Changes in the internal and external business environment have meant that more and more firms are expanding their operations across country borders. External factors such as: the removal of trade barriers, free trade agreements between countries, and an emerging middle class has made the idea of going global more attractive to organisations across the world. Internal factors such as: increasing profits, increasing market share and becoming a global brand are more drivers for organisations to globalize. Whilst there are a lot of drivers of internationalization, and hence potential advantages to internationalize. Types of Foreign Market Entry Modes An organisation has a number of different entry modes to choose from when it internationalizes its operations. All organisations will have different reasons for going global, which will have an influence on which entry mode is best suited to them. An organisation will need to determine their desired level of commitment, flexibility, control, Continue reading
International Business Basics
Sources of Attaining Competitive Advantage by a Business Firm
When a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals. A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices. Competitive advantages are capabilities that are difficult to replicate or imitate and are non-tradable. Pitts and Snow define a competitive advantage as “any feature of a business firm that enables it to earn a high return on investment despite counter pressure from competitors.” A competitive advantage exists when the firm is able to deliver the same benefits as the competitors are but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Thus, a competitive advantage enables a firm to create superior value for its customers and superior Continue reading
Target Markets in a Global Environment
The starting point in selecting the most effective channel arrangement is a clear determination of the target market for the company’s marketing effort and a determination of the needs and preferences of the target market. Where are the potential customers located? What are their information requirements? What are their preferences for service? How sensitive are they to price? These are some of the questions that the channel manager should answer. Customer preference must be carefully determined because there is as much danger to the success of a marketing program in creating too much utility as there is in creating too little. Moreover, each market must be analysed to determine the cost of providing channel services. What is appropriate in one country may not be effective in another. Channel strategy in a global marketing program must fit the company’s competitive position and overall marketing objectives in each national market. If a Continue reading
Transfer Pricing Methods
In a simple terms the term Transfer pricing refers to the prices that related parties charge one another for goods and services passing between them. The most common application of the Transfer pricing rules is the determination of the correct price for sales between subsidiaries of a multinational corporation. These prices can be used to shift profits to tax-favored jurisdictions, If in a transaction between a subsidiary in a high-tax jurisdiction and another in a low-tax jurisdiction, the high-tax subsidiary charges a price below the “true” price, some of the group’s economic profit is shifted to the low-tax subsidiary. Obviously taxpayers would want to engage in this sort of behavior because it can significantly reduce their taxes. If there were no limitations on this behavior, the entire income of multinational corporations would be taxed at the lowest tax rate in the world to zero rate of taxation. Consequently most countries Continue reading
Drivers of Globalization
The key factors seem to underlie the trend towards the increasing globalization of markets and production are the decline of barriers to trade and investment and the role of technological changes. 1. Decline of Barriers to Trade and Investment Decline in Trade Barriers Many of the barriers to international trade took the form of high tariffs on imports of manufactured goods. However, this depressed world demand and contributed to the great depression of the 1930’s. After World War II, the industrialized countries of the West started a process of removing barriers to the free flow of goods, services, and capital between nations. Under GATT, over 140 nations negotiated even further to decrease tariffs and made significant progress on a number of non-tariff issues (e.g. intellectual property, trade in services). The most recent round of negotiations known as Uruguay round was competed in December 1993. The Uruguay round further reduced trade Continue reading
Structural Design of Multinational Enterprises(MNEs)
Organizational structure gives the framework or lines of communication, authority, responsibility and accountability. Organizational structure specifies the firm’s reporting relationships, procedures, controls and authority and decision processes. It is a critical component of effective strategy implementation process. Organizational structure provides for specialization and interfaces among specializations for collaborative synergism and competitive dynamism. For Multinational Enterprises(MNEs) deciding the organization structure is very important because it cannot be the same for all units and at the same time cannot be just one design for all. Whatever the design, it must be organic enough to adapt to situations. The structure must have stability to facilitate day to day activities to go on consistently and flexibility to facilitate taking advantage of opportunities that environment throws up. While it is becoming true that form must follow function, there are some traditional/ classical organizational structures that are followed; besides new structures are experimented with. Multinational Enterprises(MNEs) Continue reading