Responses to Review Questions

Answer One
What are the factors that influence a company's decision to go abroad? Please explain how these are related to each other. In the discussion on the internationalisation process of a firm, the product life cycle model plays a major role. Please explain and discuss the usefulness this model.

(A) Generally, the first decision to go abroad is a specific one. It is a decision to look at the possibility of a specific investment in a specific country, not a general decision to look around the globe for investment opportunities. At this stage the organisation has no experience with the complexities of foreign investment, although it often has had some export experience. There are no standard operating guidelines, which can be given to deal with these complexities. What is needed mostly is a strong push and/or commitment to go abroad. A company benefits from these earlier experiences in the subsequent investment decisions. The organisational factors include:

• role of the management
• motives of the organisation
• success at home

Other than these internal forces, a number of factors in the environment, outside the organisation, may also force a company to go abroad. These drivers of internationalisation may include:

• unsolicited proposal that cannot be ignored. These may include proposals from a foreign government, distributor or customer

• competitive drive or bandwagon effect following other competitors or a general belief that presence in a certain market is a must

• strong competition from abroad in the home market.

It is normally a combination of internal and external factors that is the reason behind a decision to go abroad. Although sometimes it is possible to explain investment in a certain market with one of the above factors, e.g. a number of investments in China can be directly related to bandwagon effect, it is generally not possible to pinpoint one particular force for a particular investment decision.

(B) According to this theory a product goes through several stages of development.
The first stage is the innovation stage of the product,
The second stage is the introduction in the domestic market.
The third stage is the export of the product.
The next stage is the maturity of the product.
As it becomes standardised at this stage, it is being imitated and even produced overseas by foreign firms. The product when newly invented, attracts high-income groups as customers. Its demands grow rapidly in more advanced countries. At this stage the production also starts in other advanced countries, sometimes in a subsidiary of the inventing company. If the cost benefits of producing in the second or third country are large enough to offset transportation cost, then the subsidiary or a foreign producer may even export back to the United States. Having seen the benefits of these operations, a number of firms will then start producing and exporting the product. The companies just imitate the original innovating company, and often, even produce in the same geographic locations. In the final stage new competitors, even from far away markets, rise and start producing the same products. And, if they can achieve better production costs, due to cheaper labour, other input, or standardisation of production systems, they start exporting back to the USA and other early producer countries such as Western Europe. A number of products have followed this pattern. Television invention in the USA, typically followed this pattern. When production and marketing was standardised, costs reduced and prices dropped, so it moved to Europe and later to Japan and Korea. Vernon's product life cycle model.

This model of sequential decision making has had a great influence on internationalisation theory. The model was originally developed to explain U.S. investments in Europe and also in cheap labour countries. Its usefulness goes beyond Vernon's reappraisal of its efficacy under changed world conditions. Its relevance arises from the fact that the dynamic of the model lies in the interaction of the evolving forces of demand (taste) patterns and production possibilities. The twin rationales of cost imperatives and market pull are simply explained in Vernon's model. Although its validity for the explanation of the behaviour of modern multinationals may be questioned, this article spawned much of the empirical literature on international business.

Answer Two
Multinational enterprises are different from companies that confine their activities to the domestic market. A multinational enterprise (MNE) is a firm headquartered in one country with operations in other countries.
Why would firms consider becoming a multi-national enterprise? Please describe fully a typical internationalization process for a firm producing a standardised product.

Firms become multinationals for a number of reasons. Some of these include the following: (a) a desire to protect themselves from the risks and uncertainties of the domestic business cycle; (b) a growing world market for their goods or services; (c) a response to increased foreign competition; (d) a desire to reduce costs; (e) a desire to overcome tariff barriers; and (f) a desire to take advantage of technological expertise by manufacturing goods directly rather than allowing others to do it under a license agreement.

Under the premise that foreign markets are risky, companies expand their operations abroad incrementally and cautiously. Setting up a wholly owned subsidiary is usually the last stage of doing business abroad. A typical internationalization process for a firm producing a standardized product might begin with a licensing agreement: a contractual arrangement in which one firm provides access to some of its patents, trademarks, or technology to another firm in exchange for a fee or royalty. Apart from a licensing agreement, a firm might export via an agent or distributor. This might be followed by the direct hiring of a domestic representative or the establishment of a foreign sales subsidiary. The next step might be the establishment of local packaging and/or assembly operations. This is typically followed by FDI.

Multinational enterprises have a strategic philosophy that is different from that of home country businesses. In particular, MNEs do not see their company as an extension of its domestic roots. They hire the personnel, fire and transfer them to meet global needs, even if this means laying off home country employees. They also combine their talents with those of other MNEs in creating, financing and managing joint ventures.

Successful MNEs rely on the strategic management process, which has five major phases:
(a) identification of the firm’s basic mission; (b) external and internal environmental analysis; (c) formulation of objectives and overall plans; (d) implementation of these plans; and (e) evaluation and control of operations.

Managers of most MNEs use strategies that build upon Firm-Specific Advantages (FSAs) and Country-Specific Advantages (CSAs). The FSAs are strengths or benefits specific to a firm and a result of contributions that can be made by its personnel, technology and/or equipment. The CSAs are strengths or benefits specific to a country that result from its competitive environment, labor force, geographic location, government policies, industrial clusters, etc.

Answer Three
Porter notes that “Firms, not individual nations, compete in international markets.” How does this statement help to explain some of the major challenges facing MNEs? How do the determinants of national competitive advantage help explain how companies can maintain their economic competitiveness? (30 Marks)

This statement helps explain that a country’s international competitive advantage is determined by the strengths of its business firms because it is these organizations that compete in the environment and help determine the competitive advantages of the country.
For example, if General Motors is the best car company in the world, this would help the United States remain competitive, but it would be a result of the company, in particular, and not the country per se.
The four country-specific determinants:
Factor conditions;
Demand conditions;
Related and supporting industries;
Structure of firms and rivalry.
And two external variables:
The role of chance and government combine to help determine a nation’s international competitive advantage.
The four determinants of national competitive advantage are:
A country or business makes effective use of factor conditions to maintain economic competitiveness in a number of ways.
One is by training and educating the work force so that these people are able to produce more efficient and/or higher-tech goods.

A second is by investing capital in high-tech discoveries and developing robots and other machines that can produce goods and services more efficiently than before.
Demand conditions are important for the maintenance of economic effectiveness because a strong local market helps a company better develop goods and services for the international arena. For example, French customers help the local wine makers produce wine for the world market by providing the companies with sophisticated feedback regarding the quality of their output.
Related and supporting industries are important because they assist MNEs by providing low-cost inputs and by supplying the company with information regarding the industry environment and changes that are taking place. For example, suppliers to Italian tile firms keep these companies abreast of changes in technology, factor inputs and developments in the industry.
Firm strategy is important because it helps dictate to the competitors against whom the firm will fight and the market niche it will choose. The experience the company obtains from these decisions helps it to become more economically viable. Company competitiveness in the German chemical industry is an example.
The structure is important because some firms need simple structures, while others require more complex ones; some need bureaucratic designs, while others succeed with simpler, more participative forms. In the case of German firms, for example, many companies are hierarchical because this approach best suits the needs of the personnel.
Firm rivalry is important because, by competing against others, a firm hones its skills and becomes more internationally competitive. A good example is the way that the Japanese auto-makers have become competitive in the world market by taking on the major US and European auto producers.
The four determinants are interrelated. Each is influenced by the others and, in turn, influences the others. For example, demand conditions help to influence the firm’s rivalry, and factor conditions affect the number and type of related and supporting industries.

Answer Four
Discuss fully why a business seeking to go international might choose export-based methods in the first instance? Critically assess the importance of licensing, and joint ventures as alternative market entry strategies for multinational companies. (30 Marks)

A firm’s choice of entry mode depends on various factors, such as the ownership advantages of the firm, the location advantages of the market and the internalization advantages of specific assets, international experience, and/or the ability to develop differentiated products.

Ownership advantages are the firm's specific assets, international experience, and the ability to develop either low-cost or differentiated products within the context of its value chain. Internalization advantages are the benefits of retaining a core competency within the company and threading it through the value chain rather than opting to license, outsource, or sell it. In general, companies that have low levels of ownership advantages either do not enter foreign markets or, if they do, they enter through low-risk modes.

Assess the company’s export potential by examining its opportunities and resources. Obtain expert counseling on exporting. Seek specialized financial assistance. Secure government payments guarantees (EX-IM Bank). Hire an agent or distributor to oversee the transaction.
•Select a market or markets.
•Formulate and implement an export strategy.

Strategic Advantages of Exporting
Companies export in order to increase sales revenues, achieve economies of scale in production, diversify markets, and minimize risk. All of these objectives are ultimately motivated by the potential for greater profitability.
Diversification. Exporting companies can diversify their activities allowing for more adaptability in the home market.
The Role of Serendipity. While it is convenient to view the export process as a proactive process, research shows that firms can enter the export market by chance and become successful.
Profit Potential. Companies can often sell their products at a greater profit abroad than at home due to differences in the competitive environment or differences in stages in the product life cycle in foreign markets. Government actions at home and abroad in such areas as tax policy can also affect profitability and stimulate exporting.
.
Pitfalls of Exporting
Adjusting Financial Management. Exchange-rate changes and transactions require more advanced financial management skills. Foreign customers may also expect help with the financing of the goods they are importing.
Adjusting Customer Management. Customers around the world are increasingly demanding a greater range of services from their vendors. Customers may require the installation and setup of equipment which may require service engineers in the foreign market.
Adjusting for Information Technology. Before the Internet, exports were customarily arm's-length, ship-it-and-forget-it transactions. Now the ease of contacting vendors via email or inexpensive voiceover Internet protocol plans spurs customers to seek greater real-time involvement in transactions.
Misestimating the costs of shipping and the complexity of customs regulations and procedures
Poor selection of local agents to represent the company abroad
Unwillingness to modify products to meet other countries’ regulations or cultural preferences Under a licensing agreement, a firm (the licensor) grants rights to intangible property to another company (the licensee) to use in a specified geographic area for a specified period of time; in exchange, the licensee ordinarily pays a royalty to the licensor. Such rights may be exclusive or nonexclusive. Usually the licensor is obliged to furnish technical information and assistance, while the licensee is obliged to exploit the rights effectively and pay compensation to the licensor. Intangible property may be classified as:
• patents, inventions, formulas, processes, designs, patterns
• copyrights for literary, musical, or artistic compositions
• trademarks, trade names, brand names
• franchises, licenses, contracts
• methods, programs, procedures, systems
1. Major Motives for Licensing. Licensing often has an economic motive, such as the desire for faster start-up, lower costs, or access to additional resources (e.g., technology). For the licensor, the risks and costs of a given venture are lessened; for the licensee, costs are less than if it had to develop a product or process on its own. Cross-licensing represents the situation in which companies in various countries exchange technology rather than compete with each other with every product in every market.

A joint venture represents a direct investment in which more than one organization shares ownership. Although companies usually form a joint venture to achieve particular objectives, it may continue to operate indefinitely as the objective is redefined. A consortium represents the joining together of several entities (e.g., companies and governments) to combine resources and/or to strengthen the possibility of pursuing a major undertaking.

Answer Five
Licensing, joint ventures and strategic alliances are becoming increasingly more important in terms of market entry strategies for multinational companies. Critically analyse each entry strategy and explain why it is becoming more popular with multinationals. Analyse the control and strategic management issues of each method.

This is a relative easy one as students will have covered these alliances in some detail during the lectures. Mark allocation for this question should be 5 marks for each of the descriptions as well as an explanation of the control and strategic management of each of the methods. Zero marks for any of the three descriptions + strategic management issues connected with each that candidates might get wrong. 10 marks are then available for good reasoning as to why each is becoming more popular with multinationals.

Answer Six
Illustrate when Multi-national enterprises (MNEs) are likely to use an international joint venture strategy and when they might opt for an international strategic partnership? How do MNEs control and evaluate their international operations? (30 Marks)

The MNEs are likely to use an international joint venture when (a) the government encourages or recommends it; (b) there is a need for partners who know the local economy, the culture and the political system, and can cut through red tape in getting things done; and (c) there is a desire on the part of the MNE to have local operations that can create a beneficial synergy with an outside company. The MNEs are likely to opt for a strategic partnership when (a) each party can provide resources or capabilities that are critical to an undertaking and are lacking in the other party; (b) they want to share the costs of new research and development; and (c) the arrangement provides either or both parties with an opportunity to enter a new market niche, something that would not be done by either firm alone.

The basic control process consists of five steps: (a) identifying the goals and other endpoints to be measured; (b) establishing predetermined standards; (c) measuring results against these standards; (d) determining how closely performance matches standards; and (e) determining those actions to be taken in the light of this performance evaluation. Some of the common methods of measurement include (a) ROI, which is measured by dividing net income before taxes by total assets; (b) sales growth, which is the percentage increase in sales over the period that is being evaluated; (c) market share, which is the company’s sales in this market divided by total sales in the market; (d) costs or expenses associated with all activities; (e) new product development, as measured by the number of new products that have been created and/or brought to market; (f) MNE – host-country relations; and (g) management performance.

Answer Seven
Globalisation has been instrumental in creating a common culture, especially amongst the younger generation, with tastes in consumer products and services being quite similar. Critically analyse if this has led to a situation where a cultural analysis of the market is no longer required as part of the decision making process in international business. (30 Marks)

A good discussion will look at current issues relating to the growth of globalisation and its relationship with culture.
The globalisation of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace. Falling barriers to cross-border trade have made it easier to sell internationally. It has been argued for some time that the tastes and preferences of consumers in different nations are beginning to converge on some global norm, thereby helping to create a global market. Consumer products such as Citigroup credit cards, Coca-Cola soft drinks, Sony PlayStation video games, McDonald’s hamburgers, Starbucks coffee, and IKEA furniture are frequently identified as prototypical examples of this trend. Firms such as these are more than just benefactors of this trend; they are also facilitators of it. By offering the same basic product worldwide, they help to create a global market.
Despite the global prevalence of Citigroup credit cards, McDonald’s hamburgers, Starbucks coffee, and IKEA stores, it is important not to push too far the view that national markets are giving way to the global market. Significant differences still exist among national markets along many relevant dimensions, including consumer tastes and preferences, distribution channels, culturally embedded value systems, business systems, and legal regulations. These differences frequently require companies to customise marketing strategies, product features, and operating practices to best match conditions in a particular country.
The most global markets currently are not markets for consumer products – where national differences in tastes and preferences are still important enough to act as a brake on globalisation – but markets for industrial goods and materials that serve a universal need the world over. These include the markets for commodities such as aluminium, oil, and wheat; for industrial products such as microprocessors, computer memory chips (DRAMs), and commercial jet aircraft; for computer software; and for financial assets from US Treasury bills to Eurobonds and futures on the Nikkei index or the Mexican peso.
In many global markets, the same firms frequently confront each other as competitors in nation after nation. Coca-Cola’s rivalry with PepsiCo is a global one, as are the rivalries between General Motors and Toyota, Boeing and Airbus, Caterpillar and Komatsu in earthmoving equipment, and Sony, Nintendo, and Microsoft in video games. As firms follow each other around the world, they bring with them many of the assets that served them well in other national markets – including their products, operating strategies, marketing strategies, and brand names – creating some homogeneity across markets. Thus, greater uniformity replaces diversity. (Charles W. Hill. Ch1) Concepts of national and societal culture and the manner in which globalisation has impacted them would be discussed.
Brief description of culture
Characteristics of culture
Discussion on globalisation of culture
Pros and cons of global culture
Evaluation of impact
Justification of stand
(Hill Ch 3)

Answer Eight
What is the link between an international business’s strategy and its human resource management policies, particularly with regard to the use of expatriate employees and their pay scale? (Hill, Ch 18)

Human resource management (HRM) refers to the activities an organization carries out to utilize its human resources effectively
These activities include:
• determining the firm's human resource strategy
• staffing
• performance evaluation
• management development
• compensation
• labor relations
HRM can help the firm reduce the costs of value creation and add value by better serving customer needs. HRM is more complex in an international business because of differences between countries in labor markets, culture, legal systems, economic systems, and so on. HRM must also determine when to use expatriate managers (citizens of one country working abroad), who should be sent on foreign assignments, how they should be compensated, how they should be trained, and how they should be reoriented when they return home
Firms need to ensure there is a fit between their human resources practices and strategy. In order to carry out a strategy effectively, employees need the right training, an appropriate compensation package, and a good performance appraisal system

As shown in this figure, people are the linchpin of a firm’s organization architecture. For a firm to outperform its rivals in the global marketplace, it must have the right people in the right postings. Those people must be trained appropriately so that they have the skill sets required to perform their jobs effectively, and so that they behave in a manner that is congruent with the desired culture of the firm. Their compensation packages must create incentives for them to take actions that are consistent with the strategy of the firm, and the performance appraisal system the firm uses must measure the behavior that the firm wants to encourage. As indicated in Figure 18.1, the human resource function, through its staffing, training, compensation, and performance appraisal activities, has a critical impact upon the people, culture, incentive, and control system elements of the firm’s organization architecture (performance appraisal systems are part of the control systems in an enterprise). Thus, human resource professionals have a critically important strategic role.
There are three main approaches to staffing policy within international businesses:
1. the ethnocentric approach
2. the polycentric approach
3. the geocentric approach

Typically, both host nation managers and home office managers evaluate the performance of expatriate managers
Firms face two key issues on compensation:
1. how to adjust compensation to reflect differences in economic circumstances and compensation practices
2. how to pay expatriate managers
Two issues are raised in every discussion of compensation practices in an international business. One is how compensation should be adjusted to reflect national differences in economic circumstances and compensation practices. The other issue is how expatriate managers should be paid. From a strategic perspective, the important point is that whatever compensation system is used, it should reward managers for taking actions that are consistent with the strategy of the enterprise.
Most firms use the balance sheet approach to pay
This equalizes purchasing power across countries so employees have the same living standard in their foreign posting as at home.
An expatriate’s compensation package is made up of:
1. base salary
2. a foreign service premium
3. various allowances
4. tax differentials
5. benefits
1.Base Salary
• An expatriate’s base salary is normally in the same range as the base salary for a similar position in the home country
• Base salary can be paid wither in the home currency or in the local currency
2. Foreign Service Premium
• A foreign service premium is extra pay the expatriate receives for working outside his or her country of origin
• It is generally offered as an incentive to accept foreign assignments
3.Allowances
Expatriate compensation package often include :
• hardship allowances
• housing allowances
• cost-of-living allowances
• education allowances
4.Taxation
• The expatriate may have to pay income tax to both the home country and the host-country governments if the host country does not have a reciprocal tax treaty with the expatriate’s home country 5. Benefits -Many firms provide the same level of medical and pension benefits abroad that they received at home

Answer Nine
Why do many multinational corporations (MNCs) use global sourcing as an alternative to producing all the parts and materials in-house? Critically assess the challenges the firm is likely to face when it relies on external sources to provide essential components, parts and other production inputs (30 Marks)

Sometimes goods and/or services are provided directly by a MNE; at other times the firm has an arrangement with outside firms or suppliers (some of them being direct competitors) to assist in this process, often known as global sourcing. Global sourcing is the procurement of products or services from suppliers or company owned subsidiaries located abroad for consumption in the home country or a third country. China and India are major players in global sourcing. India received $22 billion worth of business in 2005, largely in business process outsourcing. In China, global sourcing tends to focus on manufacturing.

When MNEs turn to global sourcing, there is typically a hierarchical order of consideration. The company gives first preference to internal sources. However, if a review of outside sources reveals that there is a sufficient cost/quality difference to justify buying from an external supplier, then this is what the company will do. Over time the MNE learns which suppliers are best at providing certain goods and services and turns to them immediately. When this process is completed, attention is then focused on the actual manufacture of the goods. There are a number of reasons why global sourcing has become important.

A major reason is cost; it is often less expensive to outsource than to produce the items in-house. The MNEs face a variety of concerns in manufacturing goods and services. Primary among these are cost, quality and efficient production systems.
5. Multinationals seek to control their costs by increasing the efficiency of their production processes. Often this means using new, improved technology, such as new machinery and equipment. A second approach is to tap low-cost labour sources. A third is the development of new methods to cut costs. A fourth approach is that of costing products not on an individual basis but as part of a portfolio of related goods.

A second reason is that this strategy reduces the amount of inventory that the firm must keep on hand. Inventory control has received a great deal of attention in recent years, because a well-designed inventory strategy can have dramatic effects on the bottom line. One of the most popular concepts has been just-in-time (JIT) inventory, which is based on delivering parts and supplies just as they are needed. The JIT concept is an important one that has been adopted by MNEs throughout the world. However, its degree of use varies, depending on the product and the company’s production strategy. One of the major problems with JIT is that its success rests heavily on the quality and reliability of the suppliers. A second problem is that, while many firms find that it works well in managing delivery of parts to the assembly line, few have been able to apply the concept to the entire production process. One of the most important things to remember about JIT is that it involves strong support from both workers and suppliers. Everyone must be operating in unison. If the workers are slow, there will be excess inventory on hand; if the suppliers are late, the workers will be waiting for materials to arrive

A third reason is that it helps the firm develop a global sourcing network that may be useful whenever something cannot be produced in-house and it is necessary to shop the market. In recent years, some giant MNEs have taken equity positions in a number of different suppliers. Japanese multinationals are an excellent example. These firms often have a network of parts suppliers, subcontractors and capital equipment suppliers who can be called on. At the same time, these suppliers often provide goods and services to other firms. This helps them maintain their competitive edge because it forces them to innovate, adapt and remain cost effective.

A fourth reason is that some global sources provide higher-quality output than could be attained in-house. For well over a decade, quality has been one of the major criteria for business success. As the president of an international consulting firm recently put it, “Products are expected to be nearly perfect”.

A fifth is that this strategy can help a firm penetrate a new market by sourcing there.

Thus, buying a component from an external supplier has the advantage of reducing the firm’s financial and operating risks. Buying from others lowers the firm’s level of investment. By not having to build a new factory or learn a new technology, a firm can free up capital for other productive uses. Buying from others also reduces a firm’s training costs and expertise requirements. A firm that buys rather than makes retains the flexibility to change suppliers as circumstances dictate. This is particularly helpful in cases in which technology is evolving rapidly or delivered costs can change as a result of inflation or exchange rate fluctuations.

Challenges include time needed to select partners, added complexity of managing facilities away from home, limited control over manufacturing and production, product quality, delivery schedules, design changes, and costs, and vulnerability of intellectual property. Additional challenges include:
1. Less than expected cost savings, because transactions are more complex than managers expect.
2. Environmental factors. Internal conditions such as exchange rate changes, labour strikes, high tariffs, and energy costs will increase complications and costs.
3. Weak legal environment. Some countries have weak laws, and even weaker enforcement, particularly regarding intellectual property, taxes, and business regulations.
4. Risk of creating competition. Frequently as soon as a firm enters a new country, a competitor will arise and try to imitate them.
5. Inadequate workforce. Some companies have found that although labour costs may be cheap, productivity is lower, turnover is high, and skill sets are lower.
6. Unreliable suppliers. Once a company decides to outsource, it becomes vulnerable to its suppliers. If suppliers in a foreign market are unreliable, this can create fulfilment issues for the focal firm.
7. Lost morale among home country employees. Global sourcing may drive home country employees to feel uncertain about their jobs. This can create reduced commitment and productivity.

Answer Ten
Critically examine Toyota’s “lean production” system - focused on manufacturing and supply chain management - upon the firm’s competitiveness in the international automobile sector. Critically evaluate the firm’s response to the current challenge affecting its share of the global automobile market.

Supply chain management is the set of processes and steps used by an organization in acquiring the various resources and materials it needs to create its own products and services. Supply chain management is usually seen as a strategic issue because of its implications for product cost, product quality, and internal demands for capital
Because the production of most manufactured goods requires a variety of raw materials, parts, and other resources, the first issue an international production manager faces is deciding how to acquire those inputs. Other common terms for this activity include sourcing and procuring. Supply chain management clearly affects product cost, product quality, and internal demands for capital. Because of these impacts, most international firms approach supply chain management as a strategic issue to be carefully planned and implemented by top management.

The first step in developing a supply chain management strategy is to determine the appropriate degree of vertical integration. Vertical integration is the extent to which a firm either provides its own resources or obtains them from other sources. At one extreme, firms that practice relatively high levels of vertical integration are engaged in every step of the operations management process as goods are developed, transformed, packaged, and sold to customers. Various units within the firm can be seen as suppliers to other units within the firm, which can be viewed as the customers of the supplying units. At the other extreme, firms that have little vertical integration are involved in only one step or just a few steps in the production chain. They may buy their inputs and component parts from other suppliers, perform one operation or transformation, and then sell their outputs to other firms or consumers. The extent of a firm’s vertical integration is the result of a series of supply chain management decisions made by production managers. In deciding how to acquire the components necessary to manufacture a firm’s products, its production managers have two choices: The firm can make the inputs itself, or it can buy them from outside suppliers. This choice is called the make-or-buy decision. A decision to buy rather than make dictates the need to choose between long-term and short-term supplier relationships. A decision to make rather than buy leaves open the option of making by self or making in partnership with others. If partnership is the choice, yet another decision relates to the degree of control the firm wants to have.

The make-or-buy decision can be influenced by a firm’s size, scope of operations, and technological expertise and by the nature of its product. For example, because larger firms are better able to benefit from economies of scale in the production of inputs, larger automakers such as GM and Fiat are more likely to make their parts themselves, whereas smaller automakers such as Saab or BMW are more likely to buy parts from outside suppliers. At other times, the make-or-buy decision will depend on existing investments in technology and manufacturing facilities. For example, personal computer manufacturers such as Dell and IBM must decide whether they want to make or buy microprocessors, memory chips, disk drives, motherboards, and power supplies. Because of its extensive manufacturing expertise with mainframe computers, IBM is more likely to make a PC component in-house, whereas Dell is more likely to rely heavily on outside suppliers. All else being equal, a firm will choose to make or buy simply on the basis of whether it can obtain the resource cheaper by making it internally or by buying it from an external supplier.

Making a component has the advantage of increasing the firm’s control over product quality, delivery schedules, design changes, and costs. Buying a component from an external supplier has the advantage of reducing the firm’s financial and operating risks. Buying from others lowers the firm’s level of investment. By not having to build a new factory or learn a new technology, a firm can free up capital for other productive uses. Buying from others also reduces a firm’s training costs and expertise requirements. A firm that buys rather than makes retains the flexibility to change suppliers as circumstances dictate. This is particularly helpful in cases in which technology is evolving rapidly or delivered costs can change as a result of inflation or exchange rate fluctuations.

Answer Eleven
Compare joint ventures and other forms of strategic alliances. Using an appropriate example, critically evaluate the major benefits to the firms engaged in strategic partnerships

A joint venture (JV) is a special type of strategic alliance in which two or more firms join together to create a new business entity that is legally separate and distinct from its parents.
A firm wishing to enter a new market often faces major obstacles, such as entrenched competition or hostile government regulations. Partnering with a local firm can often help it navigate around such barriers. A strategic alliance may allow the firm to achieve the benefits of rapid entry while keeping costs down.
Strategic alliances can be used to either reduce or control individual firms' risks.
A firm may want to learn more about how to produce something, how to acquire certain resources, how to deal with local governments' regulations, or how to manage in a different environment—information that a partner often can offer.
Firms may also enter into strategic alliances in order to attain synergy and competitive advantage. These related advantages reflect combinations of the other advantages discussed in this section: the idea is that through some combination of market entry, risk sharing, and learning potential, each collaborating firm will be able to achieve more and to compete more effectively than if it had attempted to enter a new market or industry alone.
Regulations imposed by national governments also influence the formation of joint ventures. Many countries are so concerned about the influence of foreign firms on their economies that they require MNCs to work with a local partner if they want to operate in these countries. For example, the government of Namibia, an African nation, requires foreign investors operating fishing fleets off its coast to work with local partners.
The scope of cooperation among firms may vary significantly. The scope may consist of a comprehensive alliance, in which the partners participate in all facets of conducting business, ranging from product design to manufacturing to marketing. It may consist of a more narrowly defined alliance that focuses on only one element of the business, such as R&D. The degree of collaboration will depend on the basic goals of each partner.
Comprehensive alliances arise when the participating firms agree to perform together multiple stages of the process by which goods or services are brought to the market: R&D, design, production, marketing, and distribution. Because of the broad scope of such alliances, the firms must establish procedures for meshing such functional areas as finance, production, and marketing for the alliance to succeed. Yet integrating the different operating procedures of the parents over a broad range of functional activities is difficult in the absence of a formal organizational structure. As a result, most comprehensive alliances are organized as joint ventures.
Strategic alliances may also be narrow in scope, involving only a single functional area of the business. In such cases, integrating the needs of the parent firms is less complex. Thus, functionally based alliances often do not take the form of a joint venture, although joint ventures are still the more common form of organization. Types of functional alliances include production alliances, marketing alliances, financial alliances, and R&D alliances.
Incompatibility among the partners of a strategic alliance is a primary cause of the failure of such arrangements. At times, incompatibility can lead to outright conflict, although typically it merely leads to poor performance of the alliance. Compatibility problems can be anticipated if the partners carefully discuss and analyze the reasons why each is entering into the alliance in the first place.
Limited access to information is another drawback of many strategic alliances. For a collaboration to work effectively, one partner (or both) may have to provide the other with information it would prefer to keep secret.
An obvious limitation of strategic alliances relates to the distribution of earnings. The partners must also agree on the proportion of the joint earnings that will be distributed to themselves as opposed to being reinvested in the business, the accounting procedures that will be used to calculate earnings or profits, and the way transfer pricing will be handled.
Just as firms share risks and profits, they also share control, thereby limiting what each can do. Most attempts to introduce new products or services, change the way the alliance does business, or introduce any other significant organizational change first must be discussed and negotiated.
The economic conditions that motivated the cooperative arrangement may no longer exist, or technological advances may have rendered the agreement obsolete.

Answer Twelve
Identify and explain five factors, which make emerging markets attractive for international business? What strategies might the firm adopt so as to deal with the challenges associated with doing business in emerging markets?

Emerging markets are attractive: target markets, manufacturing bases, and sourcing destinations.

Emerging Markets as Target Markets
• Growing middle class - emerging markets have become important –represent substantial demand for electronics and automobiles and health care services.
• The largest emerging markets have doubled their share of world imports in the last few years.
• Emerging markets are excellent targets for manufactured products, technology, and sophisticated technology:
• Emerging markets- niche markets:
• Demand is growing fastest in emerging markets- Black & Decker and Robert Bosch, the fastest-growing markets are in Asia, Latin America, Africa, and the Middle East
• Governments and state enterprises are targets for sale of infrastructure-related products/services- machinery, power transmission equipment, transportation equipment, high-technology products, etc.
• Emerging Markets as Manufacturing Bases

Emerging markets have long served as platforms for manufacturing by global MNEs.
■ Advantages:
Home to low-wage, high-quality labor for manufacturing and assembly operations.
Large reserves of raw materials and natural resources.

Emerging Markets as Sourcing Destinations
• Outsourcing- the procurement of selected value-adding activities, including production of intermediate goods or finished products, from independent, external suppliers- helps foreign firms become more efficient, concentrate on their core competences, and obtain competitive advantages.
• Offshoring- when sourcing involves foreign suppliers or production bases.
• Global sourcing- refers to the procurement of products and services from foreign locations. Procurement can be from either independent suppliers or company-owned subsidiaries.
• Emerging markets have served as excellent platforms for sourcing:
MNEs have established call centers in Eastern Europe, India, and the Philippines.
Dell and IBM outsource certain technological functions to knowledge workers in India.
Intel and Microsoft have much of their programming activities performed in Bangalore, India.
• Investments from abroad benefit emerging markets as they lead to new jobs and production capacity, transfer of technology and linkages to the global marketplace.

RISKS AND CHALLENGES OF DOING BUSINESS IN EMERGING MARKETS
Political instability
• The absence of reliable government authorities adds to business costs, increases risks, and reduces managers’ ability to forecast business conditions.
• Political instability is associated with corruption and weak legal frameworks that discourage investment.
• Weak intellectual property protection
• Even if they exist, laws that safeguard intellectual property rights may not be enforced, or the judicial process may be painfully slow.

Bureaucracy, red tape, and lack of transparency
• Burdensome administrative rules, as well as excessive requirements for licenses, approvals, and paperwork, delay business activities.
• Excessive bureaucracy means lack of transparency, i.e. legal and political systems are not open and accountable. Where anti-corruption laws are weak, bribery, kickbacks and extortion are common.
• In Transparency International’s rankings, emerging markets such as Argentina, Indonesia, and Venezuela experience substantial corruption.

Partner availability and qualifications
• Foreign firms need to seek alliances with local partners in countries characterized by inadequate legal and political frameworks- gaining access to local market knowledge, supplier and distributor networks, and key government contacts.
• Qualified business partners in emerging markets- not readily available.

Dominance of family conglomerates
• Many emerging market economies are dominated by family-owned rather than publicly-owned businesses.
• Family conglomerate (FC) is a large, privately-owned company that is highly diversified, and control economic activity and employment in emerging markets.

STRATEGIES FOR DOING BUSINESS IN EMERGING MARKETS
• Unique approaches for different market conditions.

• Partnering with Family Conglomerates
Advantages:
(1.) reduce risks, time, and capital requirements of new market entry
(2.) develop relationships with governments and other key, local players
(3.) target market opportunities more rapidly and effectively
(4.) overcome infrastructure-related hurdles
(5.) leverage FC’s resources and local contacts.

• Marketing to Governments in Emerging Markets
1. In emerging markets, government agencies and state-owned enterprises are important customer groups:
Governments buy enormous quantities of products (such as computers, furniture, office supplies, and motor vehicles) and services (such as architectural, legal, and consulting services).
State enterprises in areas such as railways, airlines, banking, oil, chemicals, and steel buy goods and services from foreign companies.
Public sector influences the procurement activities of various private or semi-private corporations.

• Skillfully Challenge Emerging Market Competitors
Advantages such as low-cost labor, skilled workforce, government support, and FCs are fostering the rise of firms that are capturing market share from incumbent international players.

Answer Thirteen
What characteristics are generally associated with emerging economies, and why are these important considerations for foreign investors? Critically discuss how inward FDI might help emerging economies and their domestic industries? (30 Marks)

Emerging market countries are: (a) growing in importance for international managers for both “market-seeking investments” and “resource-seeking investment”; (b) strongly government-controlled, in that government agencies play a central role in negotiating with foreign investors and deciding the local “rules of the game”; (c) less predictable and riskier than triad markets, which investors often underestimate in their pursuit of the high level of rewards on offer; (d) the source of new competitors, as local firms move up the value-chain, becoming more sophisticated and more international.
Some of the characteristics that we tend to associate with emerging economies and that foreign investors must consider are: low income levels, relatively more government control than in triad nations, a lack of infrastructure, low wages, economic and political risk, abundance of natural resources, etc.
Many emerging economies have reduced trade and investment barriers to encourage FDI as well as privatized government-owned companies.

One of the primary purposes of FDI is to help an MNE increase its profits and sales. Others include: (a) to enter rapidly growing markets; (b) to reduce costs; (c) to gain a foothold in economic blocs; (d) to protect domestic markets; (e) to protect foreign markets; and (f) to acquire technological and managerial know-how.

Inward FDI often comes with know-how. This know-how is transferred to workers, suppliers, distributors and even customers and this helps create and improve domestic industries.

Ch 19
InternationalBusiness, Fifth Edition (Pearson Education, 2009) by Alan M. Rugman and Simon Collinson.

Answer Fourteen
How did Nestle create shared value while lowering costs and better serving supplier needs? Evaluate Nestlé’s management of corporate social responsibility, and indicate how this can be best managed, given an international strategic perspective. (40 marks)

Establishing the value chain in Moga required Nestlé to transform the competitive context in ways that created tremendous shared value for both the company and the region.
Nestlé built refrigerated dairies as collection points for milk in each town and sent its trucks out to the dairies to collect the milk. With the trucks went veterinarians, nutritionists, agronomists, and quality assurance experts. Medicines and nutritional supplements were provided for sick animals, and monthly training sessions were held for local farmers. Farmers learned that the milk quality depended on the cows’ diet, which in turn depended on adequate feed crop irrigation. With financing and technical assistance from Nestlé, farmers began to dig previously unaffordable wells. Improved irrigation not only fed cows but increased crop yields, producing surplus wheat and rice and raising the standard of living.
Corporate Social Responsibility is the set of obligations an organization undertakes to protect and enhance the society in which it functions.
Organizations themselves do not have ethics, but do relate to their environment in ways that often involve ethical dilemmas and decisions by individuals within the organization. These situations are generally referred to within the context of the organization's social responsibility. Managers must balance the ideal of a global stance on social responsibility against the local conditions that may compel differential approaches in the various countries where the firm does business.
Identify and discuss Nestlé’s CSR
Nestlé’s Corporate Social Responsibility is driven by the choice of a unique competitive position, which unlocks shared value, by investing in CSR issues in ways that strengthen corporate competitiveness.
The more closely related a specific CSR issue is to a company’s core business, the greater the opportunity to leverage the firm’s resources to enhance the value chain and its social impacts
Indicate how this can be best managed, given a strategic perspective:
• Nestle can create shared value while lowering costs or better serving customer needs
• Nestle can seize the opportunity to leverage resources and benefit society
• Nestle can rise to the challenge involved in adding a social dimension to the company’s value proposition.
• Increases competitiveness as suppliers are assured
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