Business International Strategy - Essay Example

Questions on International Business Jimmy Johnson, July Provide comparison of licensing, franchising, branching, or subsidiary for international businesses, their advantages and disadvantages. Provide examples to support your answer. Licensing, franchising, branching and subsidiaries grant ways for a business to expand its ventures in other countries. Rugman (2009: 329) distinguishes between different types of ‘entry modes’ that can be used to describe and categorize these. Establishing branches and subsidiaries along with direct or indirect agencies or distribution networks are ‘trade-based entry modes’ because the mode of expansion is based on extending the existing trade networks. In contrast to this are ‘contractual entry modes’ such as licensing, franchising and various types of agreements and contracts. There is also a third mode of entry, namely ‘investment entry’ that is made either directly or through acquisitions or joint ventures. Whichever mode of entry is chosen or permitted is determined by the business’ international strategy although Tallman (1992) also highlights the importance of national market characteristics and how this interacts with the strategy. The ”entry mode must be considered in the context of the industry, the overall international strategy, the management capabilities of the parent firm, and the expected role of the individual subsidiary” (Rugman, 2009: 329). A licensing agreement grants the right to use the business’ name and assets in return for a fee. Licensing can extend for example to general intellectual property or technology (Enterprise One, 2006). This mode allows quick entry and requires minimal capital. However, both profits and control are usually limited. An example is Sun Microsystem’s licensing of its Java (TechAgreements, 1995). A franchise agreement can give greater control because the plans, guidelines, training etc. is provided by the parent company. Again little capital is required because both the franchiser and franchisee can combine their skills and resources. On the other hand, direct franchising can create tax complications and difficulties in enforcing agreements (Hamilton Pratt, 2010). Franchising can take different forms such as trade name and product franchising or business format franchising. An example of an American company permitting franchising worldwide is KFC. Establishing branches or subsidiaries provides even greater control because no resources and therefore revenues need to be shared with another party. However, doing so requires careful strategic planning even if the target country appears to have similar market characteristics as in the home country. In other words, the greater control also comes with greater responsibility as well as consequences. Also, it requires a lot of investment so it is suitable in cases where the business wants to be heavily involved in the target country. An example of such branching is TCS with its headquarters in New York and over 100 branches worldwide (TATA, 2003). Once the branch is well established and successful, it is typically converted into a subsidiary, especially if there are financial gains to be had, as with GAFRI (Great American Financial Resources Inc.), which is a subsidiary of AFG (American Financial Group) (GAFRI, 2010). 2. Describe different types of currency exchange rates. How do high or low currency exchange rates impact the country’s export and import? Please describe advantages and disadvantages of high and low currency exchange rates for the country’s international trade. A business operating in another country needs to exchange currencies, the value of which is determined by the exchange rate. That is, the exchange rate is “the price of one currency in terms of another” (New York Fed, 2010) and these prices are determined by demand and supply factors. Minor fluctuations in the exchange rate do not make much difference but when large amounts are involved or larger fluctuations occur, the difference can be considerable. In terms of the values of goods and services in the home country, a high exchange rate makes them more expensive for customers in the target country. This reduces demand for those goods and services in the target country, which makes it difficult for exporting firms. Conversely, a low exchange rate resulting from a weaker value of the home currency makes foreign goods more expensive instead. This lowers the demand for imports. In theory then, a weaker home currency improves the balance of trade because exports rise and imports fall. However, the J-curve best describes what happens in practice mainly because it takes time for export and import volumes to respond to changes in exchange rates as they are mostly made in advance. The exchange rates do not necessarily need to be floating however as they can also be fixed (according to the gold-exchange standard). Since the Bretton Woods agreement began to collapse in the 1960s though, floating exchange rates have been the norm. 3. Your company is engaged in offshoring and a possible outsourcing relationship with a foreign country. What could be the reasons for such arrangements and what benefits do you expect from it? What issues and problems would you face and how would you solve these problems? Offshoring is a form of outsourcing, which means, “obtaining supplies of material and human resources outside the organization” (Statt, 2004: 109), in this case from another country. An engagement in offshoring with an outsourcing relationship with a foreign country would therefore mean that the company is taking advantage from employing labor from the foreign country without the labor being physically present. This arrangement is frowned upon by many in the home country because of the loss of jobs, but it is also seen as an ultimate demonstration of the gains from free trade, and moreover it promotes greater equity between richer and poorer countries. It is made possible by advances in global information and communication technologies. India for example, is a popular offshoring location for software development. Call centers are also popular services provided by people located in foreign countries. Offshoring is not simply an extension of international trade therefore. It has the potential to bring about a major transformation of the world economy (Blinder, 2006). The justification for offshoring is that it improves comparative advantage and could lead to improvements in productivity, as propounded by Harvard professor Gregory Mankiw (in Blinder, 2006). The advantage is brought about particularly as a result of access to cheaper labor. However, there are also other strategic justifications for offshoring such as “to enter new markets, to tap talent currently unavailable domestically or to overcome regulations that prevent specific activities domestically” (Sourcing Mag, 2010). Despite all the aforementioned benefits however, a number of problems can also arise. For example data security could become an issue with sensitive data, and there could be potential problems arising from language and cultural differences. This could be overcome by retaining a measure of control in the foreign country or taking advantage of rural sourcing or nearsourcing instead of offshoring. 4. Describe the current economic and socioeconomic environment in your country. Evaluate its impact on businesses, foreign investments, and future economic outlook. Palmisano (2008) highlighted the greater integration and complexity of the world economy today and the emergence of globally integrated enterprises from the existing multinational corporations. The American economy too is an integral part of this connection, economically, technically and socially. However, the American economy is in a bad shape today. Two seriously negative socioeconomic trends taking place in the United States are increasing homelessness and illiteracy. The consequences of all these taken together are “increasing social inequity and social polarization” (Favro, 2010). In addition, the healthcare system is in a very poor state as well. In short, the future economic outlook for the U.S. is very bleak and it is on course to suffer the same fate as the U.S.S.R. in 1990. Hartmann (2010) puts the picture very starkly by pointing our that American has moved on from being the most powerful industrial nation in the world to “the largest importer of other people’s industry, and the most indebted nation in the world”. As far as the impact on businesses is concerned, despite the measures being taken to restore confidence, it is clear that the downturn will continue. If the dollar collapses the decline will become even more rapid. As an example, the state of the automobile industry has already plunged to an all time low (Borade, 2010). Thailand has also been affected by the global recession but it has better long-term prospects. However, Thailand suffers from another kind of problem, namely social and political stability. Recently, there were two months of continuous demonstrations in which department stores were also burned and other structural damage took place in commercial districts (Semple, 2010). Consequently, the finance minister reassured Japanese business leaders who have made investments in Thailand that the country remains committed to its economic fundamentals, although he also acknowledged the huge challenges ahead. He said, “The economy is fundamentally sound … It’s purely a matter of sentiment among consumers and investors”. If we examine the overall trend, Thailand is doing well considering. According to the Thailand Business Forecast Report (Business Monitor International, 2010), despite some instabilities, the economic and business outlooks are generally favorable. Its own Board of Investment (BOI, 2010) sees bright prospects and confidence. It mentions a number of investments that exceeded expectations, that Thailand is still a favorable destination for foreign investors, Thailand’s comparatively better infrastructure in the Southeast Asia region, its strong market demand, etc. The Heritage Foundation (2010) pointed out improvements in five of ten specific economic freedoms including the freedom to invest. Its overall score is the 66th freest in 2010, which is higher than both global and regional averages, and it is ranked 10th amongst 41 Asia-Pacific countries. Notably also, “Procedures for business formation are simple and transparent … [and] the financial sector continues to strengthen and is more open to competition”. However, corruption remains an issue though the situation is not as bad as in neighboring countries. 5. You are running an international organization with the employees from different cultures working together. How would you manage such an international team to take advantage of the cultural diversity and to increase business productivity rather than facing problems, which may arise from cultural differences? An international team comprising of employees from different cultures working together would require a strategy to avoid any potential problems from occurring due to cultural differences. This is necessary to enhance interpersonal communication and team interaction, which in turn is intended to increase business productivity. The strategy should involve raising awareness of cultural differences to avoid potential communication problems and to build upon strengths (Payne) to take advantage of potential opportunities. The overall aim should be to create a positive team spirit. Cultural diversity can bring numerous benefits if exploited properly. Like age and gender, culture can make a person view something from a different perspective and this is useful in promoting creative thinking and innovation. The diversity is especially helpful for example, when marketing internationally or when negotiating with customers from different cultural backgrounds (Walton, 1993). In short, diverse management and staff would be better able to deal with a diverse customer base, diverse locations and diverse markets. Overall, it can enhance the company image internationally (Koeppel et al.) as it would better reflect today’s global business environment (Goessl, 2010). The productivity improvements that have been confirmed include a lowering of absenteeism, employee turnover and liability in discrimination lawsuits (Robinson & Dechant, 1997), References Blinder, Alan S. (2006). Offshoring: The next industrial revolution? Foreign Affairs, March/April 2006 issue. BOI. (2010). BOI sees local business environment with much optimism for 2010. 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Sourcing Mag: Practical advice for IT and business process outsourcing. Retrieved 10 July 2010 from http://www.sourcingmag.com/content/what_is_offshoring.asp. Statt, David. (2004). The Routledge Dictionary of Business Management. Routledge. Taylor & Francis Group. TATA. (2003). Asia’s largest technology firm opens office in Buffalo. TATA. Retrieved 10 July 2010 from http://www.tata.com/company/releases/inside.aspx?artid=1frsPFlB2b8=. TechAgreements. (1995). Technology license and distribution agreement. Tech Agreements. Retrieved 11 July 2010 from http://www.techagreements.com/agreement-preview.aspx?num=64923&title=Sun%20/%20Borland%20Software%20-%20Technology%20License%20And%20Distribution%20Agreement. Walton, Sally J. (1993). Cultural diversity: An asset, not a liability. R&D Innovator, Vol. 2, No. 5. Read More