Why should students study international business?

Suggested Answer: International business involves any business transaction between parties from more than one country. It differs from domestic business in that international business transactions cross national borders while domestic transactions do not. More specifically, international business involves foreign currency transactions for at least one party, it may require a company to adjust to a foreign legal system and/or culture, and the way products are produced or the types of products that are produced may vary according to the availability of resources in different countries.

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Q2: Why is it important for business students to study international business?

Suggested Answer: There are several reasons to study international business. Most large organizations will have international operations or be affected by the global economy. In addition, an understanding of international business will allow students to better assess career opportunities, interact more effectively with other managers, and keep pace with competitors. Furthermore, students may eventually work for a company headquartered in another country. Finally, small businesses are becoming more involved in international business.

Q3: Would you want to work for a foreign-owned firm? Why or why not?

Suggested Answer: The answer to this question is, of course, based on a student’s opinion and therefore can generate a lot of discussion. Some students may already work for a foreign-owned firm; some may work for a foreign-owned firm and not realize it. Students who work for foreign-owned companies can be asked to contrast their experiences in the company with positions they may have held elsewhere (or can be asked to simply comment on their experiences if they have not held other positions). This can set the stage for a discussion of the merits of working for or not working for foreign-owned companies.

Tutorial 2 (Topic 1)

Q1: What are the basic forms of international business activity?

Suggested Answer: The basic forms of international business activity are importing and exporting, international investments, licensing, franchising, and management contracts. Exporting involves selling products made in one’s own country for use or resale in other countries, while importing involves buying products made in other countries for use or resale in one’s own country. International investments include foreign direct investment and portfolio investments. Foreign direct investments are investments made for the purpose of actively controlling property, assets, or companies located in foreign host countries, while portfolio investment involves the purchase of foreign financial assets, such as stocks, bonds, and certificates of deposit for purposes other than control. A licensing agreement allows a firm in one country to use all or some of the intellectual property of a firm in another country in exchange for a royalty payment. A franchise agreement authorizes a firm in one country to utilize the brand names, logos, and operating techniques of a firm in a second country in exchange for a royalty payment. Management contracts involve an agreement in which a firm in one country operates facilities or provides other management services to a firm in another country for a fee.

Q2: What are the basic reasons for the recent growth of international business activity?

Suggested Answer: A number of factors have led to the recent growth of international business. The more important factors include market expansion, resource acquisition, competitive forces, technological change, and social change. Market expansion has led to growth in international business as firms, facing saturated domestic markets, seek new market opportunities in other countries. In some cases, firms will also expand into other markets as they seek resources such as materials, labor, and/or capital. Such resources may either be scarce or unavailable domestically. The competitive forces that exist in today’s marketplace also encourage the internationalization of business. When a firm’s competitors expand into new markets, that firm must also internationalize. Changes in technology, particularly in areas such as communications, transportation, and information processing, are making it increasingly easier for firms to carry out international transactions, thus adding to the growth of international business. Social change is making it possible for firms to sell their products more easily in foreign markets. Consumers today are much more aware of the products and services being offered in other markets, and are therefore more likely to seek out foreign-made products than in the past. Finally, looser government trade and investment policies have made it easier for international businesses to capitalize on growth opportunities in the global marketplace.

Q3: Why do some industries become global while others remain local or regional?

Suggested Answer: There are a number of factors that play a role in determining which industries become global, which become regional, and which remain local. The airline industry, for example, is considered a global industry. One of the main reasons for this status is the cost of developing and producing large aircraft, combined with market size. The industry is “forced” to be global because it must sell aircraft to a marketplace that is big enough to justify the costs of developing and building new jets. No single country has a market big enough to justify such costs, thus companies must seek customers around the globe. On the other hand, the bakery industry tends to be regional or local because its products tend to perish very easily. While improvements in transportation and shipping have created a larger marketplace, for the most part, firms in this industry cater to local customers. From this brief discussion, it is clear that factors such as cost, market size, and product life all play a role in determining which industries will be global and which will not. However, it is important to recognize that many other factors (for example, resource availability, government regulations, and similarity of customer taste) also play a role in this determination.

Q4: What is the impact of the Internet on international business? Which companies and which countries will gain as Internet usage increases throughout the world? Which will lose?

Suggested Answer: The Internet has had a significant impact on international business in at least three ways. First, the Internet facilitates international trade in services (e.g., banking, education, and retailing). Second, it has helped level the playing field between large and small firms entering a foreign market, since even small firms can sell their products internationally on the Web. Third, the Internet can make business-to-business transactions (e.g., bringing together suppliers and buyers) much easier and more efficiently.

Q5: Which markets are more important to international business – the traditional markets of North America, the European Union, and Japan or the emerging markets? Defend your answer.

Suggested Answer: Clearly, the volume of business in the traditional markets is much greater than the volume in emerging markets. However, as the traditional markets become saturated, opportunities for growth will increasingly shift toward emerging markets.

Tutorial 3 (Topic 2)

Q1: Describe the four different types of legal systems with which international businesses must deal.

Suggested Answer: The four types of legal systems with which international businesses must deal are common law, civil law, religious law, and bureaucratic law. The common law system relies on the cumulative effect of judicial decisions on individual cases. In contrast, the civil law system is based on a detailed listing of what is and is not permissible. Religious law has its base in the official rules that govern the faith and practice of a particular religion. Finally, bureaucratic law is whatever the country’s bureaucrats say it is.

Q2: How can an MNC affect its host country?

Suggested Answer: An MNC can affect its host country in numerous ways, some positive, others negative. On the positive side, local jobs may be created as a result of investments in plants and factories; tax payments may improve a country’s infrastructure; and technology may be transferred to the host country. On the negative side, local jobs and profits may be lost as a result of increased competition, and the local economy may become dependent on the success of the MNC. An MNC will typically also have a significant political impact.

Q3: Why do countries impose restrictions on foreign ownership of domestic firms?

Suggested Answer: Countries may impose restrictions on foreign ownership of domestic firms to avoid control of their economies by foreigners, because they fear that foreign companies could undermine their industrial policies, and because they believe that local citizens should receive the benefits of certain industries.

Q4: How do restrictions on repatriation of profits affect MNCs?

Suggested Answer: In an effort to encourage local reinvestment of earnings, countries may limit the repatriation of profits by MNCs. In some cases, the threat of restrictions on the repatriation of profits will discourage MNCs from investing in the first place. Restrictions are sometimes formulated in such a way that export operations are encouraged. The text provides an example of how Poland encourages firms to expand their exports from their Polish operations by allowing companies to repatriate all of their profits earned from exports.

Q5: What is political risk? What forms can it take?

Suggested Answer: Political risks are defined as any changes in the political environment that may adversely affect the value of the firm’s business activities. Most political risks can be divided into three categories: ownership risk (the threat of confiscation or expropriation), operating risk (political changes will put employees and or profits in danger), and transfer risk (the threat that the government will interfere with the firm’s ability to shift funds in and out of the country).

Tutorial 4 (Topic 3)

Q1: What is culture?

Suggested Answer: Culture consists of the interrelated values, beliefs, behaviors, customs, and attitudes that distinguish a society. It is a learned behavior that is shared between members of a society and it changes to adapt to external forces that affect a society.

Q2: What are the primary characteristics of culture?

Suggested Answer: The primary characteristics of culture are social structure, language, communication, religion, and values and attitudes. How these elements interact affects the local environment in which international businesses operate.

Q3: What are individualism and collectivism? How do they differ?

Suggested Answer: Individualism is the cultural belief that the person comes first and collectivism is the belief that the group comes first. Individuals from individualistic cultures typically possess a high degree of self-respect and independence, while those from collectivistic cultures tend to put the good of the group ahead of their own personal interests.

Q4: What is power orientation?

Suggested Answer: Power orientation, the second of Hofstede’s dimensions, refers to the beliefs that people in a culture hold about the appropriateness of power and authority differences in hierarchies such as business organizations. In cultures characterized by power respect, people tend to accept the power and authority of their superior simply on the basis of the superior’s position in the hierarchy and to respect the superior’s right to that power. In contrast, in cultures that are characterized by power tolerance, much less significance is attached to a person’s position in the hierarchy.

Q5: What is uncertainty orientation?

Suggested Answer: Uncertainty orientation, the third of Hofstede’s dimensions, is the feeling people have regarding uncertain and ambiguous situations. Those individuals characterized by uncertainty acceptance are stimulated by change and new opportunities, while those individuals characterized by uncertainty avoidance dislike and avoid ambiguity.

Tutorial 5 (Topic 4)

Q1: What is ethics? What is social responsibility?

Suggested Answer: According to the chapter, ethics is an individual’s personal beliefs about whether a decision, behavior, or action is right or wrong. Social responsibility, as defined in the text, is the set of obligations an organization undertakes to protect and enhance the society in which it functions.

Q2: Distinguish between ethical and unethical behavior.

Suggested Answer: Ethical behavior refers to behavior that conforms or is consistent with generally accepted social norms. Unethical behavior, on the other hand, is behavior that violates generally accepted social norms.

Q3: How do organizations attempt to manage ethical behavior across borders?

Suggested Answer: The chapter focuses on three main approaches to managing ethical behavior across borders. The three approaches include (1) the use of formal guidelines and codes of ethics to specify ethical behavior and hold employees accountable for unethical behavior; (2) ethics training to enable employees to make ethical decisions – even in instances not clearly covered by a formal ethics code; and (3) corporate culture and practices which set standards of behavior throughout the organization.

Q4: Identify the major areas of social responsibility for international business.

Suggested Answer: The first area is behaving responsibly toward organizational stakeholders (customers, employees, investors, as well as other groups affected by the organization). The second area involves behaving responsibly in preserving and protecting the natural environment. The final area identified in the text is the firm’s responsibility in promoting general social welfare (protecting human rights, reducing poverty and disease, and so on).

Q5: What is a whistle-blower?

Suggested Answer: A whistle-blower is an employee who discloses illegal or unethical conduct on the part of others in the organization.

Tutorial 6 (Topic 5)

Q1: What is international trade? Why does it occur?

Suggested Answer: International trade is trade between the residents (individuals, businesses, nonprofit organizations, or other forms of associations) of two countries. Trade involves the voluntary exchange of goods, services, or money. International trade occurs because the parties to the transaction believe that they benefit from the voluntary exchange.

Q2: How do the theories of absolute advantage and comparative advantage differ?

Suggested Answer: The difference between absolute advantage and comparative advantage is that the former looks at absolute differences in productivity, while the latter looks at relative productivity differences. The difference between the theories exists because comparative advantage incorporates the concept of opportunity costs in determining which good should be produced.

Q3: How do interindustry and intraindustry trade differ?

Suggested Answer: The difference between interindustry trade and intraindustry trade is that the former involves two countries exchanging goods produced in different industries (for example, the exchange of British raincoats for American beer), while the latter involves two countries exchanging goods produced in the same industry (for example, Ford exports American-made cars to Japan, while Mazda exports Japanese-made cars to the U.S.).

Q4: What are the primary sources of the competitive advantages used by firms to compete in international markets?

Suggested Answer: The primary sources of sustained competitive advantage used by firms to compete in international markets include (a) using intellectual property rights such as trademarks or brand names to gain advantages over rivals; (b) capitalizing on first-mover advantages gained by spending large sums on research and development; (c) achieving economies of scale or scope, and the resulting lower average cost base to gain an advantage over the competition; and (d) exploiting the learning curve.

Q5: What are the four elements of Porter’s diamond of national competitive advantage?

Suggested Answer: The four elements of Porter’s diamond of national competitive advantage are factor conditions (a nation’s endowment of factors of production); demand conditions (the existence of a large, sophisticated domestic consumer base); related and supporting industries (local suppliers that are eager to meet the industry’s production, marketing, and distribution needs); and company strategy, structure, and rivalry (the domestic environment in which firms compete).

Tutorial 7 (Topic 6)

Case Study : The Subprime Meltdown (Textbook: pg, 261)

The closing case examines the events leading to the financial crisis currently affecting the global financial services industry and its impact on the world economy.

Key Points:

This crises impacts people from all over the world.

The problems in the subprime mortgage market were based on poor lending practices, low interest rates, a boom in the U.S. housing market and an unusual level of high risk taking on the part of lenders and investors.

Over the past 10 years, almost $2 trillion worth of securities were sold worldwide. Investors were driven to invest on the belief that the housing prices would continue to increase, and homeowners would continue making payments against these outstanding loans.

The problem was made worse when the U.S. Federal Reserve cut interest rates in an attempt to stimulate the economy. The lowering interest rates then created the boom in the U.S. housing market.

As housing prices increased, the lenders lowered the down payment requirement, and started offering “no money down” mortgages, interest only and adjustable rate mortgages, which came with some uncharacteristically low initial rates.

People with poor credit histories then became involved because of these new non-traditional mortgage programs.

Eventually, interest rates increased and many of these borrowers started defaulting because they were unable to make the payment. With the weakening housing market, lenders were then left with property that was worth less than the value of the loan.

This became a global crisis because many of these mortgages were sold into the secondary market. Many of these mortgages were bundled together and sold to investors as “Collateralized Debt Obligations” (CDO’s).

As people started defaulting on their loans, these investors were left with properties that continued to lose value.

In an attempt to maintain liquidity, many central banks (including the U.S. Federal Reserve) released funds.

Additionally, several “Sovereign Wealth Funds” (see Chapter 2), including the Singapore Investment Authority, China Investment Corporation, and the Abu Dhabi Investment Authority purchased equity positions in many of these financial institutions.

Case Questions

Q1: This case refers to the “classic trap of borrowing short and lending long.” Explain what this means. What are the advantages of borrowing short and lending long? What are the disadvantages?

Suggested Answer: Financial institutions tend to borrow money from depositors for short terms and lend money out to clients for long terms. (For example: A depositor visits a bank and acquires a 6-month Certificate of Deposit that pays an interest rate of, say, 2.5%. The bank might then take that deposit and combine it with other short-term deposits to give a prospective homeowner a 30-year mortgage with an interest rate of 5.5%.) The case talks about “Specialized Investment Vehicles” (SIV’s). These SIV’s were financed by issuing short-term notes with low interest rates. These institutions would then take these funds and invest them in high yielding “Collateralized Debt Obligations” (CDO’s) which were backed by these subprime mortgages (long-term investment). The financial institution profits are made from the spread between the two interest rates.

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The potential risk and drawbacks occur when the bank borrows money agreeing to pay it back when term is due, without the knowledge of where or when they will obtain funds to repay the depositor. The risks related to this rests with the bank, and under normal conditions, they would be able to secure funds from other sources. However, they do not have a “crystal ball” to see what the future will hold.

Economic conditions could change dramatically, and if the conditions deteriorate, the financial institution might have to pay a much higher interest rate to the financing that they might need, reducing and potentially eliminating their profits.

Q2: Why do the Sovereign Wealth Funds of Singapore, Abu Dhabi, and China choose to invest in UBS, CITIGROUP, and Morgan Stanley at a time they were performing “poorly”? Do these investments create any public policy issues? If so, what are they?

Suggested Answer: Sovereign Wealth Funds are a new and controversial source of capital for the world economy (see Venturing Abroad – Chapter 2 / p.44). They have decided to invest in these overseas banks because of what they view as their long-term growth prospects. It might be argued that at this time the funds investment differed from a normal practice, but the current financial system is unique. The SWF could be seen as contributing to global financial stability because of their focus on diversification and long-term returns.

Q3: The change in the mortgage lending standards in the United States created a global financial crisis. Do you think an international financial regulatory agency should be created to reduce the likelihood that such crises will arise in the future? Why or why not?

Suggested Answer: Students will probably take different perspectives in responding to these questions. The obvious answer is that some governmental oversight might be necessary, but realistically an international regulatory agency (overseeing all countries) would be almost impossible. In short, the only way to perhaps avoid future occurrences of such situations would be a simple reverting back to traditional sound banking practices. Monies should be loaned only to credit-worthy individuals.

Tutorial 8 (Topic 7)

Q1: What is the infant industry argument?

Suggested Answer: The infant industry argument suggests that the infant manufacturing sector in a newly independent country be given protection from foreign competition until it has reached a level of maturity that will allow it to effectively compete in the marketplace. The text provides an example of how Japan used the argument to protect certain industries during the period after World War II.

Q2: What are the different types of tariffs?

Suggested Answer: A tariff is a tax placed on a good involved in international trade. An export tariff is levied on goods as they leave a country, while a transit tariff is levied on goods as they pass through a country bound for another country. An import tariff is levied on imported goods either on an ad valorem basis (assessed as a percentage of the market value of the imported good) or as a specific tariff (assessed as a specific dollar amount per unit of weight or some other standard measure). Compound tariffs include both ad valorem and specific tariffs.

Q3: What are the major forms of NTBs?

Suggested Answer: The major forms of nontariff barriers include quotas, numerical export controls, and other nontariff barriers. Quotas are numerical limits on the quantity of a good that may be imported into a country during a specific period of time. Numerical export controls limit the amount of a good that is exported. Examples include embargoes that absolutely ban a particular export, and voluntary export restraints. Other nontariff barriers include product and testing standards; restrictions on access to distribution systems; public sector procurement policies that give preferential treatment to domestic firms; local purchase requirements; and regulatory, currency, and investment controls.

Q4: Explain Free Trade Zones (FTZ).

Suggested Answer: A foreign trade zone is a geographic area in which imported or exported goods receive preferential tariff treatment. An FTZ may be as small as a warehouse or a factory site or as large as the entire city. Firms using foreign trade zones can reduce and even eliminate customs duties. Typically, foreign trade zones are used to stimulate economic development. Through utilization of an FTZ, a firm typically can reduce, delay, or sometimes totally eliminate customs duties. Generally, a firm can import a component into an FTZ, process it further, and then export the processed good abroad and avoid paying customs duties on the value of the imported component.

Q5: Should we worry if foreigners sell us goods cheaply?

Suggested Answer: Probably not. If the foreign exporter is engaging in predatory pricing with the hope of eventually driving domestic competitors out of business, worry might be justified. However, if the foreigner has a comparative advantage in the good being exported, cheap imported goods benefit the exporting nation and the importing nation as well. Consumers are paying less for goods that are being produced more efficiently (in an absolute or relative sense) elsewhere.

Tutorial 9 (Topic 8)

Q1: What does most favored nation (MFN) mean?

Suggested Answer: MFN is a trading status that grants the recipient the same tariff rates as the importing country gives its preferred trading partners. All members of the WTO are expected to grant MFN status to other WTO member countries.

Q2: How does the WTO differ from GATT?

Suggested Answer: The World Trade Organization has been charged with the implementation of the Uruguay round. While GATT focused primarily on trade in goods, the WTO’s scope is much broader; it will act as the world’s advocate and monitor of more open and free trade in goods, services, and technology. Moreover, unlike its predecessor, the WTO has the power to enforce its policies.

Q3: How do the various forms of economic integration differ?

Suggested Answer: There are five forms of regional economic integration. A free trade area eliminates all barriers to trade among member countries, but allows each member to establish its own trade policies against nonmembers. A customs union involves free trade among member countries, and follows a common external trade policy toward nonmembers. A common market eliminates tariffs among member countries, follows a common external trade policy, and eliminates barriers that inhibit the movement of factors of production. In an economic union, barriers to trade among member countries are eliminated, a common external trade policy is established, factors of production move freely between countries, and economic policies are coordinated. Finally, a political union further integrates nations by encompassing complete political integration.

Q4: Should international businesses promote or fight the creation of regional trading blocs?

Suggested Answer: The answer to this question depends on whether a firm is on the inside looking out, or on the outside looking in. For companies that operate in a member country, regional trading blocs offer significant opportunities associated with larger markets. However, the marketplace will probably become more competitive. Regional trading blocs are usually regarded negatively by nonmember firms because they may find themselves completely shut out of a particular market. In fact, the threat of a “Fortress Europe” prompted many outside firms to establish operations within the EU in the late 1980s.

Q5: Explain the initiatives of Asia-Pacific Economic Cooperation.

Suggested Answer: Asia-Pacific Economic Cooperation (APEC) includes 21 countries from both sides of the Pacific Ocean. It was founded in 1989 in response to the growing interdependence of the Asia-Pacific economies. A 1994 APEC meeting in Indonesia led to a declaration committing members to achieve free trade in goods, services, and investment among members by 2010 for developed economies and by 2020 for developing economies. This objective was furthered at APEC’s 1996 meeting in Manila, where many countries made explicit pledges to reduce barriers to Asia-Pacific trade.

Tutorial 10 (Topic 9)

Case Study: The New Conquistador (Textbook, pg: 351)

The closing case explores the activities of Telefonica de Espana, discussing the deregulation of the Spanish telecommunications market and concentrating on Telefonica’s aggressive expansion into South American markets.

Key Points:

Telefonica de Espana was a state-owned phone company in Spain for most of its existence.

With the EU’s abolishment of state-sponsored telephone monopolies in 1998, Telefonica privatized, modernized, and re-analyzed its strategy.

Telefonica’s management decided to target Latin America for expansion, feeling its linguistic and historical ties gave it a competitive advantage.

Having been a state-owned monopoly itself, Telefonica invested in several phone companies being privatized in Latin America and successfully turned them around. However, the case also details some of the troubles Telefonica has had in competing successfully in South America.

Case Questions

Q1: Go back in time to 1986. Do a SWOT analysis for Telefonica de Espana. Does your analysis lead to the same conclusions as Telefonica’s managers?

Suggested Answer: Not entirely. In 1986, Latin America was a long way from its move toward privatization in the 1990s. Thus, the opportunity to move aggressively into Latin America could not be foreseen. The threat of increased competition from other European competitors, however, could be expected as Spain joined the EU and barriers to trade and investment across Europe began to fall. One of Telefonica’s strengths would have been its government ownership in 1986 (no longer a strength today), and its greatest internal weakness would have been inefficiency – a weakness addressed in the late 1990s.

Q2: How would you characterize the corporate strategy adopted by Telefonica?

Suggested Answer: Related diversification through acquisition. They expanded in industries traditionally related to the telephone industry (cellular service, Internet).

Q3: Minority investors in Telefonica’s South American subsidiaries are unhappy with the parent corporation. Suppose you are a senior manager at the parent corporation. How would you handle the problem with the minority investors? What would you recommend to the CEO should be done about the minority investors?

Suggested Answer: This question allows for a lot of latitude on the part of students, as well as creative thinking. There is no “right” answer and students should be encouraged to consider a wide range of alternatives. The problem with minority stockholders is not yet severe. The management fees it charges its South American subsidiaries erodes their profitability while improving the profitability of the main office. In today’s global equity market, investors can choose to invest other stocks related to Telefonica. Telefonica may wish to reexamine the pricing of its sp