international business [read-only]

7/29/2019 International Business [Read-Only]

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International Business


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Meaning of International Business

It is the process of focusing on the resources

of the globe and objectives of organizationson global business opportunities and threats,

, ,

goods /services world-wide.


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Difference between Domestic and

International Business


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Importance of International Business

High level standards: Comparative cost

advantage for the countries which haveadvantage over raw-materials, humanresources, natural resources, and climatic

conditions in producing particular goods canproduce at low cost.

Customers can buy more products with the

same money. It can enhance the standard ofliving by consuming high quality products.


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Increased socio-economic welfare: It enhances theconsumption level and economic welfare of the people ofthe trading countries

Wider market: Companies did not depend upon singlemarket. e.g. MNCs like Toyota, Honda, Zerox and coca-cola,


.

Reduced effect of business cycle: Reduced risk: Both commercial and political risk is reduced

due to spread in different countries.

Large-scale economies: Reduces cost, will expertise, qualitywill improve etc.

Potential untapped markets: For e.g. Bata sells shoes in theU.K at Rs 8000 and the same shoes is at Rs in 1200 in India.


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Provides opportunity for and challenge to

Domestic companies: These includestechnology, management expertise, market


, .

Division of Labour and specialisation: For e.g.Brazil specialises in coffee, kenya in Tea, Japan

in automobiles, and electronics, India in textilegarments etc.


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Economic Growth of the World: Specialization, division of labour,enhancement productivity, posing challenges, development to

meet them, innovation and creation to meet the competition leadto the overall economic growth of the world. It helped particularlyAsian nations, like Japan, Taiwan, Korea, Philippines, Singapore,Malaysia, and united Arab Emirates.


Optimum and Proper utilisation of resources: The resources canflow from the country where it is in excess. Like human resourcesfrom India, consumer goods from UK, France, Italy and Germany todeveloping countries.

Cultural transformation:

Knitting the World into a closely Interactive traditional village:


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Environmental Factors International

Business

Environment means surroundings.

International business environment means thefactors those surround the IB.

n ot er wor s actors t at a ect t e .


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Different environment factors

Internal

External

Internal factors: It influences the business

rom w t n. They include HRM, trade unions,

organizational structure, financial mgmt,

marketing mgmt and production mgmt,management /leadership style.


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Social and cultural factors

It includes attitude of the people to work,

attitude to wealth, family, marriage, religion,education, ethics, human relations, social

.

The most important is to find the relativesimilarities and differences between the

countries. One has to look the cultural factors strongly.


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Culture is derived mostly from the climatic

conditions of the geographical region andeconomic conditions of the country.

are transmitted and shared in a given society

and a total way of life and thinking patterns

that are passed from generation to generation Norms, customs, art values etc.


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Prescriptive:

It prescribes the kinds of behavior consideredacceptable in the society. It limits product choicesto those which are socially acceptable.

For example, consumption of wine is acceptablein the West, but it is not socially acceptable inIndia and it is socially and legally unacceptable in

Saudi Arabia. Similarly, smoking is medically unacceptable even

in USA in the recent times.


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Sr.No Countries Product Current

Situation onConsumption

Comments

1. Thailand, China

and India

Beef Against religion No market for

Beef. KFC had

to close downone unit when

it used beef in

food product.

2. Japan Beef Well Accepted Good Mktopportunities.

3. US, Argentina Beef Preferred more Huge Mkting

opportunities.


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Technological Environment: Technology and its application are the key factors in

determining the international competitiveness of afirm when conducting international business.

Leadership is maintained through continuous R and D.

Japan for electronic equipment.

Germany for medical equipment. USA for pharmaceuticals.

The time gap between the innovation and its adoptionmay vary from country to country.

Country that innovate are few and country that followare many.


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Legal Environment

Labour legislation Taxes environment

Pollution

Distribution contract

The international environment has three aspects: Home country laws

Host country laws International laws


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Home country law Conduct of firm in the domestic territory.

Trade with other countries.

Host country laws Investment re ulations

Tariffs Anti-dumping regulations

And protection of local industries from unfair competitionfrom industrialized countries.

Super 301 against Indian nylon skirts imposed by USA asan inflammable fabrics and ban on sea food by theeuropean community are some of the examples.


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International Laws:

Treaty convention Agreement between nations

Patents

Trademark Privacy Law.

European union sanctions international routes to

those who follow Euro-dollar. Bilateral agreement, multilateral agreement and Trade

blocks are part of the international legal environment.


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Economic Environment Basic economic system

Growth strategy Industry Agriculture

National and per-capita income Exports and imports Balance of payment position

Population Literacy and longevity of citizens.


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It is classified into three categories

Home country economy: Venturing with the home countryto exploring the business. But for this the economic envt.Of the country should be free.

Host country Economy: Size of the market (BRIC nations)

GDP

Industrialization: Many countries in the developing worldwere interested into Europe and USA.

The recent trends among Indian companies is to expand inLatin

America, more specially in Brazil, Argentina, and Chile. This is due to industrialization programme in this countries.


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Banking

Purchasing Power Foreign Exchange: Countries having a foreign exchangereserves, Liberal policy on repatriation, and thedemand for the product and services are the ideal

condition for the international business. Income levels

Economic diversity: In the same country, a few urbancentre's may offer outstanding business opportunities

where in the other area may not. Like Nairobi in Kenya, Lusaka in Zambia, Johannesburg

in South Africa.


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Global level Economy: Like OPEC, WTO, IMF,Asian Development Bank etc can affect the IB.

Political Environment: It decides theinvestment decisions.

encouraging.

Host country Environment: If foreign firm

enters with contribution to ht e employment,taxes, and social security with the local

population, the political atmosphere tends to

be hospitable.


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Global Political Environment:

Multinational agreement between international organization suchas GATT, UNO, and common wealth may constitute an impedimentof free trade as well as to the nature and scope of operations ofinternational firms.

Embargos, cartels, free trade pacts and custom unions allow a fewnations to enjoy competitive advantages, while other lose theirbusiness prospects.

For example Economic embargo on Irq by the security council of theUN in 1991 meant that conducting trade with that country wasillegal for all international firms.

China ordering Microsoft to Stop selling windows95 as it containedoffensive material, including phrases like communist bandists,Microsoft agreed to change the material for re-entry.


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Competitive Environment:

The current international business operationshas to encounter competition at various

, , , ,

administration, human resources, technology,

distribution and logistics.


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Types of International (Foreign) Capital

Foreign Direct Investment Foreign Portfolio Investment

Official Flows "Official flows" refers to public (government) capital. Popularly this

includes foreign aid

Commercial LoansCommercia oans were t e argest source o oreign investment in

developing countries. Commercial loans are also called as external commercial Borrowings

(ECB).

They include commercial bank loans, buyers' credit, suppliers' credit,securitised instruments such as Floating Rate Notes and Fixed Rate Bonds

etc. Credit from official export credit agencies

Such as International Finance Corporation, (IFC), Asian Development Bank(ADB), joint venture partners etc.


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Joint ventures: The flow of foreign capital is veryuseful through joint ventures

Multilateral sources: The multilateral financialinstitutions such as World Bank and its affiliated

,

International Monetary Fund Non resident Indian funds: The NRIs have

invested in India through bank deposits, financial

instruments, portfolio investments and directinvestment skills.

Mergers and acquisitions


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FDI Foreign Direct Investment

The investment made by a company in newmanufacturing and /or marketing facilities in a

Direct Investment (FDI).


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Why in India?


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Opportunities here Stabilized democratic government

Low penetrated market

Low labor cost

Skill population Availability of resources

Supportive policies and rules


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FDI Strategies Acquisition

An international acquisition is a cross borderinvestment in which a foreign investor acquiresan establish local firm and makes the acquired

portfolio. For example, Unilever, Rank-Xerox,Grameen-Danone

Greenfield Investment

This may be defined as FDI in which investmentinvolves the establishment of a completely newoperation in a foreign land. The establishment ofwholly owned project by Mercedes-Benz plant in

Alabama is a classic example.


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Horizontal Foreign Direct Investment Horizontal FDI occurs when the MNE enters a foreign country to

produce the same products produced at home (or offer the sameservice that it does at home). soft drinks Or cement, CEMEXacquiring RMC is an example of HFDI

CEMEX is one of the world's largest building materials suppliers andcemen pro ucers

CEMEX completed its $5.8 billion acquisition of the London-basedRMC Group, which made CEMEX the worldwide leader in ready-mixconcrete production and increased its exposure to Europeanmarkets.

RMC Group plc (formerly "Ready Mixed Concrete Limited") was amultinational ready mixed concrete, quarrying and concreteproducts company headquartered in United Kingdom


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Vertical Foreign Direct Investment Vertical FDI is a companys investment into an industry abroad, whichprovides control of the different stages of making its product from rawmaterials through production to its final distribution.

Vertical FDI is understood better by dividing it into two forms: Backward vertical FDI Forward vertical FDI

1. Backward vertical FDI

Occurs when the MNE enters a foreign country to produce intermediariesgoods that are intended to use as inputs in its home country.

For example, offshore extractive investment in petroleum by reliancepetrochemical,

Joint venture plants established by IFFCO in Oman to source natural gasand raw materials for the production of fertilizers etc.

British Petroleum extracts the petroleum from the ores


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Outward FDI

Any investment made by your country in othercountries will account for outward FDI.

nwarAll the FDIs invested by other countries in your

country are called inward FDI.


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COSTS AND BENEFITS OF FDI

Benefits to Home Country

Cost AdvantagesNew Markets

Exposure to other countries

International Relations Costs to home CountryLoss of Employment

Problem of RepatriationPossibility of Loosing Competitive Advantage

Benefits to Host Country


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Benefits to Host Country

Technology advancement

Employment Effects

Balance-of-Payments Effects

FDI provides for the production of a number of

goods and services domestically

Market accessIncrease in Domestic investment

Export promotion


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Formation of Clusters: Groups of similar projects andmanufacturing centers are formed in a specific location by

way of providing common production, R&D, training andpollution control systems to a group of competingcompanies.

Spin-offs: Individuals who trained with companies startedtheir own ventures and became successful leaders in theirrespective fields. Even in India the machine tool industriesof Ludhiana and Banglore are spin-offs of yesterday years

popular companies, such as SKF, and MICO. Integration into global economy Increased competition Improved human resources


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Cost to host country

Political LobbyingExploitation of Resources:. Companies of othercountries have been known to indiscriminately

to get short run gains and profits.Threaten Small Scale Industries

Technology: They do not transfer the latest

technology to the host country with a fear thattheir home country may lose its competitiveadvantage


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Ways of Entrance


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ROUTES FOR FOREIGN DIRECT

INVESTMENTRoutes available for FDI:

Automatic Route - No prior Government approval isrequired if the investment to be made falls within the

.

Only filings have to be made by the Indian company withthe concerned regional office of the Reserve Bank of

India (RBI) within 30 days of receipt of remittance andwithin 30 days of issuance of shares.


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Continued..

FIPB Route - Investment proposals falling outside theautomatic route would require prior Governmentapproval.

Foreign Investment requiring Government approvals are

Promotion Board (FIPB).

Decision of the FIPB usually conveyed in 4-6 weeks.

Thereafter, filings have to be made by the Indiancompany with the RBI


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Continued


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Continued..

CCFI Route - Investment proposals falling outsidethe automatic route and having a project cost of Rs.6,000 million or more would require prior approval of

Cabinet Committee of Foreign Investment (CCFI).Decision of CCFI usually conveyed in 8-10 weeks.Thereafter, filings have to be made by the Indiancompany with the RBI

- Investment proposals falling within the automatic

route and having a project cost of Rs. 6,000 million or

more do not require to be approved by CCFI


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AIRPORTS

Foreign Investment up to 100% is allowed in green

field projects under automatic route

projects

- up to 74% under automatic route

- beyond 74% and up to 100% subject to

Government approval


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TELECOM FDI in basic and cellular, unified access services,

national/ international long distance , V-Sat, publicmobile radio trunk services , global mobilepersonal communications services

- Automatic up to 49%

- FIPB beyond 49% but up to 74%

Manufacture of telecom equipments - Automatic upto 100%.


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DRUGS & PHARMA FDI up to 100% is permitted under the automatic route for

manufacture of drugs and pharmaceuticals (The following isthe current position)

FDI up to 74% in the case of bulk drugs, their intermediates

Pharmaceuticals and formulations would be covered under

automatic route.

FDI above 74% for manufacture of bulk drugs will beconsidered by the Government on case to case basis


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INSURANCE

FDI up to 26% allowed on the automatic route

However, license from the Insurance Regulatory &Development Authority (IRDA) has to be obtained

There is a proposal to increase this limit to 49%


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MINING

Coal & Lignite mining for captive consumption by powerprojects, and for iron & steel and cement production -

Automatic up to 100%

Mining covering exploration and mining of diamonds and

precious stones, gold, silver and minerals - Automatic up to

100%


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PETROLEUM

Petroleum and natural gas sector, other than refining and

including market study and formulation; setting upinfrastructure for marketing - Automatic up to 100%

For petroleum refining activity 100% FDI is permitted in IndianPrivate Companies under automatic route and up to 26% FDI is

permitted in Public Sector Undertakings with Government

approval


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PRIVATE SECTOR BANKING

Foreign Investment up to 74% is permitted from all sources

of branches/subsidiaries of foreign banks issued by RBI fromtime to time.


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TRADING Wholesale / cash & carry trading - Automatic upto 100%

Trading for exports - Automatic upto 100%

Trading of items sourced from small scale sector - 100% withGovernment approval

Single Brand product retailing - 51% with Government approval


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PRINT MEDIA

FDI upto 100% in publishing/printing scientific & technical

magazines, periodicals & journals

up o n pu s ng news papers an per o ca s ea ng

in news and current affairs.

All investments are subject to the guidelines issued by the

Ministry of Information and Broadcasting


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BROADCASTING FDI permitted for setting up hardware facilities such as up-

linking, HUB, etc up to 49% under Government approval route

FDI permitted in Cable Network up to 49% under Government

Foreign Investment (FDI/FII) up to 49% allowed underGovernment approval route in Direct to Home ServiceProviders. FDI limited to 20%

FDI permitted in FM radio up to 20% under Governmentapproval route


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AVENUES


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ELECTRONIC HARDWARE AND

SOFTWARE TECHNOLOGY PARKS

100 percent foreign investment under automatic route isallowed in electronics and software industries set u

exclusively for exports.

Eligible to purchase, free of customs duty/ excise duty, theirentire requirement of capital goods, raw materials and

components, spares and consumables, office equipmentsetc.


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EXPORT ORIENTED UNITS

100% foreign equity (is permitted through Automatic Routesimilar to SEZ units) in Export Oriented Units (EOUs) even if it

is manufacturing an item reserved for the small scale sector

EOUs enjoy several privileges like duty exemption on importand domestic procurement and also Income tax exemption till

31.03. 2009


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Project with minimum investment of Rs.10 million and abovein building, plant and machinery qualify to be consideredunder EOU scheme

Not a licable in case of certain industries like a riculturefloriculture, information technology, services, hand madejewellery, etc.

Exemption of Industrial Licensing for manufacture of itemsreserved for SSI sectors.


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SPECIAL ECONOMIC ZONE Special Economic Zone (SEZ) is deemed to be foreign

territory for the purposes of trade operations and duties andtariffs

reserved for SSI as well as exemption from industriallicensing

An SEZ unit can be set up to undertake trading activities inaddition to manufacturing of goods and rendering of services


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Most manufacturing activities


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Most manufacturing activities

Drugs and pharmaceuticals Food processing Electronic hardware Software development

Film industry Advertising Hospitals

Management consultancy Computer related Services

Research and Development Services

Construction and related Engineering Services

Pollution Control and Management Services Health related & Social Services

Travel related services

Summary of Sector Wise Limits of


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investments Banking - 74%

Non-banking financial companies (stock broking, credit

cards, financial consulting, etc.) - 100% Insurance - 26%

-

Private petrol refining - 100% Construction development - 100%

Coal & lignite - 74%

Trading - 51% Electricity - 100%

Pharmaceuticals - 100%


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FDI in major sectors in India


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FDI in major sectors in India

The major sectors of the Indian economy that have

benefited from FDI in India are - Financial sector (banking and non-banking).

nsurance

Telecommunication

Hospitality and tourism

Pharmaceuticals Software and Information Technology.


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The companies with foreign holdingsexceeding 75% would have to raise the 40%estimated cost of expansion by issue ofadditional equity to Indians.

60 to 70% --- 33.3%. 51 to 60% --- 25%

Thus the government adopted the policy of

Indianisation of Foreign subsidiary companiesor to boost exports.

The Janta party and collaboration


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The Janta party and collaboration

The party didnt allow the foreign companieswhere the Indian skills and capital are available.

If needed than will be purchased outright fortechnical know-how, technological skills andmachinery.

The provisions of FERA must be rigorouslyenforced in the sector of consumer goodsindustries.

The foreign firms must be asked to go forIndianisation.


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Two major decisions were taken: Coca-cola company was asked to wind up its operations.

Secondly, the IBM was asked to dilute its equity to 40% so as to conform toFERA guidelines.

Since IBM i not agree it was a so as e to o up its operation.

Still other MNCs continued to operate in non-priority areas like tobacco,toiletries, beverages, etc.

For instance Hindustan lever was permitted 51% of foreign equity on

grounds of introduction of sophisticated technology in India.

But HL products included vanaspati, shampoo, toothpaste etc. becoz Indiacould certainly this products so technology was a lame excuse.

Policy regarding Foreign investment


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1991 It was announced by congress government. The important points of the policy was

Approval should be given up to 51% of foreign equity inhigh priority industries.

the foreign exchange requirement for imported capitalgoods.

The payment of dividends would be monitored throughRBI so as to ensure that out-flows matches the exportearnings

51% of foreign equity holdings would be allowed fortrading companies engaged in export activities.


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Automatic permission would be given for foreign technologyagreement in high priority industries up to lump sum payment ofRs. 1crore, 5% royalty for domestic sales and 8% for exports, subject

to total payment of 8% of sales over a 10 year period from date ofagreement or 7 years from commencement of production.

n - pro ec s or e ec r c y genera on, ransm ss on an

distribution, roads and highways, ports and harbours, vehicletunnels and bridges were permitted foreign equity participation upto 100% under the automatic route.

FERA 1973 has been amended and restrictions placed on foreign

companies by the FERA have been abolished. It enables free flow offoreign investment and technology.


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The restriction on FERA companies with regards to borrowing offunds and raising deposits in India as well as taking over andcreating any interest in business in Indian companies have been

removed.

Moreover the use of foreign brand names for goods manufacturedy omes c n us r es as een a owe .

Government has allowed Foreign Institutional Investors (FIIs) toinvest Indian capital market with SEBI and getting RBI approval.

Foreign Investment Implementation Authority (FIIA) wasestablished within the ministry of Industry to ensure that approvalsfor foreign investment, including NRI investments are quicklytransferred to projects.

What is protectionism?


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Protectionism represents any attempt by a government to imposerestrictions on trade in goods and services between countries:

Tariffs - import taxes.

Quotas - quantitative limits on the level of imports allowed. Voluntary Export Restraint Arrangements where two countries make an

agreement to limit the volume of their exports to one another over an.

Embargoes - a total ban on imported goods.

Intellectual property laws (patents and copyrights). Export subsidies - a payment to encourage domestic production by

lowering their costs.

Import licensing - governments grants importers the license to importgoods.

Exchange controls - limiting the amount of foreign exchange that canmove between countries

Political argument


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g

One common political argument forgovernment intervention is that its isnecessary for protecting jobs and industriesfrom unfair foreign competition.

Countries sometimes argue that it is necessaryto protect certain industries because they areimportant for national security.

Defense related industries often get this kindof attention (e.g. aerospace, advanced).

Opportunities and Outcomes of International

Strategy


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gy

81

Figure 8.1Figure 8.1


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International Strategy Benefits (contd)


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Economies of scale or learning

Expanding size or scope of markets helps toachieve economies of scale in manufacturing aswell as marketin R&D or distribution

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Can spread costs over a larger sales baseCan increase profit per unit


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Typology of strategies


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International strategy

Miniature replica of

parent

Production and

marketing function in each host

Trying to create value by transferring core competencies to foreign

markets where indigenous competitors lack those competencies.

LEARNING

Centraliseddecision making

I.E. Hilton

Carrefour



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International strategy

WEAKNESSESSTRENGTHS

Facilitates transfer of core

competencies

Moderation of operational costs

Great amounts of profits

Little local responsiveness


l i d i


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Multi-domestic strategy

Strategic and operating decisions are decentralized to Strategic Business

Units in each country to allow products to be tailored to the local market.

De-centralised decision

RESPONSIVENESS

Local

operations

I.E. Johnson & Johnson


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Limitations of Global Strategy


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It is challenging for management, particularly in highlycentralized organizations, to closely coordinate the

activities of a large number of widely-dispersedinternational operations.

The firm must maintain ongoing communication between

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headquarters and the subsidiaries, as well as among the

subsidiaries. When carried to an extreme, global strategy results in a loss

of responsiveness and flexibility in local markets.

Local managers who are stripped of autonomy over theircountry operations may become demoralized, and losetheir entrepreneurial spirit.


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GMs Global Brand Hierarchy


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Global

Europe, Middle East, North America,

Local

Middle East, Europe North America, Asia

North America North America

United Kingdom Australia Korea

Transnational Strategy


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Seeks to achieve both global efficiency and localresponsiveness

Difficult to achieve because of simultaneous

requirements:

Strong central control and coordination to

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ac eve e c ency

Decentralization to achieve local marketresponsiveness

Must pursue organizational learning to achievecompetitive advantage

Transnational Strategy: A Tug of War


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A coordinated approach to internationalization inwhich the firm strives to be more responsive tolocal needs while retaining sufficient centralcontrol of operations to ensure efficiency andlearning.

International Business: Strategy,

Management, and the New Realities107

advantages of multi-domestic and globalstrategies, while minimizing their disadvantages.

Transnational strategy implies a flexibleapproach: standardize where feasible; adaptwhere appropriate.


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IV. Case study: Procter and Gamble


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Case study: Procter & Gamble

Procter & Gamble products


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Three categories:

Beauty

Household Care

Health & Well-Being

I.E.

More than 250 brands, including 23 brands which have

more than a billion dollars in net annual sales


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Case study: Procter & Gamble

Weaknesses of P&Gs transnational strategy


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Time: The transnational strategy is not easy to build and the history of P&G

shows that the transition from a strategy to a transnational strategy requires

time.

Management: There were also big managerial challenges for Procter & Gamblein order to have a transnational strategy


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VI. Conclusion


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The strategys choice depends on the industry or

the product.

This strategy is not static


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MarketingProductionR&D

Company Infrastructure

Typical Value Chain of a Local Firm


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and SalesProductionR&D

ImitativeOlder

TechnologyCountry-Specific

Organization, Coordination & HRM

an now-

How

ar e ng

Expertise

What may the MNE desire from a local firm?

Complementary resources

Not necessarily strength in every area


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Foreign AcquisitionForeign Acquisition

HOME COUNTRY HOST COUNTRY


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Local FirmInvestment

MNE

Profit


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Going it Alone: Green Field Entry

Advantages

Normally feasible

Avoids risk of

Disadvantages

Slower startup

Requires knowledge of


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overpayment Avoids problem of

q g

foreign management High risk and high

integration

Still retains full control

commitment

When Is Green Field Entry Appropriate?When Is Green Field Entry Appropriate?

Lack of proper acquisition targetLack of proper acquisition target

InIn--house local expertisehouse local expertise

Embedded competitive advantageEmbedded competitive advantage


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Contract Manufacturing

AdvantagesDisadvantages

Reduced control (may


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g

Low financial risks Minimize resources

Reduced control (may

affect quality, deliveryschedules, etc.)

2004 Prentice Hall 12-148

devoted to

manufacturing Focus firms resources

on other elements of

the value chain

Reduce learning

potential Potential public

relations problems


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Turn-key refers to something that is ready for immediate use, generally used in thesale or supply of goods or services.

Turnkey is often used to describe a home built on the developer's land with thed l ' f d f h

Turnkey project


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developer's financing ready for the customer to move in.

If a contractor builds a "turnkey home" they frame the structure and finish theinterior. Everything is completed down to the cabinets and carpet.

" " , ,refers to the bundling of materials and labor by sub-contractors.

'Turnkey' is also commonly used in motorsports to describe a car being sold with

drivetrain (engine, transmission, etc.) to contrast with a vehicle sold without one sothat other components may be re-used.

Similarly, this term may be used to advertise the sale of an established business,including all the equipment necessary to run it, or by a business-to-businesssupplier providing complete packages for business start-up.

An example would be the creation of a "turnkey hospital" which would be buildinga complete medical center with installed high-tech medical equipment.

Turnkey is also the name given to a civilian or Police officer working in a Scottishpolice office whose duties are to assist in looking after prisoners and detainees.


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Management ContractManagement Contract

Management FeesHOME COUNTRY HOST COUNTRY


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Technological Inputs

Profit

Wholly-Owned

Subsidiary

Managerial

Service

Management Contract

Advantages

Access to local managementskills

Avoids buying unwanted

Disadvantages

Potential incentive problem

Potential adverse selectionproblem


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Avoids buying unwanted

assets Retains strategic control

problem

How do you know thecompetencies of the

manager

When Is a Management Contract Appropriate?When Is a Management Contract Appropriate?

Manager has a reputation to protectManager has a reputation to protect HotelsHotels

Consulting companiesConsulting companies PerformancePerformance--based contract provides no perversebased contract provides no perverse

incentivesincentives

Joint VentureJoint Venture

HOME COUNTRY HOST COUNTRY


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MNE Local Firm

Joint Venture

Company

Inputs

Inputs

Share of Profit

Share of

Profit


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Modes of entry

Exporting Contractual Joint Acquisition Greenfield


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Agreement

Venture Investment

Return Low Low Moderate High High

Control Moderate Low Moderate High High

Integration Negligible Negligible Low Moderate High

international business [read-only]

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