International Business Operations_M4

Question 1

How to compute comparative advantage and opportunity cost?

Answer 1

Comparative advantage represents the ability of an entity or country to produce a good or service at a lower opportunity cost than another entity or country.

Question 2

What are transfer pricing?

Answer 2

Transfer pricing involves setting prices for a product or service when exchanges occur between different units within the same organization.

• One of the goals of transfer pricing is to minimize the amount of taxes paid by the overall organization.
• Shifting more costs to the country with the highest tax burden will reduce profitability for the entity in that country, which in turn will reduce taxes owed.
• Higher profitability in the country with the lower tax burden will minimize the overall taxes paid for the entity.
• Transfer prices must be set in compliance with applicable tax regulations.
• Transfer pricing is applicable in a situation in which two companies that are owned by the same parent company engage in transactions with each other.
• Profits are maximized when the company selling the good has a lower tax rate than the company purchasing the good.

Question 3

What is a joint venture used for?

Answer 3

taking advantage of each participating firm’s comparative advantages.

Question 4

What are some inherent risk of conducting business internationally?

Answer 4

• Exchange rates fluctuating can increase the risk of doing business in other countries. This is related to the fact that interest rates of the countries involved are sometimes unstable.
• The state of the economy in a foreign country adds a significant risk of doing business internationally. This would consist of the foreign demand, interest rates of the foreign country, inflation and the exchange rate.
• Political risk is also a significant factor in conducting business internationally. The political climate in a foreign country could impact cash flow. Factors of political risk include barriers to trade, corruption, foreign government’s attitude toward other countries, taxes, attitude of consumers to foreign firms, convertibility of foreign currency and war.

Question 5

What are the key things regarding foreign economies?

Answer 5

• Lower inflation leads to increased purchasing power, which will increase local demand and will make imported goods less expensive.
• High interest rates (relative to other countries) indicates slower economic growth and demand.
• A strong local currency will increase the demand for imported goods and decrease the demand for exported goods.
• A weak local currency will reduce the demand for imported goods and increase the demand for exported goods

Question 6

What are some political risk to entering a foreign market?

Answer 6

• Barriers to trade established by local governments.
• A foreign currency that cannot be converted into another currency.
• A local government making it difficult for foreign firms to operate.

International risk mitigation:

• American depository receipts (ADRs) are securities of non-U.S. companies that trade in U.S. financial markets. Because they trade like regular shares of stock on U.S. exchanges and are denominated in U.S. dollars, they carry lower levels of risk than direct investments in foreign entities.

Question 7

What type of political and financial risk do global companies deal with conducting business in a particular foreign location face?

Answer 7

Country risk encompasses the political risk, economic risk, transfer risk, sovereign risk, and exchange rate risk associated with engaging in business with foreign countries

Question 8

What is the primary consideration in international business in the cashflow analysis?

Answer 8

Repatriation Restrictions
* Exist when a company invests money in a foreign company but is restricted from bringing that money back to its home country.
* These restrictions would affect the cash inflows expected from the investment.

Question 9

What is American depository receipts (ADR)?

Answer 9

• Are securities of non-U.S. companies that trade in U.S. financial markets.
• Because they trade like regular shares of stock on U.S. exchanges and are denominated in U.S. dollars, they carry lower levels of risk than direct investments in foreign entities.

Question 10

What is a foreign trade deficit?

Answer 10

Is relevant at a macro level and occurs
when imports exceed exports.

Question 11

What are the methods of conducting international business?

Answer 11

1. International Trade
2. Licensing
3. Franchising
4. Joint Venture
5. Direct Foreign Investment (DFI)
6. Global Sourcing

Question 12

What are Global Sourcing complications?

Answer 12

Global sourcing is the use of a worldwide supply chain.

Question 13

What happens to the foreign countries currency value when the exchange rate goes up?

Answer 13

• The higher the FCU exchange rate the more of its units it will take to purchase 1 USD.
• As the FCU exchange rate increases, the FCU is depreciating.
• Imports of U.S. goods are less affordable.
• Exports to the US will be more affordable.

Question 14

What is sourcing requirements?

Answer 14

NAFTA offers trading partners operating within its boundaries reductions in tariffs on products in exchange for compliance with limits on imported labor and materials used in the manufacture of those products.

Question 15

What are foreign trade zones?

Answer 15

• A foreign trade zone contemplates a physical location in which tariffs are waived on imported products until they leave the zone.
• Foreign trade zones anticipate delay rather than reductions in tariffs.