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FDI

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Foreign direct investment: Strategy in which the firm establishes a physical presence abroad by acquiring productive assets such as capital, technology, labor, land, plant, and equipment.

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Consortium

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Consortium: project-based, usually non-equity venture with multiple partners fulfilling a large-scale project. E.g., commercial aircraft manufacturing (Boeing and Airbus) or the construction of a new airport in Shanghai.

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Cross-Licensing Agreement

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Cross-licensing agreement: type of a project-based, non-equity venture where partners agree to access licensed technology developed by the other on preferential terms. • E.g. Microsoft entered into a cross-licensing agreement with Japan's JVC so share patented knowledge on software development.

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Joint Venture

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A form of collaboration between two or more firms to create a jointly-owned enterprise.

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Market Seeking Motives

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• Gain access to new markets or opportunities • Follow key customers • Compete with key rivals in their own markets

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Asset Seeking Motives

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• Access raw materials • Gain access to knowledge or other assets • Access technological and managerial know- how available in a key market

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Efficiency Seeking Motives

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• Reduce sourcing and production costs • Locate production near customers • Take advantage of government incentives • Avoid trade barriers

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Greenfield Investment

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The firm invests to build a new manufacturing, marketing, or administrative facility, as opposed to acquiring existing facilities. (Starting from scratch).

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Acquisition

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Direct investment or purchase of an existing company or facility.

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Licensing

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An arrangement in which the owner of intellectual property grants another firm the right to use that property for a specified period of time in exchange for royalties or other compensation.

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Purpose of Intellectual Property Rights

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Provide inventors with a monopoly advantage for a specified period of time, so they can exploit their inventions and create commercial advantage.

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Responsibility of the Licencor

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To provide intellectual property (patent, trademark, design, copyright, or know-how), and supporting goods (parts, components, raw materials, etc).

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Responsibility of the Licencee

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Compensate the licencor through a combination of a lump sum payment, down-payment plus royalty, products, know-how, and cross licensing.

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Advantages for the Licencor

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•Low investment •Low involvement •Low effort, once established •Low-cost initial entry strategy

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Disadvantages for the Licencor

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•Performance depends on the foreign licensee •Licensor has limited control over its asset(s) abroad •Runs the risk of creating a future competitor

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Franchising

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Arrangement in which the firm allows another the right to use an entire business system in exchange for fees, royalties, or other compensation.

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Franchiser Provides:

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A trademark-protected business concept plus everything needed for its implementation (patents, know-how, training, services, products).

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Franchisee Provides:

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A combination of a lump sum payment, down payment plus royalty, and other mark ups and contributions.

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Master-franchising Agreement

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An independent company authorized to establish, develop, and manage the entire franchising network in its market. E.g., McDonald's in Japan.

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Turn-key Contracting

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Arrangement where a firm plans, finances, organizes, manages, and implements all phases of a project abroad and hands it over to a foreign country after training local personnel. Typical in the construction and engineering services industries.

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Management Contracting

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A contractor supplies managerial know-how to operate a hotel, resort, airport, hospital, or other facility in exchange for compensation

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Examples of Intellectual Property

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Technical assistance, know-how, and trademarks. (Secret recipes, comic book characters such as spider man, logos).

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Global Sourcing

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Procurement of products or services from suppliers located abroad for consumption in the home country or a third country.

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Drivers of Global Sourcing

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1.Technological advances in communications, especially the Internet and international telephony 2.Falling costs of international business 3.Entrepreneurship and rapid economic transformation in emerging market countries

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Captive Sourcing

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Sourcing from the firm's own production facilities located abroad.

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Contract Manufacturing

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Arrangement in which the focal firm contracts with an independent supplier to manufacture goods according to well-defined specifications. E.g., Nike, IKEA.

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Offshoring

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The relocation of a business process or entire manufacturing facility to a foreign country.

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What types of activities in a firm are more/less likely to be outsourced?

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More likely: service sector, including banking, software writing, legal services, and customer service activities.

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Why Companies Outsource

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Lower wages and cost of products. To improve productivity. More qualified personnel.

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In international business, what is marketing concerned with?

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Marketing is concerned with identifying, measuring and pursuing customers needs and market opportunities abroad.

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Purpose of a Global Marketing Strategy

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The plan of action the firm develops for foreign markets that guides its decision making on: 1. How to position itself and its offering 2. Which customer segments to target 3. To what degree it should standardize or adapt its marketing program elements.

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Segmentation

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The process of dividing the firm's total customer base into homogeneous clusters (subgroups) that allows management to formulate unique marketing strategies for each group.

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Characteristics of a global market segment

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Income level, lifestyle, demographic profile, or desired product benefits.

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Adaptation

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Modifying elements of the marketing program (e.g. product, advertising, pricing, distribution) to accommodate specific customer requirements in individual foreign markets.

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Standardization

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Efforts to make marketing program elements uniform so as to target entire regions of countries, or even the global marketplace, with a similar product or service. However, targeting the same product everywhere is not usually feasible.

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Global Brand

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A huge brand that can: •Increase the effectiveness of marketing programs •Facilitate the ability to charge premium prices •Increase the firm's leverage with re-sellers; •Stimulate brand loyalty •Inspire trust and confidence in the product.

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Brand Equity

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The commercial value that derives from consumer perception of the brand name of a particular product or service, rather than from the product or service itself. - (Google's Definition).

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International Price Escalation

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•Refers to the problem of end-user prices reaching high levels in the export market. •It is caused by multi-layered distribution channels, intermediary margins, tariffs, and other added costs associated with the foreign market. •May result in an excessively high retail price in the target market, creating a competitive disadvantage for the exporter.

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International Financial Management

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The acquisition and use of funds for cross-border trade, investment, and other commercial activities.

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Capital Structure

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The mix of long-term equity and debt financing firms use to support their activities.

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Equity Financing

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Selling stock or reinvesting earnings.

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Debt Financing

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Obtaining loans (e.g from a bank).

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Raising Funds Through Equity and its Advantage

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Firm obtains capital from selling shares of stock. Advantage: The firm obtains capital without incurring debt and having to repay funds to providers.

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Raising Funds Through Financing and its Advantage

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The firm borrows money from a creditor in exchange for repayment of principal and interest. Advantage: The firm does not sacrifice any ownership interests.

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Raising Funds Through Intra-Corporate Loans and its Advantage

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Obtaining funds from within firm's network of subsidiaries and affiliates. Advantage: Minimizes transaction costs of borrowing from banks and avoids the ownership-diluting effects of equity financing.

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Bond

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A debt instrument that enables the issuer (borrower) to raise capital by promising to repay the principal along with the interest on a specified date (maturity).

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Purpose of Cash Flow Management

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Manage funds passing in and out of the firm's value-adding activities. Ensures cash is available where and when it is needed.

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Transfer Pricing

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(also known as intra-corporate pricing) refers to prices that subsidiaries and affiliates charge one another as they transfer goods and services within the same MNE.

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Trade Credit

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A subsidiary defers payment for goods received from the parent firm (30-day, 90-day etc.)

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What do managers use capital budgeting for?

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Managers use capital budgeting to decide which international projects are economically desirable.

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Why are capital budgeting decisions for international firms a complicated matter?

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Internationally, such decisions are complex because managers must consider many variables, each of which can strongly affect the potential profitability of a venture. •These variables include: Differences in currencies, tax rules, government intervention, country risk, inflation etc.

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Currency Risk

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Concerns exchange rate fluctuations that harm business profits.

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Transaction Exposure

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Currency risk that firms face when outstanding accounts receivable or payable are denominated in foreign currencies.

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Translation Exposure

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Currency risk that results when a firm translates financial statements denominated in a foreign currency into the functional currency of the parent firm.

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Economic Exposure

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Currency risk that results from exchange rate fluctuations affecting the pricing of products, the cost of inputs, and the value of foreign investments.

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Hedging

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Refers to efforts to compensate for a possible loss from a bet or investment by making offsetting bets or investments.

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Tax Havens

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Are countries hospitable to business and inward investment because of their low corporate income taxes. •Bahamas, Luxembourg, Monaco, Singapore, and Switzerland are examples.

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Corruption

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The abuse of power to achieve illegitimate personal gain.

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Where in the world do you have low or high levels of corruption?

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Low: Denmark, Singapore, Australia, Canada. High: Somalia, Iraq, Venezuela, Russia.

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Corporate Governance

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The system of procedures and processes by which corporations are managed, directed, and controlled. It provides the means through which firms undertake ethical behaviors, CSR, and sustainability

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U.S. Foreign Corrupt Practices Act

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Permits the U.S. government to persecute any company or individuals for paying bribes or engaging in corruption anywhere in the world, as long as the company or person has a certain degree of connection (e.g. a Spanish company, with a subsidiary in the U.S.) to the U.S.

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Ethics

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Moral principles and values that govern the behavior of people, firms, and governments, regarding right and wrong.

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Counterfeiting

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Making replicas of branded products.

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Normatist

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Belief that ethical behavioral standards are universal, and firms and individuals should seek to uphold them consistently around the world.

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Relativist

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Belief that ethical truths are not absolute but differ from group to group. According to this perspective, a good rule is "when in Rome, do as the Romans do."

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Code of Conduct

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A set of rules outlining the social norms and rules and responsibilities of, or proper practices for, an individual, party or organization.

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Sustainability

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Meeting humanity's needs without harming future generations. 3 Types of interest: Economic (Wages, and location) Social (Avoid child labor and sweatshops) Environmental.

International Business CH15,16,17,18,&20. UCF Resch – Flashcards

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