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Department
Management Core
Course
MGCR 382
Professor
John Saba
Semester
Summer

Description
Lecture 3 Activities of focal firms, intermediaries & facilitators in IB overlap. Focal firm performs 4 types of participants in IB certain activities internally BUT delegates 1. Focal firms (contractual) a. Involved in manufacturing/services & initiate IB transactions b. Include MNCs & SMEs c. Can be private/public/state enterprise 2. Distribution channel intermediary a. Specialised firm that provides logistics & marketing services to focal firms as part of international supply chain, both in focal firm’s home country & abroad b. E.g. indep. Distributors & sales rep, usually located in foreign markets where they provide distribution & marketing services to focal firms on a contractual basis 3. Facilitator a. A firm/individual providing special expertise in legal advice, banking, customs clearance, market research & similar areas that helps focal firms perform IB transactions b. Found home & abroad c. E.g. freight forwarders (specialized logistics service provider that arranges international shipping on behalf of exporting firms), banks, & other support firms 4. Government (public sector) a. Active in IB as suppliers, buyers, regulators b. State-owned enterprises account for substantial portion of GDP in many countries c. E.g. telecomm, banking, natural resources, HydroQuebec etc DD & SS slide not impt Objective 6: understand role of focal firms in IB Focal firms are key participants in IB. 3 key types: 1. MNOs (2 for profit) – broadest term, describes any international org, whether for-profit or not- for-profit a. MNCs (Takes up largest portion of MNOs) i. Engages in FDI, owns & controls foreign assets, buys resources, produces & sells goods & services ii. Home office in home country controls & coordinates ops iii. Subsidiaries in host countries may make policy adjustments iv. US has 4 & China has 3 in top 10 (based on rev), most of top 10 are in petroleum extraction, refining & distribution v. US has 4 & China has 2 in top 10 (based on profitability) vi. Tokyo has most Head offices, next Beijing b. MNEnterprises i. International organizations but NOT corporations ii. E.g. partnerships like international accounting firms such as Deloitte KPMG iii. Partnership =/= corporations c. Not-for-profit i. E.g. IOC, International Red Cross 2. SMEs a. Relatively small player in its respective industry. Manufacturing/service-providing firm with less than 500 employees b. Vast majority (90-95%) of all firms in most countries & constitute majority of firms involved in IB c. ADVANTAGE compared to MNC i. More flexible, less bureaucratic more entrepreneurial & quicker response time to biz opportunity d. DISADVANTAGE i. Limited financial & human resources prevent SMEs from engaging in FDI ii. Explains why SMEs usually choose exporting as main strategy. As ops grow, some gradually establish company-owned sales offices/subsidiaries in key target markets 3. Born Global (relatively new type of SME firm, early, rapid, substantial internationalization) a. Young entrepreneurial company that undertakes substantial IB activity very early in it evolution by moving rapidly into foreign markets b. “borderless” mindset c. Internationalize (enter foreign mkt) primarily via exporting (usually within 3 years of founding) d. May export to >20 countries generating more than 25% of sales from abroad e. ADVANTAGES i. more innovative, adaptable, quicker response times ii. Better able to serve niche markets iii. Often offer leading-edge products with strong potential to generate international sales iv. Heavy use of Internet, IT & comm. Tech facilitate early & efficient international ops v. Displays much entrepreneuraial orientation, pro-activity & customer service st vi. E.g. History & Heraldry (in 1 5 years, expanded sales to 60 countries, exporting 70% of o/p) vii. E.g. QualComm grew large enough to become a major MNC on the strength of huge international sales viii. E.g. Vix ERG self-check-in machines at airport Benefits & costs of MNC subsidiary activities to Host countries Benefits Costs Access to outside capital Competition for this capital Forex earnings Increased int rates as MNCs locally raise capital Access to tech MNCs concentrate R&D at home restricting transfer of tech to host countries Infrastructure development Infrastructure development, investment costs exceed benefits Creation of new jobs Mostly lower paying jobs created Local mgmt training & devt Few key managerial jobs for locals since MNCs usually reserve these positions for expatriates Other criticisms/COSTS of MNC subsidiary activities Majority (sometimes 100%) of stock (equity) => host country have little control over ops of firms, give rise to DD of luxury goods in host countries at the expense of essential consumer goods The MNC [& its subsidiary] interdependency with a HOST country’s government Emerging/developing country’s host gov’s attitude => love-hate relationship  Host gov wants economic development that MNCs bring  BUT does not want the accompanying reduced national sovereignty &/or tech dependence  Trade-offs associated with MNC activities in a host country create an interdependent relationship b/w MNC subsidiary & host gov  MNC has power based on: large-scale production, control over tech & location of production  HOST gov has power based on: raw materials, market access, rules for doing biz within its borders Objective 7: ID & describe the foreign market entry strategies Foreign market entry strategies of focal firms, 3 key ways: (export & import, international investments, strategic alliances) 1. Exporting & importing a. Both intermediate (raw materials & components) & finanshed goods & services b. Exporting – selling of products made in one’s own country for use or resale in other countries. Firm exporting goods/services will receive international earnings c. Importing - buying of products made in one’s own country for use or resale in other countries. Firm exporting goods/services will d. Divided into 2 groups i. Trade in goods (visible trade) 1. Merchandise, tangible goods 2. Creates 1000s of jobs. 70% of Boeing’s commercial aircraft sales were to non-US customers ii. Trade in services (invisible trade) 1. Service, intangible products 2. Service performance – providing services in foreign country (but generating import revenues to firm’s home country) such as banking/insurance/engineering iii. E.g. when Canadian stays at French-owned hotel in Paris, service export earnings to French iv. INDIRECT EXPORTING (through intermediaries) 1. Min risk, min rewards 2. Operates through intermediaries like export/import house, local distributor 3. ADVANTAGES: less costly, quicker to enter market 4. DISADVANTAGES: information & experience is “second hand” v. DIRECT EXPORTING 1. Little more risk, more reward 2. Firm engages directly with foreign host markets. Has an in-house exporting division & sells goods/services directly to foreign buyer without assistance of intermediary. 3. ADVANTAGES a. Allows exporter to monitor developments & competition in host market b. Promotes interaction b/w producer & end-user c. Involves long-term commitments (after-sales) 4. DISADVANTAGES a. More expensive, more costs, takes time to establish 2. 2 types of International investment: FDI & FPI a. Max risk, max reward b. FDI i. Longer term direct investments made for purpose of actively controlling assets, property/firms located in host countries. c. Portfolio investments i. Short term debt or equity purchases of foreign financial assets for purpose other than control, notably to improve rate of return on investment 3. 3 types of Strategic alliances (joint ventures, licensing & franchising) a. Long-term relationship b/w firms with complementary resources that decide to cooperate in an equity or non-equity relationship to gain access to resources they need to enter foreign markets b. Most sophisticated way of entering foreign markets c. Bigger firms -> FDI, but ALL firms -> may enter into strategic alliances d. Licensing i. Is a contractual arrangement in which a firm in one country licenses the use of all or some of its IP (trademarks, brand names, patents, copyrights, trade secrets) to a firm in another country in exchange for a royalty payment ii. ADVA
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