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Solution Manual for International Business The New Realities, 5th Edition

Solution Manual for International Business The New Realities, 5th Edition simplifies complex textbook exercises with easy-to-understand solutions and step-by-step guides.

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    International Business: The New Realities Fifth Edition S. Tamer Cavusgil Gary Knight John R. Riesenberger ’s Manual for International Business: The New Realities by Marta Szabo White and Gary Knight SOLUTION MANUAL

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    1 | Page PART 1 FOUNDATION CONCEPTS CHAPTER 1 INTRODUCTION: WHAT IS INTERNATIONAL BUSINESS? ’s Manual by Marta Szabo White and Gary Knight I. LECTURE STARTER/LAUNCHER ■ Consider having everyone in class introduce themselves. One way to initiate introductions is distribute random pages torn from business magazines, in which each person receives one page. Next each student circles words on the page that describe him/her. In groups of two or three, each student shares the rationale behind each word that he/she circled. Finally, one of the group members introduces another group member to the class. This process enables students to immediately know at least one other student in the class. The circled words and explanations are often humorous, which serve as icebreakers during your first classroom encounter. ■ globalEDGE™ ( globaledge.msu.edu ) assembles a collection of tools and games that will allow you to compare countries on a variety of statistical indicators, rank countries based on these indicators, and test your knowledge of country capitals from around the world. Get Insights By Country: http://globaledge.msu.edu/Global-Insights/By/country Currency Converter : http://www.xe.com/ Country Comparator : http://globaledge.msu.edu/comparator Ranking Countries : http://globaledge.msu.edu/global-resources/resource/5128 Country Tools and Data : http://globaledge.msu.edu/tools-and-data Global Resource Directory: http://globaledge.msu.edu/global-resources/ ■ Under Country Insights click on a region, then select a country, Zimbabwe for example. http://globaledge.msu.edu/Countries/Zimbabwe Everyone in the class should be assigned a different country. Each student is then responsible for becoming an expert on that country. Twice during the term, each student could report on their country, and summa rize a newspaper article published in their country, i.e. an International Newspaper Memorandum assignment.

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    2 | Page [1] An exciting way to introduce your students to International Business is the CIA Maps, from the CIA World Factbook, which provides an interactiv e and fun tool to introduce to international business: https://www.cia.gov/library/publications/the-world-factbook/ [2] Another great way to introduce student to the world of international business is to direct them to the BBC website: http://news.bbc.co.uk/1/hi/country_profiles/default.stm [3] Comic relief - Humorous (possibly offensive) introduction to IB 2:09 minutes Catherine Tate - Translator : http://www.youtube.com/watch?v=ma8Vwkpx5y8 INTERNATIONALIZATION AT HARLEY - DAVIDSON [ CLOSING CASE] ■ Harley Davidson is the chapter Closing Case. These questions serve as hooks for students to familiarize themselves with the chapter concepts ■ 1908- Harley Davidson sold the first Harley police motorcycle to which police department? ANSWER: Detroit; Nearly every large U.S. police department employed Harley motorcycles ■ 1988- Harley Davidson opened up its first foreign production facility in what country? ANSWER: Brazil (Manaus)… Why is Brazil an important foray into the international arena? It represents a key emerging market country. ■ There have been recent updates to the situation of Harley Davidson regarding its performance and international activities. In particular, Harley management has sought to move more of the firm’s production and marketing activities abroad, in light of highe r manufacturing costs in the United States and the fact that the market for Harley sales is increasingly saturated in the US and Millennials and other younger consumers are less interested in buying large motorcycles. These trends have been reported in numerous accounts in the news media. II. LEARNING OBJECTIVES AND THE OPENING CASE LEARNING OBJECTIVES After studying this chapter, students should be able to : 1.1 Describe the key concepts in international business 1.2 Understand how international business differs from domestic business 1.3 Identify major participants in international business 1.4 Describe why firms internationalize 1.5 Appreciate why you should study international business 1.6 Learn the CKR Intangible Soft Skills™ and the CKR Tangible Process Tools™ to improve your employability and success in the workplace.

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    3 | Page Key Themes ■ In this chapter, there are five themes: [1] Key concepts in international business [2] How international business differs from domestic business [3] Who participates in international business [4] Why firms internationalize [5] Why you should study international business ■ This chapter is the introduction to the text, as well as to the foundation concepts. The first part of this text (chapters 1 - 8) explores globalization from a macro, environmental level, while the second part (chapters 9 -17) examines international business from a more micro, organizational level. The fundamental concepts introduced in Chapter 1 are central to both macro and micro perspectives for understanding international business. Thus, these basic concepts permeate the entire text, and students should be well- acquainted them. ■ In this chapter, use a macro lens to introduce students to some of the fundamental international business concepts. ■ Cross -border trading has been around for centuries; contemporary international business has gained considerable momentum/complexity over the past four decades. ■ International business refers to the trade and investment activities by companies across national borders. Globalization of markets refers to ongoing economic integration and growing interdependency of countries worldwide. Stress the dramatic growth in world trade, which now exceeds some $18 trillion annually. ■ There are two way s to invest internationally- passively ( portfolio investment -financial assets ) or actively ( foreign direct investment - capital, technology, labor, land, plant and equipment ) . ■ Also important are importing (global sourcing)-buying products/services from abroad and bringing them back to the home country. Exporting- manufacturing a product or service in one country and selling it to another. ■ Address the broader questions of: ◘ Why firms go international? - Primarily to increase sales and profits! ◘ What is the difference between internationalization and globalization? Former- Expansion of international business activities vs, Latter- Integration, interdependency & interconnectedness of internationalization (the 4 I’s) Example: Increasing exports vs. Sourcing value-chain activities strategically around the globe to leverage factor efficiencies ◘ How international business is different from domestic business: Complexity and Risks (4) ◘ Who participates in international business- Multinational Enterprise (MNE) Small and Medium-sized Enterprise (SME) Born Global - entrepreneurial firm that is international from almost inception ◘ Why you should study international business - Competitive advantage- for you and your firm! ■ Note that international business is both a cause and a result of increasing national prosperity.

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    4 | Page Teaching Tips ■ In this chapter, use a broad brush approach in generating excitement about the importance of international business activity. Ask students to examine their clothing, watches, iPhones, iPods and report where in the world each item was manufactured. This discussion underscores the profound and pervasive impact that globalization has had on all of us. ■ Next, ask students what they would like to do professionally, after they gradua te. Once they respond, ask if they can accomplish that successfully without understanding international business, and the impact of global trends on their industry and business? The answer is, of course, a resounding NO!!! Commentary on the Opening Case : FACEBOOK: A GLOBAL PHENOMENON  Key message Instagram is a photo- and video-sharing network enjoyed by smartphone owners worldwide who use the service to share photos and short videos with others. The site has more than 700 million active monthly users, and was acquired by Facebook in 2012. Instagram and Facebook underscore the economic, political and personal interconnectedness among countries, companies, and consumers.  Uniqueness of the situation described ■ What is striking about this case is that by the time the reader finishes this case, Instagram usage will have again jumped globally. One of every ten people on the planet- about more than 700 million users - has an Instagram account. ■ Available in 33 languages, Instagram has a dual identity — a for-profit business and a vehicle for our personal lives. ■ Instagram is the sixth most popular social media platform worldwide, after Facebook, Twitter, LinkedIn, YouTube, and Google+.  Classroom discussion ■ This example illustrates how the global economy has permeated our everyday lives. ■ International business activity is increasingly complex and impacts our everyday lives - shopping, listening to music, watching a movie, or surfing the Internet- involve international business transactions that connect us to the global economy, and influence quality of life, standard of living, and economic well-being. ■ The vision of both Instagram and Facebook mirrors this activity by empowering individuals, mapping the social relationships among them, and creating a new system for exchanging information that many find indispensable. ■ Mode of Entry: ◘ FDI - foreign direct investment establishing offices around the world. ■ Which countries is it e specially popular in? ◘ Instagram is especially popular in Russia, Brazil, Turkey, Poland, the United Kingdom, and the United States. It enjoys fast growth in Asia. ■ What are the most photographed countries among Instagram users?

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    5 | Page ◘ Italy, Japan, Indonesia, Kuwait, Thailand, and France ■ Primary revenue generation: ◘ Advertising - Brand awareness- Key ■ How does Instagram market itself in less developing economies, where incomes are lower? ◘ The platform allows people in such countries to take and share high-quality photographs using low-resolution phones, as they often cannot afford expensive smartphones or fast Internet connections. ■ Key revenue source: ◘ Retailers and other companies leverage Instagram to market their products and services at low cost. Most of the world’s top brands— for example, Apple, BMW, and Sony — have established Instagram pages, to facilitate sharing photos about their brands. ■ Specific country examples ( Russia, Turkey, Brazil, Poland, United Kingdom, United States) enrich the overall theme: the Instagram phenomenon illustrates how converging lifestyles, modern communications technology, and imaginative entrepreneurship are facilitating the emergence of global enterprises. ■ Use this case as a springboard for the first teaching tip offered above. ■ Also ask students to update the Instagram saga since its sales to Facebook in 2012. Break students into small groups to work on the following questions, with each group providing a brief presentation of their answers. QUESTIONS 1 - 1. What advantages does Instagram obtain from doing business in international markets? (LO 1.4; AACSB: Application of knowledge) ■ Capitalizing upon the global interdependency and interconnectedness among economic, political, social forces on professional and personal levels. ■ Instagram appeals to people worldwide who enjoy taking photos and sharing them with others around the world. Many countries constitute key markets for the firm’s photo/video sharing services. Instagram earns more than $5 billion in annual advertising revenue worldwide. ■ The tendency of people to create photos and videos of their favorite brands is valuable to brand managers in a world of targeted advertising; reach is enhanced. 1 - 2. What attributes of Instagram have allowed it to gain rapid acceptance in countries around the world? (LO 1.1; AACSB: Reflective thinking) ■ Widespread adoption of smartphone a pps. The number of smartphone users worldwide has reached 3 billion, about 40 percent of world population. ■ Instagram management has developed the service so that it has a truly global platform. Management has used foreign direct investment to establish offices around the world, to support customer adoption and better understand Instagram’s most popular

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    6 | Page markets worldwide. ■ The Instagram platform allows people to take and share high -quality photographs using low-resolution phones, which appeals to users in less-developed economies. ■ Instagram also launched an expanded web version that allows users to skip the app’s wait time, data costs, and storage needs while still providing basic functionality. ■ In general, Instagram benefits from converging lifestyl es, the rise of advanced communications technologies, and imaginative entrepreneurship and skillful management in the firm. 1 - 3. How do companies use Instagram to market their products and services? (LO 1.1; AACSB: Diverse and multicultural work environments) ■ Based in Germany, sportswear company Puma contracts with Instagrammers who have many followers to capture photos that showcase the firm’s products. . ■ Based in Denmark, brewing company Carlsberg launched a marketing strategy called “Happy Hour” that offers half-priced beers in exchange for Instagram posts. ■ In Japan, Instagram’s most popular influencer is a dog, Marutaro, who promotes pet food, real estate, and other ventures through the app. ■ In Brazil, sports teams use Instagram to promote themselves. ■ Worldwide, many firms that market youth-oriented services leverage Instagram to promote their brands. Firms target Instagram for brand promotion among upwardly mobile young managers. III. DETAILED CHAPTER OUTLINE INTRODUCTION: WHAT IS INTE RNATIONAL BUSINESS? ■ International business (cross-border business) refers to cross-border trade and investment activities by firms. ■ Primarily, individual firms engage in international business, yet, governments and international agencies may also conduct international business activities. ■ Exhibit 1.1 - Elements of International Business (Six) 1] Globalization of markets 2] International trade 3] International investment 4] International business risks 5] Participants: Firms, distribution channel intermediaries, facilitators and governments. 6] International entry strategies, including exporting and direct investment ■ Globalization of markets (or the globalization of economies) refers to ongoing economic integration and growing interdependency of countries worldwide. ■ Online platforms - Amazon, Alibaba, Facebook and Instagram underscore this integration and are central to globalization.

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    7 | Page ■ Internationalization refers to the tendency of firms to systematically increase the international dimension of their business activities. ■ This has resulted in the widespread diffusion of products, technology, and knowledge worldwide. ■ Macro perspective (trend) - globalization of markets means intense economic interconnectedness between/among countries. Market globalization is characterized by several related trends: ● Cross - border transactions - unprecedented growth rates - from $ 3 00 billion per year in 1960 to current numbers of $1 6 trillion annually ● Trade = Substantial international flows of capital, technology, and knowledge ● Development of highly sophisticated global financial systems and mechanisms to facilitate cross - border flows of products, money, technology, knowledge , and data . ● Greater collaboration among nations through multilateral regulatory agencies such as the World Trade Organization (WTO: www.wto.org ) and the International Monetary Fund (IMF: www.imf.org ) ■ Micro perspective (focus) - firm level, activity- Value-Chain Perspective - Firms conduct value-adding activities on a global scale, i.e. organize, source, manufacture, market, sell, and employ market entry strategies such as exporting, strategic alliances, and direct investment. ■ The text focuses primarily on the international business activities of the individual firm. ■ Globalization both compels and facilitates companies to expand abroad- international expansion is easier due to market and product globalization. ■ A “level playing field” has made cross -border activities appealing to all types of firms- large and small; manufacturing and service sectors (e.g. banking, engineering, insurance, and retailing). ■ Globalization impacts everyone, as evidenced by the global financial crisis (2008). The economic contagion, or interconnectedness was underscored as the crisis began in the U.S. and rapidly spread to U.S. trade partners, eventually impacting Canada, Mexico, Japan, China and the world. This manifestation illustrates the integration and interdependency of national economies throughout the world. WHAT ARE THE KEY CONCEPTS IN INTERNATIONAL BUSINESS? ■ International trade and investment are the most conventional forms of international business transactions. International Trade ■ Cross -border exchange of products (merchandise) and services (intangibles) typically through exporting and importing.

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    8 | Page ■ Exporting (outbound activity) - entry strategy involving the sale of products/ services to customers located abroad. ■ Importing ( global sourcing ; inbound activity) - the procurement of products/services from foreign suppliers for consumption in the home country or a third country ■ Exporting and importing may include both intermediate (raw materials and components) and finished products. International Investment ■ Cross -border investment is the transfer of assets to another country or the acquisition of assets in that country. ■ The factors of production (assets) include capital, technology, managerial talent, and manufacturing infrastructure. ■ Trade = products and services cross national borders. ■ Cross-border investment = the firm itself crosses national borders. Two Types of International Investment: ■ International portfolio investment (typically short-term) is the passive ownership of foreign securities such as stocks and bonds for the purpose of generating financial returns. ■ Foreign direct investment (FDI) (typically long-term) is a foreign-market entry strategy that gives investors partial or full ownership of a productive enterprise. The firm establishes a physical presence abroad through acquisition of productive assets such as capital, technology, labor, land, plant, and equipment. The Nature of International Trade ■ Macro -International Trade: Aggregate export and import flows of products and services between nations. ■ Micro -International Business: Cross-border transactions of an individual business enterprise. ■ Gross domestic product (GDP) is the total value of products and services produced in a country during a year. ■ Exh ibit 1.2 contrasts the growth of total world exports to the growth of total world gross domestic product (GDP) since 1980. ■ Due to the global recession, world trade declined in 2009, ending a 27 -year boom period. ■ T rade revived and returned to normal levels in 2012. ■ R emarkable- since 2008, annual rate of growth in world exports surpassed world GDP by almost 2x (5.3% versus 2.8%). Trade Growth > GDP Growth: [1] Significant rise of emerging markets during the past three decades, which are home to growing middle class households equipped with substantial disposable incomes. [2] Advanced (or developed) economies such as the U.S. and the European Union are now sourcing many of the products from low-cost manufacturing locations such as China, India, and Mexico.

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    9 | Page [3] Advances in information and transportation technologies, decline of trade barriers, and liberalization of markets fuel the rapid growth of trade. ■ Exhibit 1.3 identifies the leading nations in merchandise exports (not including services). ■ During the recent global recession, China surpassed the U.S. as the world’s l eading exporter in total dollar terms, trade accounts for about 31% of its GDP (in the U.S., trade is 19% of its GDP). ■ For other economies, merchandise trade is a much larger component of economic activity: e.g. Netherlands (125%), Mexico (68%), and South Korea (68%). ■ Exhibit 1. 4 identifies the top 25 countries in international merchandise trade (not including services). The 25 countries shown account for the vast majority of world merchandise trade. ■ Entrepôt economies ( intermediate depot ; exports = imports): Singapore, Hong Kong and Malaysia export more than 100% of their respective GDPs. ■ Such countries import a large volume of products, some of which they process into higher value-added products and some they simply re-export to other destinations. The Nature of International Investment ■ Foreign Direct Investment (FDI) - (asset ownership and long time frame) is the ultimate commitment-level of internationalization, and thus this text focuses primarily on FDI (most common mode of entry strategy) as opposed to International Portfolio investment. ■ New legal business entity, recognized by the host country and subject to its regulations. ■ Motivations for firm FDI: (Note how these fit into the value chain) (1) Primary Activity: Set up manufacturing/assembly facilities to produce products/services; (2) Primary Activity: Open a sales/representative office to conduct marketing or distribution activities; or (3) Support Activity: Establish a regional headquarters ■ FDI and Competitive Advantage : Large, resourceful companies with substantial international operations are better able to leverage FDI to: (1) Manufacture/assemble products in low-cost labor countries (or for other resources), i.e. China, India, Russia, Brazil, and Mexico: ■ Example - ◘ Ford invested some $3 billion to build a new car factory in Mexico to manufacture Fiesta automobiles.

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    10 | Page (2) Global challengers originating in rapidly developing economies invest in western markets: ■ Examples - ◘ Chinese company Haie r purchased General Electric’s appliance division for $5.4 billion, in 2016. ◘ Turkey in 2014- Yildiz paid over three billion dollars to acquire British based cookie and snack maker, United Biscuits. ◘ India's Mittal Steel Co. acquired the Belgium-based Arcelor SA in August 2006, creating a $38 billion conglomerate -- the world's largest steel company. ◘ Russian oil and gas firm Lukos established thousands of service stations in the U.S. and Europe. ■ Exhibit 1. 5 shows the dramatic growth of FDI since the 1980s. ■ September 11, 2001 interrupted FDI inflows with the worldwide panic that ensued following the terrorist attacks in the U.S.; then interrupted again in 2008 by the global recession. Stability in world economy is key. ■ Developed (Advanced) economies = Japan, Australia, Canada, the U.S., and most countries in Western Europe. Dollar volume of FDI has grown immensely since the 1980s, in developed economies. ■ Developing economies = Parts of Africa, Asia, and Latin America. ■ Significant- is the growth of FDI into developing economies (surpassing advanced economy inflows in 2010) despite widespread poverty, lower incomes, less-developed industrial bases, and less investment capital than advanced economies, and represent the need for modern industrial infrastructure. Services as Well as Products ■ Key international players: Tangible merchandise (products) and intangibles (services - e.g. banks, consulting firms, hotels, construction companies, retailers, airlines, etc.). ■ International trade in services accounts for about one-quarter of all global trade and is growing faster than products, however the value of merchandise trade is still much greater than the value of services trade. ■ Challenges unique to se rvices: ◘ Not all services can be exported. ◘ Physical presence in host country is a prerequisite for many services. ■ More than $2 trillion worth of services are sold abroad every year. ■ Exhibit 1. 6 identifies the leading countries in total international services trade. ■ Larger, developed economies account for the greatest proportion of services - as services typically comprise more than 2/3 of the GDPs of these countries. ■ EBay - the giant Internet retailer earned $9 billion in 2017, of which more than 50% came from international sales. ■ EBay expanded to India, China, Korea, and Europe in anticipation of most of its future revenue growth coming from abroad. ■ When developing its business in India, eBay acquired the Mumbai-based e-retailer Baazee. ■ Exhibit 1. 7 (great chart) illustrates the diversity of service sectors that are internationalizing.

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    11 | Page The International Financial Services Sector ■ Banking and financial services are the most active cross-border services. ■ Explosive growth of global capital markets is attributed to: (1) Internationalization Banks/Financial institutions → increased amount of cheap, local investment capital, stimulating local financial markets and encouraging savings (2) International Flow of Money → into pension funds and portfolio investments ■ D eveloping economies- banks/financial institutions have fostered economic activity by increasing the availability of local investment capital, which stimulates the development of financial markets and encourages savings. ■ International banking is primarily conducted by very large banks. ■ Governments worldwide imposed many new regulations in the banking industry following the global financial crisis that arose in 2007 – 2008. ■ Consumers and local businesses generally prefer to deal with local banks, obtaining financial services from homegrown “brick -and- mortar” branches and personnel who understand local conditions. ■ China is now home to three of the world’s five largest banks, specifically ICBC, China Construction Bank, and the Agricultural Bank of China. ■ London long has been the banking hub of Europe, but the status may be threatened if the United Kingdom ends its membership in the European Union (EU) under the Brexit arrangement. HOW DOES INTERNATIONAL BUSINESS DIFFER FROM DOMESTIC BUSINESS? ■ Complexity - Macro forces differ from country to country- economic conditions, national culture, legal and political systems- vary by country. ■ Risk - Uncontrollable variables- the firm has little or no control over these. ■ Foreign environments involve new risks that firms must manage. ■ Instagram (opening case)- exemplifies how distinctive conditions in each country lead businesses and consumers to utilize services differently, from country to country. The Four Risks of International ization The Four Risks of International Business ■ Exhibit 1. 8 summarizes the four major risks: cross - cultural risk, country risk, currency risk, and commercial risk. Cross - Cultural Risk ■ S ituation where a cultural misunderstanding places some human value at risk. ■ Differences in language, lifestyles, mind -sets, customs, and religion. ■ Cross-cultural literacy - critical to embrace culturally-valued mind-set and/or work style. ■ Cultural blunders - hinder the effectiveness of foreign managers.

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    12 | Page ■ Language - critical dimension of culture- a window to value systems. ■ Language challenges impede effective communication. ■ Cultural differences may lead to inappropriate business strategies and ineffective customer relations. Country Risk or Political Risk ■ Differences in host country political, legal and economi c environments may adversely impact firm profitability. ■ Government intervention: restricts market access; imposes bureaucratic procedures hindering business transactions; and limits the amount of income that firms may repatriate from foreign operations- varies by country. ■ Economic freedom differs among nations - The Index of Economic Freedom from the Heritage Foundation ranks countries according to a myriad of economic freedom variables. ■ Hong Kong, Singapore and Australia typically occupy the top three countries in terms of having the highest levels of economic freedom, see ( http://www.heritage.org ). Ireland also ranks high in terms of a liberal economic environment; whereas China and Russia are the opposite- governments regularly intervene in business. ■ Critical Legal Dimensions: Laws and regulations, e.g. intellectual property protection, product liability, taxation policies, inflation, national debt, and unbalanced international trade, may encumber firm operations and performance. Currency or Financial Risk ■ Risk of adverse fluctuations in exchange rates. ( Exchange rates - the value of one currency in terms of another). ■ Inflation and other harmful economic conditions create uncertainty of returns due to the growing interconnectedness of national economies. ■ When international transactions are conducted in more than one national currency → currency risk. ■ The value of a firm’s earnings may be substantially reduced when currencies fluctuate significantly. ■ Examples- 2015-16 Rising value of U.S. dollar relative to most currencies cut into revenues of U.S. multinational firms, e.g. Apple, Caterpillar, and Pfizer. Procter and Gamble’s Duracell battery business experienced a 31% decline in profits due to weaker currencies in its foreign markets Commercial Risk ■ Poor development/execution of business strategies, tactics or procedures, resulting on firm loss, e.g. partnering selections, market entry timing, pricing, product features, and promotional themes ■ Failures in international markets are far more costly than domestic business blunders. ■ Firm reputation and profitability may also be at risk from marketing harmful products, failing customer expectations, or providing inadequate customer service. ■ Commercial risk is often affected by currency risk, because fluctuating exchange rates can affect various types of business deals.

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    13 | Page Two new types of risk — cyber risk and social media risk — have emerged in international business. Both are the result of vulnerabilities in affected organizations. — Cyber risk results from attacks on, or breaches of, the firm’s information systems. Recent data breaches have afflicted eBay, Uber, Tesco Bank, and Sony Playstation Network. — Social media risk refers to rapid and widespread circulation of unfavorable “buzz” about the firm. Such negative news is accelerated and amplified by social media. In 2015, for example, regulators announced that Volkswagen had installed software in its vehicles aimed at evading environmental regulations intended to reduce engine pollutants. When the scandal went viral on Twitter, Facebook, and other sites, Volkswagen’s brand image was damaged. By late 2015, Volkswagen’s buzz score had descended to its lowest point in several years. Risks: Always Present but Manageable ■ These types of risks are omnipresent in international business. ■ Managers need to understand their implications, anticipate them, and employ proactive measures to reduce their adverse effects. ■ Example from 2015: the Greek debt crisis has lingered for several years and affects not only the European Union but creditors elsewhere. WHO PARTICIPATES IN INTERNATIONAL BUSINESS? (Four categories) [1] Focal firm - The initiator of an international business transaction, which conceives, designs, and produces offerings intended for consumption by customers worldwide. Focal firms are primarily MNEs and SMEs. [2] Distribution channel intermediary - A specialist firm that provides various logistics and marketing services for focal firms as part of international supply chains, both in the home country and abroad. [3] Facilitator - A firm or an individual with special expertise in banking, legal advice, customs clearance, or related support services that assists focal firms in the performance of international business transactions. ■ Freight forwarder- A specialized logistics service provider that arranges international shipping on behalf of exporting firms. [4] Governments - (public sector) act as suppliers, buyers, and regulators. ◘ Russia, China, and Brazil - State-owned enterprises account for a substantial portion of economic value added, even in these rapidly liberalizing emerging markets. ◘ France, Australia, and Sweden - Governments in these advanced economies have significant ownership of companies in telecommunications, banking, and natural resources. ◘ The recent global financial crisis led governments to step up their involvement in business, especially as regulators.

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    14 | Page Focal Firms in International Business [Most prominent players] Three Types: MNE and SME and Born Global Multinational Enterprise (MNE) Also known as Multinational Corporation (MNC) ■ MNE owns a worldwide network of subsidiaries and affiliat es located in multiple countries; large firm with a home office and substantial resources. ■ Multinational enterprises have historically been the most important type of focal firm; adding value in multiple countries, through subsidiary affiliates, leveraging R&D, procurement, manufacturing, and marketing activities, to exploit economic advantages. ■ FDI (Foreign Direct Investment) - Key entry strategy. ■ Examples- ◘ Alcon - Swiss pharmaceutical firm that established major R&D facilities in the U.S., leveraging local talent in the chemicals sector ◘ Verizon Wireless - located much of its technical support operations in India, taking advantage of high-quality, low-cost customer support personnel ◘ Royal Dutch Shell - owns several oil refineries and nearly 2,000 gasoline stations in Canada. ■ Affiliates- Network of subsidiaries that MNEs collaborate with. ■ Typical MNEs - Nestlé, Sony, Citibank, Unilever, Nokia, Ford, Barclays, DHL, Four Seasons Hotels, and Shell Oil. ■ R ecently, the largest MNEs have been firms in the oil industry (such as Exxon-Mobil and Royal Dutch Shell) and the automotive industry (General Motors and Honda), as well as retailing (Walmart). ■ MNEs – For many, more than 50% of total sales/profits comes from international operations, e.g. Exxon, Honda, and Coca-Cola. ■ 1970 - fewer than 7,500 MNEs worldwide; today at least 75,000 . ■ Exhibit 1. 9 (great chart) provides a geographic distribution of the world's leading MNEs, drawn from Fortune ’s Global 500 list - concentrated in mostly advanced economies. ■ The U.S. is home to 132 of the top 500 MNEs, a number that has declined over time as other countries’ firms increase in size. ■ China has the second-most MNEs (110 firms) and rising. Europe is home to many top MNEs: Germany (29 firms), France (20 firms), and the United Kingdom (19 firms). ■ Global Challengers from Emerging Market Countries: New Contenders - Large MNEs have begun to appear in emerging market countries, such as China, Mexico, and Russia- leveraging home-country natural resources and low-cost labor, posing legitimate competitive challenges for advanced economy- incumbents in world markets. ■ Examples - ◘ The Mexican firm Cemex is one the world’s largest cement producers. ◘ Russia’s Lukoil has big ambitions in the global energy sector.

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