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Full Summary International Management
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Summary for International Management. Based on the 13th edition of International Business by Hill. Includes all materials: chapter 16-20 and articles.
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Summary International ManagementChapter 16
Most companies prefer exporting as a mode of foreign market entry because it is a relatively low
commitment to getting their products or services out globally. The volume of export activity in the world
economy has increased as exporting has become easier from a large number of countries. Additionally,
modern communication and transportation technologies have alleviated the logistical problems.
Promises export: growth and cost efficiencies. Large revenue and profit opportunities in foreign markets for
most firms in most industries; international market > domestic market -> economies of scale lowers unit
costs.
Barrier to export: ignorance of potential opportunities. Firms are unfamiliar with foreign market
opportunities. Intimidation by complexities and mechanics of exporting to countries that differ from home
country. (Cultural) differences. Firms need to become proactive.
Pitfalls: underestimate time and expertise needed. Poor market analysis, poor understanding of market
conditions, failure to customize product offering, lack of effective distribution program, poorly executed
promotional campaign, problems securing financing. -> discourages future exporting ventures.
Avoid common pitfalls through:
1) information sources. German and Japanese firms can draw on the large reservoirs of experience, skills,
information, and other resources of their respective export-oriented institutions. Japanese Ministry of
International Trade and Industry, sogo shosha (trading houses).
2) service providers. Freight forwarders combine smaller shipments into a single large shipment to
minimize shipping cost. Export management company (EMC) offers services to companies that have not
previously exported products; handle all aspects of exporting. Export trading companies export products for
companies that contract with them. Export packaging companies. Customs brokers help avoid pitfalls
involved in customs regulations. Confirming houses/buying agents represent foreign companies that want
to buy your products, try to get the lowest price and are paid a commission. Export agents, merchants, and
remarketers buy products directly from the manufacturer and package and label the products in
accordance with their own contracts under their own names and assumes all risks (small effort, low
control). Piggyback marketing is an arrangement whereby one firm distributes another firm’s products
(requires complementary products and same target market).
3) export strategy. Hire an EMC or export consultant to identify opportunities and navigate paperwork and
regulations. Initially focus on one/handful of markets and learn what is required to succeed in those
markets before moving to other markets; avoids spreading limited management resources too thin. Enter
foreign market on a small scale to reduce the costs of any subsequent failure. Recognize the time and
managerial commitment involved in building export sales and hire additional personnel. Devote a lot of
attention to building strong and enduring relationships with local distributors/customers. Hire local
personnel. Be proactive about seeking export opportunities. Retain the option of local production.
4) the globalEDGE exporting tool. The Company Readiness to Export (CORE) tool helps assess a company’s
readiness to export a product and the product’s readiness to be exported. Shows strengths and
weaknesses.
Financial devices are needed to solve the lack of trust (and different transaction preferences) for
international trade: use a third party trusted by both to act as an intermediary (usually a reputable bank).
The importer obtains the bank’s promise to pay the beneficiary on her behalf once a specified document
has been presented (letter of credit). The bank will perform a credit check on the importer beforehand, and
will charge the importer a fee for its service (0.5-2% based on creditworthiness, the larger the transaction
the lower the percentage).
-> bank promises exporter to pay on behalf of importer as long as the products are shipped in accordance
with specified instructions and conditions. Letter of credit becomes financial contract.
-> exporter ships products, title to the products is given to the bank of importer (bill of lading) through the
,bank of the exporter. Serves as a receipt, indicating that the carrier has received the merchandise. And as a
contract, specifying that the carrier is obligated to provide transportation service in return for a certain
charge. And as a document title, which can be send to obtain payment.
-> exporter tells bank to pay for the products (draft / bill of exchange), bank pays through bank of exporter.
The exporter is known as the maker, the bank is known as the drawee. Sight draft=payable on presentation
to the drawee. Time draft=allows for a delay in payment (30-120 days). When accepted by a bank, it’s
called a banker’s acceptance, and when accepted by a business firm, it’s called a trade acceptance. Time
drafts are negotiable instruments: once accepted, the maker can sell the draft to an investor at a discount
from its face value.
-> bank gives merchandise/title to importer
-> importer reimburses (pays) bank. Might be immediately, or with some time to resell the merchandise
(will have to pay interest).
(Dis)advantages of letter of credit: both parties will trust the bank even if they don’t trust each other.
Facilitates obtaining pre-export financing for exporter. Importer does not have to pay for merchandise until
the documents have arrived and all conditions have been satisfied, but has to pay a fee to the bank. Also
reduces importer’s ability to borrow funds for other purposes.
2 forms of government-backed assistance to help finance the export programs of prospective exporters:
1) The Export-Import Bank (EXIM Bank)=US corporation that assists in the financing of US exports to
support US employment and market competitiveness. Must have a reasonable assurance of repayment and
should supplement, not compete with, private capital lending. Guarantees repayment of medium- and
long-term loans that US commercial banks make to foreign borrowers for purchasing US exports, thereby
making commercial banks more willing to lend cash to foreign enterprises. Also has a direct lending
operation.
2) Export credit insurance can be bought by the exporter when the importer has high bargaining power and
did not want to use a letter of credit. If the customer defaults, the insurance firm will cover a major portion
of the loss. Can be commercial and political risks.
Countertrade: allows payment for exports to be made through goods and services rather than money, can
be a solution for foreign exchange risk. E.g. when government restricts the convertibility of its currency to
preserve its foreign exchange reserves, this means that the exporter may not be paid in its home currency.
Also used by developing countries with shortages of foreign exchange reserves. At most 20-25% of world
trade. A short-term spike in the volume of countertrade can follow periodic financial crises. Countertrade
might be needed to gain access to certain international markets. Can be used as a strategic marketing
weapon when you accept countertrade and your competitors don’t. Firms normally prefer the be paid in
currency. Risk of receiving defective product. Expensive and time-consuming: requires firms to invest in an
in-house trading department dedicated to arranging and managing countertrade deals in order to sell the
received goods. Most attractive to large, diverse multinational enterprises that can use their network to
dispose of goods required in countertrading, e.g. sogo shosha.
5 types of trading arrangements:
1) Barter=the direct exchange of goods/services between 2 parties without a cash transaction. Problems: if
goods are not exchanged simultaneously, one party ends up financing the other for a period. Risk of having
to accept goods you do not want, cannot use, or have difficulty reselling at a reasonable price. One-time-
only deals with trading partners who are not credit- / trustworthy.
2) Counterpurchase=a reciprocal buying agreement. Firm agrees to purchase a certain amount of
(different) materials back from a country to which a sale is made. Importer must draw on its foreign
exchange reserves to pay the exporter, but it will receive some of those dollars back.
3) Offset=one party agrees to purchase goods/services with a specified percentage of the proceeds from
the original sale, but this obligation can be fulfilled with any firm in the country to which the sale is being
made. More flexibility for exporter as opposed to counterpurchase.
, 4) Switch trading=the use of a specialized third-party trading house in a countertrade agreement. When a
firm enters a counterpurchase or offset agreement with a country, it often ends up with counterpurchase
credits which can be used to purchase goods from that country. The third-party trading house buys the
firm’s counterpurchase credits at a discount and sells them to another firm that can better use them.
5) Compensation / buyback=a firm builds a plant in or supplies services to a country and agrees to take
(receive) a certain percentage of the plant’s output as partial payment for the contract.
Chapter 17
Single-country strategies may be efficient operationally but often become ineffective strategically due to
political risks, cost minimization etc.
Moving factory locations from one country to another solely due to cost inefficiencies is usually not a
strategic move; cost considerations should be evaluated along with quality, flexibility, and time.
Additionally, a total cost focus of a global supply chain ensures that the goal is not necessarily to strive for
the lowest cost possible at each stage of the supply chain but to instead strive for the lowest total cost to
the customer and the greatest value at the end of the product supply chain.
Outsourcing means less control, but it can be cost-efficient.
Blockchains make it possible for ecosystems of supply chain partners to share and agree upon key pieces of
information. Offsets issues concerning transparency, trust, ability, and willingness.
Production/manufacturing/operations=the creation of a good or service. Supply chain management=the
integration and coordination of logistics, purchasing, operations, and market channel activities from raw
material to the end-customer. Logistics=the part of the supply chain that plans, implements, and controls
the effective flows and inventory of raw material, component parts, and products used in manufacturing.
Together, the objectives are:
1) the total cost of moving from raw materials to finished goods is as low as possible for the value provided
to the end-customer. Can be achieved by dispersing production activities to various locations to increase
efficiency and lower costs, and by managing the global supply chain efficiently to better match supply and
demand (both inside the global company and across the independent organizations in the chain).
2) increase quality by establishing process-based quality standards and eliminating defective raw material,
component parts, and products. Quality=reliability; the finished product has no defects and performs well.
Upstream/inbound supply chain=all of the organizations and resources that are involved in the portion of
the supply chain from raw materials to the production facility. Downstream/outbound supply chain=all of
the organizations that are involved in the portion of the supply chain from the production facility to the
end-customer (e.g. wholesaler).
Improved quality control reduces costs by:
1) increasing productivity because time is not wasted producing poor-quality products that cannot be sold,
leading to a reduction in unit costs.
2) lowering rework and scrap costs associated with defective products.
3) reducing the warranty costs and time associated with fixing defective products.
Total quality management (TQM)=philosophy that mistakes, defects, and poor-quality materials are not
acceptable and should be eliminated. The quality of supervision should be improved by allowing more time
for supervisor to work with employees and by providing them with the tools they need. Management
should create an environment in which employees will not fear reporting problems or recommending
improvements. Management has the responsibility to train employees in new skills to keep pace with
changes in the workplace. Achieving better quality requires the commitment of everyone in the company.
Six Sigma=the modern successor to TQM, aims to reduce defects, boost productivity, eliminate waste, and
cut costs throughout a company.
ISO 9000 quality standard certificate is needed in EU before firm is allowed access to the marketplace.
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