International Business Operations

Question 1

What are the 6 methods of conducting international business operations?

Answer 1

International trade- exporting/importing products or services

Licensing- entities that provide the right to use processes or technologies in exchange for a fee are engaged in licensing activities

Franchising- entities whose marketing service or delivery strategy provides training and related service delivery resources in exchange for a fee

Joint ventures- take advantage of comparative advantage of one or both of the participants in marketing or delivering a product

Direct Foreign investment (DFI)- an entity may establish international ops by purchasing a foreign company as a susidiary or by starting a subsidiary operation within the borders of a foreign country

Global sourcing- the synchronization of all levels of a product manufacturing, including R&D, production, and marketing on an international basis. Implemented through a range of organizational and business arrangements (import/export ops, licensing, franchises, JVs)

Question 2

What are the 8 relevant factors of international business operations?

Answer 2

• Political and legal influences
• Potential for asset expropriation
• taxes and tariffs
• limitations on asset ownership or JV participation
• content or value added limits
• foreign trade zones
• economic systems (centrally planned economies, market economies, conglomerates)
• culture (individualism vs collectivism, uncertainty avoidance, ST vs LT orientation, acceptance of leadership hierarchy, technology and infrastructure)

Question 3

Describe the exchange rate inherent risk of international business operations

Answer 3

• transaction risk
• economic risk
• translation risk

Question 4

Describe the foreign economies inherent risk of international business operations

Answer 4

foreign demand: a multinational corp exporting to a foreign country is concerned with demand within that country
-weakening demand may cause the foreign gov to implement tariffs that reduce foreign penetration
-a reduction in foreign penetration may require either curtailment of foreign ops or export of goods produced by the multinational inside the foreign country instead of selling within the foreign country

Interest rates:
- higher int rates in the foreign country are indicators of slower economic growth and reduced demand and vice versa

Inflation:
- higher local (economy) inflation reduces purchasing power, making imported goods more expensive and reducing local demand and vice versa

Exchange rates:
- weak local currency reduces demand for imported goods and vice versa

Question 5

Describe the political inherent risk of international business operations

Answer 5

• represent noneconomic events or environmental conditions that are potentially disruptive to financial operations
• political climates or actions can disrupt cash flows

Other features of political risk:
- bureaucracies and related inefficiencies or barriers to trade
- corruption
- the host gov’s attitude towards foreign firms
- the attitude of consumers toward foreign firms
- inconvertibility of foreign currency
- war