MGMK 4710 INTERNATIONAL BUSINESS Chapter 20. INTERNATIONAL Human Resource MANAGEMENT I. INTRODUCTION Human resource management (HRM) refers to the activities that a company takes to staff its organization. International human resource management is more complex and poses challenges to MNEs because of environmental differences among countries. This chapter discusses various aspects of human resource management as they apply to MNEs’ managers.II. STAFFING FRAMEWORKS https://www.youtube.com/watch?v=BjSX3FVAkgw There is a powerful relationship between HRM processes, management productivity, and firm performance. Thus, an effective HRM can be a source of competitive advantage. The function of HRM is to hire the right person in the right job in the right place for the right salary. International HRM involves hiring the right person who can be either a local (from the host country) or an expatriate (from the home country or a third country). The decision of the country of origin of managers will depend on the staffing policy (or framework) adopted. MNEs can adopt either the ethnocentric policy, the polycentric policy, or the geocentric policy. A. Ethnocentric policy: An ethnocentric policy is a staffing framework adopted by MNEs that fill management positions with home-country nationals. This policy has advantages and disadvantages: 1. Advantages: MNEs use the ethnocentric policy: - To maintain command and control consistent with headquarters’ policy - To fill local talent shortcomings by transferring best practices from headquarters - If the MNE has adopted the home replication strategy - Safeguard intellectual property in joint ventures - Counteract high turnover among local employees - Help managers develop a global outlook. 2. Disadvantages: Filling key management position with home-country nationals can: - Lead the company to adopt a narrow perspective in foreign markets - Limit MNEs’ exposure to different and possibly better ways of doing things - Leave local managers and workers unmotivated and demoralized. B. Polycentric policy: A polycentric policy is a staffing framework adopted by MNEs that fill management positions with host-country nationals (locals). This policy has advantages and disadvantages: 1. Advantages: MNEs use the polycentric policy: - To control costs (compared to sending someone to work abroad) - To better deal with host-country nationalism and be seen as better citizen - To develop local management talent and therefore boost employee morale - If the MNE has adopted the multidomestic strategy - Benefit from host-country nationals’ understanding of local stakeholders and environments 2. Disadvantages: Drawbacks of the polycentric policy include: - Potential disengagement of local staff from the parent company - Problems of accountability and allegiance to parent company - Development of gaps between headquarters and local operations C. Geocentric policy: A geocentric ...

1. MGMK 4710
INTERNATIONAL BUSINESS
Chapter 20. INTERNATIONAL Human Resource
MANAGEMENT
I. INTRODUCTION
Human resource management (HRM) refers to the activities that
a company takes to staff its organization. International human
resource management is more complex and poses challenges to
MNEs because of environmental differences among countries.
This chapter discusses various aspects of human resource
management as they apply to MNEs’ managers.II.
STAFFING FRAMEWORKS
https://www.youtube.com/watch?v=BjSX3FVAkgw
There is a powerful relationship between HRM processes,
management productivity, and firm performance. Thus, an
effective HRM can be a source of competitive advantage. The
function of HRM is to hire the right person in the right job in
the right place for the right salary.
International HRM involves hiring the right person who can be
either a local (from the host country) or an expatriate (from the
home country or a third country). The decision of the country of
origin of managers will depend on the staffing policy (or
framework) adopted. MNEs can adopt either the ethnocentric
policy, the polycentric policy, or the geocentric policy.
A. Ethnocentric policy:
An ethnocentric policy is a staffing framework adopted by
MNEs that fill management positions with home-country
nationals. This policy has advantages and disadvantages:
1. Advantages: MNEs use the ethnocentric policy:

2. - To maintain command and control consistent with
headquarters’ policy
- To fill local talent shortcomings by transferring best practices
from headquarters
- If the MNE has adopted the home replication strategy
- Safeguard intellectual property in joint ventures
- Counteract high turnover among local employees
- Help managers develop a global outlook.
2. Disadvantages: Filling key management position with home-
country nationals can:
- Lead the company to adopt a narrow perspective in foreign
markets
- Limit MNEs’ exposure to different and possibly better ways of
doing things
- Leave local managers and workers unmo tivated and
demoralized.
B. Polycentric policy:
A polycentric policy is a staffing framework adopted by MNEs
that fill management positions with host-country nationals
(locals). This policy has advantages and disadvantages:
1. Advantages: MNEs use the polycentric policy:
- To control costs (compared to sending someone to work

3. abroad)
- To better deal with host-country nationalism and be seen as
better citizen
- To develop local management talent and therefore boost
employee morale
- If the MNE has adopted the multidomestic strategy
- Benefit from host-country nationals’ understanding of local
stakeholders and environments
2. Disadvantages: Drawbacks of the polycentric policy include:
- Potential disengagement of local staff from the parent
company
- Problems of accountability and allegiance to parent company
- Development of gaps between headquarters and local
operations
C. Geocentric policy:
A geocentric policy is a staffing framework adopted by MNEs
that fill management positions with the best people regardless
of their nationality. This policy has advantages and
disadvantages
1. Advantages: MNEs use the geocentric policy when:

4. - The MNE has adopted the global strategy or the transnational
strategy
- The MNE needs to generate new ideas through worldwide
learning opportunities
2. Disadvantages: Drawbacks of the geocentric policy include:
- High costs of identifying, developing and keeping world-class
talents
- Having to deal with legal contingencies such as immigration
and workplace regulations
III. MANAGING EXPATRIATES
https://www.youtube.com/watch?v=_0rvZexhViU
An expatriate is a person who is sent temporarily to work in a
country other than his or her country of legal residence.
Expatriates can be home-country nationals or third-country
nationals. Home-country nationals are citizens of the country in
which the company is headquartered. Third-country nationals
are citizens of neither the host country nor the home country.
Key issues involved in managing expatriates include expatriate
selection, expatriate failure, expatriate preparation, expatriate
compensation, and expatriate repatriation.
A. Expatriate selection:
The process of expatriate selection involves screening
executives to find those with the greatest inclination and
highest potential for a foreign assignment. Screening can be
done in terms of technical competence, adaptiveness, and
leadership ability:
1. Technical competence: Technical competence (usually

5. indicated by past performance) is a
significant determinant of success in foreign assignments. The
foreign subsidiary manager must
understand both the technical necessities of a position and also
the unique conditions of foreign
environments such as scaled-down plant and equipment, varying
productivity standards, and less
efficient national infrastructure
2. Adaptiveness: Three types of adaptive characteristics
influence an expatriate’s success when
entering a new culture:
- Self-maintenance: An expatriate needs qualities such as
personal resourcefulness because things do not always go as
planned in a foreign environment
- Satisfactory relationships with host nationals: An expatriate
needs to have the ability to successfully interact with new and
different people (host-country nationals or locals)
- Sensitivity to host environments: An expatriate needs to
effectively interpret how colleagues, customers, and
competitors in the local market see events
3. Leadership ability: Leadership ability is key to an
expatriate’s success since expatriates often assume a greater
breadth and depth of leadership responsibility on a foreign
assignment than they likely would in the home country. To be
successful, an expatriate should demonstrate communication
skills, motivation, self-reliance, courage, risk-taking,
experience, and diplomacy.
B. Expatriate failure:
https://www.youtube.com/watch?v=KgH73elCLvM
Expatriate failure occurs when a manager returns prematurely
home from a foreign
assignment. The causes of expatriate failure include poor job

6. performance, and the inability of
the expatriate and/or a spouse to adapt to the host nation’s
environments. In the 1980s, research
reported that between 16–40% of Americans sent abroad to
developed countries returned early,
while nearly 70% sent to less developed countries returned
home early.
The average cost of an expatriate failure can be as high as three
times the annual domestic
salary plus the cost of relocation. In addition, there are
additional personal, family, and career
costs to expatriate failure. MNEs may try to reduce failure rates
through improved training and
better selection procedures.
C. Expatriate preparation:
A number of issues should be part of a good preparation
program:
1. General country understanding. The most common
predeparture training is an informative
briefing about the way things work in the host country. Topics
generally include things like
politics, economics, features of the workplace, and lifestyle.
2. Cultural sensitivity. Cultural training tries to preempt the
effects of culture shock by helping
employees to take an open mind to the different ideas, attitudes,
beliefs and norms they are likely
to encounter in the host culture
3. Practical skills. This training attempts to familiarize the
expatriate and his or her family with
the routines of life in the host country. Issues such as schooling,

7. socializing, and shopping are
to be clearly addressed.
D. Expatriate compensation
https://www.youtube.com/watch?v=_UEGOv_UAts
The amount and type of compensation needed to entice an
individual to accept a foreign assignment may vary widely by
person and locale. Company practices also vary in terms of
compensation for differences. The most common approach to
expatriate pay is the balance sheet compensation plan, which
aims to develop a salary structure that equalizes purchasing
power across countries so expatriates have the same standard of
living in their foreign assignment as they had at home.
Components of expatriate compensation:
1. Base salary: It usually falls in the same range as the base
salary for the comparable job in the home country and is paid in
either home-country currency or local currency
2. Foreign service premium: This is an extra pay given to
expatriates for working outside the home country. This is to
reward expatriates for living far from family/friends, facing a
new culture, language, & workplace
3. Fringe benefits: Firms typically provide the same level of
medical and retirement benefits abroad as they would at home,
and may expand benefits to deal with local contingencies such
as transferring ill employees or family members to out-of-
country medical facilities
4. Tax differentials: Firms may adjust compensation even higher
in high tax rate countries in order to make sure that expatriates
have an equivalent after-tax income in the new location. In
cases of double taxation, the MNE pays the expatriate’s tax bill
in the host country
5. Allowances: MNEs adjust the total compensation package
with a variety of allowances that help reduce the difficulties the
executive and his family face. These allowances may include:

8. - Cost-of-living allowances: Companies usually pay for
differences in cost-of-living for more expensive locations so
that expatriates can enjoy the same living standards abroad as
they would at home
- Housing allowances: Housing allowances ensure that
expatriates will duplicate their customary quality of housing
- Spouse allowances: A spouse allowance compensates for a
spouse to find work and offsets the loss in income due to a
spouse forsaking his or her job
- Hardship allowances: A hardship allowance is paid to
expatriates assigned to dangerous or especially difficult
locations. Companies may also need to purchase ransom
insurance, provide safety training, pay for home alarm systems
and security guards, and assess their legal liability regarding
employee safety for employees working in remote or dangerous
areas
- Other allowances: MNEs may also include travel allowances
to pay for visits back to the home country, and education
allowances pay for the cost of children’s schooling.
E. Expatriate repatriation
https://www.youtube.com/watch?v=QS5n2R9wtmo
Repatriation is the process of returning the expatriate to his or
her home country once the foreign assignment is completed.
Unfortunately, problems may arise with repatriation:
1. Work readjustment: Returning home can be difficult in a
work sense in that others may have been promoted, the
returning manager is no longer a "big fish in a little pond," and
a job may not be ready upon their return
2. Personal readjustment: Expatriates may experience reverse

9. culture shock when returning home. They may find that they
have to relearn things they took for granted
3. Changes in personal finances: Most expatriates enjoy a rich
lifestyle and returning home with fewer benefits and perks may
be difficult.
There are ways to ease repatriation problems. Effective human
resource practices for soothing re-entry includes placement in
jobs that build on foreign experiences, a reorientation program
and a corporate mentor who looks after expatriates’ interests
while they are abroad.
PAGE
3
BUAD 4710
INTERNATIONAL BUSINESS
Chapter 19. International finance &
AccountingINTERNATIONAL FINANCE
I. INTRODUCTION
MNEs need funds to finance their activities. The focus of the
finance function is to acquire financial resources (financing)
and to allocate those resources (investment) to activities and
projects. Financial resources come from a mix of debt and
equity (capital structure). Financial resources can be raised
through external as well as internal sources of funds. Other
international finance issues of interest are foreign-exchange
risks, and taxation of income earned abroad.
https://www.youtube.com/watch?v=3I-RVVa6mKcII.
EXTERNAL SOURCES OF FUNDS
Companies can raise funds from global capital markets and/or
offshore financial centers:

10. A.
Global capital markets
Global capital markets include Eurocurrency market,
international bonds, and Euro equity market:
1. Eurocurrency Market
A Eurocurrency is any currency banked outside its country of
origin. There are four major sources of Eurocurrencies: foreign
governments or individuals who want to hold dollars outside the
U.S., MNEs that have excessive cash, European banks with
excessive currency, and countries with large balance-of-trade
surpluses.
A Eurocurrency market is where MNEs can raise
Eurocurrencies. This market is a wholesale market, with very
large transactions, typically consisting of short to medium term
loans. As a source of funding, Eurocurrency market is more
attractive because of low interest rates. The global financial
crisis forced central banks all over the world to drop interest
rates to stimulate economic growth.
2. International Bonds
Many companies have active bond markets available to
domestic and foreign investors. There are two types of
international bonds: foreign bonds, and Eurobonds. A foreign
Bond is a title (bond) sold outside the country of the borrower,
but denominated in the currency of the country of issue. A
Eurobond is a title sold in a currency other than that of the
country of origin.
3. Euro equity Market.
In the Euro equity market, MNEs issue stocks on one or more
foreign exchanges. They therefore take ownership positions in
return for shares of stock.
B. Offshore financial centers

11. MNEs can raise debt or equity funds offshore. Offshore
financingis the provision of financial services by banks and
other agents to nonresidents of a country. Offshore financial
centers (OFC) are cities or countries that provide large amounts
of funds in currencies other than their own and are used as
locations in which to raise and accumulate cash. Generally,
OFCs provide a more flexible and less expensive source of
funding for MNEs. Also, they exhibit several characteristics,
including a large foreign-currency (Eurocurrency) market for
deposits and loans, a large net supplier of funds to the world
financial markets, economic and political stability, an efficient
and experienced financial community, good communications
and supportive services, and an official regulatory climate that
is favorable to the financial industry.
Offshore financial centers (OFC) can be operational centers,
with extensive banking activities involving short-term financial
transactions (e.g., London). They can also be booking center s,
with little actual banking activities and where transactions are
recorded to take advantage of secrecy laws and/or low or no tax
rates (e.g., Cayman Islands). Booking centers are often seen as
“tax haven” centers. III.
INTERNAL SOURCES OF FUNDS
Internal sources of funds include loans, investment through
equity capital, interfirm receivables and payables and dividends.
Intrafirm financial links become extremely important as MNEs
grow in size and complexity. Funds can flow from parent to
subsidiary, subsidiary to parent and/or subsidiary to subsidiary.
Goods, services, and funds all can move within an MNE, thus
creating receivables and payables. Entities may choose to pay
quickly (a leading strategy) or to defer payment (a lagging
strategy).

12. Another source of internal funds is transfer pricing (prices
of transactions between related entities). Transfer prices can be
used to adjust the size of a payment. One entity (e.g. a
subsidiary or parent company) can sell parts at below or above
market prices to finance or get funds from another entity within
an MNE.IV. FOREIGN-EXCHANGE RISK MANAGEMENT
MNEs’ financial strategy is to protect against the foreign-
exchange risk (or exposure) of investing abroad. Strategies to
protect against such risks include the internal movement of
funds, and the use of foreign-exchange instruments such as
options and forward contracts.
A.
Types of Exposure
There are three types of foreign-exchange exposure:
1. Translation Exposure: It is the foreign-exchange risk that
occurs because a parent firm must
translate foreign-currency financial statements into the
reporting currency of the parent, i.e., the
value of the exposed asset/liability changes as the exchange rate
varies.
2. Transaction Exposure: It is the foreign-exchange risk that
arises because a firm has
outstanding accounts receivable or payable that are denominated
in a foreign currency, i.e., the
receivable or payable changes in value as the relevant exchange
rate changes.
3. Economic Exposure: It is the foreign-exchange risk that
arises from effects of exchange-rate
changes on future cash flows, the sourcing of parts and
components, the location of

13. investments, and the competitive position of the company in
different markets.
B.
Strategies for managing foreign-exchange risks
MNEs can devise a number of strategies to protect assets from
exchange-rate risk. MNEs can hedge their position by adopting
operational and/or financial strategies, each with cost/benefit
and operational implications.
1. Operational Hedging Strategies. Firms may choose to balance
local assets with local debt
by borrowing funds locally, because that helps avoid the
foreign-exchange risk associated with
borrowing in a foreign currency. They may also choose to take
advantage of leads and lags for
interfirm payments. A lead strategy means collecting foreign-
currency receivables before they
are due when the currency is expected to weaken, or paying
foreign-currency payables before
they are due when a currency is expected to strengthen. A lag
strategy means delaying
collection of foreign-currency receivables if the currency is
expected to strengthen, or delaying
payment of foreign-currency payables when the currency is
expected to weaken.
2. Using Derivatives to Hedge Foreign-Exchange Risk. An MNE
can also hedge exposure
through forward contracts and options, which establish fixed
exchange rates for future
transactions and currency options, i.e., derivatives, which
assure access to a foreign currency at
a fixed exchange rate for a specific period of time. A foreign-
currency option is more flexible
than a forward contract because it gives the purchaser the right,
but does not impose the

14. obligation, to buy or sell a certain amount of foreign currency at
a set exchange rate within a
specified amount of time.
V.
TAXATION OF FOREIGN-SOURCE INCOME
https://www.youtube.com/watch?v=TLSYwkWCIzA
Taxes can profoundly affect profitability and cash flow,
especially in international business. Taxation has a strong
impact on several choices, including location of operations,
method of financing (internal or external sourcing, debt or
equity), and method of setting transfer prices.
A.
International Tax Practices
1. Differences in Tax Practices: Countries differ in terms of the
types of taxes they have, the tax rates applied to income, the
determination of taxable income, and the treatment of foreign
income. A major factor that affects international tax practices is
differences in generally accepted accounting principles
(GAAP). Variations among countries in GAAP can lead to
differences in the determination of taxable income.
2. Two Approaches to Corporate Taxation:
- Separate Entity Approach. Each separate entity, company, or
individual is taxed when it receives income.
- Integrated System Approach. Avoids double taxation. When
shareholders report the dividends in their taxable income, they
also get a
credit for taxes paid on that income by the company that issued
the dividend.
B.
Taxing Branches and Subsidiaries
To illustrate the complexities of taxing foreign-source income,

15. it is useful to examine how U.S.-based companies tax earnings
from a foreign branch and a foreign subsidiary.
1. The Foreign Branch. Since a foreign branch is an extension
of the parent company, any foreign branch income (or loss) is
directly included in the parent’s taxable income.
2. The Foreign Subsidiary. A foreign corporation is an
independent legal entity set up in a country according to the
laws of incorporation of that country. When an MNE purchases
or establishes such an entity, it is called a subsidiary.
Subsidiary income is either taxable to the parent or tax deferred
(not taxed until it is submitted as a dividend to the parent).C.
Transfer Prices
Transfer pricing applies to transactions between related enti ties
and is not usually an arm’s length price (price between two
unrelated entities). MNEs establish arbitrary transfer
prices primarily because of differences in taxation between
countries. MNEs manipulate transfer prices in order to minimize
tax liability.D. Double Taxation and Tax Credit
In the United States, the IRS allows a tax credit for corporate
income tax for tax that U.S. firms pay to another country in
order to avoid double taxation. A tax credit is a dollar -for-
dollar reduction of tax liability and must coincide with the
recognition of income. Some countries have sign tax treaties to
eliminate double taxation or to provide remedies when it occurs.
International Accounting
https://www.youtube.com/watch?v=pWTjllNg7qE
I. INTRODUCTION
Accounting is defined as a service activity whose function is to
provide quantitative information which will be useful in making
strategic decisions and reasoned choices among alternative

16. courses of action. The accounting and finance functions are
closely related as the data generated by accountants
(controllers) is primarily financial in nature.
II.
INTERNATIONAL DIFFERENCES IN ACCOUNTING
Accounting origins and traditions have resulted in financial
statements that are presented differently both in form (format)
and in content (substance). This presents challenges for MNEs
as they must produce financial statements using the standards of
their host countries. This poses challenges for MNEs as they
will have to consolidate all their statements.
A.
Users of accounting information
In the United States, financial accounting standards are
established by the Financial Accounting Standards Board
(FASB). The FASB states that the users of financial information
provided by accounting are potential investors, lenders, and
other creditors. For worldwide use, financial accounting
standards are set by the International Accounting Standards
Board (IASB). For the IASB, users of accounting information
are investors, employees, lenders, suppliers and other trade
creditors, customers, governments and their agencies, and the
public.
B.
Factors in International Accounting Practices
Equity markets are influential on accounting standards in the
U.S. and the U.K. Banks play a key role in Switzerland and
Germany. Taxation is a major influence in France and Japan.
International accounting firms have a significant impact.
Differences in accounting practices around the world have
resulted in a move toward convergence —the process of bringing
different generally accepted accounting principles into line with

17. IFRS issued by the IASB.
C.
Cultural Differences in Accounting
Culture impacts measurement practices (how firms value assets)
and disclosure practices (how and what information firms
provide and discuss). The secrecy-transparency/optimism-
conservatism matrix illustrates the impact of culture on
accounting practices. Secrecy and transparency refer to the
degree to which corporations disclose information to the public.
Optimismand conservatism refer to the degree of caution that
companies exhibit in valuing assets and recognizing income.
Anglo-Saxon countries such as the U.K. and the U.S. have
accounting systems that tend to be transparent and optimistic,
while countries such as Germany, Japan and Switzerland, among
others, tend to be secretive and conservative.
D.
Classifying Accounting Systems
Accounting systems can be classified according to common
characteristics:
1. From Macro-Uniform to Micro-Based Systems. Some
countries’ accounting standards are based on macro-uniform
accounting systems that are shaped more by government
influences (strong, codified, tax-based legal systems). Other
countries’ standards are shaped by micro-based accounting
systems that rely on pragmatic business practices.
2. Differences in Financial Statements: Financial statements
differ from one country to
another because of four key factors:
- Language Differences. English tends to be the first choice of
companies choosing to raise capital abroad. Many companies
provide their financial statements in different languages.

18. - Currency Differences. MNEs prepare their
financial statements in different currencies.
- Differences in Types of Statements. Financial statement
format can be confusing for a reader when accustomed to a
different format. The use of accounting footnotes also differs
greatly.
- GAAP Usage Differences. A major hurdle in raising capital in
different countries is dealing with widely varying accounting
and disclosure requirements.
E. Mutual Recognition versus Reconciliation
There are two approaches to dealing with accounting and
reporting differences. In mutual recognition, a foreign registrant
need only provide information prepared according to the
GAAPsof the home country. In reconciliation to the local
GAAPs, a foreign registrant reconciles its home-country
financial statement with the local GAAPs), and recasting
financial statements in terms of local GAAPs.
F.
Efforts toward global convergence in accounting standards
Forces encouraging the harmonization of national accounting
standards include: investors, global integration of capital
markets, the need for MNEs to raise foreign capital, regional
political and economic harmonization, MNEs’ desire to reduce
their accounting and reporting costs, and convergence efforts of
standard-setting bodies such as the International Accounting
Standards Committee (IASC) which issued a set of International
Accounting Standards (IAS).
III.
TRANSACTIONS IN FOREIGN CURRENCIES

19. In addition to minimizing or eliminating foreign-exchange risk,
firms must concern themselves with the proper recording and
subsequent accounting of transactions resulting from the
purchase or sale of products and the borrowing or lending of
foreign currency.
1. Recording Transactions: When accounting for assets,
liabilities, revenues and expenses, foreign-currency receivables
and payables result in gains and losses whenever the relevant
exchange rate changes. Such transaction gains and losses must
be included on the income statement in the accounting period in
which they arise.
2. Correct Procedures for U.S. Companies: The Financial
Accounting Standards Board
Statement (FASB) requires U.S. firms to report foreign-
currency transactions at the original
spot exchange rate in effect on the initial transaction date and to
report receivables and
payables at the subsequent balance sheet date at the spot
exchange rate on those dates. Any
foreign-exchange gains and losses associated with carrying
receivables or payables are taken
directly to the income statement.
IV.
TRANSLATING FOREIGN-CURRENCY FINANCIAL
STATEMENTS
An MNE must eventually develop one set of financial
statements in its home-country currency. Translation involves
the process of restating foreign-currency financial statements.
Consolidation is the process of combining the translated
financial statements of a parent and its subsidiaries into a single
set. In the U.S., translation is a two-step process: first,
statements are recast according to U.S. GAAPs; then foreign
currency amounts are translated into U.S. dollars.

20. There are two translation methods, the current-rate method, and
the temporal method. The
method the firm chooses depends on the functional currency of
the foreign operation, which is
the currency of the primary economic environment in which the
entity operates.
1. Current-Rate method: If the functional currency is that of the
local operating environment, the firm must use the current-rate
method, which provides that all assets and liabilities be
translated at the current exchange rate (the spot exchange rate
on the balance sheet date). All income statement items are
translated at the average exchange rate, and owner’s equity is
translated at the rates in effect when the firm issued capital
stock and accumulated retained earnings.
2. Temporal method: If the functional currency is the parent’s
currency, then the firm must use the temporal method, which
provides that only monetary assets such as cash, marketable
securities and receivables and liabilities be translated at the
current exchange rate. Inventory and property, plant and
equipment are all translated at the historical exchange rates in
effect when the assets were acquired. In general, income
statement accounts are translated at the average exchange rate,
but cost of goods sold and depreciation expenses are reported at
the appropriate historical exchange rates (not an average for the
period).
PAGE
6
MGMK 4710
INTERNATIONAL BUSINESS
Chapter 18. Global Manufacturing and Supply Chain
Management
https://www.youtube.com/watch?v=SRq-U1m2dwg Subway

21. www.youtube.com/watch?v=m2kJgpNWCrU Nike
I. INTRODUCTION
https://www.youtube.com/watch?v=yZC4neLax5o Walmart
Supply Chain
The supply chain function encompasses the sourcing and
coordination of materials, information and funds from the initial
raw material supplier to the final customer. It concerns the
management of the value-added process from the supplier to the
customer. An important part of the supply chain function is
logistics (akamaterials management), which encompasses the
planning, implementation and control of the efficient and
effective flow and storage of products and information from the
point of origin to the final customer.
II.
MANUFACTURING CONFIGURATION
https://www.youtube.com/watch?v=ltOf4-1jq0I Location of
manufacturing
Where to locate manufacturing facilities is crucial to MNEs’
success. The factors that play a
key role in manufacturing configuration strategies include
location-specific advantage, firm
-specific assets, and internalization (in-house manufacturing as
opposed to outsourcing). To
develop manufacturing strategies, MNEs need to consider three
basic configurations:

22. a.
Centralized Manufacturing Strategy. Centralized manufacturing
in a single country (basically a manufacture and export
strategy).
b.
Regional Manufacturing Strategy. Regionalized manufacturing
in the specific regions served (a regionalized marketing and
manufacturing approach).
c.
Multidomestic Manufacturing Strategy. Local manufacturing in
each country market served (multidomestic marketing and
manufacturing approach) using country-specific manufacturing
facilities to meet local demand.
Once an MNE has adopted a specific manufacturing
configuration, it needs to then
coordinate and control its manufacturing facilities. Coordination
represents the linking or
integrating of all manufacturing facilities around the world into
a unified system. Control
embraces systems, such as organizational structure and
performance measurement, which are
designed to help ensure strategies are implemented, monitored,
and revised, when appropriate.
III.
INFORMATION TECHNOLOGY AND SUPPLY CHAIN
MANAGEMENT
https://www.youtube.com/watch?v=s5FXLUHsKOE
Global supply chain management concerns the sourcing and
coordination of materials, information and funds from the initial
raw material supplier to the final customer. The key to making a
global information system work effectively is a good
information system. MNEs now rely more and more on
information technology (IT) for an effective management of
their supply chain. IT helps supply chain management in several

23. ways:
1. Electronic Data Interchange (EDI). It refers to the electronic
movement of money and information via computers and
telecommunications equipment in a way that effectively links
suppliers, customers & third-party intermediaries, & ultimately
enhances customer value.
2. Enterprise Resource Planning/Materials Resource Planning:
It refers to the use of software to link information flows from
different parts of a business and from different parts of the
world. An extension of ERP is material requirements planning
(MRP), a computerized information system that addresses
complex inventory situations and calculates the demand for
parts from the production schedules of the companies that use
the parts.
3. Radio Frequency ID (RFID): It is a system that labels
products with an electronic tag that stores and transmits
information regarding the product’s origin, destination, and
quantity.
4. E-Commerce: It refers to the use of the Internet to link
suppliers with firms and firms with customers.Linkages are
done through intranets andextranets. An intranet can be used to
help automate and speed up internal processes in a company.
The term extranet refers to using the Internet to link a company
with external constituencies. Private Technology Exchange
(PTX) refers to an online collaboration model that brings
manufacturers, distributors, resellers, and customers together to
execute trade transactions and to share information regarding
demand, production, availability, etc.IV.
QUALITY
Quality refers to product features that meet or exceed
customers’ expectations. More
specifically, it incorporates conformance to specifications,
value enhancement, fitness for use, after-sales support, and
psychological impressions. There are several approaches to
quality:

24. A. Zero Defects versus Acceptable Quality Level
Acceptable quality level (AQL) is a premise that allows for a
tolerable (negotiable) level of defects that can be corrected
through repair and service warranties (U.S.). Zero defects
describe the refusal to tolerate defects of any kind (Japan).
B.
Total Quality Management (TQM)
Total quality management (TQM) stresses three principles: (i)
customer satisfaction, (ii) employee involvement, and (iii)
continuous improvements at every level of the organization. The
goal of TQM is to eliminate all defects. It focuses on
benchmarking world-class standards, product and service
design, process design, and purchasing practices. Kaizen
represents the Japanese process of continuous improvement,
which requires identifying problems and enlisting employees at
all levels of the organization to help eliminate the problems.
C. Six Sigma
Six Sigma is a highly focused quality-control system designed
to scrutinize a firm’s entire production system to eliminate
defects, slash product cycle time, and cut costs across the board.
D. Levels of Quality Standards
Quality standards have three levels: general level, industry-
specific level, and firm level.
1.
General-Level Standards. The International Organization for
Standardization (ISO) was created to facilitate the international

25. coordination and unification of industrial standards. It
represents a network of standard setters in 158 countries around
the world.
2.
Industry-Specific Standards. Industry-specific standards
represent the quality-related requirements expected of suppliers.
3.
Firm-Specific Standards. Individual companies also set their
own standards for suppliers to meet if they are going to
continue to supply them.
V. SOURCING
Sourcingis the path a firm pursues in obtaining materials,
components and final products either in-house (vertical
integration) or outside of the firm (outsourcing), and from
either home country or foreign locations (offshoring). Global
sourcing represents the first step in the process of global
materials management.
A. Global Sourcing.
https://www.youtube.com/watch?v=ykYgVz75JGc&t=119s
Sourcing in the home country avoids such problems as lengthy
supply chains and foreign currency risk. However, there are
instances where domestic sources are too expensive.
1.
Global Sourcing: Benefits of global sourcing include cost
reduction, improved quality, increased exposure to worldwide
technology, establishing a presence in a foreign market.
2.
Problems with Global Sourcing. Quality, safety, and other
concerns come with global sourcing. Countries with the
cheapest products often lack adequate regulations, enforcement,
and logistical infrastructure, leaving it up to the purchasing
firms to ensure quality and safety.
B. Major Sourcing Configurations

26. 1. Vertical Integration. The MNE owns the entire supplier
network, or at least some part of it.
2. Industrial Clusters. Buyers and suppliers locate in close
proximity to facilitate doing business. A good example is the
Japanese Keiretsu. A Keiretsu is a group of independent firms
that work together to manage the flow of goods & services
along the value chain.
C. The Make or Buy Decision
https://www.youtube.com/watch?v=ofVM5XYCwV0
In determining whether to make (vertical integration) or buy
(outsourcing), MNEs should focus on making those parts and
performing those processes critical to a product and in which
they have a distinctive advantage. Other activities should be
potentially be outsourced.
D. The Purchasing Function
The global purchasing function normally progresses in four
phases: (1) Domestic purchasing only, (2) Foreign buying based
on need, (3) Foreign buying as a part of procurement strategy,
and then (4) Integration of global procurement strategy. The last
phase is reached when a firm realizes the benefits of purchasing
on a global basis.
VI.
INVENTORY MANAGEMENT
https://www.youtube.com/watch?v=sl5zEPRkp0U
Whether a firm decides to source from inside or outside the
company or from domestic or foreign suppliers, it needs to
manage the flow and storage of inventory. However, the
distance, time, and uncertainty associated with foreign sourcing

27. can complicate the inventory process.
A. Lean Manufacturing and Just-in-Time Systems
Lean manufacturing is a productive system that focuses on
optimizing processes and reducing waste. One method of
reducing costs is lowering inventory levels. A just-in-time (JIT)
manufacturing system reduces inventory costs by having raw
materials and components delivered just as they are needed in
the production process. JIT typically implies sole sourcing for
specific parts in order to get the supplier to commit to the
stringent delivery and quality requirements inherent in the
system. A company’s inventory management strategy
determines the desired frequency and size of shipments and
whether JIT will be used.
The risk of using JIT in foreign sourcing is supply interruptions
that can cause major production problems (stoppage). This risk
can be the result of the complications involved in international
transportation. Complications include documentation, choice of
carrier (air, land or ocean), and the decision of whether to
outsource the foreign sourcing function to a third-party
intermediary or to establish internal transportation capabilities.
B. Foreign Trade Zones
Foreign trade zones (FTZs) are government-designated areas in
which goods can be stored, inspected, and/or manufactured
without being subject to formal customs procedures until they
actually leave the zones. FTZs often serve as a site to store
inputs until they are needed at a particular production site.
PAGE
1

28. MGMK 4710
INTERNATIONAL BUSINESS
Chapter 17. Global marketing
I. INTRODUCTION
Although basic marketing principles may be the same in both
domestic and foreign markets, differences often require those
principles be applied in different ways. This raises the issue of
whether to standardize or adapt marketing strategies.
https://www.youtube.com/watch?v=4va_DtpAMHo
https://www.youtube.com/watch?v=U48nmKPJclAII.
MARKETING STRATEGIES
Marketing strategies are often known as the 4Ps (product,
pricing, promotion, place). In international business, a fifth
variable, branding, is added. Overall international marketing
strategies should depend on the company’s marketing
orientation and target market.
A.
Marketing Orientations
1. Production Orientation. A production orientation indicates a
firm is more concerned about production factors such as
efficiency, quality, and/or capacity than it is about marketing.
Firms assume customers want lower prices and/or higher
quality.
2. Sales Orientation. A sales orientation indicates a firm
assumes global customers are reasonably similar and it can
therefore sell abroad the same product it sells at home. A firm
will be aided in this approach when there is also a spillover of
product information from one country to another.

29. 3. Customer Orientation. A customer orientation indicates a
firm is sensitive to customer
Needs. Firms therefore try to identify & serve the specific needs
of the customer.
4. Strategic Marketing Orientation. A strategic marketing
orientation indicates a firm is
committed to continuously serving foreign target markets and to
making incremental product
adaptations to satisfy local customers.
5. Societal Marketing Orientation. The societal marketing
orientation indicates a firm recognizes it must do business in a
way that preserves or enhances the well-being of all its
stakeholders, i.e., as it serves the needs of its customers it must
also address the environmental, health, social, and work-related
problems that may arise when or marketing its products abroad.
B.
Segmenting and Targeting Markets
The most common way of identifying market segments within a
country is through
demographic factors such as income, age, gender, ethnicity, and
religion.
1. Approaches to Segmentation. When targeting and segmenting
markets, firms have three
basic alternatives including segmenting by country, by global
segment, or by multiple criteria.
- By Country. A firm may choose to segment its market by
selecting a single country to enter.
There is little opportunity of gaining economies through
standardization with this approach.
- By Global Segment. A company may identify some segments

30. globally, such as segments
based primarily on income. Thus, each country may have some
people within the same segment.
- By Multiple Criteria. A company can combine these
approaches by looking first at countries
as segments, second by identifying segments within each
country, and third by comparing these
within-country segments with those of other countries.
2. Mass Markets versus Niche Markets. Companies must decide
when introducing their
products abroad to enter it with a mass market or niche market
strategy. Because the percentage
of people that fall into any segment may vary substantially
among countries, a niche market in
one country may be a mass market in another.
III.
PRODUCT POLICIES
A key product policy consideration is whether to standardize
product offerings or to adapt to
local requirements. Another factor to consider is the product
mix to market in a foreign market.
A.
Product Adaptation
Usually firms will choose to standardize basic components
while adapting critical end-use characteristics. The primary
reasons behind the tendency of firms to adapt their products to
meet local conditions are legal, cultural, and/or economic in
nature.
1.Legal Considerations. Explicit product-related legal
requirements vary widely by country but are usually meant to
protect customers, the environment, or both.

31. - Packaging Requirements. One of the more cumbersome
product alterations for companies is adjusting to different laws
on packaging and warning labels.
- Environmental-Protection Regulations. Some countries
prohibit certain types of containers, others restrict the volume
of packaging materials, and some have mandates on container
reusability.
- Indirect Legal Considerations. Marketing managers must also
watch for indirect legal
requirements such as higher taxes on heavy automobiles that
may shift demand to lighter ones.
- Issues of Standardization. A recurring issue is the need to
arrive at international product standards and eliminate some of
the wasteful product requirements for alterations among
countries.
2. Cultural Considerations. Cultural factors affecting demand
may or may not be easily discerned. While religious beliefs may
offer clear guidelines regarding product acceptability, other
factors such as color, design, and artistic preferences may be
much subtler.
3. Economic Considerations. Levels of income, differences in
income distribution, and the extent and condition of available
infrastructure can all affect demand for a particular product.
Often, price-reducing alterations are required if a firm wishes to
participate in a particular country market. Poor infrastructure
may also require alterations as companies must deal with rough
terrain, etc.
B. The Product Line: Extent and Mix
Although most firms produce multiple products, it is doubtful
that all of these products could generate sufficient sales in a

32. given foreign market to justify the cost of penetrating that
market.
1.
Sales and Cost Considerations. When making product line
decisions, managers must consider the cost and effect on sales
of offering just one or a few products internationally as opposed
to an entire family of products. Whereas narrowing a product
line allows for the concentration of effort and resources, the
broadening of a product line may lead to distribution
economies.
2.
Product Life Cycle Considerations. Differences will likely exist
across countries in both the shape and the length of a product’s
life cycle. A product facing declining sales in one country may
have growing or sustained sales in another.IV.
PRICING STRATEGIES
Price represents the value asked for a product. In the
international arena, the determination of the prices to adopt can
be extremely complex, for a number of reasons:
A. Government Intervention.
One way or another, every country has laws that either directly
or indirectly affect prices. Price controls may set either
maximum or minimum prices for designated products. The WTO
permits a government to establish restrictions against any
imports that enter the country at a price below the price charged
to customers in the exporting country (dumping). However, a
firm may charge different prices in different countries because
of competitive and demand factors (e.g., a firm may choose to
exclude fixed costs in the price calculation of products exported
to developing countries in order to be price competitive in those
markets.)

33. B. Market Diversity.
Country variations lead to many ways of segmenting the market.
Consumers in some
countries simply like certain products more and are willing to
pay more for them. Depending
upon market conditions, a firm may adopt any of the following
pricing strategies:
- A skimming strategy sets a high price for a new product,
which is aimed at market innovators.
Over time, the price will be progressively lowered in response
to demand and supply conditions,
i.e., the presence of additional competitors.
- A penetration strategy sets an aggressively low price to attract
a maximum number of
customers (some of whom may switch from other brands) and to
discourage competition.
- A simple cost-plus strategy sets the price at a desired margin
over cost. Cash versus credit
buying also affects demand.
C. Export Price Escalation.
In foreign markets, lengthening the channels or adding other
expenses somewhere within the
network will further increase the delivered price of the product.
Common reasons for price
escalation in export sales are tariffs and the often-greater
distance to the market. To compete in
export markets, a firm may have to sell its products to
intermediaries at a reduced price in order
to lessen the amount of price escalation.
D. Fluctuations in Currency Value.
Pricing in the case of highly volatile currencies can be
extremely difficult, especially under

34. conditions of high inflation. This may result in the need for
frequent price adjustments. Further,
currency fluctuations also affect pricing decisions for any
product that faces foreign competition.
When a currency is strong, producers may have to accept a
lower profit margin if they wish to be
price competitive.
E. Fixed versus Variable Pricing.
MNEs often negotiate export prices, while small companies
frequently give price
concessions too quickly. This limits small companies’ ability to
negotiate on a range of
marketing factors that affect their costs such as discounts for
quantity or repeat orders, deadlines
that increase production or transportation costs, credit and
payment terms, supply of promotional
materials, or training of sales personnel or customers.
The extent to which firms set prices at the retail level varies
substantially by country. There
is also substantial variation in whether, where, and for what
products customers prefer or expect
to negotiate an agreed-upon price. Local laws and customs may
limit firms’ abilities to set prices.
In many cultures, prices are simply the starting point in the
bargaining process. V.
PROMOTION STRATEGIES
Promotion consists of the messages intended to help sell a
product or service. The types and direction of messages and the
method of presentation may be extremely diverse, depending on
the company, product, and country of operation.
A. The Push-Pull Mix

35. Promotion strategies may be categorized as push (uses direct
selling techniques) or pull (which relies on mass media). Most
firms use a combination of both. The factors that will determine
the mix of push and pull strategies include the type of
distribution system, the cost and availability of media, customer
attitudes toward sources of information, and the relative price
of the product as compared to disposable income. Push is more
likely when self service is not predominant, advertising is
restricted, and product price is a high portion of income.
B.Some Problems in International Promotion
One key question is whether to standardize promotion.
Standardization can result in cost
savings and in better quality of advertising by preventing the
confusion associated with different
national messages. For certain reasons, it is difficult to
completely standardize promotion:
1. Translation. When a media transmission spans multiple
countries, there is no opportunity to translate a message into
other local languages. When messages are translated, numerous
difficulties can be encountered with both language (content and
meaning) and images.
2. Legality. What is deemed to be legal advertising in one
country may in fact be illegal elsewhere. Differences result
mainly from varying national views on consumer protection,
competitive protection, standards of morality, and nationalism.
3. Message Needs. An advertising theme may not be appropriate
everywhere because of national differences in how well
consumers know a product, how they perceive it, who makes the
purchasing decision, and what features are most important.
VI.
BRANDING STRATEGIES

36. A brand is a name, term, sign, symbol and/or design that is
intended to identify a product or product line and differentiate it
in the marketplace. MNEs need to decide about whether to
adopt either a worldwide brand or a variety of brands for
different local markets.
1. Advantages of Worldwide Brands. A global image assists in
the marketing to international
travelers and creates an international identity as a global player.
2. Problems with Uniform Brands. A number of problems are
inherent in trying to use uniform
brands internationally:
- Language. Both the translation and pronunciation of brand
names pose potential problems in
many markets. Often the problems are obvious, but other times
they are quite subtle, yet critical.
In addition, brand symbols (shapes and colors) are culturally
sensitive in many societies.
- Brand Acquisition. When an MNE acquires a (foreign) firm, it
automatically acquires its
brands. In some cases, those brands will be kept; in others they
are folded into a larger brand in
order to capture economies of scale & promote regional/global
brand recognition.
- Country-of-Origin Image. Firms must determine whether to
promote a local or foreign image
for their products. The products of some countries may be
perceived as being particularly
desirable and of higher quality than products from other
countries. A firm may be able to
enhance its competitiveness by effectively exploiting this
perception.
- Generic and Near-Generic Names. While firms want their
brand names to become household

37. words, they do not want those names to become so common they
are considered to be generic
(e.g., Kleenex and Xerox). Generic names may either stimulate
or frustrate the sales of the firm
from whom the name was expropriated.VII. DISTRIBUTION
STRATEGIES
Distribution refers to the physical and legal path that products
follow from the point of production to the point of consumption.
In the 4Ps, distribution is referred to as place.
B. Deciding Whether to Standardize
Distribution is often the marketing mix variable that firms find
the most difficult to standardize. This is because each country
has its own national distribution system that is historically
intertwined with its cultural, economic, and legal environments.
Other factors that influence standardization of distribution
include restrictions on the size of stores and their hours of
operation, the financial ability to carry large inventories, and
the efficacy of the national postal system.
C. Choosing Distributors and Channels
Just as in the case of production, a firm may choose to handle
the distribution function internally or outsource it to a
specialized provider. When sales volume is low, it is usually
more cost effective for a firm to contract with an external
distributor. On the other hand, distribution may be handled
internally when sales volume is high, when the firm has
sufficient human, capital and financial resources, and when
after-sales service is extensive and complex.
When a firm choose to contract with an external distributor,
criteria for selecting distributors include financial strength,
good relationships with their customers, the state of a
distributor’s equipment, facilities and personnel, and

38. trustworthiness.
C.
Distribution Challenges
Distributors choose the products and firms they wish to
represent and emphasize. A new
entrant must therefore convince a desired distributor of the
viability of both its products and the
company itself. To do so it may need to provide extra incentives
or be willing to enter into
exclusive arrangements provided a competitor does not already
occupy that position.
PAGE
6
MGMK 4710
INTERNATIONAL BUSINESS
Chapter 16. THE ORGANIZATION OF INTERNATIONAL
BUSINESS
I. INTRODUCTION
It is challenging to organize operations that are located in
multiple countries. MNEs’ managers must design structures,
systems, and a culture that will contribute to an effective
implementation of their company’s strategies around the world.
Implementing an MNE’s international strategy involve such key
issues as structure, coordination and control, and culture.II.
ORGANIZATION STRUCTURE
https://www.youtube.com/watch?v=wO_-
MtWejRM&index=2&list=RDxcTtQ0hiHbE
https://www.youtube.com/watch?v=f60dheI4ARg&index=7&list
=RDxcTtQ0hiHbE

39. Organization structure is the formal arrangement of roles,
responsibilities, and relationships within an organization.
Organization structure is a powerful tool with which to
implement MNEs’ strategies. An MNE’s choice of structure
depends on many factors, including the configuration of its
value chain in terms of the location and type of foreign
facilities, and the impact of international operations on total
corporate performance. Two central issues in organization
structure are vertical and horizontal differentiation.
A. Vertical Differentiation: Centralization versus
Decentralization
Vertical differentiation refers to where the authority to make
decisions stands in the
hierarchy of an MNE. How decision-making is distributed in the
hierarchy raises the question
of centralization versus decentralization of decision-making
authority.
Centralizationis the degree to which high-level managers,
usually above the country level,
make important decisions and pass them down to lower levels
for implementation. Centralized
decision making is usually associated with a home replication or
global strategy (most decisions
are made at the corporate headquarters). Decentralized decision
making is associated with a
multidomestic strategy (more decisions are made at the
subsidiary’s level). A combination of
centralized and decentralized decision making is associated with
a transnational strategy.
B.
Horizontal Differentiation: The Design of the Formal Structure
Horizontal differentiation describes the division of labor (how

40. tasks are grouped
into departments, divisions and subsidiaries throughout the
MNE. There are several types of
horizontal structures for MNEs:
1.
International Division Structure. An international division
groups all international
activities into a single division within a firm. This is usually the
case when foreign operations
represent a small percentage of an MNE’s total revenues. The
MNE will have several domestic
departments or divisions, and an international division. This
type of structure is more
appropriate for MNEs that have adopted the home replication
strategy.
2. Product Division Structure. A product division structure
groups an MNE’s worldwide
operations by products. This type of structure is more
appropriate for MNEs that have adopted
the global strategy. Each division coordinate worldwide
operations for a particular product.
3. Geographic Division Structure. A geographic division
structure groups activities on a
regional basis. It is used when a firm has extensive foreign
operations that are not dominated by
a single country or region. This structure is more appropriate
for MNEs that have adopted the
multidomestic strategy.
4. Matrix Structure. A matrix structure is a structure designed to

41. give functional, product,
and/or geographic groups a common focus. This type of
structure is more appropriate for MNEs
that have adopted the transnational strategy. This structure is
referred to as a matrix structure
because the MNE will address two conflicting demands,
pressures for local responsiveness and
pressures for global integration (cost reduction).
III. COORDINATION AND CONTROL SYSTEMS
MNEs have operations in several countries. Therefore, complex
systems of coordination
and control must be developed. There are several coordination
and control tools MNEs can
choose from.
A.
Coordination Systems
Coordination systems are integration mechanisms that link
various activities of an
MNE. Worldwide coordination is needed to counteract the
tendency of different groups of
managers and employees to develop different concerns and
orientations based on their location
and immediate responsibilities. MNEs’ managers can choose
among several approaches to the
coordination of worldwide units. Approaches include
coordination by standardization, by
plans, and by mutual adjustment.
1. Coordination by Standardization. Firms with widely

42. dispersed operations often
standardize the ways that employees do their jobs and deal with
customers. Standardization sets
universal rules and procedures that apply worldwide and
enforces consistency in performance
of activities in geographically dispersed units. Rules and
procedures about how employees
interact (also called formalization) aim to reduce workplace
uncertainty and simplify the
exchange of ideas & resources.
2. Coordination by Plan. This type of coordination requires
interdependent units to meet common deadlines and objectives.
MNEs following a multidomestic strategy may opt to establish
objectives and schedules that give interdependent units greater
discretion in developing coordination systems. This process is
often complicated by the difficulties imposed by distance and
cultural differences. Greater expense, time, and possibility of
error are inherent in planning across national boundaries.
3. Coordination by Mutual Adjustment. Coordination by mutual
adjustment requires managers to interact with counterparts to
enable flexible coordination mechanisms, largely informally.
MNEs that opt to encourage mutual adjustment also adopt a
formal structure and install standardization and planning
systems, but they see great value in engaging an adaptable
approach to coordination that involves creating more
opportunity and incentive for parties to work with one another.
B.
Control Systems
Control systems are mechanisms put in place to ensure that
people are doing what they are supposed to do. Every MNE
must clarify what its employees can and cannot do in order to
avoid spinning out of control. Several control mechanisms are
used to direct the activities of individuals toward the
achievement of organizational goals.

43. 1. Reports. Reports must be timely, accurate, and informative.
Written reports are crucial for
international operations because subsidiary’s managers often
lack substantive personal contact
with corporate staff. To permit comparisons across operations,
most MNEs use reports for
foreign subsidiaries that resemble those they use domestically.
2. Visits to Subsidiaries. Within many MNEs certain members
of the corporate staff spend
considerable time visiting foreign subsidiaries in order to
collect information and offer advice
and directives related to corrective actions (if needed).
3. Evaluative Metrics. A system that relies on a combination of
metrics is more reliable than
one that does not. The most important criteria tend to be
budget-compared-with-profit and
budget-compared-with-sales-value. Other non-financial criteria
such as market share, quality
control, and host government relations are also important.
4. Information Systems. With ever-expanding computer and
global telecommunications links,
managers can monitor dispersed units more quickly and easily
than ever before.
IV.
ORGANIZATION CULTURE
https://www.youtube.com/watch?v=zDV-LCjq_D0
Organization culture is a system of shared values about what is
important and beliefs about how the world works. As such, it is
an important part of how an MNE is organized.
1. Culture and Values. Key features of organizational culture
include values and principles of management, work climate and

44. atmosphere, patterns of “how we do things around here,”
traditions, and ethical standards. The shared values that make
up organization culture influence what employees perceive, how
they interpret, and what they do to respond to their world.
2. Culture’s Increasing Importance. Studies have shown that
there is a significant link between organization culture and
financial performance. A firm culture often shapes the strategic
moves an MNE will consider or reject, and it can dramatically
influence the success of corporate initiatives. It is therefore
crucial for the corporate headquarters to develop a strong
culture that is shared by most organizational members
3. Building an Organizational Culture. Normally, firms develop
and manage their cultures, rather than allowing them to emerge
naturally. For MNEs however, this is challenging because
managers from different countries often have different values
than those of their MNE. Convergent values ease the exchange
of ideas between people from different countries, while
divergent values tend to create boundaries and barriers. To
overcome these challenges, many MNEs promote closer contact
among managers from different countries by rotating managers
among operations in their various locations. Besides spreading
best practices throughout the organization, rotating managers
improves their understanding of the company's culture.
PAGE
1
MGMK 4710
INTERNATIONAL BUSINESS
Chapter 12. Strategy of International Business
https://www.youtube.com/watch?v=DhHHmUd6xfo McDonald’s
https://www.youtube.com/watch?v=59lAz0-KpSo McDonald’s
in China is different
I. INTRODUCTION

45. This chapter shifts the focus from external factors that exert
influence on the international business to internal decision-
making that helps determine how effectively a given firm
competes in its industry. First, the chapter will discuss how an
MNE can create the most value in order to compete in
international markets. Then it will examine the strategies that
MNEs can adopt to be competitive in the global marketplace.
II.
VALUE CHAIN ANALYSIS
When competing, firms need to address the question of how to
create value so customers can buy its products. A framework
developed to discuss how firms can create value is called value
chain analysis.
A. Value creation:
Value refers to either low cost or differentiation. Firms create
low cost value by making their products for a lower cost than
any other firm in their industry. Firms create differentiation
value by making products with distinctive characteristics that
consumers want (when customers value differentiation, they
must be willing to pay a premium price).
B. Value Chain:
The value chain is a representation of the firm as a series of
discrete value creating activities. Value chain is comprised of
primary activities and support activities. Primary activities are
involved in the physical movement of raw materials and
finished products, the production of goods and services,
marketing and subsequent services of the outputs of the
business. Performing primary activities requires the general
infrastructure of a firm. This infrastructure is composed of
support activities such as procurement, technology and system
development, human resource management, and firm

46. infrastructure.
C. Value chain analysis:
To be successful, a firm needs to create the most value
(compared to competitors). Value chain analysis is a framework
used to determine how a firm can effectively create the most
value. Managers should focus their efforts in performing the
activities in which the firm has the expertise (core
competencies) to either reduce costs (low cost value) or develop
distinctive features (differentiation value). The activities where
the firm lacks expertise should be outsourced, that is, purchased
from independent suppliers.
Configuration of the value chain refers to the process of
dispersing value chain activities to those locations around the
globe where the MNE can maximize value. Every MNE looks to
establish elements of its value chain in the best location in the
world. Location economies arise when MNEs locate activities in
the optimal location for that activity, wherever in the world that
may be. Because MNEs’ activities are dispersed around the
world, coordination is necessary.
Coordination of the value chain describes the process of
integrating dispersed activities into a cohesive, coherent whole.
The task of coordinating the different activities that go into
making and moving a product around the world has emerged as
the basis of the superior performance that separates good from
great MNEs.
III.
TYPES OF MNEs STRATEGIES
After the identification of the value customers prefer (either low
cost or differentiation), and the determination of how to create

47. the most value, MNEs’ managers are in a position to decide the
strategies to use in order to achieve above-average performance.
To determine the types of international strategies, MNEs’ need
to make two sets of international strategic choices: choices
about how to enter foreign markets (international entry
strategies), and choices about how to compete in foreign
markets (international competitive strategies).A. International
entry strategies
MNEs have a wider choice of entry strategies, some of them
involving collaboration.
1. Exporting: An international entry strategy whereby an MNE
makes goods in its
home country and then sells them to foreign markets. This is
usually the first entry strategy. As
the exporting MNE is not yet familiar with foreign
environments, it minimizes risks by simply
shipping goods to foreign importers
2. Entry strategies involving collaboration:
a. Licensing: Under a licensing agreement, an MNE (the
licensor) grants rights to intangible property to a foreign firm
(the licensee) to use in a specified geographic area for a
specified period of time; in exchange, the licensee or dinarily
pays a royalty to the licensor. Intangible property may include
patents, inventions, formulas, brand names, methods,
procedures. Licensor’s motives include faster start-up, lower
costs. Licensee’s motives are no product development costs.
b. Franchising: Franchising represents a special form of

48. licensing in which the
franchisor not only sells an independent franchisee the use of
the intangible property essential to
the franchisee’s business, but also operationally assists and
exercises control over the
franchisee.
c. Management Contracts: A management contract represents an
arrangement in
which an MNE provides management personnel to perform
general or specialized functions to
another firm for a fee. A firm usually pursues such contracts
when it believes a partner can
manage certain operations more efficiently and effectively than
it can itself.
d. Turnkey Operations: Turnkey operations represent a type of
collaborative
arrangement in which an MNE contracts with a foreign entity to
build complete, ready-to-operate facilities. Usually, the MNE is
an industrial-equipment and construction company. Often, the
foreign entity is a government agency or a large MNE
e. Joint Ventures: A joint venture represents a direct investment
in which two or more firms share ownership of a new company
in a foreign country. Forms of joint ventures include
two firms from one country joining together in a foreign market,
a foreign firm joining with a local firm, companies from two or
more countries establishing a joint venture in a third country, a
private firm and a local government forming a joint venture, a
private firm joining a government-owned firm in a third
country.
f. Equity Alliances: An equity alliance represents a
collaborative arrangement in which
at least one of the collaborating firms takes an ownership
position (usually a minority) in the other(s).

49. 3. Wholly owned subsidiaries (no collaboration is involved):
The MNE owns 100% of its foreign operations. This entry
strategy can be accomplished in two ways: acquisitions, or
greenfield investments.
B. International competitive strategies
To make the choice of which international competitive strategy
to adopt, MNEs need to look at the types of pressures they are
facing in foreign markets
1.Global integration versus local responsiveness pressures
Two types of pressures that challenge how an MNE configures
and coordinates its value chain activities: pressures for global
integration (also known as pressures for cost reduction), and
pressures for local responsiveness.
Pressures for global integration:
There is a general trend toward rapid economic integration,
which in turn increases pressures for global integration.
Although many factors can explain this trend, the two primary
factors behind pressures for global integration are the
globalization of markets and the efficiency gains of
standardization:
Globalization of markets: Global buying patterns and firm
strategies suggest that consumers seek and accept standardized
global products. Consumers are searching for products that meet
their needs and provide superior value, regardless of where they
originate. As communication and transportation infrastructures
have become more integrated across borders, consumer
preferences have begun to homogenize and companies’ abilities
to meet those preferences on a global scale have increased. The

50. resulting economies of scale translate to lower prices.
Standardization and efficiency: Standardization is the process of
increasing the uniformity of a product or service by decreasing
the extent of variation. Worldwide standardization of an MNE’s
products, purchases, methods, and policies can significantly
reduce the costs of its operations. Standardization is also a
powerful means to exploit local economies, since value chain
activities can be placed in optimal locations for global
production and distribution.
Pressures for local responsiveness:
MNEs also face several pressures to tailor their operations to
local market conditions. Consumer divergence and host-
government policies are two of the major forces contributing to
pressures for local responsiveness:
Consumer divergence: Contrary to the globalization of markets
thesis, some argue that differences in consumer tastes and
preferences across countries emerge and endure due to cultural
predisposition, historical legacy, emergent nationalism,
economic prosperity, and other factors. In some industries, like
food production, products are unsuitable for standardization and
local preferences remain strong.
Host-government policies: Differences in policies among host-
country governments contribute to great variability in political,
legal, and economic situations in various markets. Policies such
as trade protectionism, local content rules, and national product
standards require some degree of local responsiveness.
2. Types of international competitive strategies
Pressures for global integration and pressures for local

51. responsiveness are the two dimensions used to derive the
strategy an MNE can choose from. Based on whether those
pressures are high or low, four strategies emerge: global
strategy, multidomestic strategy, home replication strategy, and
transnational strategy.
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High
!
!
!
!

52. !
!
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!

53. !
Global
!
Transnational
!
!
strategy
!
strategy
!

54. !
!
!
!
!

55. !
Pressures
!
!
!
for global
!--------------------------------------------------------------------------
integration
!

56. !
!
!
!
!
!

57. !
!
!
Home replication
!
Multidomestic
!
!
strategy

58. !
strategy
!
!
!
!
!

59. !
!
Low
!
!
!

60. ---------------------------------------------------------------------------
Low
High
Pressures for local responsiveness
Home replication strategy: The home replication strategy
emphasizes the transfer of core competencies from the domestic
operation to foreign subsidiaries. This strategy works well when
industry conditions do not push the firm to improve its cost

61. controls or to respond to local demand.
Multidomestic strategy: Firms following a multidomestic
strategy adjust products, services, and business practices to
meet the needs of individual countries and regions. Because
pressures for local responsiveness are high, this strategy allows
each of its foreign-country operations to act fairly
independently. Management that chooses the multidomestic
strategy believes in responding to the unique conditions
prevailing in different markets.
Global strategy: A global strategy requires worldwide
consistency and standardization in order to be effective. Firms
that choose the global strategy face strong pressures for cost
reductions but weak pressure for local responsiveness.
Operationally, MNEs that adopt a global strategy usually are or
aim to become the low-cost player in their industry. This
generally requires global-scale production facilities in a few
low-cost locations.
Transnational strategy: Transnational strategy aims to
simultaneously exploit location economies, leverage core
competencies, and pay attention to local responsiveness. It is
arguably the most challenging strategy because MNEs face high
pressures for both global integration and local responsiveness.
PAGE
2
MGMT 4710
INTERNATIONAL BUSINESS
USEFUL INTERNET LINKS
Here is the list of a few online links you can use to find data on
your country. Data for some factors can be in more than one
link. There are other links that you can search on your own if
you google (or yahoo or Firefox, etc.). You can also use
Wikipedia, but for academic research, it is not a reliable

62. resource.
1. The GlobalEconomy.com. Country indicators.
www.theglobaleconomy.com/indicators_list.php
- Click Indicators
- Click on the indicator that you are looking for
- The ranking of countries is given
- Click on a country for an explanation of the indicator (at the
bottom of the page)
This is a worldwide online educational resource that compiles
data from several sources, including the World Bank, the
International Monetary Fund, the United Nations, and the World
Economic Forum.
2. United Nations Conference on Trade and Development
(UNCTAD)
http://unctadstat.unctad.org/wds/ReportFolders/reportFolders.as
px?sCS_ChosenLang=en
3. The Heritage Foundation. Index of Economic Freedom.
www.heritage.org/index
- Click About The Index
- Scroll down to Frequently Asked Questions for explanation of
economic freedom
- Click Country Rankings (upper left) for the ranking of
countries
4. International Monetary Fund (World Economic Outlook
Databases)
https://www.imf.org/en/Publications/SPROLLS/world-
economic-outlook-databases#sort=%40imfdate%20descending
5. The World Bank Group. Ease of Doing Business.

63. www.doingbusiness.org
- Click Reports
- Click About Doing Business
- Go to Table 2.1 that provides 11 areas of business regulation
- Click Rankings
6. Trade competitiveness map
http://tradecompetitivenessmap.intracen.org/RS_TP_CI.aspx
- Select a country, a year, and exports, imports, or both
- Data for all industries (i.e. all products) and by product is
given
- Click on the + sign that follows All industries to get data for
trading partners
7. Global capital market
https://www.youtube.com/watch?v=VEq04xjxfyY
8. Will China rule the world?
https://www.youtube.com/watch?v=gVF7u_vcm7k
9. Automobile production (OICA)
http://www.oica.net/production-statistics/
1
MGMK 4710
INTERNATIONAL BUSINESS
UNIT 3: ORGANIZATIONAL STRATEGIES AND
OPERATIONS
ESSAY QUESTIONS 3.1.
JAPAN
Alyssa Parsley
Instructions:

64. · In D2L, click Content/Unit 3/Unit 3 Study Guides, and read
chapters 12, 16, 17, 18, 19, and 20.
· Questions: In D2L, click Content/Unit 3, then Unit 3 Essay
Questions. Go to the Essay Questions.
· The title must look like the one above. Write your country’s
name and your group members’ names.
· Write the question # (e.g., Question 1), provide your answer,
then delete all the instructions.
· Break each answer into two or more paragraphs. Single-space
answers.
· When explaining your answers, provide specifics related to
your country (that is, do not be generic).
· Each answer must show that you have understood the concepts
from Study Guides posted to D2L.
· Data is found everywhere online. Give the references of your
sources.
· I have provided a few links in D2L under Content. Click
Useful Online Links.
QUESTION 1:
In one sentence, give the name of ONE Multinational Enterpri se
(MNE) from your country that has manufacturing operations in
one or more foreign countries (NOTE: Use the same MNE for
all Essay Questions 3.1.). In one sentence, give the name of
ONE international entry strategy the MNE you have chosen
used to enter ONE of those foreign countries (please identify
that country by name and use that country for all Essay
Questions 3.1.). Explain your answer in five to seven sentences.
QUESTION 2:
In one sentence, give the name of ONE international
competitive strategy the MNE you have chosen is using to
compete in the foreign country you have named above. Explain
your answer in five to seven sentences.
QUESTION 3:

65. In one sentence, state whether, for its operations in the foreign
country, the MNE should make its parts and components (a
strategy called vertical integration) or buy them from
independent suppliers (a strategy called outsourcing). Explain
your answer in five to seven sentences.
2