
Currency Conversion
Currency Hedging
Currency Arbitrage
Currency Speculation
Understand How to Determine Exchange Rates
How to Quote a Currency
Direct Currency Quote and Indirect Currency Quote
Spot Rates
Cross Rates
Forward Rates
Swaps, Options, and Futures
Exchange-Traded and Standardized Terms
Settlement and Delivery
Maturity
Key Takeaways
Exercises
|
is the price at which a bank or financial services firm is willing to buy a specific currency. The ask (or the offer or sell)
Quote that refers to the price at which a bank or financial services firm is willing to sell that currency. , refers to the price at which a bank or financial services firm is willing to sell that currency. Typically, the bid or the buy is always cheaper than the sell; banks make a profit on the transaction from that difference. For example, imagine you’re on vacation in Thailand and the exchange rate board indicates that the Bangkok Bank is willing to exchange currencies at the following rates (see the following figure). GBP refers to the British pound; JPY refers to the Japanese yen; and HKD refers to the Hong Kong dollar, as shown in the following figure. Because there are several countries that use the dollar as part or whole of their name, this chapter clearly states “US dollar” or uses US$ or USD when referring to American currency.
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What Do We Mean by Currency and Foreign Exchange?
|
7.1
What Do We Mean by Currency and Foreign Exchange?
7.1 What Do We Mean by Currency and Foreign Exchange?
Learning Objectives
What Are Currency and Foreign Exchange?
What Is the Purpose of the Foreign Exchange Market?
Currency Conversion
Currency Hedging
Currency Arbitrage
Currency Speculation
Understand How to Determine Exchange Rates
How to Quote a Currency
Direct Currency Quote and Indirect Currency Quote
Spot Rates
Cross Rates
Forward Rates
Swaps, Options, and Futures
Exchange-Traded and Standardized Terms
Settlement and Delivery
Maturity
Key Takeaways
Exercises
|
For example, imagine you’re on vacation in Thailand and the exchange rate board indicates that the Bangkok Bank is willing to exchange currencies at the following rates (see the following figure). GBP refers to the British pound; JPY refers to the Japanese yen; and HKD refers to the Hong Kong dollar, as shown in the following figure. Because there are several countries that use the dollar as part or whole of their name, this chapter clearly states “US dollar” or uses US$ or USD when referring to American currency. This chart tells us that when you land in Thailand, you can use 1 US dollar to buy 31.67 Thai baht. However, when you leave Thailand and decide that you do not need to take all your baht back to the United States, you then convert baht back to US dollars. We then have to use more baht—32.32 according to the preceding figure—to buy 1 US dollar. The spread
The difference between the bid and the ask. This is the profit made for each unit of currency bought and sold.
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What Do We Mean by Currency and Foreign Exchange?
|
7.1
What Do We Mean by Currency and Foreign Exchange?
7.1 What Do We Mean by Currency and Foreign Exchange?
Learning Objectives
What Are Currency and Foreign Exchange?
What Is the Purpose of the Foreign Exchange Market?
Currency Conversion
Currency Hedging
Currency Arbitrage
Currency Speculation
Understand How to Determine Exchange Rates
How to Quote a Currency
Direct Currency Quote and Indirect Currency Quote
Spot Rates
Cross Rates
Forward Rates
Swaps, Options, and Futures
Exchange-Traded and Standardized Terms
Settlement and Delivery
Maturity
Key Takeaways
Exercises
|
This chart tells us that when you land in Thailand, you can use 1 US dollar to buy 31.67 Thai baht. However, when you leave Thailand and decide that you do not need to take all your baht back to the United States, you then convert baht back to US dollars. We then have to use more baht—32.32 according to the preceding figure—to buy 1 US dollar. The spread
The difference between the bid and the ask. This is the profit made for each unit of currency bought and sold. between these numbers, 0.65 baht, is the profit that the bank makes for each US dollar bought and sold. The bank charges a fee because it performed a service—facilitating the currency exchange. When you walk through the airport, you’ll see more boards for different banks with different buy and sell rates. While the difference may be very small, around 0.1 baht, these numbers add up if you are a global company engaged in large foreign exchange transactions. Accordingly, global firms are likely to shop around for the best rates before they exchange any currencies.
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What Do We Mean by Currency and Foreign Exchange?
|
7.1
What Do We Mean by Currency and Foreign Exchange?
7.1 What Do We Mean by Currency and Foreign Exchange?
Learning Objectives
What Are Currency and Foreign Exchange?
What Is the Purpose of the Foreign Exchange Market?
Currency Conversion
Currency Hedging
Currency Arbitrage
Currency Speculation
Understand How to Determine Exchange Rates
How to Quote a Currency
Direct Currency Quote and Indirect Currency Quote
Spot Rates
Cross Rates
Forward Rates
Swaps, Options, and Futures
Exchange-Traded and Standardized Terms
Settlement and Delivery
Maturity
Key Takeaways
Exercises
|
between these numbers, 0.65 baht, is the profit that the bank makes for each US dollar bought and sold. The bank charges a fee because it performed a service—facilitating the currency exchange. When you walk through the airport, you’ll see more boards for different banks with different buy and sell rates. While the difference may be very small, around 0.1 baht, these numbers add up if you are a global company engaged in large foreign exchange transactions. Accordingly, global firms are likely to shop around for the best rates before they exchange any currencies. What Is the Purpose of the Foreign Exchange Market? The foreign exchange market (or FX market) is the mechanism in which currencies can be bought and sold. A key component of this mechanism is pricing or, more specifically, the rate at which a currency is bought or sold. We’ll cover the determination of exchange rates more closely in this section, but first let’s understand the purpose of the FX market. International businesses have four main uses of the foreign exchange markets.
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What Do We Mean by Currency and Foreign Exchange?
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7.1
What Do We Mean by Currency and Foreign Exchange?
7.1 What Do We Mean by Currency and Foreign Exchange?
Learning Objectives
What Are Currency and Foreign Exchange?
What Is the Purpose of the Foreign Exchange Market?
Currency Conversion
Currency Hedging
Currency Arbitrage
Currency Speculation
Understand How to Determine Exchange Rates
How to Quote a Currency
Direct Currency Quote and Indirect Currency Quote
Spot Rates
Cross Rates
Forward Rates
Swaps, Options, and Futures
Exchange-Traded and Standardized Terms
Settlement and Delivery
Maturity
Key Takeaways
Exercises
|
What Is the Purpose of the Foreign Exchange Market? The foreign exchange market (or FX market) is the mechanism in which currencies can be bought and sold. A key component of this mechanism is pricing or, more specifically, the rate at which a currency is bought or sold. We’ll cover the determination of exchange rates more closely in this section, but first let’s understand the purpose of the FX market. International businesses have four main uses of the foreign exchange markets. Currency Conversion
Companies, investors, and governments want to be able to convert one currency into another. A company’s primary purposes for wanting or needing to convert currencies is to pay or receive money for goods or services. Imagine you have a business in the United States that imports wines from around the world. You’ll need to pay the French winemakers in euros, your Australian wine suppliers in Australian dollars, and your Chilean vineyards in pesos. Obviously, you are not going to access these currencies physically.
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What Do We Mean by Currency and Foreign Exchange?
|
7.1
What Do We Mean by Currency and Foreign Exchange?
7.1 What Do We Mean by Currency and Foreign Exchange?
Learning Objectives
What Are Currency and Foreign Exchange?
What Is the Purpose of the Foreign Exchange Market?
Currency Conversion
Currency Hedging
Currency Arbitrage
Currency Speculation
Understand How to Determine Exchange Rates
How to Quote a Currency
Direct Currency Quote and Indirect Currency Quote
Spot Rates
Cross Rates
Forward Rates
Swaps, Options, and Futures
Exchange-Traded and Standardized Terms
Settlement and Delivery
Maturity
Key Takeaways
Exercises
|
Currency Conversion
Companies, investors, and governments want to be able to convert one currency into another. A company’s primary purposes for wanting or needing to convert currencies is to pay or receive money for goods or services. Imagine you have a business in the United States that imports wines from around the world. You’ll need to pay the French winemakers in euros, your Australian wine suppliers in Australian dollars, and your Chilean vineyards in pesos. Obviously, you are not going to access these currencies physically. Rather, you’ll instruct your bank to pay each of these suppliers in their local currencies. Your bank will convert the currencies for you and debit your account for the US dollar equivalent based on the exact exchange rate at the time of the exchange. Currency Hedging
One of the biggest challenges in foreign exchange is the risk of rates increasing or decreasing in greater amounts or directions than anticipated. Currency hedging
Refers to the technique of protecting against the potential losses that result from adverse changes in exchange rates. refers to the technique of protecting against the potential losses that result from adverse changes in exchange rates.
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What Do We Mean by Currency and Foreign Exchange?
|
7.1
What Do We Mean by Currency and Foreign Exchange?
7.1 What Do We Mean by Currency and Foreign Exchange?
Learning Objectives
What Are Currency and Foreign Exchange?
What Is the Purpose of the Foreign Exchange Market?
Currency Conversion
Currency Hedging
Currency Arbitrage
Currency Speculation
Understand How to Determine Exchange Rates
How to Quote a Currency
Direct Currency Quote and Indirect Currency Quote
Spot Rates
Cross Rates
Forward Rates
Swaps, Options, and Futures
Exchange-Traded and Standardized Terms
Settlement and Delivery
Maturity
Key Takeaways
Exercises
|
Rather, you’ll instruct your bank to pay each of these suppliers in their local currencies. Your bank will convert the currencies for you and debit your account for the US dollar equivalent based on the exact exchange rate at the time of the exchange. Currency Hedging
One of the biggest challenges in foreign exchange is the risk of rates increasing or decreasing in greater amounts or directions than anticipated. Currency hedging
Refers to the technique of protecting against the potential losses that result from adverse changes in exchange rates. refers to the technique of protecting against the potential losses that result from adverse changes in exchange rates. Companies use hedging as a way to protect themselves if there is a time lag between when they bill and receive payment from a customer. Conversely, a company may owe payment to an overseas vendor and want to protect against changes in the exchange rate that would increase the amount of the payment. For example, a retail store in Japan imports or buys shoes from Italy. The Japanese firm has ninety days to pay the Italian firm. To protect itself, the Japanese firm enters into a contract with its bank to exchange the payment in ninety days at the agreed-on exchange rate.
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What Do We Mean by Currency and Foreign Exchange?
|
7.1
What Do We Mean by Currency and Foreign Exchange?
7.1 What Do We Mean by Currency and Foreign Exchange?
Learning Objectives
What Are Currency and Foreign Exchange?
What Is the Purpose of the Foreign Exchange Market?
Currency Conversion
Currency Hedging
Currency Arbitrage
Currency Speculation
Understand How to Determine Exchange Rates
How to Quote a Currency
Direct Currency Quote and Indirect Currency Quote
Spot Rates
Cross Rates
Forward Rates
Swaps, Options, and Futures
Exchange-Traded and Standardized Terms
Settlement and Delivery
Maturity
Key Takeaways
Exercises
|
Companies use hedging as a way to protect themselves if there is a time lag between when they bill and receive payment from a customer. Conversely, a company may owe payment to an overseas vendor and want to protect against changes in the exchange rate that would increase the amount of the payment. For example, a retail store in Japan imports or buys shoes from Italy. The Japanese firm has ninety days to pay the Italian firm. To protect itself, the Japanese firm enters into a contract with its bank to exchange the payment in ninety days at the agreed-on exchange rate. This way, the Japanese firm is clear about the amount to pay and protects itself from a sudden depreciation of the yen. If the yen depreciates, more yen will be required to purchase the same euros, making the deal more expensive. By hedging, the company locks in the rate. Currency Arbitrage
Arbitrage is the simultaneous and instantaneous purchase and sale of a currency for a profit. Advances in technology have enabled trading systems to capture slight differences in price and execute a transaction, all within seconds.
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What Do We Mean by Currency and Foreign Exchange?
|
7.1
What Do We Mean by Currency and Foreign Exchange?
7.1 What Do We Mean by Currency and Foreign Exchange?
Learning Objectives
What Are Currency and Foreign Exchange?
What Is the Purpose of the Foreign Exchange Market?
Currency Conversion
Currency Hedging
Currency Arbitrage
Currency Speculation
Understand How to Determine Exchange Rates
How to Quote a Currency
Direct Currency Quote and Indirect Currency Quote
Spot Rates
Cross Rates
Forward Rates
Swaps, Options, and Futures
Exchange-Traded and Standardized Terms
Settlement and Delivery
Maturity
Key Takeaways
Exercises
|
This way, the Japanese firm is clear about the amount to pay and protects itself from a sudden depreciation of the yen. If the yen depreciates, more yen will be required to purchase the same euros, making the deal more expensive. By hedging, the company locks in the rate. Currency Arbitrage
Arbitrage is the simultaneous and instantaneous purchase and sale of a currency for a profit. Advances in technology have enabled trading systems to capture slight differences in price and execute a transaction, all within seconds. Previously, arbitrage was conducted by a trader sitting in one city, such as New York, monitoring currency prices on the Bloomberg terminal. Noticing that the value of a euro is cheaper in Hong Kong than in New York, the trader could then buy euros in Hong Kong and sell them in New York for a profit. Today, such transactions are almost all handled by sophisticated computer programs. The programs constantly search different exchanges, identify potential differences, and execute transactions, all within seconds. Currency Speculation
Speculation refers to the practice of buying and selling a currency with the expectation that the value will change and result in a profit.
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http://2012books.lardbucket.org/books/challenges-and-opportunities-in-international-business/s11-01-what-do-we-mean-by-currency-an.html
|
What Do We Mean by Currency and Foreign Exchange?
|
7.1
What Do We Mean by Currency and Foreign Exchange?
7.1 What Do We Mean by Currency and Foreign Exchange?
Learning Objectives
What Are Currency and Foreign Exchange?
What Is the Purpose of the Foreign Exchange Market?
Currency Conversion
Currency Hedging
Currency Arbitrage
Currency Speculation
Understand How to Determine Exchange Rates
How to Quote a Currency
Direct Currency Quote and Indirect Currency Quote
Spot Rates
Cross Rates
Forward Rates
Swaps, Options, and Futures
Exchange-Traded and Standardized Terms
Settlement and Delivery
Maturity
Key Takeaways
Exercises
|
Previously, arbitrage was conducted by a trader sitting in one city, such as New York, monitoring currency prices on the Bloomberg terminal. Noticing that the value of a euro is cheaper in Hong Kong than in New York, the trader could then buy euros in Hong Kong and sell them in New York for a profit. Today, such transactions are almost all handled by sophisticated computer programs. The programs constantly search different exchanges, identify potential differences, and execute transactions, all within seconds. Currency Speculation
Speculation refers to the practice of buying and selling a currency with the expectation that the value will change and result in a profit. Such changes could happen instantly or over a period of time. High-risk, speculative investments by nonfinance companies are less common these days than the current news would indicate. While companies can engage in all four uses discussed in this section, many companies have determined over the years that arbitrage and speculation are too risky and not in alignment with their core strategies. In essence, these companies have determined that a loss due to high-risk or speculative investments would be embarrassing and inappropriate for their companies. Understand How to Determine Exchange Rates
How to Quote a Currency
There are several ways to quote currency, but let’s keep it simple.
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|
What Do We Mean by Currency and Foreign Exchange?
|
7.1
What Do We Mean by Currency and Foreign Exchange?
7.1 What Do We Mean by Currency and Foreign Exchange?
Learning Objectives
What Are Currency and Foreign Exchange?
What Is the Purpose of the Foreign Exchange Market?
Currency Conversion
Currency Hedging
Currency Arbitrage
Currency Speculation
Understand How to Determine Exchange Rates
How to Quote a Currency
Direct Currency Quote and Indirect Currency Quote
Spot Rates
Cross Rates
Forward Rates
Swaps, Options, and Futures
Exchange-Traded and Standardized Terms
Settlement and Delivery
Maturity
Key Takeaways
Exercises
|
Such changes could happen instantly or over a period of time. High-risk, speculative investments by nonfinance companies are less common these days than the current news would indicate. While companies can engage in all four uses discussed in this section, many companies have determined over the years that arbitrage and speculation are too risky and not in alignment with their core strategies. In essence, these companies have determined that a loss due to high-risk or speculative investments would be embarrassing and inappropriate for their companies. Understand How to Determine Exchange Rates
How to Quote a Currency
There are several ways to quote currency, but let’s keep it simple. In general, when we quote currencies, we are indicating how much of one currency it takes to buy another currency. This quote requires two components: the base currency
The currency that is to be purchased with another currency and is noted in the denominator. and the quoted currency
The currency with which another currency is to be purchased. .
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What Do We Mean by Currency and Foreign Exchange?
|
7.1
What Do We Mean by Currency and Foreign Exchange?
7.1 What Do We Mean by Currency and Foreign Exchange?
Learning Objectives
What Are Currency and Foreign Exchange?
What Is the Purpose of the Foreign Exchange Market?
Currency Conversion
Currency Hedging
Currency Arbitrage
Currency Speculation
Understand How to Determine Exchange Rates
How to Quote a Currency
Direct Currency Quote and Indirect Currency Quote
Spot Rates
Cross Rates
Forward Rates
Swaps, Options, and Futures
Exchange-Traded and Standardized Terms
Settlement and Delivery
Maturity
Key Takeaways
Exercises
|
In general, when we quote currencies, we are indicating how much of one currency it takes to buy another currency. This quote requires two components: the base currency
The currency that is to be purchased with another currency and is noted in the denominator. and the quoted currency
The currency with which another currency is to be purchased. . The quoted currency is the currency with which another currency is to be purchased. In an exchange rate quote, the quoted currency is typically the numerator. The base currency is the currency that is to be purchased with another currency, and it is noted in the denominator. For example, if we are quoting the number of Hong Kong dollars required to purchase 1 US dollar, then we note HKD 8 / USD 1. ( Note that 8 reflects the general exchange rate average in this example.)
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|
What Do We Mean by Currency and Foreign Exchange?
|
7.1
What Do We Mean by Currency and Foreign Exchange?
7.1 What Do We Mean by Currency and Foreign Exchange?
Learning Objectives
What Are Currency and Foreign Exchange?
What Is the Purpose of the Foreign Exchange Market?
Currency Conversion
Currency Hedging
Currency Arbitrage
Currency Speculation
Understand How to Determine Exchange Rates
How to Quote a Currency
Direct Currency Quote and Indirect Currency Quote
Spot Rates
Cross Rates
Forward Rates
Swaps, Options, and Futures
Exchange-Traded and Standardized Terms
Settlement and Delivery
Maturity
Key Takeaways
Exercises
|
The quoted currency is the currency with which another currency is to be purchased. In an exchange rate quote, the quoted currency is typically the numerator. The base currency is the currency that is to be purchased with another currency, and it is noted in the denominator. For example, if we are quoting the number of Hong Kong dollars required to purchase 1 US dollar, then we note HKD 8 / USD 1. ( Note that 8 reflects the general exchange rate average in this example.) In this case, the Hong Kong dollar is the quoted currency and is noted in the numerator. The US dollar is the base currency and is noted in the denominator. We read this quote as “8 Hong Kong dollars are required to purchase 1 US dollar.” If you get confused while reviewing exchanging rates, remember the currency that you want to buy or sell. If you want to sell 1 US dollar, you can buy 8 Hong Kong dollars, using the example in this paragraph.
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|
What Do We Mean by Currency and Foreign Exchange?
|
7.1
What Do We Mean by Currency and Foreign Exchange?
7.1 What Do We Mean by Currency and Foreign Exchange?
Learning Objectives
What Are Currency and Foreign Exchange?
What Is the Purpose of the Foreign Exchange Market?
Currency Conversion
Currency Hedging
Currency Arbitrage
Currency Speculation
Understand How to Determine Exchange Rates
How to Quote a Currency
Direct Currency Quote and Indirect Currency Quote
Spot Rates
Cross Rates
Forward Rates
Swaps, Options, and Futures
Exchange-Traded and Standardized Terms
Settlement and Delivery
Maturity
Key Takeaways
Exercises
|
In this case, the Hong Kong dollar is the quoted currency and is noted in the numerator. The US dollar is the base currency and is noted in the denominator. We read this quote as “8 Hong Kong dollars are required to purchase 1 US dollar.” If you get confused while reviewing exchanging rates, remember the currency that you want to buy or sell. If you want to sell 1 US dollar, you can buy 8 Hong Kong dollars, using the example in this paragraph. Direct Currency Quote and Indirect Currency Quote
Additionally, there are two methods—the American terms
Also known as US terms, American terms are from the point of view of someone in the United States. In this approach, foreign exchange rates are expressed in terms of how many US dollars can be exchanged for one unit of another currency (the non-US currency is the base curren
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International Expansion and Global Market Opportunity Assessment
|
Chapter 8
International Expansion and Global Market Opportunity Assessment
Chapter 8 International Expansion and Global Market Opportunity Assessment
What’s in It for Me?
Opening Case: The Invisible Global Retailer and Its Reentry into US Markets
Opening Case Exercises
8.1 Global Strategic Choices
The Why, Where, and How of International Expansion
Rationale for International Expansion
Planning for International Expansion
International Market Due Diligence
Regional Differences
Understanding Local Consumers
How to Learn the Needs of a New Foreign Market
Differentiation and Capability
Did You Know?
Industry Dynamics
Ethics in Action
Steps and Missteps in International Expansion
Key Takeaways
Exercises
8.2 PESTEL, Globalization, and Importing
Know the Components of PESTEL Analysis
PESTEL Analysis
Political Factors
Economic Factors
Sociocultural Factors
Technological Factors
Environmental Factors
Legal Factors
PESTEL and Globalization
Factors Favoring Industry Globalization
Markets
Costs
Governments and Competition
Importing as a Stealth Form of Internationalization
Key Takeaways
Exercises
8.3 International-Expansion Entry Modes
The Five Common International-Expansion Entry Modes
Exporting
Amusing Anecdotes
Ethics in Action
Licensing and Franchising
Partnerships and Strategic Alliances
Did You Know?
Acquisitions
New, Wholly Owned Subsidiary
Entrepreneurship and Strategy
Key Takeaways
Exercises
8.4 CAGE Analysis
The Inputs into CAGE Analysis
CAGE Analysis and Institutional Voids
Three Strategies for Handling Institutional Voids
Ethics in Action
Key Takeaways
Exercises
8.5 Scenario Planning and Analysis
The History and Role of Scenario Planning and Analysis
Scenario Planning
Six Basic Steps of Scenario Planning
Trends and Uncertainties
Did You Know?
Key Takeaways
Exercises
8.6 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
International Expansion and Global Market Opportunity Assessment
Chapter 8 International Expansion and Global Market Opportunity Assessment
What’s in It for Me? What are the inputs into global strategic move choices? What are the components of PESTEL analysis and the factors that favor globalization? What are the traditional entry modes for international expansion? How can you use the CAGE model of market assessment? What is the importance of and inputs into scenario analysis? This chapter pulls together all the information about choosing to expand internationally and possible ways to make that choice. Section 8.1 "Global Strategic Choices" shows that choosing to expand internationally is rarely black and white. A wide variety of internationalization moves are available after choosing to expand. Moreover, some flatteners make global moves easier, while some make them more difficult.
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|
International Expansion and Global Market Opportunity Assessment
|
Chapter 8
International Expansion and Global Market Opportunity Assessment
Chapter 8 International Expansion and Global Market Opportunity Assessment
What’s in It for Me?
Opening Case: The Invisible Global Retailer and Its Reentry into US Markets
Opening Case Exercises
8.1 Global Strategic Choices
The Why, Where, and How of International Expansion
Rationale for International Expansion
Planning for International Expansion
International Market Due Diligence
Regional Differences
Understanding Local Consumers
How to Learn the Needs of a New Foreign Market
Differentiation and Capability
Did You Know?
Industry Dynamics
Ethics in Action
Steps and Missteps in International Expansion
Key Takeaways
Exercises
8.2 PESTEL, Globalization, and Importing
Know the Components of PESTEL Analysis
PESTEL Analysis
Political Factors
Economic Factors
Sociocultural Factors
Technological Factors
Environmental Factors
Legal Factors
PESTEL and Globalization
Factors Favoring Industry Globalization
Markets
Costs
Governments and Competition
Importing as a Stealth Form of Internationalization
Key Takeaways
Exercises
8.3 International-Expansion Entry Modes
The Five Common International-Expansion Entry Modes
Exporting
Amusing Anecdotes
Ethics in Action
Licensing and Franchising
Partnerships and Strategic Alliances
Did You Know?
Acquisitions
New, Wholly Owned Subsidiary
Entrepreneurship and Strategy
Key Takeaways
Exercises
8.4 CAGE Analysis
The Inputs into CAGE Analysis
CAGE Analysis and Institutional Voids
Three Strategies for Handling Institutional Voids
Ethics in Action
Key Takeaways
Exercises
8.5 Scenario Planning and Analysis
The History and Role of Scenario Planning and Analysis
Scenario Planning
Six Basic Steps of Scenario Planning
Trends and Uncertainties
Did You Know?
Key Takeaways
Exercises
8.6 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
What is the importance of and inputs into scenario analysis? This chapter pulls together all the information about choosing to expand internationally and possible ways to make that choice. Section 8.1 "Global Strategic Choices" shows that choosing to expand internationally is rarely black and white. A wide variety of internationalization moves are available after choosing to expand. Moreover, some flatteners make global moves easier, while some make them more difficult. Indeed, even importing and outsourcing can be considered stealth, or at least early, steps in internationalization, because they involve doing business across borders. In Section 8.1 "Global Strategic Choices", you will learn the rationale for international expansion and the planning and due diligence it requires. This chapter also features a richness of analytical frameworks. In Section 8.2 "PESTEL, Globalization, and Importing", you will learn about PESTEL, the framework for analyzing the political, economic, sociocultural, technological, environmental, and legal aspects of different international markets. Section 8.3 "International-Expansion Entry Modes" describes the strategies available to you when entering a new market.
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|
International Expansion and Global Market Opportunity Assessment
|
Chapter 8
International Expansion and Global Market Opportunity Assessment
Chapter 8 International Expansion and Global Market Opportunity Assessment
What’s in It for Me?
Opening Case: The Invisible Global Retailer and Its Reentry into US Markets
Opening Case Exercises
8.1 Global Strategic Choices
The Why, Where, and How of International Expansion
Rationale for International Expansion
Planning for International Expansion
International Market Due Diligence
Regional Differences
Understanding Local Consumers
How to Learn the Needs of a New Foreign Market
Differentiation and Capability
Did You Know?
Industry Dynamics
Ethics in Action
Steps and Missteps in International Expansion
Key Takeaways
Exercises
8.2 PESTEL, Globalization, and Importing
Know the Components of PESTEL Analysis
PESTEL Analysis
Political Factors
Economic Factors
Sociocultural Factors
Technological Factors
Environmental Factors
Legal Factors
PESTEL and Globalization
Factors Favoring Industry Globalization
Markets
Costs
Governments and Competition
Importing as a Stealth Form of Internationalization
Key Takeaways
Exercises
8.3 International-Expansion Entry Modes
The Five Common International-Expansion Entry Modes
Exporting
Amusing Anecdotes
Ethics in Action
Licensing and Franchising
Partnerships and Strategic Alliances
Did You Know?
Acquisitions
New, Wholly Owned Subsidiary
Entrepreneurship and Strategy
Key Takeaways
Exercises
8.4 CAGE Analysis
The Inputs into CAGE Analysis
CAGE Analysis and Institutional Voids
Three Strategies for Handling Institutional Voids
Ethics in Action
Key Takeaways
Exercises
8.5 Scenario Planning and Analysis
The History and Role of Scenario Planning and Analysis
Scenario Planning
Six Basic Steps of Scenario Planning
Trends and Uncertainties
Did You Know?
Key Takeaways
Exercises
8.6 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
Indeed, even importing and outsourcing can be considered stealth, or at least early, steps in internationalization, because they involve doing business across borders. In Section 8.1 "Global Strategic Choices", you will learn the rationale for international expansion and the planning and due diligence it requires. This chapter also features a richness of analytical frameworks. In Section 8.2 "PESTEL, Globalization, and Importing", you will learn about PESTEL, the framework for analyzing the political, economic, sociocultural, technological, environmental, and legal aspects of different international markets. Section 8.3 "International-Expansion Entry Modes" describes the strategies available to you when entering a new market. Section 8.4 "CAGE Analysis" will demonstrate how globalization and the CAGE (cultural, administrative, geographic, and economic) framework address questions related to the flattening of markets and how the dimensions they help you assess are essentially flatteners. Finally, in Section 8.5 "Scenario Planning and Analysis", you will learn about scenario analysis, which will prepare you to begin an analysis of which international markets might present the greatest opportunities, as well as suggest possible landmines that you could encounter when exploiting them. Opening Case: The Invisible Global Retailer and Its Reentry into US Markets
Which corporation owns 123 companies, operates in twenty-seven countries, and has been in the mobile-phone business for over a decade? If you don’t know, you’re not alone.
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|
International Expansion and Global Market Opportunity Assessment
|
Chapter 8
International Expansion and Global Market Opportunity Assessment
Chapter 8 International Expansion and Global Market Opportunity Assessment
What’s in It for Me?
Opening Case: The Invisible Global Retailer and Its Reentry into US Markets
Opening Case Exercises
8.1 Global Strategic Choices
The Why, Where, and How of International Expansion
Rationale for International Expansion
Planning for International Expansion
International Market Due Diligence
Regional Differences
Understanding Local Consumers
How to Learn the Needs of a New Foreign Market
Differentiation and Capability
Did You Know?
Industry Dynamics
Ethics in Action
Steps and Missteps in International Expansion
Key Takeaways
Exercises
8.2 PESTEL, Globalization, and Importing
Know the Components of PESTEL Analysis
PESTEL Analysis
Political Factors
Economic Factors
Sociocultural Factors
Technological Factors
Environmental Factors
Legal Factors
PESTEL and Globalization
Factors Favoring Industry Globalization
Markets
Costs
Governments and Competition
Importing as a Stealth Form of Internationalization
Key Takeaways
Exercises
8.3 International-Expansion Entry Modes
The Five Common International-Expansion Entry Modes
Exporting
Amusing Anecdotes
Ethics in Action
Licensing and Franchising
Partnerships and Strategic Alliances
Did You Know?
Acquisitions
New, Wholly Owned Subsidiary
Entrepreneurship and Strategy
Key Takeaways
Exercises
8.4 CAGE Analysis
The Inputs into CAGE Analysis
CAGE Analysis and Institutional Voids
Three Strategies for Handling Institutional Voids
Ethics in Action
Key Takeaways
Exercises
8.5 Scenario Planning and Analysis
The History and Role of Scenario Planning and Analysis
Scenario Planning
Six Basic Steps of Scenario Planning
Trends and Uncertainties
Did You Know?
Key Takeaways
Exercises
8.6 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
Section 8.4 "CAGE Analysis" will demonstrate how globalization and the CAGE (cultural, administrative, geographic, and economic) framework address questions related to the flattening of markets and how the dimensions they help you assess are essentially flatteners. Finally, in Section 8.5 "Scenario Planning and Analysis", you will learn about scenario analysis, which will prepare you to begin an analysis of which international markets might present the greatest opportunities, as well as suggest possible landmines that you could encounter when exploiting them. Opening Case: The Invisible Global Retailer and Its Reentry into US Markets
Which corporation owns 123 companies, operates in twenty-seven countries, and has been in the mobile-phone business for over a decade? If you don’t know, you’re not alone. Many people haven’t heard of the Otto Group, the German retailing giant that’s second only to Amazon in e-commerce and first in the global mail-order business. The reason you’ve likely never heard of the Otto Group is because the firm stays in the background while giving its brands the spotlight. This strategy has worked over the company’s almost eighty-year history, and Otto continues to apply it to new moves, such as its social media site, Two for Fashion. “ They are talking about fashion, not about Otto, unless it suits,” explained Andreas Frenkler, the company’s division manager of new media and e-commerce, about the site’s launch in 2008. Lydia Dishman, “How the Biggest Online Retailer You’ve Never Heard of Will Take the U.S. Market,” BNET, April 16, 2010, accessed August 20, 2010, http://www.bnet.com/blog/publishing-style/how-the-biggest-online-retailer-you-8217ve-never-heard-of-will-take-the-us-market/248.
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|
International Expansion and Global Market Opportunity Assessment
|
Chapter 8
International Expansion and Global Market Opportunity Assessment
Chapter 8 International Expansion and Global Market Opportunity Assessment
What’s in It for Me?
Opening Case: The Invisible Global Retailer and Its Reentry into US Markets
Opening Case Exercises
8.1 Global Strategic Choices
The Why, Where, and How of International Expansion
Rationale for International Expansion
Planning for International Expansion
International Market Due Diligence
Regional Differences
Understanding Local Consumers
How to Learn the Needs of a New Foreign Market
Differentiation and Capability
Did You Know?
Industry Dynamics
Ethics in Action
Steps and Missteps in International Expansion
Key Takeaways
Exercises
8.2 PESTEL, Globalization, and Importing
Know the Components of PESTEL Analysis
PESTEL Analysis
Political Factors
Economic Factors
Sociocultural Factors
Technological Factors
Environmental Factors
Legal Factors
PESTEL and Globalization
Factors Favoring Industry Globalization
Markets
Costs
Governments and Competition
Importing as a Stealth Form of Internationalization
Key Takeaways
Exercises
8.3 International-Expansion Entry Modes
The Five Common International-Expansion Entry Modes
Exporting
Amusing Anecdotes
Ethics in Action
Licensing and Franchising
Partnerships and Strategic Alliances
Did You Know?
Acquisitions
New, Wholly Owned Subsidiary
Entrepreneurship and Strategy
Key Takeaways
Exercises
8.4 CAGE Analysis
The Inputs into CAGE Analysis
CAGE Analysis and Institutional Voids
Three Strategies for Handling Institutional Voids
Ethics in Action
Key Takeaways
Exercises
8.5 Scenario Planning and Analysis
The History and Role of Scenario Planning and Analysis
Scenario Planning
Six Basic Steps of Scenario Planning
Trends and Uncertainties
Did You Know?
Key Takeaways
Exercises
8.6 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
Many people haven’t heard of the Otto Group, the German retailing giant that’s second only to Amazon in e-commerce and first in the global mail-order business. The reason you’ve likely never heard of the Otto Group is because the firm stays in the background while giving its brands the spotlight. This strategy has worked over the company’s almost eighty-year history, and Otto continues to apply it to new moves, such as its social media site, Two for Fashion. “ They are talking about fashion, not about Otto, unless it suits,” explained Andreas Frenkler, the company’s division manager of new media and e-commerce, about the site’s launch in 2008. Lydia Dishman, “How the Biggest Online Retailer You’ve Never Heard of Will Take the U.S. Market,” BNET, April 16, 2010, accessed August 20, 2010, http://www.bnet.com/blog/publishing-style/how-the-biggest-online-retailer-you-8217ve-never-heard-of-will-take-the-us-market/248. The site is now one of the top fashion blogs in Germany and is an integral part of the retailer’s marketing strategy. Leading through Passion, Vision, and Strategy
Today, the Otto Group consists of a large number of companies that operate in the major economic zones of the world. The Otto Group’s lines of business include financial services, multichannel retail, and other services. The financial services segment covers an international portfolio of commercial services along the value chain of retail companies, such as information-, collection-, and receivable-management services. The multichannel retail segment covers the Otto Group’s worldwide range of retail offerings;
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International Expansion and Global Market Opportunity Assessment
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Chapter 8
International Expansion and Global Market Opportunity Assessment
Chapter 8 International Expansion and Global Market Opportunity Assessment
What’s in It for Me?
Opening Case: The Invisible Global Retailer and Its Reentry into US Markets
Opening Case Exercises
8.1 Global Strategic Choices
The Why, Where, and How of International Expansion
Rationale for International Expansion
Planning for International Expansion
International Market Due Diligence
Regional Differences
Understanding Local Consumers
How to Learn the Needs of a New Foreign Market
Differentiation and Capability
Did You Know?
Industry Dynamics
Ethics in Action
Steps and Missteps in International Expansion
Key Takeaways
Exercises
8.2 PESTEL, Globalization, and Importing
Know the Components of PESTEL Analysis
PESTEL Analysis
Political Factors
Economic Factors
Sociocultural Factors
Technological Factors
Environmental Factors
Legal Factors
PESTEL and Globalization
Factors Favoring Industry Globalization
Markets
Costs
Governments and Competition
Importing as a Stealth Form of Internationalization
Key Takeaways
Exercises
8.3 International-Expansion Entry Modes
The Five Common International-Expansion Entry Modes
Exporting
Amusing Anecdotes
Ethics in Action
Licensing and Franchising
Partnerships and Strategic Alliances
Did You Know?
Acquisitions
New, Wholly Owned Subsidiary
Entrepreneurship and Strategy
Key Takeaways
Exercises
8.4 CAGE Analysis
The Inputs into CAGE Analysis
CAGE Analysis and Institutional Voids
Three Strategies for Handling Institutional Voids
Ethics in Action
Key Takeaways
Exercises
8.5 Scenario Planning and Analysis
The History and Role of Scenario Planning and Analysis
Scenario Planning
Six Basic Steps of Scenario Planning
Trends and Uncertainties
Did You Know?
Key Takeaways
Exercises
8.6 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
The site is now one of the top fashion blogs in Germany and is an integral part of the retailer’s marketing strategy. Leading through Passion, Vision, and Strategy
Today, the Otto Group consists of a large number of companies that operate in the major economic zones of the world. The Otto Group’s lines of business include financial services, multichannel retail, and other services. The financial services segment covers an international portfolio of commercial services along the value chain of retail companies, such as information-, collection-, and receivable-management services. The multichannel retail segment covers the Otto Group’s worldwide range of retail offerings; goods are marketed across three distribution channels—catalogs, e-commerce, and over-the-counter (OTC) retail. The third segment combines the Otto Group’s logistics, travel, and other service providers as well as sourcing companies. Logistics service providers and sourcing companies support both the Otto Group’s multichannel retail activities and non-Group clients. Travel service providers offer customers travel offerings across all sales channels. Unique to the Otto Group is the combination of travel agencies, direct marketing, and Internet sites.
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International Expansion and Global Market Opportunity Assessment
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Chapter 8
International Expansion and Global Market Opportunity Assessment
Chapter 8 International Expansion and Global Market Opportunity Assessment
What’s in It for Me?
Opening Case: The Invisible Global Retailer and Its Reentry into US Markets
Opening Case Exercises
8.1 Global Strategic Choices
The Why, Where, and How of International Expansion
Rationale for International Expansion
Planning for International Expansion
International Market Due Diligence
Regional Differences
Understanding Local Consumers
How to Learn the Needs of a New Foreign Market
Differentiation and Capability
Did You Know?
Industry Dynamics
Ethics in Action
Steps and Missteps in International Expansion
Key Takeaways
Exercises
8.2 PESTEL, Globalization, and Importing
Know the Components of PESTEL Analysis
PESTEL Analysis
Political Factors
Economic Factors
Sociocultural Factors
Technological Factors
Environmental Factors
Legal Factors
PESTEL and Globalization
Factors Favoring Industry Globalization
Markets
Costs
Governments and Competition
Importing as a Stealth Form of Internationalization
Key Takeaways
Exercises
8.3 International-Expansion Entry Modes
The Five Common International-Expansion Entry Modes
Exporting
Amusing Anecdotes
Ethics in Action
Licensing and Franchising
Partnerships and Strategic Alliances
Did You Know?
Acquisitions
New, Wholly Owned Subsidiary
Entrepreneurship and Strategy
Key Takeaways
Exercises
8.4 CAGE Analysis
The Inputs into CAGE Analysis
CAGE Analysis and Institutional Voids
Three Strategies for Handling Institutional Voids
Ethics in Action
Key Takeaways
Exercises
8.5 Scenario Planning and Analysis
The History and Role of Scenario Planning and Analysis
Scenario Planning
Six Basic Steps of Scenario Planning
Trends and Uncertainties
Did You Know?
Key Takeaways
Exercises
8.6 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
goods are marketed across three distribution channels—catalogs, e-commerce, and over-the-counter (OTC) retail. The third segment combines the Otto Group’s logistics, travel, and other service providers as well as sourcing companies. Logistics service providers and sourcing companies support both the Otto Group’s multichannel retail activities and non-Group clients. Travel service providers offer customers travel offerings across all sales channels. Unique to the Otto Group is the combination of travel agencies, direct marketing, and Internet sites. The combined revenue of these three ventures is growing rapidly, even during the global economic downturn. The travel service revenues for 2010 were 10 billion euros, or about $12 billion. “ Otto Group: Private Company Information,” BusinessWeek, accessed February 7, 2011, http://investing.businessweek.com/businessweek/research/stocks/private/snapshot.asp?privcapId=61882597. Even though it operates in a variety of market segments, business ideas, and distribution channels—not to mention its regional diversity—the Otto Group sees itself as a community built on shared values.
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International Expansion and Global Market Opportunity Assessment
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Chapter 8
International Expansion and Global Market Opportunity Assessment
Chapter 8 International Expansion and Global Market Opportunity Assessment
What’s in It for Me?
Opening Case: The Invisible Global Retailer and Its Reentry into US Markets
Opening Case Exercises
8.1 Global Strategic Choices
The Why, Where, and How of International Expansion
Rationale for International Expansion
Planning for International Expansion
International Market Due Diligence
Regional Differences
Understanding Local Consumers
How to Learn the Needs of a New Foreign Market
Differentiation and Capability
Did You Know?
Industry Dynamics
Ethics in Action
Steps and Missteps in International Expansion
Key Takeaways
Exercises
8.2 PESTEL, Globalization, and Importing
Know the Components of PESTEL Analysis
PESTEL Analysis
Political Factors
Economic Factors
Sociocultural Factors
Technological Factors
Environmental Factors
Legal Factors
PESTEL and Globalization
Factors Favoring Industry Globalization
Markets
Costs
Governments and Competition
Importing as a Stealth Form of Internationalization
Key Takeaways
Exercises
8.3 International-Expansion Entry Modes
The Five Common International-Expansion Entry Modes
Exporting
Amusing Anecdotes
Ethics in Action
Licensing and Franchising
Partnerships and Strategic Alliances
Did You Know?
Acquisitions
New, Wholly Owned Subsidiary
Entrepreneurship and Strategy
Key Takeaways
Exercises
8.4 CAGE Analysis
The Inputs into CAGE Analysis
CAGE Analysis and Institutional Voids
Three Strategies for Handling Institutional Voids
Ethics in Action
Key Takeaways
Exercises
8.5 Scenario Planning and Analysis
The History and Role of Scenario Planning and Analysis
Scenario Planning
Six Basic Steps of Scenario Planning
Trends and Uncertainties
Did You Know?
Key Takeaways
Exercises
8.6 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
The combined revenue of these three ventures is growing rapidly, even during the global economic downturn. The travel service revenues for 2010 were 10 billion euros, or about $12 billion. “ Otto Group: Private Company Information,” BusinessWeek, accessed February 7, 2011, http://investing.businessweek.com/businessweek/research/stocks/private/snapshot.asp?privcapId=61882597. Even though it operates in a variety of market segments, business ideas, and distribution channels—not to mention its regional diversity—the Otto Group sees itself as a community built on shared values. Otto’s passion for success is based on four levels of performance, which together represent the true strength of the Otto Group: “ Passion for our customers, passion for innovation, passion for sustainability, and passion for integrated networking.” Each one of these performance levels is an integral element of the Otto Group’s guiding principle and self-image. “ Accelerating toward New Goals,” Otto Group, accessed August 20, 2010, http://www.ottogroup.com/en/die-otto-group/daten-und-fakten/segmente.php. Future growth is guided by the Otto Group’s Vision 2020 strategy, which is based on achieving a strong presence in all key markets of the three largest regions—Europe, North America, and Asia.
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International Expansion and Global Market Opportunity Assessment
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Chapter 8
International Expansion and Global Market Opportunity Assessment
Chapter 8 International Expansion and Global Market Opportunity Assessment
What’s in It for Me?
Opening Case: The Invisible Global Retailer and Its Reentry into US Markets
Opening Case Exercises
8.1 Global Strategic Choices
The Why, Where, and How of International Expansion
Rationale for International Expansion
Planning for International Expansion
International Market Due Diligence
Regional Differences
Understanding Local Consumers
How to Learn the Needs of a New Foreign Market
Differentiation and Capability
Did You Know?
Industry Dynamics
Ethics in Action
Steps and Missteps in International Expansion
Key Takeaways
Exercises
8.2 PESTEL, Globalization, and Importing
Know the Components of PESTEL Analysis
PESTEL Analysis
Political Factors
Economic Factors
Sociocultural Factors
Technological Factors
Environmental Factors
Legal Factors
PESTEL and Globalization
Factors Favoring Industry Globalization
Markets
Costs
Governments and Competition
Importing as a Stealth Form of Internationalization
Key Takeaways
Exercises
8.3 International-Expansion Entry Modes
The Five Common International-Expansion Entry Modes
Exporting
Amusing Anecdotes
Ethics in Action
Licensing and Franchising
Partnerships and Strategic Alliances
Did You Know?
Acquisitions
New, Wholly Owned Subsidiary
Entrepreneurship and Strategy
Key Takeaways
Exercises
8.4 CAGE Analysis
The Inputs into CAGE Analysis
CAGE Analysis and Institutional Voids
Three Strategies for Handling Institutional Voids
Ethics in Action
Key Takeaways
Exercises
8.5 Scenario Planning and Analysis
The History and Role of Scenario Planning and Analysis
Scenario Planning
Six Basic Steps of Scenario Planning
Trends and Uncertainties
Did You Know?
Key Takeaways
Exercises
8.6 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
Otto’s passion for success is based on four levels of performance, which together represent the true strength of the Otto Group: “ Passion for our customers, passion for innovation, passion for sustainability, and passion for integrated networking.” Each one of these performance levels is an integral element of the Otto Group’s guiding principle and self-image. “ Accelerating toward New Goals,” Otto Group, accessed August 20, 2010, http://www.ottogroup.com/en/die-otto-group/daten-und-fakten/segmente.php. Future growth is guided by the Otto Group’s Vision 2020 strategy, which is based on achieving a strong presence in all key markets of the three largest regions—Europe, North America, and Asia. In doing so, the Otto Group relies on innovative concepts in the multichannel business, on current trends in e-commerce, on OTC retail, and on developments in mobile commerce. In keeping with that vision, its focus for near-term expansion is on expanding the Group’s strong position in Russia and increasing market share in other economic areas, such as the Chinese and Brazilian markets. Investment options in core European markets are continually being reviewed to strengthen the multichannel strategy. As a global operating group, Otto aims to have a presence in all major markets and will continue to expand OTC retailing. © 2011, Otto Group
In 2010, for instance, the Otto Group continued to develop its activities in the growth markets of Central and Eastern Europe.
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International Expansion and Global Market Opportunity Assessment
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Chapter 8
International Expansion and Global Market Opportunity Assessment
Chapter 8 International Expansion and Global Market Opportunity Assessment
What’s in It for Me?
Opening Case: The Invisible Global Retailer and Its Reentry into US Markets
Opening Case Exercises
8.1 Global Strategic Choices
The Why, Where, and How of International Expansion
Rationale for International Expansion
Planning for International Expansion
International Market Due Diligence
Regional Differences
Understanding Local Consumers
How to Learn the Needs of a New Foreign Market
Differentiation and Capability
Did You Know?
Industry Dynamics
Ethics in Action
Steps and Missteps in International Expansion
Key Takeaways
Exercises
8.2 PESTEL, Globalization, and Importing
Know the Components of PESTEL Analysis
PESTEL Analysis
Political Factors
Economic Factors
Sociocultural Factors
Technological Factors
Environmental Factors
Legal Factors
PESTEL and Globalization
Factors Favoring Industry Globalization
Markets
Costs
Governments and Competition
Importing as a Stealth Form of Internationalization
Key Takeaways
Exercises
8.3 International-Expansion Entry Modes
The Five Common International-Expansion Entry Modes
Exporting
Amusing Anecdotes
Ethics in Action
Licensing and Franchising
Partnerships and Strategic Alliances
Did You Know?
Acquisitions
New, Wholly Owned Subsidiary
Entrepreneurship and Strategy
Key Takeaways
Exercises
8.4 CAGE Analysis
The Inputs into CAGE Analysis
CAGE Analysis and Institutional Voids
Three Strategies for Handling Institutional Voids
Ethics in Action
Key Takeaways
Exercises
8.5 Scenario Planning and Analysis
The History and Role of Scenario Planning and Analysis
Scenario Planning
Six Basic Steps of Scenario Planning
Trends and Uncertainties
Did You Know?
Key Takeaways
Exercises
8.6 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
In doing so, the Otto Group relies on innovative concepts in the multichannel business, on current trends in e-commerce, on OTC retail, and on developments in mobile commerce. In keeping with that vision, its focus for near-term expansion is on expanding the Group’s strong position in Russia and increasing market share in other economic areas, such as the Chinese and Brazilian markets. Investment options in core European markets are continually being reviewed to strengthen the multichannel strategy. As a global operating group, Otto aims to have a presence in all major markets and will continue to expand OTC retailing. © 2011, Otto Group
In 2010, for instance, the Otto Group continued to develop its activities in the growth markets of Central and Eastern Europe. Through takeovers and the acquisition of further shares in various distance-selling concepts, including Quelle Russia, the Otto Group has continued to build on its market leadership in Russian mail order. A further major goal for the future is to expand OTC retail within the multichannel retail segment, making it one of the pillars of Otto alongside its e-commerce and catalog businesses. The foundations of value-oriented corporate management are reflected in the uncompromising customer orientation evident in business activities with both end consumers and corporate clients. The strategy envisages targeted investments that provide the Otto Group with “Best in Class” business models. Otto not only draws on an excellent range of customer services as the basis for its success in its core business of multichannel retailing but also offers an array of retail-related services for its corporate clients.
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International Expansion and Global Market Opportunity Assessment
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Chapter 8
International Expansion and Global Market Opportunity Assessment
Chapter 8 International Expansion and Global Market Opportunity Assessment
What’s in It for Me?
Opening Case: The Invisible Global Retailer and Its Reentry into US Markets
Opening Case Exercises
8.1 Global Strategic Choices
The Why, Where, and How of International Expansion
Rationale for International Expansion
Planning for International Expansion
International Market Due Diligence
Regional Differences
Understanding Local Consumers
How to Learn the Needs of a New Foreign Market
Differentiation and Capability
Did You Know?
Industry Dynamics
Ethics in Action
Steps and Missteps in International Expansion
Key Takeaways
Exercises
8.2 PESTEL, Globalization, and Importing
Know the Components of PESTEL Analysis
PESTEL Analysis
Political Factors
Economic Factors
Sociocultural Factors
Technological Factors
Environmental Factors
Legal Factors
PESTEL and Globalization
Factors Favoring Industry Globalization
Markets
Costs
Governments and Competition
Importing as a Stealth Form of Internationalization
Key Takeaways
Exercises
8.3 International-Expansion Entry Modes
The Five Common International-Expansion Entry Modes
Exporting
Amusing Anecdotes
Ethics in Action
Licensing and Franchising
Partnerships and Strategic Alliances
Did You Know?
Acquisitions
New, Wholly Owned Subsidiary
Entrepreneurship and Strategy
Key Takeaways
Exercises
8.4 CAGE Analysis
The Inputs into CAGE Analysis
CAGE Analysis and Institutional Voids
Three Strategies for Handling Institutional Voids
Ethics in Action
Key Takeaways
Exercises
8.5 Scenario Planning and Analysis
The History and Role of Scenario Planning and Analysis
Scenario Planning
Six Basic Steps of Scenario Planning
Trends and Uncertainties
Did You Know?
Key Takeaways
Exercises
8.6 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
Through takeovers and the acquisition of further shares in various distance-selling concepts, including Quelle Russia, the Otto Group has continued to build on its market leadership in Russian mail order. A further major goal for the future is to expand OTC retail within the multichannel retail segment, making it one of the pillars of Otto alongside its e-commerce and catalog businesses. The foundations of value-oriented corporate management are reflected in the uncompromising customer orientation evident in business activities with both end consumers and corporate clients. The strategy envisages targeted investments that provide the Otto Group with “Best in Class” business models. Otto not only draws on an excellent range of customer services as the basis for its success in its core business of multichannel retailing but also offers an array of retail-related services for its corporate clients. In the future, the company is looking to expand these services, moving beyond its core business. The buying organization of the Otto Group has been repositioned under the name Otto International and is now a firm fixture in the world’s key sourcing markets. Otto International’s corporate clients stand to benefit directly from the market power of the Otto Group while providing the volumes to make their own contribution to its growth. The US Market Reentry Initiative
Germany remains the Otto Group’s most-important regional sales market, followed by France, the rest of Europe, North America, and Asia. In the United States, Otto set up a greenfield division called Otto International and quietly launched Field & Stream 1871, a brand of outdoor clothing, outerwear, footwear, and accessories, in 2010.
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International Expansion and Global Market Opportunity Assessment
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Chapter 8
International Expansion and Global Market Opportunity Assessment
Chapter 8 International Expansion and Global Market Opportunity Assessment
What’s in It for Me?
Opening Case: The Invisible Global Retailer and Its Reentry into US Markets
Opening Case Exercises
8.1 Global Strategic Choices
The Why, Where, and How of International Expansion
Rationale for International Expansion
Planning for International Expansion
International Market Due Diligence
Regional Differences
Understanding Local Consumers
How to Learn the Needs of a New Foreign Market
Differentiation and Capability
Did You Know?
Industry Dynamics
Ethics in Action
Steps and Missteps in International Expansion
Key Takeaways
Exercises
8.2 PESTEL, Globalization, and Importing
Know the Components of PESTEL Analysis
PESTEL Analysis
Political Factors
Economic Factors
Sociocultural Factors
Technological Factors
Environmental Factors
Legal Factors
PESTEL and Globalization
Factors Favoring Industry Globalization
Markets
Costs
Governments and Competition
Importing as a Stealth Form of Internationalization
Key Takeaways
Exercises
8.3 International-Expansion Entry Modes
The Five Common International-Expansion Entry Modes
Exporting
Amusing Anecdotes
Ethics in Action
Licensing and Franchising
Partnerships and Strategic Alliances
Did You Know?
Acquisitions
New, Wholly Owned Subsidiary
Entrepreneurship and Strategy
Key Takeaways
Exercises
8.4 CAGE Analysis
The Inputs into CAGE Analysis
CAGE Analysis and Institutional Voids
Three Strategies for Handling Institutional Voids
Ethics in Action
Key Takeaways
Exercises
8.5 Scenario Planning and Analysis
The History and Role of Scenario Planning and Analysis
Scenario Planning
Six Basic Steps of Scenario Planning
Trends and Uncertainties
Did You Know?
Key Takeaways
Exercises
8.6 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
In the future, the company is looking to expand these services, moving beyond its core business. The buying organization of the Otto Group has been repositioned under the name Otto International and is now a firm fixture in the world’s key sourcing markets. Otto International’s corporate clients stand to benefit directly from the market power of the Otto Group while providing the volumes to make their own contribution to its growth. The US Market Reentry Initiative
Germany remains the Otto Group’s most-important regional sales market, followed by France, the rest of Europe, North America, and Asia. In the United States, Otto set up a greenfield division called Otto International and quietly launched Field & Stream 1871, a brand of outdoor clothing, outerwear, footwear, and accessories, in 2010. The products are available only on the Field & Stream e-commerce site. As always, the Otto name is almost nowhere on the site, being visible only on the site’s privacy policy page. Industry experts thought it surprising that Otto launched the clothing line because it had previously left the US market after its acquisition of Eddie Bauer’s parent company, Spiegel, failed in 2009. Still, the Otto Group has received much acclaim for its innovations in the retail arena. For example, according to a Microsoft case study, Otto was the first company (1) to use telephone ordering, (2) to produce a CD-ROM version of its catalog in the 1990s (to deal with slow dial-up connections), and (3) to build one of the largest collections of online merchandise, at http://www.otto.de. “
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International Expansion and Global Market Opportunity Assessment
|
Chapter 8
International Expansion and Global Market Opportunity Assessment
Chapter 8 International Expansion and Global Market Opportunity Assessment
What’s in It for Me?
Opening Case: The Invisible Global Retailer and Its Reentry into US Markets
Opening Case Exercises
8.1 Global Strategic Choices
The Why, Where, and How of International Expansion
Rationale for International Expansion
Planning for International Expansion
International Market Due Diligence
Regional Differences
Understanding Local Consumers
How to Learn the Needs of a New Foreign Market
Differentiation and Capability
Did You Know?
Industry Dynamics
Ethics in Action
Steps and Missteps in International Expansion
Key Takeaways
Exercises
8.2 PESTEL, Globalization, and Importing
Know the Components of PESTEL Analysis
PESTEL Analysis
Political Factors
Economic Factors
Sociocultural Factors
Technological Factors
Environmental Factors
Legal Factors
PESTEL and Globalization
Factors Favoring Industry Globalization
Markets
Costs
Governments and Competition
Importing as a Stealth Form of Internationalization
Key Takeaways
Exercises
8.3 International-Expansion Entry Modes
The Five Common International-Expansion Entry Modes
Exporting
Amusing Anecdotes
Ethics in Action
Licensing and Franchising
Partnerships and Strategic Alliances
Did You Know?
Acquisitions
New, Wholly Owned Subsidiary
Entrepreneurship and Strategy
Key Takeaways
Exercises
8.4 CAGE Analysis
The Inputs into CAGE Analysis
CAGE Analysis and Institutional Voids
Three Strategies for Handling Institutional Voids
Ethics in Action
Key Takeaways
Exercises
8.5 Scenario Planning and Analysis
The History and Role of Scenario Planning and Analysis
Scenario Planning
Six Basic Steps of Scenario Planning
Trends and Uncertainties
Did You Know?
Key Takeaways
Exercises
8.6 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
The products are available only on the Field & Stream e-commerce site. As always, the Otto name is almost nowhere on the site, being visible only on the site’s privacy policy page. Industry experts thought it surprising that Otto launched the clothing line because it had previously left the US market after its acquisition of Eddie Bauer’s parent company, Spiegel, failed in 2009. Still, the Otto Group has received much acclaim for its innovations in the retail arena. For example, according to a Microsoft case study, Otto was the first company (1) to use telephone ordering, (2) to produce a CD-ROM version of its catalog in the 1990s (to deal with slow dial-up connections), and (3) to build one of the largest collections of online merchandise, at http://www.otto.de. “ Microsoft Case Studies,” Microsoft, accessed August 20, 2010, http://www.microsoft.com/casestudies/Case_Study_Detail.aspx?CaseStudyID=200504; and “Otto Group: OTTO,” accessed February 7, 2011, http://www.ottogroup.com/otto.html?&L=0. So the Otto Group may have other innovations planned for Field & Stream. But the US fashion market is saturated with competitors.
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International Expansion and Global Market Opportunity Assessment
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Chapter 8
International Expansion and Global Market Opportunity Assessment
Chapter 8 International Expansion and Global Market Opportunity Assessment
What’s in It for Me?
Opening Case: The Invisible Global Retailer and Its Reentry into US Markets
Opening Case Exercises
8.1 Global Strategic Choices
The Why, Where, and How of International Expansion
Rationale for International Expansion
Planning for International Expansion
International Market Due Diligence
Regional Differences
Understanding Local Consumers
How to Learn the Needs of a New Foreign Market
Differentiation and Capability
Did You Know?
Industry Dynamics
Ethics in Action
Steps and Missteps in International Expansion
Key Takeaways
Exercises
8.2 PESTEL, Globalization, and Importing
Know the Components of PESTEL Analysis
PESTEL Analysis
Political Factors
Economic Factors
Sociocultural Factors
Technological Factors
Environmental Factors
Legal Factors
PESTEL and Globalization
Factors Favoring Industry Globalization
Markets
Costs
Governments and Competition
Importing as a Stealth Form of Internationalization
Key Takeaways
Exercises
8.3 International-Expansion Entry Modes
The Five Common International-Expansion Entry Modes
Exporting
Amusing Anecdotes
Ethics in Action
Licensing and Franchising
Partnerships and Strategic Alliances
Did You Know?
Acquisitions
New, Wholly Owned Subsidiary
Entrepreneurship and Strategy
Key Takeaways
Exercises
8.4 CAGE Analysis
The Inputs into CAGE Analysis
CAGE Analysis and Institutional Voids
Three Strategies for Handling Institutional Voids
Ethics in Action
Key Takeaways
Exercises
8.5 Scenario Planning and Analysis
The History and Role of Scenario Planning and Analysis
Scenario Planning
Six Basic Steps of Scenario Planning
Trends and Uncertainties
Did You Know?
Key Takeaways
Exercises
8.6 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
Microsoft Case Studies,” Microsoft, accessed August 20, 2010, http://www.microsoft.com/casestudies/Case_Study_Detail.aspx?CaseStudyID=200504; and “Otto Group: OTTO,” accessed February 7, 2011, http://www.ottogroup.com/otto.html?&L=0. So the Otto Group may have other innovations planned for Field & Stream. But the US fashion market is saturated with competitors. As WWD reported, Otto may do better to focus on growing its own retail brands and utilizing its impressive in-house manufacturing and logistics divisions, which are now Otto’s fastest-growing segment. Thomas Brenner, “Otto Group: A German Giant Tiptoes Back to the U.S.,” WWD, April 14, 2010, accessed February 7, 2011, http://www.wwd.com/wwd-publications/wwd/2010-04-14?id=3036440&date=today&module=tn/today#/article/retail-news/otto-group-a-german-giant-tiptoes-back-to-the-u-s--3036
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Chapter 9
Exporting, Importing, and Global Sourcing
Chapter 9 Exporting, Importing, and Global Sourcing
What’s in It for Me?
Opening Case: Q-Cells
Opening Case Exercises
9.1 What is Importing and Exporting?
What Do We Mean by Exporting and Importing?
An Entrepreneur’s Import Success Story
Why Do Companies Export?
Benefits of Exporting: Vitrac
Risks of Exporting
Ethics in Action
Specialized Entry Modes: Contractual
Licensing
Franchising
Specialized Entry Modes: Investment
Joint Ventures
Risks of Joint Ventures
Did You Know?
Wholly Owned Subsidiaries
Did You Know?
Cautions When Purchasing an Existing Foreign Enterprise
Did You Know?
Building Long-Term Relationships
Did You Know?
Conclusion
Key Takeaways
Exercises
9.2 Countertrade
What Is Countertrade?
Why Do Companies Engage in Countertrade?
Structures in Countertrade
Disadvantages of Countertrade
Key Takeaways
Exercises
9.3 Global Sourcing and Its Role in Business
What Is Global Sourcing?
Best Practices in Global Sourcing
Judging Quality from Afar: ISO 9000 Certification
Trends in Sourcing: Considering Carbon Costs
Outsourcing versus Global Sourcing
The Hidden Costs of Outsourcing
Managing Outsourced Services
Johns Hopkins Enterprise’s SLA for Accounts Receivable
Entrepreneurial Opportunities from Outsourcing
Key Takeaways
Exercises
9.4 Managing Export and Import
Who Are the Main Actors in Export and Import?
Cooperation for Security
Role of Intermediaries
What’s Needed for Import and Export Transactions?
Did You Know?
Humorous Anecdote
Certificate of Origin as Marketing Tool
Impact of Trade Agreements
Key Takeaways
Exercises
9.5 What Options Do Companies Have for Export and Import Financing?
How Companies Receive or Pay for Goods and Services
Basics of Export Financing
Did You Know?
Success Tips for Entrepreneurs
The Role of Organizations in Providing Financing
Did You Know?
Key Takeaways
Exercises
9.6 Tips in Your Walkabout Toolkit
Negotiating for Success across Cultures
9.7 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
Exporting, Importing, and Global Sourcing
Chapter 9 Exporting, Importing, and Global Sourcing
© 2003–2011, Atma Global Inc. Reprinted with permission. What’s in It for Me? What are importing and exporting? What is countertrade? What is global sourcing? How do companies manage importing and exporting? What options do companies have to finance their importing and exporting? A major part of international business is, of course, importing and exporting. An increase in the level of exports and imports is, after all, one of the symptoms of a flattening world. In a flat world, goods and services can flow fluidly from one part of the globe to another.
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Chapter 9
Exporting, Importing, and Global Sourcing
Chapter 9 Exporting, Importing, and Global Sourcing
What’s in It for Me?
Opening Case: Q-Cells
Opening Case Exercises
9.1 What is Importing and Exporting?
What Do We Mean by Exporting and Importing?
An Entrepreneur’s Import Success Story
Why Do Companies Export?
Benefits of Exporting: Vitrac
Risks of Exporting
Ethics in Action
Specialized Entry Modes: Contractual
Licensing
Franchising
Specialized Entry Modes: Investment
Joint Ventures
Risks of Joint Ventures
Did You Know?
Wholly Owned Subsidiaries
Did You Know?
Cautions When Purchasing an Existing Foreign Enterprise
Did You Know?
Building Long-Term Relationships
Did You Know?
Conclusion
Key Takeaways
Exercises
9.2 Countertrade
What Is Countertrade?
Why Do Companies Engage in Countertrade?
Structures in Countertrade
Disadvantages of Countertrade
Key Takeaways
Exercises
9.3 Global Sourcing and Its Role in Business
What Is Global Sourcing?
Best Practices in Global Sourcing
Judging Quality from Afar: ISO 9000 Certification
Trends in Sourcing: Considering Carbon Costs
Outsourcing versus Global Sourcing
The Hidden Costs of Outsourcing
Managing Outsourced Services
Johns Hopkins Enterprise’s SLA for Accounts Receivable
Entrepreneurial Opportunities from Outsourcing
Key Takeaways
Exercises
9.4 Managing Export and Import
Who Are the Main Actors in Export and Import?
Cooperation for Security
Role of Intermediaries
What’s Needed for Import and Export Transactions?
Did You Know?
Humorous Anecdote
Certificate of Origin as Marketing Tool
Impact of Trade Agreements
Key Takeaways
Exercises
9.5 What Options Do Companies Have for Export and Import Financing?
How Companies Receive or Pay for Goods and Services
Basics of Export Financing
Did You Know?
Success Tips for Entrepreneurs
The Role of Organizations in Providing Financing
Did You Know?
Key Takeaways
Exercises
9.6 Tips in Your Walkabout Toolkit
Negotiating for Success across Cultures
9.7 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
How do companies manage importing and exporting? What options do companies have to finance their importing and exporting? A major part of international business is, of course, importing and exporting. An increase in the level of exports and imports is, after all, one of the symptoms of a flattening world. In a flat world, goods and services can flow fluidly from one part of the globe to another. In Section 9.1 "What is Importing and Exporting?" you’ll take a quick look back in time to see importing and exporting in their historical context. Then, you’ll discover the reasons why companies export, as well as the pitfalls and risks associated with exporting. Next, you’ll venture into more specialized modes of entry into an international market, moving progressively from the least expensive to the most expensive options. Section 9.2 "Countertrade" focuses on what countertrade is and why companies engage in it.
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Exporting, Importing, and Global Sourcing
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Chapter 9
Exporting, Importing, and Global Sourcing
Chapter 9 Exporting, Importing, and Global Sourcing
What’s in It for Me?
Opening Case: Q-Cells
Opening Case Exercises
9.1 What is Importing and Exporting?
What Do We Mean by Exporting and Importing?
An Entrepreneur’s Import Success Story
Why Do Companies Export?
Benefits of Exporting: Vitrac
Risks of Exporting
Ethics in Action
Specialized Entry Modes: Contractual
Licensing
Franchising
Specialized Entry Modes: Investment
Joint Ventures
Risks of Joint Ventures
Did You Know?
Wholly Owned Subsidiaries
Did You Know?
Cautions When Purchasing an Existing Foreign Enterprise
Did You Know?
Building Long-Term Relationships
Did You Know?
Conclusion
Key Takeaways
Exercises
9.2 Countertrade
What Is Countertrade?
Why Do Companies Engage in Countertrade?
Structures in Countertrade
Disadvantages of Countertrade
Key Takeaways
Exercises
9.3 Global Sourcing and Its Role in Business
What Is Global Sourcing?
Best Practices in Global Sourcing
Judging Quality from Afar: ISO 9000 Certification
Trends in Sourcing: Considering Carbon Costs
Outsourcing versus Global Sourcing
The Hidden Costs of Outsourcing
Managing Outsourced Services
Johns Hopkins Enterprise’s SLA for Accounts Receivable
Entrepreneurial Opportunities from Outsourcing
Key Takeaways
Exercises
9.4 Managing Export and Import
Who Are the Main Actors in Export and Import?
Cooperation for Security
Role of Intermediaries
What’s Needed for Import and Export Transactions?
Did You Know?
Humorous Anecdote
Certificate of Origin as Marketing Tool
Impact of Trade Agreements
Key Takeaways
Exercises
9.5 What Options Do Companies Have for Export and Import Financing?
How Companies Receive or Pay for Goods and Services
Basics of Export Financing
Did You Know?
Success Tips for Entrepreneurs
The Role of Organizations in Providing Financing
Did You Know?
Key Takeaways
Exercises
9.6 Tips in Your Walkabout Toolkit
Negotiating for Success across Cultures
9.7 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
In Section 9.1 "What is Importing and Exporting?" you’ll take a quick look back in time to see importing and exporting in their historical context. Then, you’ll discover the reasons why companies export, as well as the pitfalls and risks associated with exporting. Next, you’ll venture into more specialized modes of entry into an international market, moving progressively from the least expensive to the most expensive options. Section 9.2 "Countertrade" focuses on what countertrade is and why companies engage in it. You’ll learn about countertrade structures, such as barter and counterpurchase, and the role they play in the modern economy. In Section 9.3 "Global Sourcing and Its Role in Business", you’ll explore global sourcing and study the best practices to manage sourcing, to judge quality from afar, and to improve sustainability through well-planned sourcing that’s beneficial to the environment. You’ll understand what outsourcing is, why companies outsource, and what the hidden costs of outsourcing are. Some of these costs are related to the fact that the world is not all that flat! You’ll see tips for managing outsourced services and look at the opportunities that outsourcing offers entrepreneurs.
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Chapter 9
Exporting, Importing, and Global Sourcing
Chapter 9 Exporting, Importing, and Global Sourcing
What’s in It for Me?
Opening Case: Q-Cells
Opening Case Exercises
9.1 What is Importing and Exporting?
What Do We Mean by Exporting and Importing?
An Entrepreneur’s Import Success Story
Why Do Companies Export?
Benefits of Exporting: Vitrac
Risks of Exporting
Ethics in Action
Specialized Entry Modes: Contractual
Licensing
Franchising
Specialized Entry Modes: Investment
Joint Ventures
Risks of Joint Ventures
Did You Know?
Wholly Owned Subsidiaries
Did You Know?
Cautions When Purchasing an Existing Foreign Enterprise
Did You Know?
Building Long-Term Relationships
Did You Know?
Conclusion
Key Takeaways
Exercises
9.2 Countertrade
What Is Countertrade?
Why Do Companies Engage in Countertrade?
Structures in Countertrade
Disadvantages of Countertrade
Key Takeaways
Exercises
9.3 Global Sourcing and Its Role in Business
What Is Global Sourcing?
Best Practices in Global Sourcing
Judging Quality from Afar: ISO 9000 Certification
Trends in Sourcing: Considering Carbon Costs
Outsourcing versus Global Sourcing
The Hidden Costs of Outsourcing
Managing Outsourced Services
Johns Hopkins Enterprise’s SLA for Accounts Receivable
Entrepreneurial Opportunities from Outsourcing
Key Takeaways
Exercises
9.4 Managing Export and Import
Who Are the Main Actors in Export and Import?
Cooperation for Security
Role of Intermediaries
What’s Needed for Import and Export Transactions?
Did You Know?
Humorous Anecdote
Certificate of Origin as Marketing Tool
Impact of Trade Agreements
Key Takeaways
Exercises
9.5 What Options Do Companies Have for Export and Import Financing?
How Companies Receive or Pay for Goods and Services
Basics of Export Financing
Did You Know?
Success Tips for Entrepreneurs
The Role of Organizations in Providing Financing
Did You Know?
Key Takeaways
Exercises
9.6 Tips in Your Walkabout Toolkit
Negotiating for Success across Cultures
9.7 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
You’ll learn about countertrade structures, such as barter and counterpurchase, and the role they play in the modern economy. In Section 9.3 "Global Sourcing and Its Role in Business", you’ll explore global sourcing and study the best practices to manage sourcing, to judge quality from afar, and to improve sustainability through well-planned sourcing that’s beneficial to the environment. You’ll understand what outsourcing is, why companies outsource, and what the hidden costs of outsourcing are. Some of these costs are related to the fact that the world is not all that flat! You’ll see tips for managing outsourced services and look at the opportunities that outsourcing offers entrepreneurs. Section 9.4 "Managing Export and Import" reviews the mechanics of import and export—from the main players involved, to the intermediaries, to the important documentation needed for import and export transactions. Section 9.5 "What Options Do Companies Have for Export and Import Financing?" concludes the chapter with a look at the options companies have for financing their import/export activities. Opening Case: Q-Cells
Q-Cells exemplifies the successes and challenges of global importing and exporting.
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Chapter 9
Exporting, Importing, and Global Sourcing
Chapter 9 Exporting, Importing, and Global Sourcing
What’s in It for Me?
Opening Case: Q-Cells
Opening Case Exercises
9.1 What is Importing and Exporting?
What Do We Mean by Exporting and Importing?
An Entrepreneur’s Import Success Story
Why Do Companies Export?
Benefits of Exporting: Vitrac
Risks of Exporting
Ethics in Action
Specialized Entry Modes: Contractual
Licensing
Franchising
Specialized Entry Modes: Investment
Joint Ventures
Risks of Joint Ventures
Did You Know?
Wholly Owned Subsidiaries
Did You Know?
Cautions When Purchasing an Existing Foreign Enterprise
Did You Know?
Building Long-Term Relationships
Did You Know?
Conclusion
Key Takeaways
Exercises
9.2 Countertrade
What Is Countertrade?
Why Do Companies Engage in Countertrade?
Structures in Countertrade
Disadvantages of Countertrade
Key Takeaways
Exercises
9.3 Global Sourcing and Its Role in Business
What Is Global Sourcing?
Best Practices in Global Sourcing
Judging Quality from Afar: ISO 9000 Certification
Trends in Sourcing: Considering Carbon Costs
Outsourcing versus Global Sourcing
The Hidden Costs of Outsourcing
Managing Outsourced Services
Johns Hopkins Enterprise’s SLA for Accounts Receivable
Entrepreneurial Opportunities from Outsourcing
Key Takeaways
Exercises
9.4 Managing Export and Import
Who Are the Main Actors in Export and Import?
Cooperation for Security
Role of Intermediaries
What’s Needed for Import and Export Transactions?
Did You Know?
Humorous Anecdote
Certificate of Origin as Marketing Tool
Impact of Trade Agreements
Key Takeaways
Exercises
9.5 What Options Do Companies Have for Export and Import Financing?
How Companies Receive or Pay for Goods and Services
Basics of Export Financing
Did You Know?
Success Tips for Entrepreneurs
The Role of Organizations in Providing Financing
Did You Know?
Key Takeaways
Exercises
9.6 Tips in Your Walkabout Toolkit
Negotiating for Success across Cultures
9.7 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
Section 9.4 "Managing Export and Import" reviews the mechanics of import and export—from the main players involved, to the intermediaries, to the important documentation needed for import and export transactions. Section 9.5 "What Options Do Companies Have for Export and Import Financing?" concludes the chapter with a look at the options companies have for financing their import/export activities. Opening Case: Q-Cells
Q-Cells exemplifies the successes and challenges of global importing and exporting. Founded in Germany in 1999, the company became the largest manufacturer of solar cells worldwide. LDK Solar, “Q-Cells and LDK Solar Announce Formation of Joint Venture for Development of PV Systems in Europe and China,” news release, April 8, 2009, accessed October 27, 2010, http://www.ldksolar.com/med_press_list.php?news_id=100. By 2010, however, it was experiencing losses due, in part, to mistiming some of the entry strategies that are covered in Section 9.1 "What is Importing and Exporting?". First, it’s important to know that Germany is a high-cost manufacturing country compared to China or Southeast Asia. On the other hand, Germany is known for its engineering prowess.
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Exporting, Importing, and Global Sourcing
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Chapter 9
Exporting, Importing, and Global Sourcing
Chapter 9 Exporting, Importing, and Global Sourcing
What’s in It for Me?
Opening Case: Q-Cells
Opening Case Exercises
9.1 What is Importing and Exporting?
What Do We Mean by Exporting and Importing?
An Entrepreneur’s Import Success Story
Why Do Companies Export?
Benefits of Exporting: Vitrac
Risks of Exporting
Ethics in Action
Specialized Entry Modes: Contractual
Licensing
Franchising
Specialized Entry Modes: Investment
Joint Ventures
Risks of Joint Ventures
Did You Know?
Wholly Owned Subsidiaries
Did You Know?
Cautions When Purchasing an Existing Foreign Enterprise
Did You Know?
Building Long-Term Relationships
Did You Know?
Conclusion
Key Takeaways
Exercises
9.2 Countertrade
What Is Countertrade?
Why Do Companies Engage in Countertrade?
Structures in Countertrade
Disadvantages of Countertrade
Key Takeaways
Exercises
9.3 Global Sourcing and Its Role in Business
What Is Global Sourcing?
Best Practices in Global Sourcing
Judging Quality from Afar: ISO 9000 Certification
Trends in Sourcing: Considering Carbon Costs
Outsourcing versus Global Sourcing
The Hidden Costs of Outsourcing
Managing Outsourced Services
Johns Hopkins Enterprise’s SLA for Accounts Receivable
Entrepreneurial Opportunities from Outsourcing
Key Takeaways
Exercises
9.4 Managing Export and Import
Who Are the Main Actors in Export and Import?
Cooperation for Security
Role of Intermediaries
What’s Needed for Import and Export Transactions?
Did You Know?
Humorous Anecdote
Certificate of Origin as Marketing Tool
Impact of Trade Agreements
Key Takeaways
Exercises
9.5 What Options Do Companies Have for Export and Import Financing?
How Companies Receive or Pay for Goods and Services
Basics of Export Financing
Did You Know?
Success Tips for Entrepreneurs
The Role of Organizations in Providing Financing
Did You Know?
Key Takeaways
Exercises
9.6 Tips in Your Walkabout Toolkit
Negotiating for Success across Cultures
9.7 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
Founded in Germany in 1999, the company became the largest manufacturer of solar cells worldwide. LDK Solar, “Q-Cells and LDK Solar Announce Formation of Joint Venture for Development of PV Systems in Europe and China,” news release, April 8, 2009, accessed October 27, 2010, http://www.ldksolar.com/med_press_list.php?news_id=100. By 2010, however, it was experiencing losses due, in part, to mistiming some of the entry strategies that are covered in Section 9.1 "What is Importing and Exporting?". First, it’s important to know that Germany is a high-cost manufacturing country compared to China or Southeast Asia. On the other hand, Germany is known for its engineering prowess. Q-Cells gambled that customers would be willing to pay a premium for German-made solar panels. ( You’ll learn more about this “country of origin” factor in Chapter 14 "Competing Effectively through Global Marketing, Distribution, and Supply-Chain Management" .) The trouble was that solar cells aren’t that sophisticated or complex to manufacture, and Asian competitors were able to provide reliable products at 30 percent less cost than Q-Cells. The Cost Advantage
Q-Cells recognized the Asian cost advantage—not only are labor and utility costs lower in Asia, but so are the selling, general, and administrative (SG&A) costs. What’s more, governments like China provide significant tax breaks to attract solar companies to their countries.
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Exporting, Importing, and Global Sourcing
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Chapter 9
Exporting, Importing, and Global Sourcing
Chapter 9 Exporting, Importing, and Global Sourcing
What’s in It for Me?
Opening Case: Q-Cells
Opening Case Exercises
9.1 What is Importing and Exporting?
What Do We Mean by Exporting and Importing?
An Entrepreneur’s Import Success Story
Why Do Companies Export?
Benefits of Exporting: Vitrac
Risks of Exporting
Ethics in Action
Specialized Entry Modes: Contractual
Licensing
Franchising
Specialized Entry Modes: Investment
Joint Ventures
Risks of Joint Ventures
Did You Know?
Wholly Owned Subsidiaries
Did You Know?
Cautions When Purchasing an Existing Foreign Enterprise
Did You Know?
Building Long-Term Relationships
Did You Know?
Conclusion
Key Takeaways
Exercises
9.2 Countertrade
What Is Countertrade?
Why Do Companies Engage in Countertrade?
Structures in Countertrade
Disadvantages of Countertrade
Key Takeaways
Exercises
9.3 Global Sourcing and Its Role in Business
What Is Global Sourcing?
Best Practices in Global Sourcing
Judging Quality from Afar: ISO 9000 Certification
Trends in Sourcing: Considering Carbon Costs
Outsourcing versus Global Sourcing
The Hidden Costs of Outsourcing
Managing Outsourced Services
Johns Hopkins Enterprise’s SLA for Accounts Receivable
Entrepreneurial Opportunities from Outsourcing
Key Takeaways
Exercises
9.4 Managing Export and Import
Who Are the Main Actors in Export and Import?
Cooperation for Security
Role of Intermediaries
What’s Needed for Import and Export Transactions?
Did You Know?
Humorous Anecdote
Certificate of Origin as Marketing Tool
Impact of Trade Agreements
Key Takeaways
Exercises
9.5 What Options Do Companies Have for Export and Import Financing?
How Companies Receive or Pay for Goods and Services
Basics of Export Financing
Did You Know?
Success Tips for Entrepreneurs
The Role of Organizations in Providing Financing
Did You Know?
Key Takeaways
Exercises
9.6 Tips in Your Walkabout Toolkit
Negotiating for Success across Cultures
9.7 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
Q-Cells gambled that customers would be willing to pay a premium for German-made solar panels. ( You’ll learn more about this “country of origin” factor in Chapter 14 "Competing Effectively through Global Marketing, Distribution, and Supply-Chain Management" .) The trouble was that solar cells aren’t that sophisticated or complex to manufacture, and Asian competitors were able to provide reliable products at 30 percent less cost than Q-Cells. The Cost Advantage
Q-Cells recognized the Asian cost advantage—not only are labor and utility costs lower in Asia, but so are the selling, general, and administrative (SG&A) costs. What’s more, governments like China provide significant tax breaks to attract solar companies to their countries. So, Q-Cells opened a manufacturing plant in Malaysia. Once the Malaysian plant is fully ramped up, the costs to manufacture solar cells there will be 30 percent less than at the Q-Cells plant in Germany. © 2011, Q-Cells SE
Then, Q-Cells entered into a joint venture with China-based LDK, in which Q-Cells used LDK silicon wafers to make its solar cells. The two companies also used each other’s respective expertise to market their products in China and Europe. Richard A. Kessler, “Q-Cells, China’s LDK Solar Form Joint Venture for Export Push,” Recharge, April 8, 2009, accessed September 9, 2010, http://www.rechargenews.com/regions/north_america/article175506.ece?print=true.
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Exporting, Importing, and Global Sourcing
|
Chapter 9
Exporting, Importing, and Global Sourcing
Chapter 9 Exporting, Importing, and Global Sourcing
What’s in It for Me?
Opening Case: Q-Cells
Opening Case Exercises
9.1 What is Importing and Exporting?
What Do We Mean by Exporting and Importing?
An Entrepreneur’s Import Success Story
Why Do Companies Export?
Benefits of Exporting: Vitrac
Risks of Exporting
Ethics in Action
Specialized Entry Modes: Contractual
Licensing
Franchising
Specialized Entry Modes: Investment
Joint Ventures
Risks of Joint Ventures
Did You Know?
Wholly Owned Subsidiaries
Did You Know?
Cautions When Purchasing an Existing Foreign Enterprise
Did You Know?
Building Long-Term Relationships
Did You Know?
Conclusion
Key Takeaways
Exercises
9.2 Countertrade
What Is Countertrade?
Why Do Companies Engage in Countertrade?
Structures in Countertrade
Disadvantages of Countertrade
Key Takeaways
Exercises
9.3 Global Sourcing and Its Role in Business
What Is Global Sourcing?
Best Practices in Global Sourcing
Judging Quality from Afar: ISO 9000 Certification
Trends in Sourcing: Considering Carbon Costs
Outsourcing versus Global Sourcing
The Hidden Costs of Outsourcing
Managing Outsourced Services
Johns Hopkins Enterprise’s SLA for Accounts Receivable
Entrepreneurial Opportunities from Outsourcing
Key Takeaways
Exercises
9.4 Managing Export and Import
Who Are the Main Actors in Export and Import?
Cooperation for Security
Role of Intermediaries
What’s Needed for Import and Export Transactions?
Did You Know?
Humorous Anecdote
Certificate of Origin as Marketing Tool
Impact of Trade Agreements
Key Takeaways
Exercises
9.5 What Options Do Companies Have for Export and Import Financing?
How Companies Receive or Pay for Goods and Services
Basics of Export Financing
Did You Know?
Success Tips for Entrepreneurs
The Role of Organizations in Providing Financing
Did You Know?
Key Takeaways
Exercises
9.6 Tips in Your Walkabout Toolkit
Negotiating for Success across Cultures
9.7 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
So, Q-Cells opened a manufacturing plant in Malaysia. Once the Malaysian plant is fully ramped up, the costs to manufacture solar cells there will be 30 percent less than at the Q-Cells plant in Germany. © 2011, Q-Cells SE
Then, Q-Cells entered into a joint venture with China-based LDK, in which Q-Cells used LDK silicon wafers to make its solar cells. The two companies also used each other’s respective expertise to market their products in China and Europe. Richard A. Kessler, “Q-Cells, China’s LDK Solar Form Joint Venture for Export Push,” Recharge, April 8, 2009, accessed September 9, 2010, http://www.rechargenews.com/regions/north_america/article175506.ece?print=true. Although the joint venture gave Q-Cells local knowledge of the Chinese market, it also locked Q-Cells into buying wafers from LDK. These wafers were priced higher than those Q-Cells could source on the spot market. As a result, Q-Cells was paying about 20 cents more for its wafers than competitors were paying. Thus, in the short term, the joint venture hurt Q-Cells. However, the company was able to renegotiate the price it would pay for LDK wafers.
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Chapter 9
Exporting, Importing, and Global Sourcing
Chapter 9 Exporting, Importing, and Global Sourcing
What’s in It for Me?
Opening Case: Q-Cells
Opening Case Exercises
9.1 What is Importing and Exporting?
What Do We Mean by Exporting and Importing?
An Entrepreneur’s Import Success Story
Why Do Companies Export?
Benefits of Exporting: Vitrac
Risks of Exporting
Ethics in Action
Specialized Entry Modes: Contractual
Licensing
Franchising
Specialized Entry Modes: Investment
Joint Ventures
Risks of Joint Ventures
Did You Know?
Wholly Owned Subsidiaries
Did You Know?
Cautions When Purchasing an Existing Foreign Enterprise
Did You Know?
Building Long-Term Relationships
Did You Know?
Conclusion
Key Takeaways
Exercises
9.2 Countertrade
What Is Countertrade?
Why Do Companies Engage in Countertrade?
Structures in Countertrade
Disadvantages of Countertrade
Key Takeaways
Exercises
9.3 Global Sourcing and Its Role in Business
What Is Global Sourcing?
Best Practices in Global Sourcing
Judging Quality from Afar: ISO 9000 Certification
Trends in Sourcing: Considering Carbon Costs
Outsourcing versus Global Sourcing
The Hidden Costs of Outsourcing
Managing Outsourced Services
Johns Hopkins Enterprise’s SLA for Accounts Receivable
Entrepreneurial Opportunities from Outsourcing
Key Takeaways
Exercises
9.4 Managing Export and Import
Who Are the Main Actors in Export and Import?
Cooperation for Security
Role of Intermediaries
What’s Needed for Import and Export Transactions?
Did You Know?
Humorous Anecdote
Certificate of Origin as Marketing Tool
Impact of Trade Agreements
Key Takeaways
Exercises
9.5 What Options Do Companies Have for Export and Import Financing?
How Companies Receive or Pay for Goods and Services
Basics of Export Financing
Did You Know?
Success Tips for Entrepreneurs
The Role of Organizations in Providing Financing
Did You Know?
Key Takeaways
Exercises
9.6 Tips in Your Walkabout Toolkit
Negotiating for Success across Cultures
9.7 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
Although the joint venture gave Q-Cells local knowledge of the Chinese market, it also locked Q-Cells into buying wafers from LDK. These wafers were priced higher than those Q-Cells could source on the spot market. As a result, Q-Cells was paying about 20 cents more for its wafers than competitors were paying. Thus, in the short term, the joint venture hurt Q-Cells. However, the company was able to renegotiate the price it would pay for LDK wafers. To stay cost competitive, Q-Cells has decided to outsource its solar-panel production to contract manufacturer Flextronics International. Q-Cells’ competitors, SunPower Corp. and BP’s solar unit, also have outsourced production to contract manufacturers. The outsourcing has not only saved manufacturing costs but also brought the products physically closer to the Asian market where the greatest demand is currently. This has reduced the costs of shipping, breakage, and inventory carrying. Leonora Walet, “Sun Shines Through for Clean Tech Outsourcing,” Reuters, May 3, 2010, accessed September 9, 2010, http://www.reuters.com/article/idUSTRE6421KL20100503.
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Chapter 9
Exporting, Importing, and Global Sourcing
Chapter 9 Exporting, Importing, and Global Sourcing
What’s in It for Me?
Opening Case: Q-Cells
Opening Case Exercises
9.1 What is Importing and Exporting?
What Do We Mean by Exporting and Importing?
An Entrepreneur’s Import Success Story
Why Do Companies Export?
Benefits of Exporting: Vitrac
Risks of Exporting
Ethics in Action
Specialized Entry Modes: Contractual
Licensing
Franchising
Specialized Entry Modes: Investment
Joint Ventures
Risks of Joint Ventures
Did You Know?
Wholly Owned Subsidiaries
Did You Know?
Cautions When Purchasing an Existing Foreign Enterprise
Did You Know?
Building Long-Term Relationships
Did You Know?
Conclusion
Key Takeaways
Exercises
9.2 Countertrade
What Is Countertrade?
Why Do Companies Engage in Countertrade?
Structures in Countertrade
Disadvantages of Countertrade
Key Takeaways
Exercises
9.3 Global Sourcing and Its Role in Business
What Is Global Sourcing?
Best Practices in Global Sourcing
Judging Quality from Afar: ISO 9000 Certification
Trends in Sourcing: Considering Carbon Costs
Outsourcing versus Global Sourcing
The Hidden Costs of Outsourcing
Managing Outsourced Services
Johns Hopkins Enterprise’s SLA for Accounts Receivable
Entrepreneurial Opportunities from Outsourcing
Key Takeaways
Exercises
9.4 Managing Export and Import
Who Are the Main Actors in Export and Import?
Cooperation for Security
Role of Intermediaries
What’s Needed for Import and Export Transactions?
Did You Know?
Humorous Anecdote
Certificate of Origin as Marketing Tool
Impact of Trade Agreements
Key Takeaways
Exercises
9.5 What Options Do Companies Have for Export and Import Financing?
How Companies Receive or Pay for Goods and Services
Basics of Export Financing
Did You Know?
Success Tips for Entrepreneurs
The Role of Organizations in Providing Financing
Did You Know?
Key Takeaways
Exercises
9.6 Tips in Your Walkabout Toolkit
Negotiating for Success across Cultures
9.7 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
To stay cost competitive, Q-Cells has decided to outsource its solar-panel production to contract manufacturer Flextronics International. Q-Cells’ competitors, SunPower Corp. and BP’s solar unit, also have outsourced production to contract manufacturers. The outsourcing has not only saved manufacturing costs but also brought the products physically closer to the Asian market where the greatest demand is currently. This has reduced the costs of shipping, breakage, and inventory carrying. Leonora Walet, “Sun Shines Through for Clean Tech Outsourcing,” Reuters, May 3, 2010, accessed September 9, 2010, http://www.reuters.com/article/idUSTRE6421KL20100503. Opening Case Exercises
(AACSB: Ethical Reasoning, Multiculturalism, Reflective Thinking, Analytical Skills)
Do you think Q-Cells could have avoided its current financial troubles? What could they have done differently? Do you see import or export opportunities for entrepreneurs or small businesses in the solar industry? What advice would you give them?
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Chapter 9
Exporting, Importing, and Global Sourcing
Chapter 9 Exporting, Importing, and Global Sourcing
What’s in It for Me?
Opening Case: Q-Cells
Opening Case Exercises
9.1 What is Importing and Exporting?
What Do We Mean by Exporting and Importing?
An Entrepreneur’s Import Success Story
Why Do Companies Export?
Benefits of Exporting: Vitrac
Risks of Exporting
Ethics in Action
Specialized Entry Modes: Contractual
Licensing
Franchising
Specialized Entry Modes: Investment
Joint Ventures
Risks of Joint Ventures
Did You Know?
Wholly Owned Subsidiaries
Did You Know?
Cautions When Purchasing an Existing Foreign Enterprise
Did You Know?
Building Long-Term Relationships
Did You Know?
Conclusion
Key Takeaways
Exercises
9.2 Countertrade
What Is Countertrade?
Why Do Companies Engage in Countertrade?
Structures in Countertrade
Disadvantages of Countertrade
Key Takeaways
Exercises
9.3 Global Sourcing and Its Role in Business
What Is Global Sourcing?
Best Practices in Global Sourcing
Judging Quality from Afar: ISO 9000 Certification
Trends in Sourcing: Considering Carbon Costs
Outsourcing versus Global Sourcing
The Hidden Costs of Outsourcing
Managing Outsourced Services
Johns Hopkins Enterprise’s SLA for Accounts Receivable
Entrepreneurial Opportunities from Outsourcing
Key Takeaways
Exercises
9.4 Managing Export and Import
Who Are the Main Actors in Export and Import?
Cooperation for Security
Role of Intermediaries
What’s Needed for Import and Export Transactions?
Did You Know?
Humorous Anecdote
Certificate of Origin as Marketing Tool
Impact of Trade Agreements
Key Takeaways
Exercises
9.5 What Options Do Companies Have for Export and Import Financing?
How Companies Receive or Pay for Goods and Services
Basics of Export Financing
Did You Know?
Success Tips for Entrepreneurs
The Role of Organizations in Providing Financing
Did You Know?
Key Takeaways
Exercises
9.6 Tips in Your Walkabout Toolkit
Negotiating for Success across Cultures
9.7 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
Opening Case Exercises
(AACSB: Ethical Reasoning, Multiculturalism, Reflective Thinking, Analytical Skills)
Do you think Q-Cells could have avoided its current financial troubles? What could they have done differently? Do you see import or export opportunities for entrepreneurs or small businesses in the solar industry? What advice would you give them? 9.1 What is Importing and Exporting? Learning Objectives
Understand what importing and exporting are. Learn why companies export. Explain the main contractual and investment entry modes. What Do We Mean by Exporting and Importing?
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Chapter 9
Exporting, Importing, and Global Sourcing
Chapter 9 Exporting, Importing, and Global Sourcing
What’s in It for Me?
Opening Case: Q-Cells
Opening Case Exercises
9.1 What is Importing and Exporting?
What Do We Mean by Exporting and Importing?
An Entrepreneur’s Import Success Story
Why Do Companies Export?
Benefits of Exporting: Vitrac
Risks of Exporting
Ethics in Action
Specialized Entry Modes: Contractual
Licensing
Franchising
Specialized Entry Modes: Investment
Joint Ventures
Risks of Joint Ventures
Did You Know?
Wholly Owned Subsidiaries
Did You Know?
Cautions When Purchasing an Existing Foreign Enterprise
Did You Know?
Building Long-Term Relationships
Did You Know?
Conclusion
Key Takeaways
Exercises
9.2 Countertrade
What Is Countertrade?
Why Do Companies Engage in Countertrade?
Structures in Countertrade
Disadvantages of Countertrade
Key Takeaways
Exercises
9.3 Global Sourcing and Its Role in Business
What Is Global Sourcing?
Best Practices in Global Sourcing
Judging Quality from Afar: ISO 9000 Certification
Trends in Sourcing: Considering Carbon Costs
Outsourcing versus Global Sourcing
The Hidden Costs of Outsourcing
Managing Outsourced Services
Johns Hopkins Enterprise’s SLA for Accounts Receivable
Entrepreneurial Opportunities from Outsourcing
Key Takeaways
Exercises
9.4 Managing Export and Import
Who Are the Main Actors in Export and Import?
Cooperation for Security
Role of Intermediaries
What’s Needed for Import and Export Transactions?
Did You Know?
Humorous Anecdote
Certificate of Origin as Marketing Tool
Impact of Trade Agreements
Key Takeaways
Exercises
9.5 What Options Do Companies Have for Export and Import Financing?
How Companies Receive or Pay for Goods and Services
Basics of Export Financing
Did You Know?
Success Tips for Entrepreneurs
The Role of Organizations in Providing Financing
Did You Know?
Key Takeaways
Exercises
9.6 Tips in Your Walkabout Toolkit
Negotiating for Success across Cultures
9.7 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
9.1 What is Importing and Exporting? Learning Objectives
Understand what importing and exporting are. Learn why companies export. Explain the main contractual and investment entry modes. What Do We Mean by Exporting and Importing? The history of importing and exporting dates back to the Roman Empire, when European and Asian traders imported and exported goods across the vast lands of Eurasia. Trading along the Silk Road
The land and water trade routes that covered more than four thousand miles and connected the Mediterranean with Asia. flourished during the thirteenth and fourteenth centuries. Jack Goldstone, Why Europe? The Rise of the West in World History 1500–1850 (New York:
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Chapter 9
Exporting, Importing, and Global Sourcing
Chapter 9 Exporting, Importing, and Global Sourcing
What’s in It for Me?
Opening Case: Q-Cells
Opening Case Exercises
9.1 What is Importing and Exporting?
What Do We Mean by Exporting and Importing?
An Entrepreneur’s Import Success Story
Why Do Companies Export?
Benefits of Exporting: Vitrac
Risks of Exporting
Ethics in Action
Specialized Entry Modes: Contractual
Licensing
Franchising
Specialized Entry Modes: Investment
Joint Ventures
Risks of Joint Ventures
Did You Know?
Wholly Owned Subsidiaries
Did You Know?
Cautions When Purchasing an Existing Foreign Enterprise
Did You Know?
Building Long-Term Relationships
Did You Know?
Conclusion
Key Takeaways
Exercises
9.2 Countertrade
What Is Countertrade?
Why Do Companies Engage in Countertrade?
Structures in Countertrade
Disadvantages of Countertrade
Key Takeaways
Exercises
9.3 Global Sourcing and Its Role in Business
What Is Global Sourcing?
Best Practices in Global Sourcing
Judging Quality from Afar: ISO 9000 Certification
Trends in Sourcing: Considering Carbon Costs
Outsourcing versus Global Sourcing
The Hidden Costs of Outsourcing
Managing Outsourced Services
Johns Hopkins Enterprise’s SLA for Accounts Receivable
Entrepreneurial Opportunities from Outsourcing
Key Takeaways
Exercises
9.4 Managing Export and Import
Who Are the Main Actors in Export and Import?
Cooperation for Security
Role of Intermediaries
What’s Needed for Import and Export Transactions?
Did You Know?
Humorous Anecdote
Certificate of Origin as Marketing Tool
Impact of Trade Agreements
Key Takeaways
Exercises
9.5 What Options Do Companies Have for Export and Import Financing?
How Companies Receive or Pay for Goods and Services
Basics of Export Financing
Did You Know?
Success Tips for Entrepreneurs
The Role of Organizations in Providing Financing
Did You Know?
Key Takeaways
Exercises
9.6 Tips in Your Walkabout Toolkit
Negotiating for Success across Cultures
9.7 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
The history of importing and exporting dates back to the Roman Empire, when European and Asian traders imported and exported goods across the vast lands of Eurasia. Trading along the Silk Road
The land and water trade routes that covered more than four thousand miles and connected the Mediterranean with Asia. flourished during the thirteenth and fourteenth centuries. Jack Goldstone, Why Europe? The Rise of the West in World History 1500–1850 (New York: McGraw-Hill, 2008). Caravans laden with imports from China and India came over the desert to Constantinople and Alexandria. From there, Italian ships transported the goods to European ports. J. O. Swahn, The Lore of Spices (Gothenburg, Sweden: Nordbok, 1991), 15–17.
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Chapter 9
Exporting, Importing, and Global Sourcing
Chapter 9 Exporting, Importing, and Global Sourcing
What’s in It for Me?
Opening Case: Q-Cells
Opening Case Exercises
9.1 What is Importing and Exporting?
What Do We Mean by Exporting and Importing?
An Entrepreneur’s Import Success Story
Why Do Companies Export?
Benefits of Exporting: Vitrac
Risks of Exporting
Ethics in Action
Specialized Entry Modes: Contractual
Licensing
Franchising
Specialized Entry Modes: Investment
Joint Ventures
Risks of Joint Ventures
Did You Know?
Wholly Owned Subsidiaries
Did You Know?
Cautions When Purchasing an Existing Foreign Enterprise
Did You Know?
Building Long-Term Relationships
Did You Know?
Conclusion
Key Takeaways
Exercises
9.2 Countertrade
What Is Countertrade?
Why Do Companies Engage in Countertrade?
Structures in Countertrade
Disadvantages of Countertrade
Key Takeaways
Exercises
9.3 Global Sourcing and Its Role in Business
What Is Global Sourcing?
Best Practices in Global Sourcing
Judging Quality from Afar: ISO 9000 Certification
Trends in Sourcing: Considering Carbon Costs
Outsourcing versus Global Sourcing
The Hidden Costs of Outsourcing
Managing Outsourced Services
Johns Hopkins Enterprise’s SLA for Accounts Receivable
Entrepreneurial Opportunities from Outsourcing
Key Takeaways
Exercises
9.4 Managing Export and Import
Who Are the Main Actors in Export and Import?
Cooperation for Security
Role of Intermediaries
What’s Needed for Import and Export Transactions?
Did You Know?
Humorous Anecdote
Certificate of Origin as Marketing Tool
Impact of Trade Agreements
Key Takeaways
Exercises
9.5 What Options Do Companies Have for Export and Import Financing?
How Companies Receive or Pay for Goods and Services
Basics of Export Financing
Did You Know?
Success Tips for Entrepreneurs
The Role of Organizations in Providing Financing
Did You Know?
Key Takeaways
Exercises
9.6 Tips in Your Walkabout Toolkit
Negotiating for Success across Cultures
9.7 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
McGraw-Hill, 2008). Caravans laden with imports from China and India came over the desert to Constantinople and Alexandria. From there, Italian ships transported the goods to European ports. J. O. Swahn, The Lore of Spices (Gothenburg, Sweden: Nordbok, 1991), 15–17. For centuries, importing and exporting has often involved intermediaries, due in part to the long distances traveled and different native languages spoken. The spice trade of the 1400s was no exception. Spices were very much in demand because Europeans had no refrigeration, which meant they had to preserve meat using large amounts of salt or risk eating half-rotten flesh. Spices disguised the otherwise poor flavor of the meat. Europeans also used spices as medicines.
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Exporting, Importing, and Global Sourcing
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Chapter 9
Exporting, Importing, and Global Sourcing
Chapter 9 Exporting, Importing, and Global Sourcing
What’s in It for Me?
Opening Case: Q-Cells
Opening Case Exercises
9.1 What is Importing and Exporting?
What Do We Mean by Exporting and Importing?
An Entrepreneur’s Import Success Story
Why Do Companies Export?
Benefits of Exporting: Vitrac
Risks of Exporting
Ethics in Action
Specialized Entry Modes: Contractual
Licensing
Franchising
Specialized Entry Modes: Investment
Joint Ventures
Risks of Joint Ventures
Did You Know?
Wholly Owned Subsidiaries
Did You Know?
Cautions When Purchasing an Existing Foreign Enterprise
Did You Know?
Building Long-Term Relationships
Did You Know?
Conclusion
Key Takeaways
Exercises
9.2 Countertrade
What Is Countertrade?
Why Do Companies Engage in Countertrade?
Structures in Countertrade
Disadvantages of Countertrade
Key Takeaways
Exercises
9.3 Global Sourcing and Its Role in Business
What Is Global Sourcing?
Best Practices in Global Sourcing
Judging Quality from Afar: ISO 9000 Certification
Trends in Sourcing: Considering Carbon Costs
Outsourcing versus Global Sourcing
The Hidden Costs of Outsourcing
Managing Outsourced Services
Johns Hopkins Enterprise’s SLA for Accounts Receivable
Entrepreneurial Opportunities from Outsourcing
Key Takeaways
Exercises
9.4 Managing Export and Import
Who Are the Main Actors in Export and Import?
Cooperation for Security
Role of Intermediaries
What’s Needed for Import and Export Transactions?
Did You Know?
Humorous Anecdote
Certificate of Origin as Marketing Tool
Impact of Trade Agreements
Key Takeaways
Exercises
9.5 What Options Do Companies Have for Export and Import Financing?
How Companies Receive or Pay for Goods and Services
Basics of Export Financing
Did You Know?
Success Tips for Entrepreneurs
The Role of Organizations in Providing Financing
Did You Know?
Key Takeaways
Exercises
9.6 Tips in Your Walkabout Toolkit
Negotiating for Success across Cultures
9.7 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
For centuries, importing and exporting has often involved intermediaries, due in part to the long distances traveled and different native languages spoken. The spice trade of the 1400s was no exception. Spices were very much in demand because Europeans had no refrigeration, which meant they had to preserve meat using large amounts of salt or risk eating half-rotten flesh. Spices disguised the otherwise poor flavor of the meat. Europeans also used spices as medicines. The European demand for spices gave rise to the spice trade. Antony Wild, The East India Company: Trade and Conquest from 1600 (Guilford, CT: Lyons Press, 2000). The trouble was that spices were difficult to obtain because they grew in jungles half a world away from Europe.
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Exporting, Importing, and Global Sourcing
|
Chapter 9
Exporting, Importing, and Global Sourcing
Chapter 9 Exporting, Importing, and Global Sourcing
What’s in It for Me?
Opening Case: Q-Cells
Opening Case Exercises
9.1 What is Importing and Exporting?
What Do We Mean by Exporting and Importing?
An Entrepreneur’s Import Success Story
Why Do Companies Export?
Benefits of Exporting: Vitrac
Risks of Exporting
Ethics in Action
Specialized Entry Modes: Contractual
Licensing
Franchising
Specialized Entry Modes: Investment
Joint Ventures
Risks of Joint Ventures
Did You Know?
Wholly Owned Subsidiaries
Did You Know?
Cautions When Purchasing an Existing Foreign Enterprise
Did You Know?
Building Long-Term Relationships
Did You Know?
Conclusion
Key Takeaways
Exercises
9.2 Countertrade
What Is Countertrade?
Why Do Companies Engage in Countertrade?
Structures in Countertrade
Disadvantages of Countertrade
Key Takeaways
Exercises
9.3 Global Sourcing and Its Role in Business
What Is Global Sourcing?
Best Practices in Global Sourcing
Judging Quality from Afar: ISO 9000 Certification
Trends in Sourcing: Considering Carbon Costs
Outsourcing versus Global Sourcing
The Hidden Costs of Outsourcing
Managing Outsourced Services
Johns Hopkins Enterprise’s SLA for Accounts Receivable
Entrepreneurial Opportunities from Outsourcing
Key Takeaways
Exercises
9.4 Managing Export and Import
Who Are the Main Actors in Export and Import?
Cooperation for Security
Role of Intermediaries
What’s Needed for Import and Export Transactions?
Did You Know?
Humorous Anecdote
Certificate of Origin as Marketing Tool
Impact of Trade Agreements
Key Takeaways
Exercises
9.5 What Options Do Companies Have for Export and Import Financing?
How Companies Receive or Pay for Goods and Services
Basics of Export Financing
Did You Know?
Success Tips for Entrepreneurs
The Role of Organizations in Providing Financing
Did You Know?
Key Takeaways
Exercises
9.6 Tips in Your Walkabout Toolkit
Negotiating for Success across Cultures
9.7 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
The European demand for spices gave rise to the spice trade. Antony Wild, The East India Company: Trade and Conquest from 1600 (Guilford, CT: Lyons Press, 2000). The trouble was that spices were difficult to obtain because they grew in jungles half a world away from Europe. The overland journey to the spice-rich lands was arduous and involved many middlemen along the way. Each middleman charged a fee and thus raised the price of the spice at each point. By the end of the journey, the price of the spice was inflated 1,000 percent. Jack Turner, Spice: The History of a Temptation (Westminster, MD:
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Exporting, Importing, and Global Sourcing
|
Chapter 9
Exporting, Importing, and Global Sourcing
Chapter 9 Exporting, Importing, and Global Sourcing
What’s in It for Me?
Opening Case: Q-Cells
Opening Case Exercises
9.1 What is Importing and Exporting?
What Do We Mean by Exporting and Importing?
An Entrepreneur’s Import Success Story
Why Do Companies Export?
Benefits of Exporting: Vitrac
Risks of Exporting
Ethics in Action
Specialized Entry Modes: Contractual
Licensing
Franchising
Specialized Entry Modes: Investment
Joint Ventures
Risks of Joint Ventures
Did You Know?
Wholly Owned Subsidiaries
Did You Know?
Cautions When Purchasing an Existing Foreign Enterprise
Did You Know?
Building Long-Term Relationships
Did You Know?
Conclusion
Key Takeaways
Exercises
9.2 Countertrade
What Is Countertrade?
Why Do Companies Engage in Countertrade?
Structures in Countertrade
Disadvantages of Countertrade
Key Takeaways
Exercises
9.3 Global Sourcing and Its Role in Business
What Is Global Sourcing?
Best Practices in Global Sourcing
Judging Quality from Afar: ISO 9000 Certification
Trends in Sourcing: Considering Carbon Costs
Outsourcing versus Global Sourcing
The Hidden Costs of Outsourcing
Managing Outsourced Services
Johns Hopkins Enterprise’s SLA for Accounts Receivable
Entrepreneurial Opportunities from Outsourcing
Key Takeaways
Exercises
9.4 Managing Export and Import
Who Are the Main Actors in Export and Import?
Cooperation for Security
Role of Intermediaries
What’s Needed for Import and Export Transactions?
Did You Know?
Humorous Anecdote
Certificate of Origin as Marketing Tool
Impact of Trade Agreements
Key Takeaways
Exercises
9.5 What Options Do Companies Have for Export and Import Financing?
How Companies Receive or Pay for Goods and Services
Basics of Export Financing
Did You Know?
Success Tips for Entrepreneurs
The Role of Organizations in Providing Financing
Did You Know?
Key Takeaways
Exercises
9.6 Tips in Your Walkabout Toolkit
Negotiating for Success across Cultures
9.7 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
The overland journey to the spice-rich lands was arduous and involved many middlemen along the way. Each middleman charged a fee and thus raised the price of the spice at each point. By the end of the journey, the price of the spice was inflated 1,000 percent. Jack Turner, Spice: The History of a Temptation (Westminster, MD: Alfred A. Knopf, 2004), 5. As explained in Chapter 8 "International Expansion and Global Market Opportunity Assessment", exporting
The sale of products and services in foreign countries that are sourced or made in the home country. is defined as the sale of products and services in foreign countries that are sourced or made in the home country. Importing is the flipside of exporting. Importing
Buying goods and services from foreign sources and bringing them back into the home country.
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http://2012books.lardbucket.org/books/challenges-and-opportunities-in-international-business/s13-exporting-importing-and-global.html
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Exporting, Importing, and Global Sourcing
|
Chapter 9
Exporting, Importing, and Global Sourcing
Chapter 9 Exporting, Importing, and Global Sourcing
What’s in It for Me?
Opening Case: Q-Cells
Opening Case Exercises
9.1 What is Importing and Exporting?
What Do We Mean by Exporting and Importing?
An Entrepreneur’s Import Success Story
Why Do Companies Export?
Benefits of Exporting: Vitrac
Risks of Exporting
Ethics in Action
Specialized Entry Modes: Contractual
Licensing
Franchising
Specialized Entry Modes: Investment
Joint Ventures
Risks of Joint Ventures
Did You Know?
Wholly Owned Subsidiaries
Did You Know?
Cautions When Purchasing an Existing Foreign Enterprise
Did You Know?
Building Long-Term Relationships
Did You Know?
Conclusion
Key Takeaways
Exercises
9.2 Countertrade
What Is Countertrade?
Why Do Companies Engage in Countertrade?
Structures in Countertrade
Disadvantages of Countertrade
Key Takeaways
Exercises
9.3 Global Sourcing and Its Role in Business
What Is Global Sourcing?
Best Practices in Global Sourcing
Judging Quality from Afar: ISO 9000 Certification
Trends in Sourcing: Considering Carbon Costs
Outsourcing versus Global Sourcing
The Hidden Costs of Outsourcing
Managing Outsourced Services
Johns Hopkins Enterprise’s SLA for Accounts Receivable
Entrepreneurial Opportunities from Outsourcing
Key Takeaways
Exercises
9.4 Managing Export and Import
Who Are the Main Actors in Export and Import?
Cooperation for Security
Role of Intermediaries
What’s Needed for Import and Export Transactions?
Did You Know?
Humorous Anecdote
Certificate of Origin as Marketing Tool
Impact of Trade Agreements
Key Takeaways
Exercises
9.5 What Options Do Companies Have for Export and Import Financing?
How Companies Receive or Pay for Goods and Services
Basics of Export Financing
Did You Know?
Success Tips for Entrepreneurs
The Role of Organizations in Providing Financing
Did You Know?
Key Takeaways
Exercises
9.6 Tips in Your Walkabout Toolkit
Negotiating for Success across Cultures
9.7 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
Alfred A. Knopf, 2004), 5. As explained in Chapter 8 "International Expansion and Global Market Opportunity Assessment", exporting
The sale of products and services in foreign countries that are sourced or made in the home country. is defined as the sale of products and services in foreign countries that are sourced or made in the home country. Importing is the flipside of exporting. Importing
Buying goods and services from foreign sources and bringing them back into the home country. Importing is also known as global sourcing. refers to buying goods and services from foreign sources and bringing them back into the home country. Importing is also known as global sourcing, which will be examined in depth in Section 9.4 "Managing Export and Import". An Entrepreneur’s Import Success Story
Selena Cuffe started her wine import company, Heritage Link Brands, in 2005. Importing wine isn’t new, but Cuffe did it with a twist:
| 7,981 | 8,911 |
msmarco_v2.1_doc_00_11359553#18_16192298
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http://2012books.lardbucket.org/books/challenges-and-opportunities-in-international-business/s13-exporting-importing-and-global.html
|
Exporting, Importing, and Global Sourcing
|
Chapter 9
Exporting, Importing, and Global Sourcing
Chapter 9 Exporting, Importing, and Global Sourcing
What’s in It for Me?
Opening Case: Q-Cells
Opening Case Exercises
9.1 What is Importing and Exporting?
What Do We Mean by Exporting and Importing?
An Entrepreneur’s Import Success Story
Why Do Companies Export?
Benefits of Exporting: Vitrac
Risks of Exporting
Ethics in Action
Specialized Entry Modes: Contractual
Licensing
Franchising
Specialized Entry Modes: Investment
Joint Ventures
Risks of Joint Ventures
Did You Know?
Wholly Owned Subsidiaries
Did You Know?
Cautions When Purchasing an Existing Foreign Enterprise
Did You Know?
Building Long-Term Relationships
Did You Know?
Conclusion
Key Takeaways
Exercises
9.2 Countertrade
What Is Countertrade?
Why Do Companies Engage in Countertrade?
Structures in Countertrade
Disadvantages of Countertrade
Key Takeaways
Exercises
9.3 Global Sourcing and Its Role in Business
What Is Global Sourcing?
Best Practices in Global Sourcing
Judging Quality from Afar: ISO 9000 Certification
Trends in Sourcing: Considering Carbon Costs
Outsourcing versus Global Sourcing
The Hidden Costs of Outsourcing
Managing Outsourced Services
Johns Hopkins Enterprise’s SLA for Accounts Receivable
Entrepreneurial Opportunities from Outsourcing
Key Takeaways
Exercises
9.4 Managing Export and Import
Who Are the Main Actors in Export and Import?
Cooperation for Security
Role of Intermediaries
What’s Needed for Import and Export Transactions?
Did You Know?
Humorous Anecdote
Certificate of Origin as Marketing Tool
Impact of Trade Agreements
Key Takeaways
Exercises
9.5 What Options Do Companies Have for Export and Import Financing?
How Companies Receive or Pay for Goods and Services
Basics of Export Financing
Did You Know?
Success Tips for Entrepreneurs
The Role of Organizations in Providing Financing
Did You Know?
Key Takeaways
Exercises
9.6 Tips in Your Walkabout Toolkit
Negotiating for Success across Cultures
9.7 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
Importing is also known as global sourcing. refers to buying goods and services from foreign sources and bringing them back into the home country. Importing is also known as global sourcing, which will be examined in depth in Section 9.4 "Managing Export and Import". An Entrepreneur’s Import Success Story
Selena Cuffe started her wine import company, Heritage Link Brands, in 2005. Importing wine isn’t new, but Cuffe did it with a twist: she focused on importing wine produced by black South Africans. Cuffe got the idea after attending a wine festival in Soweto, where she saw more than five hundred wines from eighty-six producers showcased. Selena Cuffe’s bio, African-American Chamber of Greater Cincinnati / Greater Kentucky, accessed September 4, 2010, http://african-americanchamber.com/view-user-profile/selena-cuffe.html. Cuffe did some market research and learned of the $3 billion wine industry in Africa. She also saw a gap in the existing market related to wine produced by indigenous African vintners and decided to fill it.
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http://2012books.lardbucket.org/books/challenges-and-opportunities-in-international-business/s13-exporting-importing-and-global.html
|
Exporting, Importing, and Global Sourcing
|
Chapter 9
Exporting, Importing, and Global Sourcing
Chapter 9 Exporting, Importing, and Global Sourcing
What’s in It for Me?
Opening Case: Q-Cells
Opening Case Exercises
9.1 What is Importing and Exporting?
What Do We Mean by Exporting and Importing?
An Entrepreneur’s Import Success Story
Why Do Companies Export?
Benefits of Exporting: Vitrac
Risks of Exporting
Ethics in Action
Specialized Entry Modes: Contractual
Licensing
Franchising
Specialized Entry Modes: Investment
Joint Ventures
Risks of Joint Ventures
Did You Know?
Wholly Owned Subsidiaries
Did You Know?
Cautions When Purchasing an Existing Foreign Enterprise
Did You Know?
Building Long-Term Relationships
Did You Know?
Conclusion
Key Takeaways
Exercises
9.2 Countertrade
What Is Countertrade?
Why Do Companies Engage in Countertrade?
Structures in Countertrade
Disadvantages of Countertrade
Key Takeaways
Exercises
9.3 Global Sourcing and Its Role in Business
What Is Global Sourcing?
Best Practices in Global Sourcing
Judging Quality from Afar: ISO 9000 Certification
Trends in Sourcing: Considering Carbon Costs
Outsourcing versus Global Sourcing
The Hidden Costs of Outsourcing
Managing Outsourced Services
Johns Hopkins Enterprise’s SLA for Accounts Receivable
Entrepreneurial Opportunities from Outsourcing
Key Takeaways
Exercises
9.4 Managing Export and Import
Who Are the Main Actors in Export and Import?
Cooperation for Security
Role of Intermediaries
What’s Needed for Import and Export Transactions?
Did You Know?
Humorous Anecdote
Certificate of Origin as Marketing Tool
Impact of Trade Agreements
Key Takeaways
Exercises
9.5 What Options Do Companies Have for Export and Import Financing?
How Companies Receive or Pay for Goods and Services
Basics of Export Financing
Did You Know?
Success Tips for Entrepreneurs
The Role of Organizations in Providing Financing
Did You Know?
Key Takeaways
Exercises
9.6 Tips in Your Walkabout Toolkit
Negotiating for Success across Cultures
9.7 End-of-Chapter Questions and Exercises
Experiential Exercises
Ethical Dilemmas
|
she focused on importing wine produced by black South Africans. Cuffe got the idea after attending a wine festival in Soweto, where she saw more than five hundred wines from eighty-six producers showcased. Selena Cuffe’s bio, African-American Chamber of Greater Cincinnati / Greater Kentucky, accessed September 4, 2010, http://african-americanchamber.com/view-user-profile/selena-cuffe.html. Cuffe did some market research and learned of the $3 billion wine industry in Africa. She also saw a gap in the existing market related to wine produced by indigenous African vintners and decided to fill it. She started her company with $70,000, financed through her savings and credit cards. ( In Section 9.5 "What Options Do Companies Have for Export and Import Financing?", you’ll learn about other sources of financing available to entrepreneurs and small businesses as well as to larger enterprises.) In the first year, sales were only $100,000 but then jumped to $1 million in the second year, when Cuffe sold to more than one thousand restaurants, retailers, and grocery stores. South Afri
| 8,912 | 10,000 |
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http://2012books.lardbucket.org/books/culture-and-media/s10-03-radio-s-impact-on-culture.html
|
Radio’s Impact on Culture
|
7.3
Radio’s Impact on Culture
7.3 Radio’s Impact on Culture
Learning Objectives
A New Kind of Mass Media
War of the Worlds and the Power of Radio
Radio and the Development of Popular Music
Regional Sounds Take Hold
Radio’s Lasting Influences
Radio and Politics
FDR’s Fireside Chats
The Importance of Talk Radio
Repeal of the Fairness Doctrine
The Revitalization of AM
Coast to Coast AM
On-Air Political Influence
Freedom of Speech and Radio Controversies
Making (and Unmaking) a Career out of Controversy
Key Takeaways
Exercises
|
Radio’s Impact on Culture
7.3 Radio’s Impact on Culture
Learning Objectives
Analyze radio as a form of mass media. Describe the effects of radio on the spread of different types of music. Analyze the effects of the Fairness Doctrine on political radio. Formulate opinions on controversial issues in radio. Since its inception, radio’s impact on American culture has been immense. Modern popular culture is unthinkable without the early influence of radio. Entire genres of music that are now taken for granted, such as country and rock, owe their popularity and even existence to early radio programs that publicized new forms. A New Kind of Mass Media
Mass media such as newspapers had been around for years before the existence of radio. In fact, radio was initially considered a kind of disembodied newspaper. Although this idea gave early proponents a useful, familiar way to think about radio, it underestimated radio’s power as a medium.
| 0 | 943 |
msmarco_v2.1_doc_00_11472262#1_16201168
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http://2012books.lardbucket.org/books/culture-and-media/s10-03-radio-s-impact-on-culture.html
|
Radio’s Impact on Culture
|
7.3
Radio’s Impact on Culture
7.3 Radio’s Impact on Culture
Learning Objectives
A New Kind of Mass Media
War of the Worlds and the Power of Radio
Radio and the Development of Popular Music
Regional Sounds Take Hold
Radio’s Lasting Influences
Radio and Politics
FDR’s Fireside Chats
The Importance of Talk Radio
Repeal of the Fairness Doctrine
The Revitalization of AM
Coast to Coast AM
On-Air Political Influence
Freedom of Speech and Radio Controversies
Making (and Unmaking) a Career out of Controversy
Key Takeaways
Exercises
|
Modern popular culture is unthinkable without the early influence of radio. Entire genres of music that are now taken for granted, such as country and rock, owe their popularity and even existence to early radio programs that publicized new forms. A New Kind of Mass Media
Mass media such as newspapers had been around for years before the existence of radio. In fact, radio was initially considered a kind of disembodied newspaper. Although this idea gave early proponents a useful, familiar way to think about radio, it underestimated radio’s power as a medium. Newspapers had the potential to reach a wide audience, but radio had the potential to reach almost everyone. Neither illiteracy nor even a busy schedule impeded radio’s success—one could now perform an activity and listen to the radio at the same time. This unprecedented reach made radio an instrument of social cohesion as it brought together members of different classes and backgrounds to experience the world as a nation. Radio programs reflected this nationwide cultural aspect of radio. Vox Pop, a show originally based on person-in-the-street interviews, was an early attempt to quantify the United States’ growing mass culture.
| 380 | 1,580 |
msmarco_v2.1_doc_00_11472262#2_16203228
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http://2012books.lardbucket.org/books/culture-and-media/s10-03-radio-s-impact-on-culture.html
|
Radio’s Impact on Culture
|
7.3
Radio’s Impact on Culture
7.3 Radio’s Impact on Culture
Learning Objectives
A New Kind of Mass Media
War of the Worlds and the Power of Radio
Radio and the Development of Popular Music
Regional Sounds Take Hold
Radio’s Lasting Influences
Radio and Politics
FDR’s Fireside Chats
The Importance of Talk Radio
Repeal of the Fairness Doctrine
The Revitalization of AM
Coast to Coast AM
On-Air Political Influence
Freedom of Speech and Radio Controversies
Making (and Unmaking) a Career out of Controversy
Key Takeaways
Exercises
|
Newspapers had the potential to reach a wide audience, but radio had the potential to reach almost everyone. Neither illiteracy nor even a busy schedule impeded radio’s success—one could now perform an activity and listen to the radio at the same time. This unprecedented reach made radio an instrument of social cohesion as it brought together members of different classes and backgrounds to experience the world as a nation. Radio programs reflected this nationwide cultural aspect of radio. Vox Pop, a show originally based on person-in-the-street interviews, was an early attempt to quantify the United States’ growing mass culture. Beginning in 1935, the program billed itself as an unrehearsed “cross-section of what the average person really knows” by asking random people an assortment of questions. Many modern television shows still employ this format not only for viewers’ amusement and information but also as an attempt to sum up national culture. Jason Loviglio, “Vox Pop: Network Radio and the Voice of the People” in Radio Reader: Essays in the Cultural History of Radio, ed.
| 944 | 2,035 |
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