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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