Summary: International Business - A strategic management approach

Summary written and donated to WorldSupporter in 2012-2013


International Business – consists of international transactions (e.g. trade (exports and imports) and foreign direct investment). It is very useful in order to satisfy the needs of companies and private households.
Multinational  Enterprises  (MNEs)  –  these  are  organizations  that  have  their
headquarters in one particular country, but do business in one or more other country. This  creates  an  extended  arena  for  international  trade  since  it  supports international business. 
Exports – these are goods and services that are being produced in one country and then  traded  to  another  country.  In  order  to  maintain  a  positive  balance  of  trade,  a company should always export more than it imports.
Imports – this includes goods and services that are being produced in one country and then  brought  in  by  another  country.  In  case  of  imports  exceeding  exports  in  one country, a trade deficit will be the result on the nation’s trade balance.
The basis of international business is trade which contributes to the understanding of MNE strategies and practices. The world’s most exporters are also the world’s biggest importers. Exports  and  imports  are  the  motor  of  international  trade  and  enhance  worldwide interaction  among  countries  and  businesses.  If  they  were  to  decrease,  the  world economy would suffer grandly from that.
Foreign Direct Investment (FDI) – FDI are equity funds invested in other countries by MNEs. 
FDI is often used by organizations to gain a foothold in other markets by obtaining firms in different countries or by operating in foreign markets.
Especially  companies  from  the  US  have  invested  greatly  into  several  countries (Western Europe, Latin and North America and Japan). FDI is an essential factor when it comes to international trade because it helps, for example, less developed countries to establish worldwide trade relationships.
Triad – these are geographic areas (the US, the EU and Japan) that play a crucial role in international trade. They are responsible for most of the trade and investments that take  place  worldwide.  Further,  when  the  US  is  important  as  a  triad  member,  Mexico and Canada are usually included into the considerations.
North  American  Free  Trade  Agreement  (NAFTA)  –  The  NAFTA  is  a  free  trade agreement between the US, Canada and Mexico which was founded in 1994. It has the purpose to abolish trade and investment barriers between those three nations.
Concerning  the  triad,  the  US  has  the  world’s  largest  economy.  Followed  by  the  EU, whose  collective  GDP  is  larger  than  that  of  the  US  or  Japan.  Japan  is  the  greatest economy in Asia and is a grand investor into the US and the EU. Countries from the triad practice more trade and FDI than any other economy.
The global environment has rapidly been changing in recent years and the reasons for this fact are:
A -   A slowdown in the triad economies
B -   The introduction of additional trade regulations
C -   The impact of technology
D -   More small and medium-sized multinationals
A  -  In  the  1990s  the  US  held  a  fast  growing  and  healthy  economy  and  became  the most competitive nation in the world. After the Clinton-era, the triad and other countries started to suffer from economic problems. 
Organization  for  Economic  Cooperation  and  Development  (OECD)  –  an
organization with 30 moderately wealthy member countries that assists its members, if economic  difficulties  evolve.  This  is  done  in  form  of  a  forum  in  which  economic problems and their solutions may be discussed.
B – The development of a liberalization in trade and investment helped organizations in the triad countries to improve their profits in open markets. In case of a trade conflict between  countries,  international  organizations  were  formed  to  regulate  international trade.
World  Trade  Organization  (WTO)  –  the  WTO  is  a  worldwide  organization  that  was founded  in  1995.  It  deals  with  the  rules  of  trade  and  smoothing  out  conflicts  among member countries; furthermore, the WTO is allowed to enforce its decisions.
General Agreement on Tariffs and Trade (GATT) – the GATT is a trade organization that  was  created  in  1947.  Its  purpose  was  to  liberalize  trade  and  negotiate  trade concessions among member countries
Nowadays  the  WTO  implements  the  provisions  of  GATT.  If  conflicts  arise  among member  countries,  the  WTO  supports  problem  solving.  If  nations  disagree  with decisions made by the WTO, harsh consequences such as trade retaliation may be the result.  Due  to  trade  liberalization  though,  disputes  among  countries  should  be eliminated because it encourages international business transactions. 
C  –  Technology  is  a  constantly  developing  area  and  especially  communication technology is of great importance to many businesses and in certain markets. The use of computers, the internet, as well as cellular technology makes it possible for firms to remain  in  continuous  contact  with  their  office  and  their  customers.  This  enhanced communication is essential for individuals since it eases conducting business. Through  technology  the  production  of  goods  and  services  is  enhanced.  Shorter production periods as well as less defect goods can be ensured due to the “Six Sigma” quality programs. These are quality measurements that have been created in order to
ensure high quality, as well as remove performance difficulties.
D – Small and medium-sized enterprises (SMEs) – the definition varies depending on the country. In the US, SMEs have up to 500 employees; in Japan SMEs in industry have up to 300 employees, those in the wholesale industry have up to 150 employees, and those in the retail industry up to 50 employees. In the EU SMEs employ between 11  and  200  individuals  and  the  company’s  sales  are  less  than  40  billion  US  $.  The World Bank benchmark for developing countries is set from 11 to 150 employees, and sales of under 5 billion US $.
Due  to  the  fact  that  many  SMEs  have  a well-trained workforce, are highly innovative and apply the latest technology, they can compete effectively and are very flexible in comparison  to  larger  firms.  These  points  are  important  for  SMEs  because  they  rely heavily on their customers and therefore focus on cost control and quality. 
Facts about MNEs:

  • Mainly, MNEs earn their revenues either within the country they are located in or by selling in locales that are close by.
  • MNEs  need  to  implement  strategies  that  are  regionally  applicable  and  not worldwide  in  order  to  be  successful.  They  need  to  carefully  adapt  their strategies  to  the  local  markets.  MNEs  should  also  have  a  high  sensitivity  to local  consumers  rather  than  having  only  one  global  strategy.  This  is  due  to differences  in  countries,  their  cultures,  and  therefore  their  needs  and preferences.
  • Achieving  sustainable  long-term  profits  or  building  political  advantages  has become  impossible  for  MNEs  because  of  the  grand  rivalry  among  firms  in regional  and  triad  competition.  A  possible  solution  of  this  problem  is  for enterprises  to  engage  in  strategic  alliances  (explained  below)  in  order  to penetrate local markets and increase profits.
  • MNEs  have  to  alter  their  products  for  regional  markets  in  order  to  receive adequate  profits.  Depending  on  the  preferences  of  certain  countries,  the product needs to be adapted to them.
  • An MNE’s success is mainly drawn from creating and executing strategies on a regional and local basis.

Strategic Alliance – this is a relationship between two or more businesses in order to attain  a  communal  advantage.  This  has  become  popular  since  MNEs  started  to recognize the importance of creating regional and local strategies.
In order for a business to stay competitive it needs to be continuously innovative. The ability of a firm to gain success by doing so depends on four determinants developed by Michael Porter:

  • Factor  conditions:  Land,  labour  and  capital.  A  country  will  export  goods and  services  that  make  most  use  of  the  factor  conditions  with  which  it  is moderately  well  supplied.  If  a  country  has  a  rather  large  and  uneducated workforce, more goods will be exported that are extremely labour-intensive. If the workforce is very well educated, more goods and service will be produced that  tap  the  intellectual  capabilities  of  the  employees.  Factor  conditions constantly need to be upgraded for upholding a competitive position.
  • Demand  conditions:  According  to  Porter,  a  country’s competitive edge  is maintained  in  the  presence  of  a  strong  local  demand  for  its  goods and services. This helps the seller understand what buyers wish for. Moreover, a local seller is more sensitive to impending changes and can therefore adjust and innovate for the market before more distant competitors can take action.
  • Related  and  supporting  industries:  Suppliers  that  are  closer  located  to the producer often offer lower-cost inputs that are not provided to more distant competitors. Additionally, suppliers have a good understanding of the industry environment and therefore can both forecast and react to changes. By sharing this information with the producer, a competitive position can be maintained.
  • Firm  strategy,  structure,  and  rivalry:  A  firm’s  managerial  system (domestic rivalry, management, organization, and the establishment of a firm) plays  a  major  role  for  a  national  advantage.  Furthermore,  a  company’s managerial  system  needs  to  be  adapted  to  the  specific  country  where  it  is applied. If the management practices of industries, which are supported by the national  environment,  are  suited  to  their  industries’  sources  of  competitive advantage,  nations  tend  to  perform  well.  Moreover,  national  goals  are important since  the  preferences  of nations differ. Some  favour rapid  results, some  long-term  development.  The  fact  that  countries  with  leading  world positions often have many local rivals shows that domestic rivalry should also be taken into account.  Domestic  rivalry  supports  improvements  in  the  other  three  influences (factor conditions, demand conditions, and related and supporting industries) and  geographic  concentration  enhances  the  relations  of  the  four  separate determinants.

Strategic  Management  –  managerial  actions  including  strategy  formulation, implementation, evaluation, and control. Also assessment of organizational strengths and weaknesses and environmental analysis of internal and external circumstances is a task in strategic management


Multinational Enterprise (MNE) – an MNE is a company with its headquarters in one nation, but it operates in one or more other nations. MNEs are essential organizations for international trade.
The  largest  500  MNEs  are  responsible  for  80  %  of  the  world’s  foreign  direct investment. Out of these, 430 businesses are located in the “triad”. Therefore it can be said that the “triad” represents the basis of an analysis of strategies of MNEs. 
Characteristics of MNEs:
To  identify  the  characteristics  of  such  an  enterprise  it  is  useful  to  look  at  the environment  in  which  it  is  active.  More  clearly,  this  is  the  home  country  (where  the headquarters are located) and the host country in which it operates.

  • A  MNEs’  associates  have  the  task  to  take  care  of  the  environmental  forces which encompass competitors, suppliers, customers, government and financial institutions.  Often  the  same  suppliers  that  are  domestically  utilized  are  used overseas.
  • MNEs  usually  have  the  possibility  of  using  many  resources  such  as  assets, trademarks,  human  resources,  patents  and  information  because  of  good relations with their affiliates that all belong to the same company.
  • Since  MNEs  usually  have  a  strategic  vision  of  how  the  company  should operate, this common goal brings together the company with its partners even closer.  The  implementation  of  the  strategy  is  therefore  easier  to  enforce because all business partners fit into the plan, and therefore want to attain the same goal.

Internationalization  –  when  a  business  penetrates  a  foreign  market,  this  process  is called internationalization.
In order to stay away from risk and information costs, the internationalization process should  be  implemented  carefully,  as  well  as  step-by-step,  supported  by  experts  in international  trade  that  are  not  employees  of  the  organization.  With  the  passage  of time, information costs will decrease and the perceived risk that is involved with “going international”  will  be  lessened  due  to  increased  experience  concerning  the  foreign environment. 
License – a contractual agreement between two firms. One business, which is called the licensor, allows another one, the licensee, to make use of its patents, technology or trademarks in return for a fee or royalty.
Licensor  –  a  company  giving  the  licensee  access  to  its  patents,  technology  or trademarks and therefore receiving a fee or royalty.
Licensee – a company gaining access to another company’s (the licensor’s) patents, technology or trademarks in exchange for paying a fee or royalty.
The internationalization process can be viewed as follows:

Export via agent or distributor

Export through sales representative or subsidiary

Local packaging and/or assembly

Taking the licensing option not into consideration, there are other options to follow the internationalization process:
A  –  Firstly,  a  local  agent  or  distributor  may  be  employed  to  enter  a  certain  foreign market  because  the  company  discovered  that  there  might  be  potential  for  exports to generate additional sales.
B – A sales representative may then be used in order to situate a sales subsidiary in a particular foreign market, giving the company the possibility to expand its capacity for more exports. Furthermore, the sales representative may then set up a separate export department  to  administer  foreign  sales  and  production.  In  addition,  the  production process,  as  well  as  the  product  design  may  then  be  adapted  to  manufacture  tailor-made products for these foreign markets.
C – Moreover, in order to engage in local assembly and packaging of its products, the business  may  begin  employing  host-country  workers  and  start  dealing  with  working conditions  of  its  host-country.  This  is  a  critical  action  since  the  enterprise  starts  to become more familiar with the foreign markets and has to begin dealing with cultural attitudes, worker expectations, and wage rates. 
D – After gaining adequate knowledge  about its host-country, and therefore reducing the perceived risk, the company may regard a foreign direct investment as appropriate. This means, that the entire production process of the product line is being moved to the host-country and sales are generated there as well.
There are several reasons for a company to become a multinational enterprise:
A – Companies may diversify risk by investing in separate markets. By spreading the risk  this  way,  negative  economic  developments  in  the  home-country  may  be compensated.
B – Engaging in the world market in order to sell goods and services is a reason for a firm  to  become  an  MNE.  This  action  is  associated  with  the  process  of  globalization, meaning there is growth in an integrated world market.
C  –  Enterprises  may  feel  the  need  to  respond  to  the  increasing  number  of  foreign competitors in order to defend their home market share.  This “following the competitor” strategy is useful because it takes away business from the  competitors  by  making  a  greater  product  variety  available  to  the  customers. Furthermore, it makes it harder for competitors to engage in the other company’s home market knowing that the company will respond similarly.
D – The issue of reducing costs is another important reason for companies to become an MNE. For example, transportation costs, as well as middlemen handling a product can be removed by locating a company’s operations nearby a foreign customer. This also makes the firm more flexible in reacting to customer needs.
E – Firms may want to become an MNE in order to overcome barriers to entry. These include tariffs, quotas (tariff and non-tariff barriers) and can be avoided by supplying a market from within.
F  –  Having  technological  experts  work  with  the  company  is  an  advantage  when operating as a MNE. Due to the direct manufacturing of goods (FDI) rather than making license  agreements,  the  firm  can  maintain  their  exclusive  rights  concerning  patents, trademarks, and technological expertise.
In general, MNEs make decisions concerning their operations based on what is best for the  company.  Though  personal  matters  such as cutting back jobs or moving working places to other countries are important issues, the MNE will not take those into account when making decisions regarding the firm’s success.
Due  to  the  “triad”,  there  is a vast economic interaction worldwide. Since many MNEs hire  workers  in  several  different  countries,  every  business  has  a  great  responsibility concerning the economies of other nations.
The process of Strategic Management:
The steps in the process of strategic management need to be conducted carefully. The outcome  of  the  process  helps  the  MNE to create a strategic plan which supports the MNE to be able to compete successfully in international trade. The following illustrate the essential steps for formulating the strategic plan:
Classification of the firm’s mission

Examination of internal and external environment

Formulation of objectives and plan

Execution of the plan

Assessment and control of operations
Firstly, this process contains the formulation of the firm’s basic mission. Further, an environmental analysis of internal and external conditions of the environment is crucial in order to be able to take the process to the next level. The internal analysis takes care of the company’s financial strengths and weaknesses, while the external analysis is performed to identify the firm’s opportunities and threats. The next action to be taken is the formulation of the company’s objectives and its plan which contains, for example, goals to be achieved. Both, long-range (2-5 years) and short-range (<1 year) goals are
being recognized. After completing these analyses, the actual implementation process starts. A periodical assessment of the new strategy in action is very important in order to confirm the success of the strategic plan. If problems concerning the implementation arise, the operations should be adjusted or the plan may be revised.
Basic Mission – a company’s vision answering the questions: “Which business is the firm  in?”  and  “Why  does  the  firm  exist?”  and  therefore  determining  the  company’s identity, as well as identifying the direction in which the business wants to go
The CSA-FSA Matrix
Firm specific advantages (FSA’s) are firm specific factor that determine the competitive advantage of an organization. It can also be called a proprietorial capability, which is also  unique.  Another  kind  of advantages is the country specific advantages (CSA’s). These advantages can be based several factors like the labour force of a country, or the  natural  endowments.  Managers  hope  to  strike  a balance  between  two  factors,  in order  to  be  in  a  unique  space.  The  firm’s  ability  to  coordinate  certain  factors  like productivity, are related to FSA’s
The competitive advantage matrix
This  matrix  helps  in  formulating  a  strategic  option  (s)  for  a  multinational.  On  the horizontal axis, the FSA’s are denoted and on the vertical axis the CSA’s. The matrix consist of 4 quandrants, each with a corresponding generic strategy.


Triad – three geographic areas consisting of the US, the EU and Japan that deal with most of all trades and investments worldwide.
Foreign  Direct  Investment  (FDI)  –  if  firms  have  ownership  in  foreign  countries  or control of foreign assets, this financial involvement is called foreign direct investment (FDI).
This ownership of a business in another country may either be whole or partial and is called a foreign subsidiary. Investments can be made by overtaking an already existing company  or  by  building  up  a  new  company  while  working  with  joint  ventures  or complete ownership in foreign countries.
The purpose of FDI is for the investing firm to be able to actively take part in managing the foreign company in order to get a foothold in the host-market. 
Portfolio Investment – this is the purchase of financial securities (e.g. bonds) of other firms in order to gain money when the firm’s assets are sold.
The  purpose  of  a  portfolio  investment  is  for  the  investing  firm  to  be  able  to  gain financial growth in the value of its financial holdings in the foreign company. 
There are several reasons for companies to make FDIs and portfolio investments:
A - The increase of sales and profits.
Many  firms  (MNEs  as  well  as  SMEs)  receive  a  large  part  of  their  revenues  through international  relationships.  Especially SMEs now recognize the opportunities that are offered  to  them  by  extending  their  worldwide  relations.  As  multinationals  constantly grow larger, local suppliers are increasingly needed which then represents the task of an SME. If there is a good cooperation between the two companies, there is potential for the SME to receive a longer contract and get in touch with other MNEs. A result of this  may  be  increased  profits  for  the  SME,  as  well  as  the  establishment  of  business
B - The entrance in quickly growing markets.
Most  of  the  international  markets  are  growing  and  developing  much more rapid than domestic ones, meaning that MNEs are able to take advantage of this by increasingly making foreign direct investments. The potential for profits in such markets is very high, which is one of the incentives for MNEs to make FDIs and portfolio investments.
C – The reduction of costs.
Due  to  high  labour  costs  in  several  markets,  companies  that  have  labour-intensive operations might want to consider reducing costs by going abroad. 
Moreover, the costs of materials should be taken into account. Rather than importing costly materials, it might be wise to move production closer to the supply of materials. This decreases transportation costs significantly. 
A  third  factor  is  materials  that  are  of  short  supply.  Again,  moving  the  production process to another country where there is a sufficient amount of those materials helps reducing costs. Lastly, the cost of energy plays an important role. In the case of expensive energy in the  domestic  market,  a  firm  could  reduce  costs  by  moving  closer  to  cheaper  energy sources.
Twin Factories or Maquiladoras – institutions (in the US and Mexico) that engage in production processes in both countries, as well as the shipment of goods between both nations in order to reduce tariffs.
D – The gain of a foothold in economic areas.
MNEs entering an alliance or obtaining a company in one of the economic areas of the triad  have  the  advantage  to  be  able  to  sell  their  goods  and  services  without  any restrictions such as tariffs etc.
E – The protection of domestic markets.
In order to protect their home markets, many MNEs penetrate foreign markets to keep potential competitors from expanding their companies. In this case, the likeliness of the competitor  entering  the  other  company’s  home  market  is  low  since  the  firm  is  busy defending its own market position.
Now  and  then  there  are  MNEs  that  penetrate  an  international  market  to  challenge another company which before confronted the other firm’s domestic market. As can be seen, international rivalry is a crucial factor that MNEs have to deal with. Further,  if  firms  want  to  make  portfolio  investments  and  FDIs,  there  might  arise  the advantage that by going abroad, the company protects its position with current clients who are also going abroad.
F – The protection of international markets.
Sometimes it is important for a company to protect its position in the foreign market by making a foreign direct investment (e.g. merging with another company that is active and healthy) in order to protect one’s market share.
G – The attainment of managerial and technological knowledge.
In  order  to  be  able  to  set  up  a  well-trained  workforce,  many  MNEs  recruit  scientists from different universities or laboratories. This helps the enterprise to employ the latest technology  and  stay  up-to-date.  To  be  able  to  implement  this  strategy,  the  company should shift its operations closer to their competitors.
The Triad:
Considering that the worldwide FDI is made up to 80% by the triad, it is obvious that triad  countries  invest  grand  amounts  of  money  in  each  other’s  markets.  These  three economic  areas  are  therefore  the  economic  forces  with  the  highest  influence worldwide. Moreover, the countries belonging to the triad also invest in poorer nations. 
FDI  Cluster  –  an  assembly  of  developing  nations  that  are  mainly  positioned  in  the same geographic area as the particular triad country and usually there is some kind of economic link between the two countries. 
The developing countries often have difficulties in attracting the triad members because many MNEs rather build regional networks than investing into poor nations. The fact that the countries located in the triad area are constantly strengthening their position by investing into one another makes trade and investments complicated for the poorer countries. It becomes therefore clear that non-triad members are in the need of being linked to the triad in some way. Concerning the future, it is expected that the triad will persist in leading the worldwide markets. 
Especially  the  auto  market  is  relevant  for  the  triad  members.  On  the  one hand, both demand and supply in the auto market are footed grandly in the triad countries. On the other  hand,  there  is  an  increasing  activity  in  the  auto  market  by  non-triad  members concerning demand and production. 
The triad countries are overall interrelated. An action taken by one country often has a grand  effect  on  another  market  of  the  triad  members  since  members  of  the  triad compete  with  one  another  in  domestic  as  well  as  foreign  markets.  In  addition,  triad relations are influenced by economic conditions. If, for example, the economy of the EU suffers,  the  US  and  Japan  will  increasingly  serve  as  the  target  for  exports  by  other countries.
Triad  members  continuously  search  for  ways  to  make  them  gradually  more competitive.  Especially  Japanese  business  practices  are  being  observed  by  the  EU and the US because they have a vast potential of success. It is common in Japan to form  “keiretsus”  (also  called  business  groups)  which  cover  several  economically dominating firms. These are linked through joint ventures and/or ownership in order for them to be able to control markets worldwide due to their connections and wealth. 
The members of the triad have a significant fdi flow between them. Part of this was because of the deregulation in Japan. American firms were very eager to buy local Japanese firms. Also, European countries were very interested in pouring money into American firms.


Considering the political and economic environment, there are continuous movements among  these  factors  which  releases  new  opportunities  for  multinationals.  Some countries that cannot adapt their processes to new developments quickly enough might easily fall behind compared to other nations. 
Ideology – these are political theories, beliefs and doctrines that have been created in order  to  give  direction  to  the  actions  of  society.  Political  ideology  and  economic philosophy are almost always interrelated.
Democracy  –  a  governmental  condition  in  which  people  directly  or  through  elected officials come to a decision  of overall actions of the government. Characteristics are, for  example,  the  right  to  express  one’s  opinion,  the  election  of  representatives  for limited  terms  of  office,  an  independent  court  system,  and  a  moderately  non-political bureaucracy and defense infrastructure.
Totalitarianism – this is a state of government in which there is only one leader or only one leading party.
Communism  –  a  type  of  totalitarianism,  in  which  all  property  is  owned  by  the government. It is also those distributing goods and services to individuals, as well as determining how much is to be produced by companies. (E.g. Cuba)
Theocratic  Totalitarianism  –  this  is  a  religious  grouping of people having complete power and repressing or discriminating non-orthodox people. (E.g. Iran)
Secular Totalitarianism – a form of totalitarianism in which the military has power over the government and makes decisions for the whole country. (E.g. Iraq) In general, due to political systems, an economic infrastructure within a country is being established.  In  order  for  a  nation  to  be  able  to  change  its  economic  system,  the governmental system in the country needs to be altered before.
Concerning  the  economic  systems,  it  can  be  differentiated  between  capitalism, socialism  and  a  mixed  system.  Nevertheless,  when  dividing  these  economic arrangements into a resource allocation, the following economies are to be taken into consideration:
Market-driven  Economy  –  a  form  of  economy  in  which  goods  and  services  are allocated  in  terms  of  market  demand  and  supply.  The  characteristic  of  this  form  of economy  is  private  ownership;  market  share  is  trying  to  be  maintained  by  the companies by selling high quality goods and services at competitive prices.
Centrally Determined Economy – a design of an economy in which the allocation of goods and services is determined by a committee that sets limitations to the availability of  certain  goods  and  services.  Public  ownership  with  fixed  production  quotas  is  a characteristic of this kind of economy. 
Mixed  Economy  –  this  is  a  state  of  economy  in  which  a  mixture  of  market-  and centrally driven economies is present. 
In general, over the past years, a movement from centrally determined economies to market-driven and mixed planning can be observed. 
Privatization  –  this  is  the  process  of  selling  government  assets  to  private  buyers. Privatization gives companies and individuals the possibility to obtain these businesses and therefore make high potential profits.
Nationalization – this is the process in which governments control business assets. In order to be able to overtake privately-owned companies, governments sometimes pay a certain amount to the previous owners to compensate for his loss. 
There  are  many  reasons  for  nations  to  engage  in  nationalization.  Some  of  these include:

  • Encourage economic development .  This action allows the government to combine several business resources in one plan that can be applied to, for example, a certain industry
  • Earn profits for national treasury.  By  running  more  firms,  the  state  is  able  to  gain  money  for  itself  and  the country in general
  • Ensure that goods and services are available to everyone in society. The  amount  of  production  of  all  goods  and  services  of  businesses  that  are publicly-owned  can  be  determined  by  the state, meaning that every citizen’s needs are taken care of.
  • Avoid that firms go out of business because they went bankrupt.  Sometimes, if a company was not doing well before, the government might be able to increase its profitability
  • Enhance economic and political control of the ones that are in power.  This  allows  the  government  and  others  to  gain  increased  power  over  the country in terms of its financial system and political management
  • Develop programs that serve the national interests.  By overtaking firms, the state has the possibility to establish certain programs that benefit the entire nation

Divestiture – this is a form of privatization in which a government’s or firm’s assets are being sold to the public.
Contract  Management  –  the  process  in  which  a  certain  operating  responsibility  is given  to  an  industry  by  an  organization  such  as  the  government.  In  this  case,  the government does not transfer its ownership or a legal title to this particular industry.
Reasons for countries to engage in privatization:

  • The  efficiency  increases  when  having  private  companies  offer  goods  and services  rather  than  having  publicly-owned  firms  offer  the  products.  Due  to natural competition, it is essential for the enterprise to take, for example, costs, profits,  and  the  amount  to  be  produced  into  account  and  therefore  conduct business in such a way that it is most profitable. There are more incentives to stay competitive for a privately-owned company.
  • A change in the political culture creates the wish to sell off these assets
  • If the business has been profitable, the government might gain more by selling the firm now than by holding on to it. 
  • National debt may be decreased through  the money the government receives when selling a publicly-owned company. This would therefore benefit the entire country.
  • If  the  government’s  company  is  losing  money,  the  national  treasury  has  to compensate these losses. This results in less liquidity for the state, as well as in disadvantages for the citizens of that nation.
  • If the government needs money to finance research and development in order to keep up its competitive position and does not want to make this investment, privatization  may  help.  By  selling  its  assets  to  the  public,  the  state  does  not have to make further financial transactions and gives this responsibility to the individual that obtains the business.
  • International  funding  agencies  support  the  country  and  ask  for  a lessening in the  size  of  the  government  in  revenge.  With  this  incentive,  the  state  might consider  increased  privatization  because  of  the  ability  to  raise  its  liquidity through funds. In return, less publicly-owned businesses are the result.

Ministry of International Trade and Industry (MITI) – a Japanese ministry having the responsibility  to  supply  information  about  foreign  markets,  facilitate  in  guiding  an economy, as well as promoting investment in certain industries. The organization has moved  from  a  proactive  form  to  a  cooperative  institution.  Lately  the  ministry’s  focal point  lies  on  industries  which  are  less  energy-intensive  in  order  to  boost  Japanese growth and investments.
Research  and  development  is  a  crucial  factor when it  comes to conducting business successfully. In order to be able to apply the latest technology and serve the needs and preferences of the customers, R&D needs to be performed carefully.  Several  organizations  have  received  money  by  the  government  in  order  to  improve research and development (R&D):
RACE - R&D in Advanced Communications in Europe
Focus:  Supporting  research  in  the  development  of  an  integrated  broadband
telecommunications network
ESPRIT - European Strategic Program for R&D in Information Technology
Focus:  Working  in  high-tech  areas  in  R&D  (e.g.  IT,  microelectronics,  and
computer-integrated manufacturing)
EUREKA - a pan-European group
Focus:  Reaching  better  cooperation  between  research  institutes  and  privately-owned businesses
Sematech – a group of 14 companies in the US
Focus: Shoring up the chip-making equipment industry
National Center for Manufacturing Sciences
Focus: Technological breakthroughs
Microelectronics & Computer Technology Corporation 
Focus: Working on advanced computing, software and computer-aided design
America’s  government  has  made  agreements  stating  that  it  will  provide  help  for research. They have actively supported research consortia monetary in their research on technological development.
Economic Integration – Regulations that have been created in order to improve trade and cooperation among nations. Despite this, there are some difficulties concerning the implementation.  Participants  may  not  want  to  give  up  their  economic  control  by agreeing to a common goal in economic integration.
Trade Creation – arises when countries that are a member of an economic integration group  have  a  comparative  advantage compared to others and therefore start trading with  those  goods  and  services  increasingly  among  each  other.  This  might  result  in other countries being left behind; Further, the gap between nations with a comparative advantage  and  others  that  are  not  involved  in  the  economic  integration  group  may increase constantly because it is harder for outsiders to keep up with the pace of trade.
Trade  Diversion  –  arises  when  countries  that  are  a  member  of  an  economic integration  group  trade  less  with  non-member  nations,  but  increase  their  trade  with other member countries. This happens mainly because of the costs that evolve due to trade barriers that are set for non-members. The  consequences  for  non-member  countries  may  be  the  loss  of  exports  and production. Therefore economic integration groups are only helpful when trade creation goes beyond trade diversion. 
Free  Trade  Area  –  a  group  of  countries  that  are  economically  integrated  and where there are no trade barriers among member nations. If this is the case, countries with a comparative advantage may start specializing on  those, and import those goods and services for which other countries maintain a comparative advantage.
North American Free Trade Agreement (NAFTA) – the NAFTA is a free trade region made up of the US, Canada and Mexico
Customs Union – a group of countries in an economic integration group that creates common trade policies toward non-members, but do not have trade barriers among the member countries. This facilitates trade among members and enhances their economic development.
Common Market – a group of countries in an economic integration group that creates common  trade  policies  toward  non-members,  in  which  there  are  no  trade  barriers among member countries and in which there is a free flow of production factors (labor, capital  etc.)  among  members.  Trade  among  participants  of  the  integration  group  is being improved grandly; this is due to less cost concerning trade and the ease of the flow of the factors of production. As can be seen, a common market contains several benefits.
Economic Union – a deep form of economic integration in which there is free flow of factors of production, as well as free flow of products and services between members. Moreover, an economic union has a common currency, holds the same tax rates and structures  for  all  member  countries  and  combines  fiscal  and  monetary  policy  among members.
Political Union – an economic union in which there is a single government, unification of economic policies, as well as complete economic integration.
Facts about economic integration:

  • The level of economic integration for each nation is mainly determined by their economic and political needs since every country differs in some ways
  • Free  trade  for  group  members  mostly  creates  a  win-win  situation  for  all members due to the gains of specializing
  • Due to internal savings and less production costs within a company, countries that participate in economic integration often enjoy internal economies of scale
  • Due to savings through feely flowing factors of production (e.g. lower costs of capital) external economies may also be accomplished
  • Some  member  countries  may  lead  certain  markets  because  they  achieved higher  efficiency  in  comparison  with  others.  This  makes  other  nations  lack behind.
  • In the long run, economic integration makes all member nations achieve higher efficiency, as well as increased competitiveness

Internal  Economies  of  Scale  –  This  is  the  theory  of  the  relation  between  efficiency and  internal  costs:  The  lower  the  internal  costs  (e.g.  production  costs),  the  more efficient a company operates.
External Economies of Scale – This is the theory of the relation between efficiency and external costs: The lower the external costs (e.g. labor costs), the more efficient a company operates.
Non-Governmental  Organizations  (NGOs)  –  Non-profit  organizations  whose
ambition  it  is  to  advance  various  social  interests.  Usually  the  interests  of  NGOs concerning  equity  and  redistribution  do  not  go  well  together  with  the  economic  and efficiency issues that are essential for conducting business.
Civil Society – a grouping of institutions, organizations and individuals, whose goal it is  to  advance  various  interests.  This movement is independent from the government and the market and is against global business.
European  Coal  and  Steel  Community  (ECSC)  –  a  set  of  six  nations  (Belgium, France, Italy, Luxembourg, the Netherlands, and West Germany) that have the aim of creating a common market in order to increase efficiency and competitiveness of these particular industries. The ECSC is the basis of the European Union (EU).
European Union (EU) – a set of countries that united under several treaties in order to enhance economic and political integration. The founding treaty of 1957 had as main provisions the following:

  • they would gradually eliminate tariffs, quotas etc, this would lead to a formation of a free trade are, among the members that is
  • Labour,  capital  and  business  enterprises  would  be  gradually  able  to  move freely.
  • Certain agricultural policies, which will be common among the member states, will be adopted
  • The less advanved regions would het investements from the advanced regions
  • A uniform tariff and the custom union needed for that would be created

European Free Trade Association (EFTA) – a combination of four countries (Iceland, Liechtenstein, Norway,  and  Switzerland)  with the objective to  eliminate trade barriers among each other
Single  European  Act  (SEA)  –  this  act  prevents  a  nation  from  rejecting  any  EU decision it considers to be in conflict with its central interests
Issues faced by the EU today:

  • There is divergence among the member countries on how the nations outside of the  EU should be treated. The many different opinions of the members  about this issue make it difficult for the EU to come to a conclusion.
  • Every economy from the EU puts a certain priority on their own industries which conflicts with the overall reasons of forming the European Union. In the future, the  participating nations should  shift their thinking to a broader scope when it comes to this issue and rather see the overall common goal of the EU.
  • There  is  divergence  among  the  EU  members  concerning  the  safeguard  of poorer nations that belong the Union.

Associations that are in charge of regulating the EU: 
European Council – is constituted by the president of the European Commission, and the heads of state of every EU member nation. The European Council is responsible for directing policies, as well as for resolving policy issues.
Council  of  Ministers  –  this  institution  is  made  up  of  the  foreign  ministers  of  each country. It is their responsibility to make final EU decisions 
European Commission – its 20 members act as the executive of the EU and it is their objective to propose changes in legislation to the Council of Ministers and furthermore carry out studies on key policy concerns
European  Parliament  –  this  institution  is  composed  of  individuals  that  are  directly elected  by  voters  in  each  member  nation.  The  European  Parliament  is  in  charge  of voting on the appointment of commissioners and vetoing issues concerning the budget of the EU and the single market legislation
Court of Justice – the participants of this are judges from each EU member country (one per country) and they serve the purpose of defining the EU law. 
There are several different economic unions present:

  1. Andean Pact – this is a pact which is composed of Bolivia, Colombia, Ecuador, Peru, and Venezuela. Their goal is to gain a foothold in the economy, as well as to create trade barriers for non-members. Furthermore, FDI is prohibited in the areas of banking, retail sales, and telecommunications.
  2. Mercosur – a group made up by some South American countries whose object it is to encourage economic cooperation
  3. Association of Southeast Asian Nations ASEAN – the main purpose of this group is that they want to encourage exports to other nations.
  4. Free  Trade  Area  of  the  Americas  (FTAA) –  a  union  that  is  to  be  created  in 2005. It will be based on the already existing NAFTA.

The purpose of a strategic alliance is for firms to work together and therefore to gain a common  advantage  due  to  creating  business  relationships.  For  example,  some companies allow another company to produce and trade a certain product of theirs in a specific  area.  Another  common  case  is  a  jointly  transmitting  of  research  in  order  to promote a product. Often a strategic alliance takes on the shape of a joint venture.
Since  companies  all  over  the  world  differ  in  the  way  business  operations  are  being conducted, it is important to take the localization of products, profits, production, and management into account. In order to meet the needs and tastes of local and regional customers, MNEs consider the localization of business operations in general. 
These include:
Localization of products – mostly a process of modification of a certain product in order for it to meet the needs of customers and the certain market. This is done by considering the development, manufacturing, and marketing of goods and services.
Localization  of  profits  –  the  reinvestment  of  earnings  gained  within  a  company into  a  local  marketplace  (e.g.  expand  plants  and  offices,  increase  operations, enlarge the workforce).
Localization  of  production  –  the  process  of  manufacturing  goods  in  the  host market.  Often  firms  do  this  by  amplifying  the  local  content  in  the  product  by increasingly producing more of the subunits in the host economy. Another common strategy is to import the product, and adjust it to local conditions and preferences and therefore add value to the final product.
Localization  of  management  –  the process of either persuading managers from the  home  country  to  move  their  workplace  to  the  host  country,  or  increasing  the power of managers in the host country to support these employees.


Culture  –  values  and  attitudes  of  a  group,  organization  or  society  which  have  the purpose  to  create  adequate  social  behavior.  Culture  is  usually  acquainted  by experiences, as well as education.
Grande ecole
On  of  the  most  pregious  group  of  school,  admission  is  said  to  determine  wheter someone will be selected for a business of political function.
Corporate culture
This  is  the  term  used  to  describe  the  behaviour  of  employees  and  managers  of  a certain firm. It could also means the attempt of senior exectutives to shape the kind of behavioru they want to see in their organizations.
Cross  cultural  management  is  gaining  in  importante.  Managers  are  required  to understand different ultures and make them work together. In other word there need to be a balance.
Ethnocentrism – judging one’s way of doing things superior compared to others. This can become an issue in business operations, if, for example, a manager from the home country  is  employed  in  the  host  country  due  to  his  expertise,  but  not  because  he  is capable of adapting to another culture, or if a certain product is not altered in order for it to serve the needs of a foreign market.
Cultural convergence
Also  termed  as  Americanization  or  mcdonaldization.  It  states  the  fact  that  cultural preferences all over the world are coverging, or getting the same.
Two ways to look at culture:

  • psychic distance, focus on the internal norms etc
  • intitutional level, focus on the culture, on the national level

There are several factors that need to be taken into consideration when dealing
with culture:
The  most  important  way  of  communication  in  order  to  understand  certain
information,  establish  good  business  relationships,  and  to  form  ideas  is
communication  in  different  languages.  When  corresponding  with  foreign
countries,  the  capability  to  speak  and  understand  different  languages  is
essential for being successful.
Religion  can  become  an  issue,  if  the  workforce  of  MNEs  includes  different
beliefs. There are several variations among countries in terms of religion, and
especially  the  way  in  which  employees  perform  their  tasks  may  become  a

  • Protestant  work  ethic  –  concerns  the  behavior  of  the  workforce  in terms of hard-working, being industrious and saving money.
  • Confucian  work  ethic  –  present  in  Asia;  in  Japan  also  known  as Shinto  work  ethic.  Confucian  work  ethic  is  the  expectation  that individuals work ambitiously when performing their tasks.

Values & Attitudes
Among  diverse  cultures  there  may  arise  different  values  and  attitudes  which may make dealing with them difficult in the workplace.

  • Values – people’s opinions about the righteousness and importance of
  • certain things
  • Attitude  –  a  certain  kind  of  behavior  and  feeling  towards  a  particular object.

In  general,  attitudes  evolve  from  values  which  then  have  a  direct  weight  on international  business.  Moreover,  values  influence  culture  in  several  different ways, showing that all elements are interrelated. 
Customs & Manners
Customs  and  manners  vary  among  cultures.  Dealing  with  them  may  be  a
difficult task, and should therefore be taken into consideration.

  • Customs – common or created practices that dictate people the way of
  • doing things
  • Manners – adequate behaviors of people in a certain society

Material goods
The overall infrastructure in  a country regarding finance, economy, and social
systems  is  of  grand  importance  for  an  MNE.  After  becoming  familiar  with  the differences in the host-nation, the conduction of business should be eased.

  • Material  goods  –  are  items  that  people  produce.  Examining  this, technologies  used  (how  are  they  made)  and  the  economics  of  the situation (who makes them and why) are being taken into account. 
  • Basic  Economic  Infrastructure  –  a  nation’s  communications  and transportation possibilities, as well as its energy capacities
  • Social  Infrastructure  –  concerns  a  nation’s  health  systems,  housing and education
  • Financial Infrastructure – consists of a country’s financial services, its banking sector and its insurance systems

Aesthetics  in  different  countries  need  to  be  understood by companies that go international.  This  is  best  done  by  studying  the  dissimilarities  and  how  these particularly affect behaviors of individuals.

  • Aesthetics – certain preferences of a culture concerning artistic

The  education  of  a  culture  is  very  important  when  it  comes  to  business.  The better  educated,  the  greater  the  economic  productivity  and  technological advances.  Literate  people  tend  to  have  a  better  understanding  of  culture  in general and it is easier for them to build up managerial ability.
When dealing with culture, its dimensions should be taken into account:
Power  Distance  –  since  power  is  not  allocated  equally,  power  distance  is  the degree  to  which  organizational  members  accept  this  irregularity.  For  example, when there is low power distance in a firm, a greater priority is set on independent working  of  the  employees.  In  this  case,  the  organizational  structure is  rather  flat. When  a  moderately  high  power  distance  is  present  in  a  company,  the  decisions made are based on a rather autocratic style with a tall organizational structure.
Uncertainty Avoidance – The handling of risk and ambiguity by certain people. If there  is  low  uncertainty  avoidance,  the  society  is  more  risk-taking  and  practices rather  low-structured  activities  within  companies.  In  case  of  high  uncertainty avoidance, risks are hardly ever taken by firms and they rely grandly on rules and instructions.
Individualism  –  the  independent  self.  When  people  follow  individualism,  they mainly  take care of themselves and their direct family. This is particularly true for nations  that  are  economically  advanced.  Self-sufficiency,  achievement,  personal financial  security,  autonomy,  and  individual  initiative  are  just  some  of  the characteristics of a culture that emphasizes on individualism. Decisions of people that live in an individualist culture are expected to be made independently without the support of groups.
Collectivism – the trend for people to be group-oriented. Looking after one another is essential within those groups in exchange for loyalty. This is particularly true for countries which are rather poor. Affiliation, group decision making, and the feeling of belonging to a group are attributes in collectivism. 
Masculinity  –  the  tendency  to  entitle  the  most  important  values  in  society  as “money, success and material things”. All achievements of an individual are judged by  these  characteristics.  A  high  degree  of  economic  growth  and  rather  large businesses are regarded as positive, if masculinity is in place.
Femininity – the opposite of masculinity. In this case the leading values in society are  defined  concerning  the  quality  of  life,  as  well  as  taking  care  of  others. Cooperation, a pleasant work environment, and employment security represent the attributes of countries where femininity is in place.
Culture  can  take  on  several  different  shapes  and  it  is  important to  be  able  to  define these when doing business:
Universalism – the belief of managers that certain business practices can be equally applied  worldwide.  This  means  that  the  actions  taken  are  not  being  adapted  to  the specific country the company works with. This  might result in problems since the way business is conducted varies in almost every nation.
Particularism  –  the  opposite of universalism. Particularism is the idea that  business practices need to be adapted to the surrounding conditions and nothing can be applied universally.  Further,  particularism  states  that  the  way  ideas  and  practices  should  be performed is determined by the surrounding conditions.
Neutral  Culture  –  a  culture  in  which  emotions  are  not  expressed  freely  (e.g. in Asia and the UK).
Emotional  Culture  –  a  culture  in  which  emotions  are  expressed  freely  and  naturally (e.g. in Mexico).
Achievement Culture – a culture in which people are valued by looking at their status and success in their workplace (e.g. in the US and the UK). 
Ascription Culture – a culture in which people are valued based on their personality
Differences in management styles in different cultures may evolve to a problem since the underlying ethics sometimes differ grandly. When taking into account mergers and acquisitions  (M&As),  which  is  a  widespread  way  of  gaining  a  foothold  in  another country,  a  cultural  clash  with  losses  in  morale  and  effectiveness  is  sometimes  the outcome.  Especially  due  to  acquisitions  of  firms  by  foreign  businesses  and  the maintenance  of  the  previous  workforce  makes  the  work  environment  more complicated. The unequal management styles of both cultures need to be adapted to one another in order to prevent such losses.

Moreover,  work  attitudes  of  the  workforce  are  of  great  importance  in  order  for  the business to function. The way employees perform their tasks is essential for the overall quality  and  quantity  of  the  products.  Organizational  commitment,  as  well  as  job satisfaction is a crucial factor in order for a company to operate successfully.
Furthermore,  another  cultural  aspect  is  achievement  motivation.  If  there  is  no aspiration by the employees to complete their tasks productively and therefore reach the goal of achievement, an effective operation of business cannot be ascertained.
Obviously,  time  and  the  future  are  also  an  issue  that  needs  to  be  discussed in this context. The way in which a certain culture views time makes a difference to decision making  and  can  affect  long-term  strategies.  For  example,  some  cultures  take  more time  to  make  up  their  mind  when  it  comes  to  decision  making,  but  are  quicker implementing the strategy once they decided. In other cultures this might be the other way around, meaning fast-made decisions, but slow execution.
Ethics  represent  the  basis  of  morality  and  conduct.  Standards  should  be  set  when operating internationally because there sometimes are grandly diverse views of ethics in different countries.


International Trade – consists of the exchange of goods and services among different nations. International trade becomes continuously more important as many economies increasingly  turn  from  state-run  to  rather  market-driven  economies.  Worldwide  trade offers  many  possibilities  and  advantages  to  MNEs  such  as  enhanced  business relationships, cutting costs, and exploring new markets. 
Mercantilism  –  a  theory  in  trade  which  states  that  by  supporting  exports  and repressing imports, a government can enhance the economy of a country. This has the effect of increased wealth and a positive trade balance for that particular nation.
Theory  of  Absolute  Advantage  –  when  countries  are  able  to  produce  goods  more efficiently compared to others, they should specialize on those in order to advance their economy. 
By doing so, the country’s resources can be allocated appropriately, and the nation is then  able  to  offer  a  larger  number  of  goods,  produce  efficiently,  and  enhance  the national well-being.
Theory  of  Comparative  Advantage  –  consists  of  the  theory  that  countries  should concentrate  their  production  on  goods  for  which  they  have  the  largest  relative advantage. 
By doing so, trade can be improved; given that the relative price ratios of the goods are different under international exchange from what they would be under circumstances of no  trade  (this  domestic  situation  is  also  called  autarky  -an  entirely  self-sufficient government policy). Overall, worldwide consumption and efficiency rise if there is free trade  and nations equally gain an advantage (even  if one of them holds an absolute advantage of both goods). An uncertainty concerning the comparative advantage is the allocation of gains among the countries, which it not necessarily always equal.
Factor  Endowment  Theory  (a.k.a.  Heckscher-Ohlin  Theory)  –  consists  on  the assumption  that  any  nation  will  import  products  for  which  their resources are limited, and  export  those  goods  for  which  their  resources  are  plentiful.  The  theory  therefore takes the size of the workforce, and the amount and cost of the production factors into account. 
One  disadvantage  of  this  assumption  is,  for  example,  that  some  nations  have  high prices for a moderately large workforce due to minimum wages, resulting in imports of some goods that can be produced for less in another country.
Leontif  Paradox  –  Some  countries  (e.g.  the  US)  export  more  labor-intensive  goods and import rather capital-intensive goods. In this case, the quality of labor input is more important than man-hours of production.
International Product Life Cycle (IPLC) Theory – consists of the different stages of every good’s particular lifecycle. When the theory is being applied and trade patterns are to be found out, the factor of technology as an essential need for the development of  new  products,  as  well  as  the  market  size  and  structure  are  important  elements. When it comes to technology in the international arena, it is possible for a product to be in  the  standardized  product  stage  in  some  countries,  and  in  the  maturing  stage  in others since the development of technology is different worldwide.
Stages of the lifecycle:
·  New product
In the beginning, the price of the product usually is inelastic and the purchase of
the product takes place in the home country. Often the profits are relatively high
and  when  production  eventually  exceeds  local  consumption,  the  company
usually starts exporting.
·  Maturing product
Due  to  the  exports,  the  firm  continuously  has  increasing  sales.  Foreign
competitors  usually  recognize  the  potential  profits  they  could  gain  through producing  an  imitation  of  the  product  quickly  and  therefore  start  working  on inexpensive substitutes. Demand for the original product then usually decreases and  the  company’s  strategy  moves  from  production  to  a  rather  market-protective strategy.
·  Standardized product
The  technology  of  the  product  develops  into  a  commonly  used  one  and  the demand  often  turns  into  the  determinant  of  the  product’s  price.  Production  is being  moved  to  rather  low-cost  countries  and  the  product  is  eventually associated with an image of being standard.
Other  factors  that  have  an  impact  on  international  trade  theory  are  government regulations which often consist of trade restrictions with other countries. Furthermore, monetary currency valuations, as well as consumer tastes play an important role when dealing with international trade. 
Monetary  Exchange Rate – the price of one currency expressed in terms of another currency. Therefore, a specific value is given to a currency.
Trade barriers are a crucial factor in international trade and they are usually set in order to:

  • Support local companies in terms of production, and exports through subsidies by  the  government.  These  incentives  created  by the state help businesses to stay competitive.
  • Weaken foreign competition by making it more difficult for foreign companies to penetrate the local market.
  • Protect domestic jobs since these are important for the overall economic well-being of the country.
  • Promote  local  and  foreign  direct  investment  in  order  for  firms  to  have  the possibility to expand more easily into other markets.
  • Promote  political  goals  such  as  rejecting  trade  with  particular  nations  which disallow civil liberties in their country to individuals. 
  • Protect  start-up  companies  that  have  just  been  established  since  these  are weaker in resisting foreign rivalry.
  • Improve the country’s balance of payments by allowing less imports, and thus preventing a trade deficit.

There are numerous types of trade barriers:

  • Price-based barriers
    A tariff on goods and services is usually placed on imports based on their price. This  tariff  increases  the  government’s  revenues  and  makes  importing  less attractive.
  • Quantity limits
    Quotas  –  set  the  limit  based  on  the  amount  of  units  of  a product that can be imported or based on the value of the market share.
    Embargo – a quota that is set at the value of zero, meaning that trade of some products is completely restricted.
  • International price fixing
    Cartel  –  international  fixing  of  price  or  quantity  in  order  to  control  prices  and profits. The application of a cartel decreases competition and is illegal in the US and Europe.
  • Non-tariff barriers
    Non-tariff  Barriers  –  the  hindrance  or  prevention  of  the  purchase  of  foreign goods  by  the  government  in  terms  of  rules,  regulations,  and  bureaucratic obstacles  (e.g.  the  creation  of  quality  standards  from which foreign producers are excluded right away).
  • Financial Limits
    Exchange  Controls  –  limit  the  flow  of  currency  between  countries  and therefore lessens trade.
  • Foreign Investment Controls
    Foreign  Investment  Controls  –  restrict  foreign  direct  investment  and  the relocation or payment of funds (e.g. limited profit remittance).

There are several different types of tariffs in international trade:

  • Tariff – a certain tax on goods that are being traded internationally
  • Import Tariff – a tax on goods for importing
  • Export Tariff – a tax on goods for exporting (rather uncommon)
  • Transit Tariff – a tax on goods that are passing through a country
  • Specific Duty – a tax based on the quantity of goods imported (e.g. € 1 per item)
  • Ad  Valorem  Duty  –  a  tax  based  on  a  certain  percentage  of  the  value of  the  goods imported
  • Compound Duty – a tariff based on both, a specific duty and an ad valorem duty

These are mainly used to increase the revenue of the government and to protect the domestic market. Due to the tariffs imposed, the price is higher for the consumer and therefore  the  demand  decreases.  These  trade  barriers  harm  mostly  the  purchasers with a rather low income and have hardly any effect on higher-income consumers.
Dumping – an action of firms selling imported goods below cost or below the price of the home country. Dumping is prohibited in many countries by the government in order to protect domestic industries or enterprises since it harms these economically.
The US and their trade policies:
Due  to  the  North  American  Free  Trade  Agreement  (NAFTA),  trade  is  supported because many trade barriers between the US, Mexico and Canada are eliminated.
Caribbean  Basin  Initiative  –  a  trade  union  which  abolishes  almost  all  tariffs  on imports between the Caribbean and Central America
Furthermore,  the  US  enforced  a  Trading-with-the-Enemy  Act,  consisting  on  no  trade with nations that are considered to be enemies of the United States (e.g. Cuba).
Foreign Sales Corporation Act – an act created in favor of US exporters. When they found partnerships overseas, they do not pay taxes on the partner’s  income until the incomes are forwarded to the parent company
Trade Adjustment Assistance  – a service offered by the government to support US companies  and  individuals,  if  they  suffer  from  foreign  competition.  In  that  case,  the government provides job counseling or loans.
Types of non-tariff barriers (NTBs):

  • Quotas

When it comes to imports, quotas set the limit to the amount of goods that are
allowed to be imported. As a result, prices rise and there is increasing domestic

  • Buy national restrictions

A  regulation  for  the  government  to  give  priority  to  domestic  businesses;
occasionally foreign companies are being entirely excluded. These restrictions
are  important  in  supporting  and  protecting  local  businesses  from  going

  • Customs valuation

This  valuation  works  in  the  area  for  the  payment  of  duties  and  holds  that  the value  for  duty  is  based  on  the  invoice  cost,  and  the  latitude  of  customs  to reclassify goods has been decreased.

  • Technical barriers

If  there  are  certain  standards  required  for  imports  in  some  countries,  the
obstacle  of  tec lead to an exclusion of such nations in trade, and thus lets them fall behind in economic developments even more.

  • Antidumping legislation, subsidies, and countervailing duties 

Countries are allowed to protect their markets from dumping because this unfair
competition  may  drive  local  producers  out  of  business.  They  have  the
permission  to  place  extra  duties  on  goods  that  were  subsidized  in  their home countries or are dumped.

  • Agricultural products

In order to sustain high domestic prices in the area of agriculture, international
trade  with  such  goods  is  vastly  controlled.  Local  producers  receive  subsidies from  the  government  and  quotas,  as  well  as  fixed  and  variable  tariffs  are imposed.

  • Export restraints

When dealing with the exporting of natural resources, the circumstances under
which exports can be limited have been tightened. After the Tokyo round, where
such issues are being discussed, countries are now allowed to limit exports to
encourage further domestic processing. 
Countertrade  –  barter  trade  where  goods  are  being  exchanged.  In  the  case  of countertrade  the  exporting  company  obtains  payment  in  terms  of  products  from  the importing nation. This sort of trade usually reduces efficiency of international trade.
Free  Trade  Zone  –  a  trade  area  in  which  the  payment  of  customs  duties  may  be postponed while at the same time a continuation of the  processing of products takes place.  A  free  trade  zone  serves  as  a  tax-exempt  commercial  activity  by  taking advantage of local workers and financing. 
Advantages of free trade zones:

  • The duty only needs to be paid when the products are ready to be sold
  • The  cost  of  producing  are  lower  in  a  free  trade  zone  because  no  taxes  are charged
  • The  company  is  able  to  check  the  goods  for  damages,  and  repackage  them while he is still in the free trade zone
  • Insurance premiums are decreased since those are based on duty-free worth
  • Fines are less for inadequately market merchandise because the products can be inspected within the zone
  • High protection against criminal actions
  • Involvement in international trade of locally importing firms is supported by free trade zones, as well as increased competition with foreign companies

Maquiladora Industry – this is a free trade zone between the US and Mexico in order for them to produce goods and then trading them between the two nations.


International Finance – deals with the international monetary scheme, as well as with the balance of payments (BOP).  For example, if the value in currency of one country compared to others changes, the costs of imports and exports are grandly influenced by this incident.
Balance  of  Payments  (BOP)  –  all  transactions  between  one country and the rest of the world are documented in the balance of payments. Thereby the economic activity of  a  nation  can be determined and divided into the areas of the current account, the capital account, and reserves. For example, if an amount is debited from the BOP, it means that something was imported, assets increased, or liabilities decreased.
International Monetary Fund (IMF) – an organization whose objective it is to sustain stability  of  the  balance  of  payments  since  this  has  an  influence  on  the  entire international financial system.
Current  Account  –  an  account  on  the  balance  of  payments  in  which  services, merchandise trade, and unrequited transfer are recorded.
Merchandise  Trade  –  the  part  of  the  current  account  where  imports  and  exports  of goods and services are documented. Exports are recorded as credits, and imports as debits 
The  part  of  the  current  account  called  Services  covers  for  example  financial transactions  such  as  tourist  travel,  and  insurance  and  freight  on  international shipments. If the country acquires such services from other countries, it is reported as a debit since it can be set equal to an import.
Unrequited  Transfers  –  the  area  of  the  current  account  that  does  not  require  a payment  or  the  performance  of  any  other  service.  When,  for  example,  a  sanitary organization sends food to third-world countries.
Capital Account Items – transfers that entail claims in ownership. Direct investments, as  well  as  portfolio  investment  are  examples  of  such  transactions.  Furthermore, governmental and private transactions are being distinguished.
Moreover,  Reserves  is  an  important  account.  It  is  used  in  order  to  balance  out  the accounts  from  the  balance  of  payments.  Since  debits  never  exactly  equal  credits, ‘reserves’  is  an  account  in  which  net  errors  and omissions are recorded. If a country continuously  carries a deficit on the BOP, its currency will depreciate and loans from the  capital  market  will  be  hard  to  acquire.  If  this  is  the  case,  the  nation  may  borrow money  from  the  International  Monetary  Fund  (IMF)  in  exchange for certain rules that
the particular country has to follow. If a nation does not want to borrow money from the IMF, it may for example start changing its fiscal policy concerning taxes and tariffs.
International  Monetary  System  –  an  agreement  of  all  central  banks  from  the countries  that engage in the  International Monetary Fund (IMF). This System has the goal  to  promote  the  free  flow  of  goods,  services,  and  capital  among  countries; furthermore, a stable foreign currency, and liquidity for countries are objectives to be strived for by the IMF.
International  Bank  for  Reconstruction and Development (today called the World Bank)  –  a  bank  owned  by  several  governments.  It  serves  the  purpose  of  supporting economic development projects by offering low-interest loans.
Objectives of the IMF in general:

  • Support members financially
  • Promote the removal exchange constraints
  • Encourage exchange stability, and eliminate competitive currency devaluation
  • Assist in advancing balanced growth of international trade

Special Drawing Right (SDR) – a unit of value that has been established by the IMF in order to replace the dollar as a reserve asset. Thereby, international reserves may be raised.
A managed float system  has been created in order to allow a floating exchange rate. This  way,  every  country  is  responsible  for  its  own  monetary  policy.  Furthermore, floating rates automatically facilitate trade balance adjustments. 
Opposed  opinions  rather  see  advantages  in  fixed  exchange  rates.  For  example, countries  cannot  simply  increase  their  money  supply  and  cause  inflation.  Also,  the trade  with  currencies  would  not  be  possible  and  therefore  there  are  no  grand fluctuations in the exchange rates. Fixed rates ease business planning and decrease risks concerning international transactions such as imports, exports and FDI. 
European Monetary System (EMS) – a system made  up of the major EU members. Their currencies are fixed among the members of the EMS, but float against the rest of the world.  Its main purpose is to:

  • Establish monetary stability and decrease the volatility of the exchange rate
  • Manage inflation through the use of monetary discipline by the countries
  • Organize exchange rate policies compared to those currencies outside the EU

In order to realize these goals, the European currency unit (ecu) and the exchange rate mechanism (ERM) have been created. 
Economic cooperation is an important factor when it comes to national policies of the industrialized countries. If monetary and fiscal policies are used independently by some nations, exchange rates may become highly volatile. 
Foreign  Exchange  –  the  exchange  of  payments  from  one  currency  to  another.  This can  take  place  in  different  transactions.  Between  banks,  foreign  exchange  is  mainly conducted through telephone transfer. Between businesses it is the draft. In the case of tourism, currencies are physically exchanged.
Exchange  Rate  –  the  value  of  one  currency  in  comparison  to  another  currency.  In detail, it is the amount of one currency that can be acquired for another currency
Foreign exchange can take place in different ways:
·  Through a broker
When there is a broker conducting business, he deals with several other foreign
exchange  brokerage  companies. His objective is to bring together buyers and
sellers and then charge a commission for doing so.
·  Business between banks
When  banks  engage  in  foreign  exchange,  the  interbank  market  for  foreign
exchange is playing an active role.
·  Through forward transactions
The forward foreign exchange market gives the customer the ability to “lock in”
an exchange rate and thereby eliminate the risk of a devaluation of the currency
that he needs.
Spot  Rate  –  a  type  of  exchange  rate  that  stands  for  current  foreign  currency transactions.
Forward  Rate  –  is  the  rate  that  stands for the delivery of foreign currency at a  fixed future date.
Cross Rate – an exchange rate consisting on two other rates. This may be of interest for businesses if they are dealing with more than two currencies.
Foreign Exchange Traders – are employees in banks that fulfill orders such as buying and selling foreign currency for their employer. This is done because certain customers placed  orders  before  and  then the  transactions are  made  at  the  spot  rate or forward rate.
Foreign Exchange Brokers – individuals that are employed in brokerage firms. They usually  only  engage  in  foreign  exchange  transactions  at  both spot rates and forward rates.
Speculator – an individual that has either foreign currency on hand or is supposed to deliver foreign currency in the future which he does not have on hand. Currency that one has on hand is called “long-position”, whereas currency that one has not on hand is called “short-position”.
Foreign  Exchange  Hedgers  –  these  are  participants  that  avoid  risk  by  “locking  in” assured foreign exchange positions.
Foreign  Exchange  Arbitrageurs  –  individuals  who  benefit  from  differences  in exchange  rates  of  two  or  more  currencies;  it  is  their  work  to  buy  and  sell  those  in foreign markets.
Furthermore,  governments  also  play  an  important  role  in  foreign  exchange  markets. They sometimes serve the purpose of stabilizing particular prices by acting as buyers and sellers in the market. This benefits the overall well-being of the economy in terms of international trade.
Purchasing Power Parity (PPP) Theory – relies on the assumption that the relative purchasing  power  of  two  currencies  determines  the  exchange  rate  between  those currencies.  For  example,  in  case  of  inflation,  purchasing  power  is  influenced  and foreign currencies have to rise or fall in value in order to restore parity. 
Fisher Effect – a theory which expresses the relationship of interest rates and inflation in two nations. For example, if inflation increases, the nominal interest rate will as well since lenders want to protect the real interest rate. 
The Fisher Effect consists of three important factors:

  • Nominal Rate of Interest – the amount of interest that a borrower has to pay. (Also called the “money” rate of interest.
  • The rate of inflation in one country.
  • Real  Interest Rate – the real interest rate reflects the difference between the nominal interest rate and the inflation.

International  Fisher  Effect  (IFE)  –  a  theory  which  states  that  the  exchange  rate differential is a neutral determinant for forecasting future changes in the spot exchange rate.
The  forward  exchange  rate  can  also  be  concluded  from  the  differential  since  the difference  in  interest  between  two  countries  may  be  counterbalanced  by  the  forward exchange rate. Other elements that need to be considered when exchange rates are being  determined  are,  for  example,  confidence  in  the  currency  by  the  public. Furthermore, technical factors such as seasonal demands and economic statistics are important.
Exchange  Risk  –  the  risk  for  a  business  to  not  be  able  to  alter  costs  and  prices  to compensate  changes  in  the  exchange  rate.  In  order  to  decrease  exchange  risk, methods to do so include:

  • Exchange  Risk  Avoidance  –  Some  firms entirely eliminate exchange risk by conducting business locally.
  • Exchange Risk Adaptation – In order to defend a company against exchange rate  fluctuations,  hedging  may  be  applied.  This  can  be  done  through  the acquisition  of  a  forward  contract  or  through  the determination of  a fixed price with the other contractor.
  • Currency  Diversification  –  In  order  to  lessen  the  exchange  risk  for  a  firm, it may spread its financial assets across several different currencies.

When it comes to matters of financing, a company may try to borrow or lend money on foreign capital markets depending on where the interest rates are the most promising. If  multinationals  establish  part  of  their  production  in  a  foreign  country,  they  often receive loans in the form of subsidies from governments. 
Eurocurrency – any currency that is stored outside its home country
Eurodollars – dollars that are banked outside the United States
Eurodollars have several possible sources:

  • European  banks  that  hold  foreign  currency  in  addition  to  what  their  current needs are
  • Companies having excess cash
  • Reserves of nations that have grand trade surpluses
  • Governments  from  outside  the  US  of  businesses  that  want  to  hold  dollars outside the US

London  Inter-Bank  Offered  Rate  (LIBOR)  –  If  banks  hold  Eurocurrency  loans,  the LIBOR is the interest rate charged between banks for such loans.
Foreign  Bond  –  a  bond  which  is  issued  in  the  currency  of  the  country  where  it originated, but then sold outside the country of the borrower.
Eurobond  –  this  is  a  bond  that  is  usually  signed  by  several  banks  from  different nations.  It  is  then  sold  in  any  country  which does not have the currency in which the bond has been issued.
Eurobonds have several advantages:

  • Currency option
  • This  allows  the  buyer  to  reduce  the  exchange  risk  associated  with  single-currency foreign bonds by being able to demand repayment in one of several currencies
  • Convertibility option 
  • The bond may be changed into common stock
  • A moderately unregulated market
  • The Eurobond is able to float
  • National boundaries are insignificant
  • A vast geographic area may be appealed by Eurobonds


Strategic planning is the evaluation of the environment of the company and its
internal strengths, identifying long- and short-term objectives and implementing an action plan for achieving these goals. Multinational Enterprises (MNEs) find great support in this kind of planning since it provides them with both general direction and specific guidance. Competitive situations ask a different kind of approach from MNEs and they either redirected their efforts or exploited new areas of opportunity. Without strategic planning, they wouldn’t have been able to do this.
MNEs have strategic tendencies that determine the specific courses of action the firm undertakes. There are four such tendencies, an MNE with a:
1.  Ethnocentric predisposition relies on the values and interests of the parent
company while formulating and implementing their strategic plan. Their basic
mission is profitability and when a company tries to sell the same products
abroad as they sell at their home country, this tendency is most commonly
2.  Polycentric predisposition will adapt its strategic plan to the needs of the
local culture. Their basic mission is public acceptance and profits will be set
back into the country in the form of expansion and growth. When the enterprise
is doing business in more than one culture, the overall plan will be adapted to
reflect the local needs.
3.  Regiocentric predisposition has a combination of the poly- and ethnocentric
tendency. Their mission is to obtain both profitability and public acceptance.
Both local and regional needs will be taken up in their strategy. The focus is not
so much on a particular country, but more on a geographic region.
4.  Geocentric predisposition has a strategic plan with a global view of
operations. This tendency is most often used by the largest international
corporations and Multinationals in the true meaning of the word.
The strategic planning process is influenced by the MNEs tendency. Some are
interested in profit, others in large-scale manufacturing and again others in selling in other countries with a culture similar to their own.
A Strategy formulation contains the evaluation of the environment and the company’s internal strengths.
First, the external environment will be assessed. This analysis exists of two activities: Information gathering and information assessment. Competitive intelligence (the use of systematic techniques to obtain public information about competitors as part of the decision-making process) helps with these activities.
Information gathering is a very important phase of international strategic planning. It is even critical, which not all companies realize early enough.
MNEs have different ways of conducting an environmental scan. 
The four most commonly used are: 

  1. asking experts to make trends and future projections 
  2. using historical trends to forecast future trends 
  3. asking knowledgeable managers to make a forecast  
  4. using computers to make a forecast. 

The expert opinion is used most frequently. Information about competitor strengths and weaknesses is particularly important when a company serves a product in many market niches around the world which are too small to be profitable in an individual niche. Firms that are coming under attack benefit from this information as well.
Information assessment is the evaluation of the gathered data. One of the most
common approaches is to make an overall assessment based on the five forces.
Bargaining power of buyers: MNEs want to predict the probability of keeping their buyers (customers). If the chance of buyers moving their purchases to another business is great, MNEs will counter this by adapting their strategy.
Bargaining power of suppliers: an MNE wants to see if it can gain competitive
advantage over other suppliers in the industry.
New entrants: an MNE will investigate the possibility of new entrants entering the industry and will try to keep the power of new entrants low by keeping costs low and consumer loyalty high and by encouraging the government to limit foreign business activity through regulation.
Threat of substitutes: By lowering prices, offering similar products and increasing customer services the threat of substitutes will be kept low. 
Rivalry: an MNE will investigate the rivalry between itself and the competition. The market strength can be improved by: offering new goods/services, increasing productivity, differentiate current goods, increasing overall quality, targeting specific niches.
The internal environmental assessment helps to find the MNEs strengths and
weaknesses. The MNE will explore two specific areas: Physical resources and personnel competencies and how the value chain can be used to bring these resources together.
Physical resources are the assets used to carry out the strategic plan. Many of these are on the balance sheet under cash, inventory machinery and equipment accounts. However, the location and disposition of these assets play an important role. Many MNEs are divided in 
Strategic Business Units (SBU’s), which are operating units with their own strategic space. 
Some large MNEs use vertical integration: ownership of all assets involved in
producing the final product. The goal is to have control over the supply and that the materials needed are delivered. 
However, this strategy is not profitable to all MNEs and therefore some use virtual integration: ownership of the main assets for producing the final product, but rely on outsourcing to provide all other inputs needed. The advantage of using virtual integration in a company is that it can operate like a vertical integrated company, without needing ownership of all factors of production.
Personnel competencies (capabilities of the employees) reflect most of the
company’s strengths and weaknesses and are therefore useful to investigate. An
understanding of employee abilities can help a firm to decide if it wants to be the leader in the firm or to follow and copy the leader. After all, not every company has the competencies to be a good leader.
The value chain is a complementary approach to internal environment assessment and it consists of primary activities which, together with supporting activities generate customer value and increasing profit margins. The primary activities consist of inbound logistics, operations, outbound logistics and marketing & sales. The supporting activities contain firm infrastructure, human resource management, technology development and procurement. A value chain analysis helps the company to choose a strategy. 
There are three generic strategies possible from this analysis:
1.  A cost strategy relies on low price and is achieved through cost reductions,
overhead-control and cost minimalization in R&D, sales and advertising. 
2.  A differentiation strategy is aimed at adding perceived value, something unique and is achieved through many forms including creation of brand image and increased customer service. 
3.  A focus strategy aims at concentrating on a particular market segment or buyer group and is different from the two other strategies because their objectives are industry-wide focused and the focus strategy is built around a particular target market. 
Furthermore, the company will decide its competitive scope, which is the width of its target market within the industry.
In both external and internal analysis, the MNEs are provided with information needed for setting goals. There are two ways to investigate these goals or objectives. One way is to examine them on an operating basis and the other is to examine them by geographical area or on an SBU basis. The “cascading effect” is an approach that each SBU will have its own list of goals.
Strategy implementation is the process of achieving predetermined goals by
implementing the formulated strategy in a good manner. In this process there are many areas on which the focus can be, the three most important are: location, ownership decisions, and functional area execution.
Location is important for a number of reasons: Local facilities often provide cost
advantages for the manufacturer, especially when raw materials or labor needed for the final product can be obtained close to the facility. Further, residents may prefer locally produced products. Sometimes an MNE is doing so much business in a country, that the local government can insist that the company will produce its products locally. That is one of the major reasons that Japanese car manufacturers moved their operations to the US. Although the benefits can be great, there are disadvantages in locating operations overseas. An unstable political climate can leave the MNE in a vulnerable position towards low profits. Moreover, the possibility of attacks by international terrorists has lead MNEs in those areas to reduce their risks.
Ownership of international operations has become an important issue recently. Many Americans feel that foreign-owned businesses located in the US, harm the US economy. On the other hand, non Americans have the same feeling about US business there. The real issue of ownership is that whether or not the company is bringing economic prosperity to the country where it is doing business. If countries want to stay economically strong they should attract international investors and build products that are demanded on the world market. Two approaches in achieving this objective are: international joint ventures and strategic alliances.
An international joint venture (IJV) is an agreement between to or more partners to control and own a business overseas. Government encouragement and legislation have raised the popularity to start an IJV in recent years. Further, the growing need for partners with knowledge of the local culture and the urge for outside investors to find local partners to team up with have contributed to the popularity of joint ventures. Unfortunately, most IJV’s did not work out well. The major reason is the desire of MNEs to control the operation which sometimes resulted in poor decision making. Mainly, joint ventures are very difficult to manage and therefore many MNEs have switched to strategic alliances.
A Strategic partnership is an alliance between competitive MNEs for the goal of
serving a global market. Strategic partnerships are almost always formed between MNEs that are in the same line of business (this need not be the case with IJV). Since a 100% ownership of a business in another country is a very risky and expensive given that the MNE may not have much experience in that particular market, it is becoming more and more popular to start an IJV or strategic partnership. 
Functional strategies help to coordinate operations and to make sure that the plan is carried out properly. The functions fall into six major areas: marketing, manufacturing, finance, procurement, technology and human resources. For purposes of analysis they can be divided in three: marketing, manufacturing and finance.
The marketing strategy is designed to identify consumer needs and to formulate an action plan to sell these needs (products of services) to the customer. Most marketing strategies are divided in the “four p’s” (product, price, promotion and place). First, the demanded product is defined, it will be adapted to local needs and then the appropriate price will be determined. Then promotion of selling the product to the local market can be started.
The manufacturing strategy is designed to fit to the marketing plan and to ensure that all products are manufactured and delivered in time for sale. This strategy is also coordinated with the procurement and technology department to make sure that products have the state-of-the-art quality and are delivered in time.
Financial strategies used to be formulated and controlled out of the home office, but recent years showed that this approach is quite unmanageable because of a.o. fluctuating currencies. Nowadays, overseas units can control their finances more but they are bound to a constructed budget that is in line with the overall strategy. Moreover, they are held responsible for their financial performance. When the finance strategy has a leading position, the other functional strategies are limited to the amount of money they can spend. In a lag position, the financial strategy is used to evaluate performance and to provide insight in future strategies.
Strategy formulation and execution is followed by control and evaluation. After control and evaluation the MNE might want to set higher standards or change the strategy formulation or implementation. In making these decisions, there are common methods of measurement. 
In most cases, return on investment is used (net income before taxes/ total assets). The reason that ROI is such a popular measurement is that it is an extensive result which is influenced by all business activity. Moreover, ROI is easy to compare with other units in the same country as well as in others. ROI does however have some shortcomings: ROI can be artificially inflated if a unit sells to another unit, the ROI in a growing market will be higher than in a maturing market, so the performance can be misleading and ROI is a short term performance measure.
Other types of measurement are sales growth and/or market share (the MNE wants to increase sales and maintain or increase market share), costs, new product development (an extremely important area for firms that rely on new offerings), MNE/host-country relations (poor host-country relations can endanger profits) and  management performance.
These methods of measurements are used to determine if the MNE performs well. Based on the results, the MNE can sharpen or soften its goals and the strategic planning process will start over.


Major MNEs operate in global structures that form the basis of their organizational strategy. Sometimes these MNEs have affiliates which are integrated in the company structure, for example the Mitsubishi group. Forming these global structures is a very difficult task, especially when you need to take all other businesses into account. Sometimes it takes more time and effort than the formulation of the strategic plan.
MNEs need an effective structure to implement their strategies; because the structure is needed in order to ensure that the desired goals are met efficiently. Every enterprise will choose a structure that best meets company goals. Of course, strategic plans change and therefore also the organizing structure.
Early organizational structures
When a company starts with international operations, these activities are normally a continuation of the domestic operations. While the local market is still the primary focus, international involvement is of second importance. There is no attempt yet to put international transactions in a separate department. When international operations increase, the MNE will align the growth structurally. There are several ways to do this, for example:
Let international sales be handled by the marketing department, create an export
department which is a sub department within the marketing area or directly reports to the CEO, use of overseas subsidiaries. 
When MNEs become more involved in foreign markets, the export department
structure or subsidiary arrangement cannot meet the changing needs of the company anymore and will be discarded or supplemented. 
After this the company will look into joint ventures or foreign direct investment and is likely to choose an international division structure.
The International division structure is an organizational arrangement that centralizes all international operations. This gives the advantage of reducing the CEO’s burden. Furthermore, this structure raises the status of overseas operations to that of the domestic departments. 
But, this structure also has a few disadvantages, namely: it separates operations in two categories: domestic and international. This can create rivalry between them. The second drawback is that this arrangement puts a lot of pressure on the home office to think globally. This is very difficult for MNEs which have most of their sales in the home country and is domestically focused. In spite of the disadvantages, the international division structure is mainly used among US MNEs.
When MNEs generate more revenues from overseas operations, their strategy
changes. Moreover, their organizational structure changes too. There are six basic types: global product, global area, global function, mixed, matrix and transnational network. 
Global product structure is an organizing arrangement in which the domestic
divisions have worldwide responsibility for product groups. So, each product division sells its output worldwide and each manager is responsible for the entire product line and product division (marketing, personnel and finance).
This arrangement works by a “profit center” concept. This entails that each product line is expected to generate a predetermined ROI and the performance of each line is measured by ROI. Further, each product line is an autonomous business free from the home management controls. The only exception is a budgetary constraint enforced by the central management. 
A number of benefits come with this global product structure. Each major product line is allowed to focus on customer needs (if the firm has a large product portfolio) and can therefore help the company matching its marketing strategy to customer needs.
There are also a couple of disadvantages that come with this structure. First, there are more personnel and facilities needed, since every product line operates by itself. A second disadvantage is that the attention is on successful products, while less successful products are sidetracked. This can lead to a long term profit loss. A third is that most managers are knowledgeable about the local demand, whereas knowledge about the international market is needed. A fourth is the difficulty of organizing the different product divisions. Because each product division operates on its own, less scale advantages are obtained which can lead to a loss in sales. 
A global area structure is an arrangement where operations are divided between area managers which are each responsible for a specific geographic region. This is a polycentric structure (host-country-oriented). Each regional division is responsible for all functions within the area (production, marketing, personnel, finance). There is structural similarity between this arrangement and the global product structure, but they way they operate is very different. A product division in a global product structure is responsible for the output of one product line throughout the world, whereas a product division in a global area structure is responsible for all product lines in one specific area. 
A global area structure is most commonly used by mature businesses with narrow product lines that are not differentiated by geographic area. The global area structure provides managers to react rapidly on local tastes and regulations and therefore the firm becomes more “nationally responsive”. Herewith the company usually gains competitive advantage. 
With this structure however, there are great expenses associated with duplicating facilities. Moreover, since production efficiency is usually dependent on the amount of output, small plants are often less efficient than large ones. Further, companies using this structure, find it hard to coordinate the dispersed divisions into the overall strategic plan. R&D is not favored in companies that obtain this structure because global area divisions are not ready to accept new offerings. Because each group serves a regional market and new products often need adaptations to fit in the current market, managers are unwilling to try new products.
A global functional structure is built around the fundamental tasks (and herewith, primary functions) of the company. The head of production is in this case responsible for all domestic and international manufacturing. Similarly, the head of the marketing department is responsible for all sales (domestic and abroad). MNEs with a narrow product line which have reached a stable coverage and are not likely to face major changes in competitive attack use this structure most commonly.
A main advantage of the global functional structure is that a small group of managers have responsibility and control over a wide-reaching organization. Further, there is little duplication of facilities. Moreover, this structure allows a close-fitting, centralized control.
A disadvantage is the difficulty to coordinate the different functions (production and marketing) since they operate independent of each other. This is particular problematic when the enterprise has multiple product lines. Another drawback is that the responsibility for profits is with the CEO because there is little distribution of operating authority far down the chain.
The global functional structure serves raw materials extractors with heavy capital investments and energy firms also use this structure. However, other kinds of companies do not benefit from this structure.
A mixed structure is a cross organization design that combines different structures in a way that best meets company needs. Sometimes this structure is used temporarily but it’s also used to serve the company for an infinite time. The drawback of this structure is that when a new “mix” is introduced, it sometimes is too flexible and employees find it hard to adapt quickly to this new structure. Therefore, MNEs must carefully outweigh the advantages and disadvantages of whether to use this arrangement.
A (geographic) matrix structure is an arrangement that blends two structures such as a product and functional structure or a regional and product structure. There is emphasis on as well the function (attention to the activities to be performed, inputs) as the product (attention to the good to be produced, outputs). Herewith, managers get a more globally orientated attitude.
There are three types of managers in this matrix structure:
1.  Regional managers have a polycentric focus and are charged with selling
products in their geographic locale.
2.  Product managers have an ethnocentric attitude and need to coordinate
people’s efforts in such a manner to ensure profitability in a product line or
3.  Matrix managers are responsible to both regional and product managers. 
There is also another matrix design: the multinational matrix structure. It is more complex than the geographic matrix structure and has three dimensions.

There are two kinds of managers in this structure:

  • Resource managers have to provide people for operations (concerned with inputs).
  • Business managers have to coordinate the efforts of these people to make profits for the product line (concerned with outputs).

Further, this multidimensional matrix addresses three areas: function, production and geography.
On of the major advantages of the matrix structure is that it allows management to focus on more than one primary area. MNEs that need a balance between a product and global location strategy can find great advantage with this type of structure.
Unfortunately this structure brings disadvantages. The complexity of the design and the use of deal command can lead to confusion regarding what everyone is responsible for and to whom one reports on different matters. A second disadvantage is the large amount of meetings and discussions that need to be held because so many different groups need to be coordinated. A third drawback is that managers need to learn how to operate in a matrix structure and this takes a lot of time. The matrix structure is almost never a first choice of MNEs; however this structure can function as a temporary arrangement as the company looks for some hybrid design that will help them to operate more efficiently in the international business.
The transnational network structure is the newest form of international
organizational arrangements. It is designed to help MNEs take advantage of global economies of scale while at the same time being responsive to local demands. It combines elements of functional, product and geographic designs, while relying on a network arrangement to link the various worldwide subsidiaries. Different product groups and geographical areas have different structures depending on what best suits their operations.
The basic structural framework consists of three components:

  • Dispersed subunits: subsidiaries that are located throughout the world to bring advantages to the organization.
  • Specialized operations: activities performed by subunits that focus on particular product lines, research areas and marketing areas and are designed to tap specialized expertise in the company’s subsidiaries.
  • Interdependent relationships are used to share information and resources throughout the various and specialized subunits.

This structure is difficult to put in the form of an organization chart because it is very complex and continually changing.
Effective organizations begin by formulating a strategy and after that design a structure that will efficiently implement this plan. To determine the best structure, three questions must be answered.
1.  Is it possible for the enterprise to operate efficiently with only domestic
divisions, or are international divisions also necessary?
2.  How should the organization be structured? By: product, area, function, mixed or matrix?
3.  How can the cooperation and coordination be most effectively reached?
There are five key variables that MNEs examine in choosing the right structure.
Most of the time, there are three or four interacting variables that the structure must address.
1.  Evaluation of relative importance of international operations at present time and with this information estimating the future.
2.  The history and experience of the enterprise in the international arena.
3.  The company’s business and product strategy.
4.  Management’s operating philosophy.
5.  Company’s ability to adjust to organizational changes.
The ultimate decision lies with the management, but that usually comes down to a compromise between personnel needs and needs of the enterprise. The result is a structure that is efficient and humanistic.
Decision making is the process of selecting between alternatives. In international operations it is important to consider where the ultimate decision-making authority lies. When the home office is in control, decision making is centralized. When the subsidiary can make decisions, it is decentralized.
Decision making in MNE subsidiaries varies from country to country and culture to culture. For example, British organizations work with decentralized decision making because they feel that middle-level managers have a higher level of understanding about business operations than upper-level managers. 
French and German subsidiaries are fairly centralized. French senior executives like to stay in control of operations and German managers are hierarchical in their approach  and most decisions are made at the top.
In Norway, Sweden and Denmark operations are highly decentralized as well in
Scandinavian based companies and abroad. They put great emphasis on the quality of work, which is more important than high profits. 
The Japanese use a combination of centralization and decentralization; they make use of a process called ringsei, decision-making by consensus. At the same time they keep control of authority in what will be discussed at lower levels.
US MNEs use centralized decision making in their overseas operations, particularly in marketing policies, financial matters, and decisions on production capacity. 
Decentralization is a current trend worldwide as MNEs try to increase economies of scale and try to attain a higher operational efficiency. This is mainly done through outsourcing, thus simplifying their structures and delegating some authority to their suppliers.
Communication is the process of transferring denotations from sender to receiver. The way in which this is done varies per MNE. US MNEs use direct communication, since their culture encourages openness and specific communication. The Japanese use indirect communication, their culture encourages indirect and implied approaches.
These differences in cultures can be very difficult for an MNE. Non-verbal messages are another communication problem. These take two major forms in international business: 
·  Kinesics is the transfer of information through body movement and facial
·  Proxemics is the physical space that people take when talking to one another.
Controlling is the process of ensuring that all things go according to plan. This
process is to reward performance and consists of three steps:
1.  Establishing standards
2.  Comparing performance against standards
3.  Correcting deviations

There are many differences in controlling a US, Japanese, or European firm.  These differences are summarized in the following table.


You see, there are many differences on how to control an MNE; running operations in the same way abroad as at home is often difficult.


Many new goods and services were produced because of production management. The nature of this management is in many respects similar to MNEs and domestic firms. Both are interested in:
·   Efficient use of labor and capital
·  investing in R&D
·  organizing operations to generate successful new product lines
·  increase service and production efficiency
MNEs should organize their production management, through the use of inventory control so that they can minimize operating expenses. However, pressures from the host-country governments can influence the decision-making of MNEs in production areas. For example, resource-based MNEs are often criticized because of their integration.
Backward integration is the purchase of a firm that is involved at an earlier stage of the production chain. MNEs who apply this kind of integration are criticized by doing little for development or employment in the host nation. 
Forward integration is the purchase of another firm that is at a later stage in the chain of production so that the company moves closer to the customer. A point of criticism is that MNEs use this strategy to homogenize the taste of the consumer and that is damaging to national identities. 
Horizontal integration is the merging of two companies in the same industry and at the same state of production. MNEs who choose this kind of integration are criticized for introducing the same product line on a worldwide scale. Local firms cannot compete with these economies of scale and will be taken by the MNEs.
The industrial relations area copes with the same problems. MNEs must bear in mind different labor practices and wage rates. Host governments can pressure multinationals to use local sources for their supplies, hire local workers and to help improve the production environment in the host nation.
Another challenge is financing of operations. Foreign exchange risk, international tax laws and government controls on capital complicate the choice between local and international borrowing and the use of internally generated funds. Additionally, MNEs need to know where they are on global and local cost curves, so as to exploit any cost advantages with an appropriate organizational structure. In spite of all these challenges, experienced MNEs learned how to deal with them and have employed a wide range of production strategies.
An effective production strategy begins with new product development, not
manufacturing. When you think of the fact that today’s best-sellers were unavailable a short time ago, this new product development gains importance. If MNEs are not developing new products they should improve their current offerings. In either case, they focus on R&D and innovation.
Every year, many new products or services are introduced, or old ones are proved. Most MNEs develop their own goods and services, but some of them use outsourcing to obtain innovative offerings. In fact, many small firms are rising and provide large companies with new products. Other companies form agreements with firms to jointly produce and market a new product while continuing to produce others on their own.
A big challenge for MNEs is the speed with which they bring new products to the
market. A “speed to market” strategy can be extremely profitable according to many companies. To be clear, it is important to design and market the new product as quickly as possible. 
A way to increase speed is to make use of a time-to-market accelerator. This
accelerator removes bottlenecks and errors out of the production process and ensures a product that is of higher quality and can be faster delivered. Every company uses a different accelerator, but the effects and outcomes are the same. An example comes from Pirelli, a French tire maker, showed its modular integrated robotized system (MIRB). MIRB allows the entire production system to be robotized.
Previously, companies focused on the manufacturing side of the operation, but recent research showed that putting most attention on product design and planning of operations is the best way to increase the delivery speed and to reduce defective objects. This accomplished through concurrent engineering. This is the process of having engineering, design, and manufacturing people working together to create a product. 
A good product design is useful for two reasons:
1.  There are fewer changes needed later in the product stage and the good can
be put to the market more quickly.
2.  Costs of changing the product get higher when coming close to completion.
Once the product has been planned out, the attention will turn to production. This strategy is focused on minimizing costs and increasing quality and productivity.
The production process does not only involve producing physical goods, but it is also about generating services. Quite often the two are interlinked. Sometimes the goods or services are produced by the MNE itself and other times the firm will have an arrangement with other firms or suppliers to provide them with the goods needed. When generating goods and services, there is often a mix of product/service strategies at work. 
Global sourcing is the use of suppliers, which are more efficient than the MNE. The location of these suppliers is not important (can be anywhere in the world), but the efficiency is. There are a number of reasons why global sourcing gained importance and the most obvious one is cost.
It is important to remember that not all global sourcing involves an outside supplier. Some MNEs use their own source of supply or hold an equity position in a supplier. This relationship does not have any guaranties for a next bid and there is a great deal of pressure on the supplier to develop and maintain quality products.
At the same time, these suppliers provide service/ goods to more than one firm. If they are operating in similar or complementary industries, their processes will be easily copied by others, therefore, their business relationships are important to stay competitive and to hold positions as world-class suppliers.
Close working relationships between suppliers and the industry leads to competitive advantages. Suppliers help firms notice new methods and opportunities to apply new technology. Firms have quick access to information, ideas and supplier innovations. The exchange of R&D and joint problem solving results in faster and more efficient solutions. Suppliers also function as water pipes for transmitting information and innovations from firm to firm. Because of this process, the velocity of innovation within the national industry is accelerated.
These advantages explain to some extent why US suppliers are going international. By setting up operations close to competitors, US suppliers find it easier to monitor developments, changes in production and technology in the industry and can herewith stay competitive. In fact, when production companies set up operations abroad, they find their suppliers putting a plant nearby in order to keep serving the manufacturer. The other reason for doing this is to prevent local competitors from taking up some of this business.
When MNEs turn to global sourcing, the use of internal sources is their first preference. However, if it turns out that it is more profitable to use outside sources, the company will do that. Actually, sometimes MNEs do not make the effort to produce part of a product if they know that they are not sufficient in manufacturing it. 
After an amount of time, MNEs know exactly which supplier is best and will turn to them immediately. Then, the attention can be focused on the actual manufacturing of goods.
This production of goods comes with a variety of concerns. For example, cost, quality and efficient production systems.
A way to control the MNEs costs is by increasing the efficiency of production
processes. This often means exploiting new, improved technology such as new
equipment and machinery.
This seems quite expensive but it is often the best way to increase productivity and to maintain competitive advantage.
Modular manufacturing is a production process that consists of modules that can be easily adjusted to suit changing demand. Car producers like Volkswagen, Ford and General Motors make use of this process. Moreover, they are also developing similar assembly plants to test their efficiency for future execution to their other factories. A second approach is to make use of low-cost labor sources. In the maquiladora industry hundreds of US plants have been established because of the low-labor cost. Labor costs are 20% lower for workers in these plants than for workers in the US. Further, because there exists a free trade zone between Mexico and the United States, US duties are levied only to the extent of the value added in Mexico. So Mexico’s low wage rates help to keep down the import duty. 
A third approach is the development of new methods used to cut costs. In the US, it is typical for a company to calculate the selling price after a new product is developed. When the price is judged to be too high, the firm sends the product back to the drawing room to be reworked or accepts a lower profit margin.
Japan uses a different system, they first determine the target cost of the product before going into design, engineering and supplier pricing. This unique cost-cutting system helps the Japanese to keep their costs low and to be cheaper than competitors.
A fourth method gaining popularity with MNEs is that of costing products as part of a portfolio of related goods and not on an individual basis. Instead of evaluating the costs of developing one new soft drink, a company will look at the costs and revenues of the entire line of beverages. For example, in Japan 1000 new beverages are introduced every year. Ninety percent of them fail, but this does not stop Coca-Cola to introduce approximately one new beverage each month. This is not a very profitable strategy from a cost accounting standpoint. However, one Coke executive said that they have to produce these many new products, because their competitors do also. As a result, Coca Cola has a most profitable market in Japan and the company sells a variety of non-carbonated drinks to supplement its main brand.
Quality has been on of the major criteria for business success over the past decade: products are expected to be close to perfect. Nowhere is this more clearly reflected than in the auto industry. The Japanese have gathered a large market share in the international market because they make use of kaizen, which means, non-stop improvement. Ways to achieve kaizen are:
Large R&D expenditures and meticulous design, engineering, and production
processes that ensure a right fit of all parts and overall endurance of the unit.
Recently, US car manufacturers have been able to improve their quality and herewith gained market share. European car producers are very focused on quality, because they are aware of the fact that Japanese are a threat to their markets.
Another example of a high quality company is an auto supplier called Monroe Auto Equipment. This company has continually increased its quality and is a major supplier of parts in North America. Further, it does prosperous business in Japan (Toyota) and Europe (Nissan).
Other companies that have a blooming business are the WD-40 Co. that manufactures WD-40 a kind of super product that fights rust, cleans heel marks, looses sticky valves and defrosts frozen locks and screws. This super product is a best-seller in Great-Britain and is rapidly gaining international market-share.
Another company, A.T. Cross of Providence, Rhode Island manufactures mechanical pens and pencils of extremely high quality. In fact, despite a lifetime guarantee, less than 2 percent are ever returned for repair. This company’s pens and pencils are one of the most popular US-made gifts in Japan.
A production system is a group of related activities, which are designed to create value. 
In generating goods and services this system includes:
·  Location
·  Layout
·  Materials handling
Location can have a great impact on distribution and distribution costs and is therefore important. Many MNEs have found that governments as well national as local encourage them to set up operations by providing tax breaks or other financial stimulations. Location is also important for service companies; they need a face-to-face contact with customers. Typical examples are hotels and airlines. Further, accountants, lawyers and management consultants fall into this category.
Plant Layout has a major impact on the efficiency of a company and is therefore very important. For example, car producers use an assembly line layout so that employees can stay at their station and the cars move past them. Volvo uses another layout: employees work in small teams to build an entire car. Of course this work flow is accommodated with an appropriate plant layout. Other manufacturing settings use U-shaped-cell flow lines because these are more efficient. According to Schonberger (an internationally known manufacturing expert) this production design enables one employee to contribute to several workstations and to increase the speed of material delivery and the speed of which defective parts can be adapted.
In service companies the layout varies widely, although the use appears universal. For example, in fast-food units, the place where food is prepared is close to the counter of the restaurant as well as to the drive-in counter. This helps employees to serve both the in-unit and drive-through customers quickly.
Materials handling is the careful planning of when, where and how much inventory will be at one’s disposal to warrant maximum production efficiency. Careful inventory control process resolves part of this. The remaining is handled when the production layout is designed. 
For example, General Electric uses process mapping, a very detailed flowchart of
every step in the production process of a particular product. Through this the company can carefully look at every step in the process and determine which are redundant or can be streamlined.
One of the most popular concepts in inventory control is just-in-time inventory (JIT), which is based on delivering parts and supplies just before they go into a production process. Many MNEs throughout the world have adopted this concept, although the degree of use varies based on the product and the company’s production strategy. For example, the Big Three US auto manufacturers use JIT to keep their inventory low. In Japan, firms like Toyota have taken the concept to a next level and match supply directly to demand. Dealers order directly from the factory, which means that customers can get
their car in 7 to 10 days.
However, the success of JIT relies greatly on the quality and reliability of suppliers. This creates a major problem. In Japan, MNEs have shares in their supplier companies. Therefore, suppliers will make a lot of effort to meet the demands of their partners. In Europe and the US it works differently. Most suppliers are independent companies that work under a contract relationship and therefore the relations between the two parties are not that good.
Another problem with JIT is that many firms have troubles with applying the concept to the entire production process. Most firms use JIT with delivery of parts to the assembly line, but they lack in matching supply and demand before producing.
It is very important to remember that JIT requires strong support from workers and suppliers in order to work well. Everyone must be operating in unison.
Another production process is Demand-Flow™ Technology (DFT). This allows for
flexible changes in the middle stages of production. It is typically used to manufacture standardized assembly products, such as computers. DFT permits quick reactions to changes in demand and technology. This process caused Intermec, a bar code printer and hand held scanner company, to reduce inventory by 50% and decreasing manufacturing floor space by 20%.
Many products are involved with a service element. Sometimes this element is even more important than the product itself. MNEs will do two things in addressing this area:
1.  Orientation of the strategy, a product or service focus or a combination of the two.
2.  Ideal degree of service to provide.
Some MNEs benefit from a product dominated focus while others benefit most from a service orientation. Underneath is a table that gives an overview of which kind of firms are product oriented, which are service oriented or equally balanced. However, it should be used as a reference, not as a factual source that addresses every firm in the industry.

Knowing whether to sell on a product-dominated focus or on a service-dominated focus is critical to the success of an MNE. When an MNE makes a mistake at this point it can lead up to putting emphasis on the wrong sales factors.
After setting the balance of product and service domination, the MNE will evaluate the specific type of service that is warranted. This is very important because many MNEs find that the strategy used in their home country does not work internationally. For example, Japanese firms offer much more service with their product than Western firms do. But, when the Japanese firm competes in the US, it will provide less service than in their own country, simply because Americans don’t appreciate this.
International logistics is the designing and managing of a system to control the flow of materials and products throughout a firm. It is an important area of strategic consideration because the expenses are high. In the logistics area, three topics are discussed:
1.  Transportation
2.  Packaging
3.  Storage
There are means of transportation. Rail, pipeline and motor carrier are commonly used in the EU, but for most MNEs, the primary modes of transportation are ocean and air.
There are many ocean carriers to choose from and the three most commonly
used are:
1.  Container ships: used for carrying standardized containers that can be simply
loaded on the carrier at shipping point and unloaded at destination.
2.  Unconventional cargo vessels: used for shipping cargoes with an unusual
3.  Roll-on-roll-off (RORO) vessels: are ocean-going ferries. Trucks can ride on
and roll-off at the destination point.
A carrier similar to RORO is the lighter aboard ship (LASH) vessel. Instead of ships, there are barges stored on the ship and lowered in the water at destination point. From there, the barges can operate on inland waterways.
Because there is a lack of ports and port services it is very difficult to plan an ocean shipping strategy. Especially in developing countries there is limited equipment to load or unload container cargo.
Air shipping is a difficult mode of transportation because its costs are very high.
Although international air freight has grown, it still accounts for less than 1% of the total volume of international shipments. It is only used for items of high value that must reach their destination quickly. 
Although, a number of developments have helped to increase air shipment. These include more efficient ground facilities, larger aircrafts and better marketing of these services to shippers. In particular, the development of jumbo cargo jet planes and the combination of cargo and passengers planes has helped immensely.
In deciding the best mode of transportation to use, MNEs tend to focus on four
important criteria:
1.  Time
2.  Predictability
3.  Cost
4.  Non-economic factors
A question the firm will have to answer is: How Quickly is delivery needed? A couple of factors influence this answer. For example: the perishability of the product. Exotic flowers are flown from South America to the US, because they would not survive transport per ship. A second factor is how soon the goods need to fill up the current stocks.
In businesses where speed is very important companies are coordinating their supply chains in order to reduce the time that materials are in the production cycle.
Although, both air and water transportation are reliable, they are dependent on nature and its “surprises”: An airport can be shot down because of bad weather. Because there is a great difference in the delivery time, the choice between the two options is often clear. If a package needs to be delivered the next day, it will come by air. 
However, some carriers are more reliable than others and the MNE will choose the best companies for delivery. It should be clear that reliability is particularly important for air shipments, since the difference of a day directly influences the salability of a product.
Sometimes, the mode of transportation is determined by non-economic factors. For example in the US, all government cargo must use flag carriers when available. Similarly, other governments subsidize their carriers and MNEs are pressured to use these when doing business with such countries.
Packaging is important in ensuring that it is shipped safely and that it arrives
undamaged. It is also important because it has a direct effect on costs. If units must be shipped in odd-shaped containers, there can be fewer containers in one transfer and thus the product gets more expensive. The weight is also important, especially when goods are shipped by air and the costs are dependent on both weight and distance. Additionally, the package is important in reducing theft and pilferage and keeping loading and unloading costs minimal.
Lately, many shippers started using intermodal containers, which are large metal boxes which fit on many modes of transportation like trains, trucks and airplanes. It helps to reduce handling cost and theft losses because the merchandise is shipped in an easy-to-move unit that is tightly sealed.
In some cases, goods need to be stored before they can be transported to their
destination. In the US public storage is widely available, but in Japan there is little supply of these facilities. Additionally, the sizes of these warehouses are often different then in the US. For example, the ceilings are lower and there is less automation for loading and unloading containers. In these cases MNEs must decide whether to invest in warehouse facilities or eliminate the function and only ship goods when needed.
In some countries are free trade zones. By making effective use of them, the MNE is helped:
·  Store its goods temporarily while breaking a large shipment into smaller ones to be shipped to other places.
·  Combine small shipments into large ones and reship them together.
·  Process the goods and be a host for value-adding activities before repackaging them for the market.
·  Give goods that will remain in the country a “made in” status so that they can be sold as locally produced products.
An effective storage strategy can be helpful in carrying out the final stages of the production plan, minimize overall product cost, reduce delivery time and increase customer satisfaction.
Currently, MNEs are focusing on a number of areas to improve their production
strategies; three are getting particular attention, namely:
·  Technology and design
·  Continuous operations improvement (kaizen)
·  Use of strategic alliances and acquisitions
MNEs are spending more money on R&D nowadays than they ever did in the past. These investments help to explain why auto engineering and quality have improved so much. During the 1980s US MNEs focused on new R&D whereas their international competitors focused on improved R&D. The US found a lot of problems in putting their focus on new R&D and in the nineties they started to focus more on improved R&D.
A second trend is concurrent engineering. Many MNEs are realizing that working in a team to develop a new product creates a more successful good.
Innovative human resource development programs are coupled with these strategies and are designed around the concept of empowerment. Empowerment is the process of giving employees more and more control over their work. This strategy works very well, because employees get a feeling of pride and ownership of the job and makes them feel important. Empowerment is not restricted to the R&D department, it is important in all phases of production.
Due to the success of Japanese MNEs, kaizen is being strived for on an international basis. US firms have benefited from this mostly as seen in their immense increases in productivity.
JIT is a related concept that MNEs use to achieve continuous improvement. In the past it was only used for managing inventory but nowadays JIT is being employed in many other ways.
Another strategic production strategy is the use of alliances and acquisitions. Many MNEs find that they cannot operate effectively if they do not form alliances or joint ventures that can complement in their production strategy. 
The forming of alliances or joint ventures works well in most cases and some
researchers claim that alliances account for more of the success of Japanese firms than does JIT or other production technique. Working in unison with each other, keiretsu companies have been able to exercise a great deal of power.
Fujitsu exercises another production strategy: acquisition coupled with autonomy. In  addition, the firm strongly believed that the Japanese way of management can not be obtained universally. Overseas companies have their own ways of doing things. So it yields to give overseas acquisitions the autonomy to make their own decisions.


International marketing involves the identification of goods and services wanted in other countries than the home country and providing them at the right price and place. This process is quite similar to the national marketing process but there are some important modifications that are used to fit the local needs. Some MNEs are able to use the same marketing strategy abroad as at their home country. For example, many fast-food units have found that people anywhere in the world have the same reasons for coming to their unit. However, in most cases there needs to be a local marketing strategy made. These changes fit into five main areas:
1.  Market assessment
2.  Product decisions
3.  Promotion strategies
4.  Pricing decisions
5.  Place or distribution strategies
The latter four are also known as the four p’s, a term commonly used in marketing, which forms the core of international marketing efforts.
An international marketing strategy starts with international market assessment, an evaluation of goods and services that the MNE can sell globally. This assessment consists of a couple of screenings and the first one is the screening of basic need and potential, the initial screening.
Initial screening is the process of determining the potential basic demand of the MNEs goods and services in foreign markets. The following question will be answered through this screening: Who might have the need to buy our output?
One way how initial screening can be done is by examining the current import policies of other countries and identifying which goods and services are imported. A second way is by stating the amount of local production. A third way is by investigating the demographic changes in a country which can result in new emerging markets. All these efforts help the MNE to target its potential markets.
The second screening is used to narrow its selection of market prospects by removing those that do not meet the financial and economic considerations. Financial considerations include inflation and interest rates, expected ROI, the buying habits of customers and credit availability. These factors are important to select those markets from the initial screening that are financially feasible.
Economic considerations relate to a range of market demand influences, including market indicators. Market indicators are used for measuring the relative market strengths of various geographic areas. These indicators focus on three important areas:
1.  Market size: relative size of a market compared to the total world market (as a percentage).
2.  Market intensity: degree of purchasing power, compared with other countries.
3.  Market growth: increase in sales on an annual basis.
To analyze all these data there is made use of quantitative techniques, which are
sometimes fairly simple. A trend analysis is an estimation of future demand by
extrapolating the data over the last three to five years, assuming that this trend
continues. A similar approach is the estimation by analogy: forecasters estimate
market demand or growth based on information gathered in other countries. A
regression analysis is a more refined approach, which forecasts in a mathematical way which attempts to test the explanatory power of a set of independent variables.  Another sophisticated approach is the cluster analysis: a marketing approach to forecast customer demand through the grouping of data based on variables like market area and customers for example. Than, a market strategy is formulated for each group.
The third screening looks at political and legal forces. One of the primary
contemplations is the entry barriers some countries have in the form of import
restrictions or limits on local ownership of business operations. Some MNEs have been able to avoid these legal restrictions by setting up joint ventures with local firms. Production restrictions and limitations on profit transfers that restrict operating flexibility must be taken into account. When starting a successful operation the stability of the government is important, however this is often difficult to predict. Something else to consider is the protection offered for trademarks, patents and copyrights.
The fourth level of screening focuses on sociocultural forces such as language, work habits, customs, religion and values. Culture has a great effect on how people live and MNEs want to know how well their operations will fit into another culture. For example, Japanese car manufacturers that have set up facilities in the US have adapted the length of the work week to the wants of the Americans because most of them are unwilling to work 5,5 days a week, which is common in Japan.
The fifth screening is focused on competitive forces. If there are more locations equally attractive, the final choice of the MNE will depend on the degree of competition in every locale. 
In some cases the company does not want to operate in a competitive environment but most of the times the MNE will decide to enter a competitive market because they believe that the advantages outweigh the disadvantages. In a competitive environment the company can force itself to improve and get more efficient and becoming thus more competitive.
The final step in the screening process is making a field trip to the site and talking to trade representatives or local officials. Depending on the outcome, the MNE will decide which goods and services to offer overseas.
Product strategies will depend on the product as well as the customer. Some goods need a modified strategy when sold abroad and some don’t need any adoption at all. The following table provides an overview of which products need adaptation and which don’t.

Industrial goods and technical services are typical examples of products that do not need modification. A bulldozer and a photocopying machine serve the same purpose in every country. The only modifications that should be made are minor and include things like adapting the machine to the appropriate electric voltage or changing the language in the instructions manual.
If an MNE has to use a moderate or a high modification is influenced by a
number of factors such as:
·  Economics
·  Culture
·  Local laws
·  Level of technology
·  Product’s life cycle
Economic considerations can affect the decision to modify a product in many ways. For example, in the US chewing gum packages consists of 10 to 20 sticks. In many other countries, however these packages consists of 5 to 10 sticks because the country has a lower purchasing power and is more likely to buy the product if the content is of smaller volume. 
Economic considerations are also important when the cost of a product is either too high or too low to make it salable in another country. For example, electronic cash registers are only used in economically advanced countries, because the less developed countries simply do not have the money for it and use hand-cranked versions.
Similarly, in economic advanced countries products are likely to have extras, while at the same time in less developed countries the basic model is offered. Bikes are in many countries a primary source of transportation and are made to be easily maintained, but in the US a bike has special features for comfort and ease of handling. So, the producer will modify the product to the customers’ needs.
Sometimes, a product must be adapted to the way people are used to doing things. Producers of washing machines who sell in the EU must produce a variety of different units: French people prefer to load their laundry from the top, while British prefer to load from the front. Germans prefer a high speed machine because they like their laundry to be dry when it comes out of the machine. Italians, however like to dry their wash in the sun and prefer a low speed machine.
Food is another product that should be modified or sold differently to serve customer needs. For example coffee in South America has a stronger blend than in North America. Sometimes the product is not modified, but the marketing focus is because the item is used differently. Schweppes serves as a mixer in Countries like the US and Britain, where it is drunk with gin. In France, on the other hand, it is not drunk with alcohol at all. 
Style also influences purchasing decisions. Cosmetics that are best-sellers in Europe often have difficulty with selling in the US. The same account for shampoos and deodorant, because people may find it difficult differentiating the product from local offerings.
Convenience and comfort are other factors that help to explain why there is a need for modification. Especially in the car industry this is widely seen.
Yet other product modifications include color and language. The color black is in most Western countries a color for mourning, whereas in other countries white is the color for mourning and so it is not used for consumer goods. Further, in bilingual countries such as Canada and Switzerland, the information is provided in the appropriate languages.
Local laws can require modification of a product in order to meet environmental or safety requirements. Emission-control laws in the US have required Japanese and European car importers to adapt their model significantly to those requirements before they could be sold in the US. Food and pharmaceutical regulations require packaging and labeling that are often quite different from those in the home country. Brand-name protection can also require product modification, Ford-Motor has found this several times, with its Ford Falcon in Mexico and in case of the Mustang in Germany.
Another reason for modifying a product is because of the limited product life cycle (PLC) of the good. One of the best strategies is to shorten PLC by offering new goods before the old good starts losing demand. By doing this, the MNE can retain a large market share. The typical strength of this process is that the competition is left scurrying up, because every time they try to “copy” the product of the leading MNE, this MNE markets a new product.
Promotion is the process of encouraging demand for a company’s goods and services. MNEs execute this process through advertising and personal selling.
A variety of approaches can be used when promoting a product. The choice of
approach will be heavily influenced by whether the company will adapt its product and/ or marketing strategy. 
There are four variations:
1.  Identical product and identical message: when the MNE believes that it can sell the product worldwide with an identical promotion in all markets.
2.  Identical product but different message: when the product satisfies a different need in various markets.
3.  Modified product but same message: when the market asks for a different
version of the product but the customer needs are the same.
4.  Modified product and modified message: when the product use and buying
habits of customers are different then from those in the home country.
Advertising is a non-personal form of promotion to persuade a consumer to a certain point of view. Many products satisfy worldwide needs, but in many cases the advertisement needs to be adapted. 
There are two common reasons for adapting the advertisement to the local
·  The use of the product is different from that in the home country.
·  A direct translation of the message does not make any sense.
Commercials that are not adapted when needed will only leave the viewer confused as to what the advertiser was saying. As a result advertisers do not want to tie the message to buyer needs and wants too much. On the other hand, there are many advertisements that are slightly adapted because they do make sense in other cultures. For example, Marlboro’s “cowboy image” has a universal appeal and Nike’s use of international stars works across boundaries.
MNEs use a number of media to carry their advertisements, most commonly used are television, radio and newspapers. However, there are restrictions to what the commercial may show. For example, some countries forbid comparative advantage in which firms compare their products to those of the competition with the purpose of talking the customer into buying a particular product. Another example is that some countries want to discourage the use of products like cigarettes or alcohol and therefore do not allow advertisement for those products. Censoring is another example of a restriction. In Islamic countries there is censor on messages that are regarded as erotic.
Personal selling is a direct form of promotion to persuade a consumer to a certain point of view. Firms that rely heavily on personal selling are industrial products or goods that require explanation or description. This form of promotion is also commonly used in pharmaceuticals and sophisticated electronic equipment. Many international markets are so large that many MNEs have turned to telemarketing, which has been particularly successful in the US.
MNEs have focused on attaining salespeople worldwide. Recruiting local talent is
extremely important because these people know more about the local market and are better in selling to local customers.
Prices of goods and services in the international marketplace are often influenced by factors in home market pricing. These factors include:
·  Government controls
·  Market diversity
·  Currency fluctuations
·  Price escalation forces
Every country has government regulations that influence the price of a good. Some countries use minimum and maximum prices to protect either the producer or the consumer. Minimum prices are adopted to protect local companies. Because there is a price floor these firms are ensured with profit.
Dumping is the selling of imported goods at a price lower than its costs and is
prohibited by governments. 
Consumer tastes and demands vary per country and that is why MNEs have to price some products differently. For example in the US, there is a high demand for light turkey meat and a low demand for dark turkey meat. In Europe however, there is strong demand for dark turkey meat. That is why dark turkey meat is much cheaper in the US than in Europe.
A second factor that influences market strategy is the perceived quality of the product. In the US, people are willing to pay a premium for German cars, while in Japan this is not at all the case. Therefore German car manufacturers like Mercedes have a different pricing structure in Japan.
A third factor is the tax laws and attitudes about carrying debt. In some countries like the US interest payments are tax deductible and there is no aversion against having some debt. In Japan, the opposite is going on: interest payments are not tax deductible and there is aversion against having debts.
When selling products overseas, MNEs tend to take the responsibility of the risks associated with currency fluctuations. For example, Mercedes produces and ships a particular model to the US, which costs 30000 dollars and then sells it to the dealer for 40000 dollars. 
The profit is than (10000/30000) is 33%. However if the dollar decreases against the euro, the company’s profit will decline and the firm will have to choose between the following options:
·  Increase the selling price to the dealer to make up for the loss of the dollar
·  Leave the price the same and absorb the loss.
·  A combination of the above: raise the dealer price and absorb the loss.
A similar problem is price escalation forces that drive up the cost of products. If prices rise, the company would want to pass this on to the dealer and the dealer will pass this on to the customer. You can imagine that the more middlemen there are in the process, the more the price will rise. The price has an effect on consumer demand and therefore will be a key marketing consideration.
Distribution is the course that goods take between manufacturing and the final
customers. Every country has another way of distributing goods and an MNE will spend a lot of time in deciding which distributors and channels to use.
It is often difficult to standardize a distribution system because there are many
individual differences to be considered. For example, retailers in Finland carry a wide assortment of merchandise while in Italy every retailer specializes on limited lines of merchandise. So, MNEs need to employ different strategies in distributing goods in these two countries.
Consumer spending can also have a negative effect on standardized distribution. In the US most people pay with a credit card while in Japan most consumer purchases are on a cash basis.
The location where consumers are used to buying their products also has an effect on distribution. Most purchases are made in small stores and therefore the MNE has to deal with a large number of retailers.
In creating the most efficient distribution system, MNEs use a number of criteria. One is to get the best distributors to carry their products. The retailer’s financial strength is very important because MNEs want to know if the retailer survives in the long run. MNEs that sell goods which require periodic maintenance and servicing (autos, computers and electronic equipment) want to work with a distributor that can keep sufficient inventory on hand. A second factor is how well the distributor has its own network of knowing the right people and being able in helping the MNE handle the governmental bureaucracy. A third factor is how many product lines the distributor carries currently. If the MNE knows this it can identify middlemen who are most likely to give its products a marketing boost.
In many cases distributors sell competitive products or do not want to add another product line. If this is the case, then the MNE needs to convince the distributor to carry its products. 
This is done through a number of reasons:
·  Pay a part of the product’s local promotion campaigns.
·  Providing generous sales abundance
·  Performing marketing research to help the distributor decide how much
inventory to carry. 
·  Ensuring that unsold or outmoded products can be returned to the MNE.
Depending on the nature of the market and the competition, the MNE may decide to have one local distributor or to have a number of sellers that sell the same product.
Data collection and analysis for the purpose of developing and updating market
assessments is very important to MNEs. As a result, MNEs change their market
approach and in other cases it supports maintaining a current strategy.
Clarins SA, a French cosmetics firm, refines its market strategy based on market
assessment data. They have gathered feedback from customers about their products for years. Their company growth has been huge in France and is now achieving the same in the US. Particularly interesting is that they have achieved this growth despite their high costs. They focus on up-scale customers and have been very good in using market assessment information to develop and market high-quality skin-care products.
Shell Oil is an MNE whose market assessment has showed the importance of not
changing too much about products or delivery systems; the company has learned to stay close to what it knows best. Moreover, they learned that being able to assess situations and react quickly is an important element in its marketing strategy. Shell has improved its assessment skills by simulating supply disruptions such as dealing with a cut-off of oil from Kuwait. By evaluating these situations, Shell was able to bring in preapproved crudes from other sources after Kuwait and Iraq had no oil in 1990 because of the Iraq invasion.
New product development is also a critical part of the strategic management plan. In the early 1990’s General Motors (GM) was the leading US car manufacturer in Europe because of product development and expansion. However, in the early 2000s, GM’s energy was shifted to cost reduction because of overcapacity in the Western European market. Today, GM is trying to retrieve its position by increasing market outlets and setting up a 178000 unit capacity assembly plant in the eastern part of Germany.
Sabaru is another example of a car company that is turning to product development for market growth. During the 1980’s it has been known for its cheap, good quality cars. But when the value of the yen decreased against the dollar, the price of a Sabaru rose significantly and market share in the US dropped. In the 2000s they attempted a comeback by developing new products and it is working, by 2001 Subaru was the market leader in four wheel drive in the US.
IBM has a 75% world market share in top-of-the-line disk drives that are used in
mainframe computers. For the millennium, this market was one of its top priorities because disk drives have high profit margins. IBM is now developing higher capacity versions of mainframe disk drives and intends to speed up its product cycle. By doing this, IBM tries to stay ahead of competition because by the time the competitor introduces a new product, IBM markets a better version.
Effective pricing can either be to obtain a high price strategy or a low-price strategy. Both strategies can be successful, depending on the nature of the market. 
Bang & Olufsen is a Danish company that manufactures electronics (stereo
components, televisions and video equipment). They serve style-conscious consumers who are willing to pay a high price for their products. There products include: thin, sleek and modern looking televisions and stereos with a futuristic design. While many consumers prefer less stylish products, Bang & Olufsen have a steady stream of customers and a 406 million mark sales.
In 1997, Wal-Mart showed an interest in Chifra Inc. of Mexico, the country’s largest retailer. Wal-Mart’s acquisition fueled expansion throughout Mexico and today Wal-Mart has 545 stores. Wal-Mart Chifra is doing the opposite of what Bang & Olufsen are doing; they offer low prices. Today, they are pushing a “bodega-concept”: fast-moving, non-perishable goods that are sold in bulk in poor neighborhoods. This concept averages a million dollars per store each month.


International human resource management (IHRM) is the process of selecting,
training, developing and compensating employees in overseas positions. The process begins with selecting and hiring of personnel and there are three basic kinds of sources. Home country nationals are citizens of the parent country of the multinational but are assigned at a host country and reside there. These individuals are called expatriates. Host country nationals are people who are locally hired by the MNE. Third country nationals are citizens of a country different from the country in which the MNE is headquartered or the one in which they are assigned to work by the MNE. 
There are different approaches in how to staff employees. One approach is to use home country nationals in less developed countries and to use host country nationals in more developed areas. Another approach is to use a home country manager at the start of a new operation, but once the unit runs well, turn it over to a host country manager.
Stages of internationalization follow a certain pattern of country managers. When an MNE is exporting to a foreign market, everything is handled by host country nationals. As the firm starts its production in that country, it makes more use of expatriates and third country nationals. As the company moves through different stages of internationalization, the changing demands of the environment will determine which kind of country managers will be used.
Different countries have different approaches to staff personnel. In Japan, home
country managers usually staff senior-level positions. In the same fashion, European MNEs assign home country managers overseas for their entire career. US MNEs view overseas assignments as temporarily and will use expatriates to work under a host country manager.
The costs of sending people overseas has increased and therefore, host country or third country nationals who know the language and customs are more widely used.
Two major challenges that face HRM are to select qualified people for overseas
assignments and in the case of home country nationals, repatriating them effectively into the workforce when they return.
International screening criteria are factors used to determine which individuals are most suitable for overseas assignments. There are a number of screening criteria used in this determination and they focus both on individual and family considerations.
One screening criterion is an individual’s ability to adapt to cultural change. Most managers find themselves very happy when sent overseas, but after a few months they begin to suffer from a cultural shock, because of the large number of changes they go through. This has a negative effect on one’s job satisfaction, but as managers continue performing their job, satisfaction goes back up. It is also found that men are able to adjust slightly faster than women and people over the age of 35 have higher levels of satisfaction after the first year.
In determining the ability to adapt to cultural change, MNEs examine a number of characteristics:

  • Work experiences with cultures other than one’s own
  • Previous overseas travel
  • Knowledge of foreign languages
  • Ability to solve problems from a different perspective
  • Overall sensitivity to the environment

Managers who are posted overseas must be self-reliant and independent because they have to make immediate decisions without consulting the home office. In determining independence, the amount of field experience will be evaluated as well as special project and task force experience, because such assignments often require and nurture independence.
Age is another matter of consideration. Young managers are often eager for
international assignments and want to learn about other cultures. Older managers are more experienced and mature. Often, both kind of managers are sent to the overseas post so that they can learn from each other.
Opinions on whether an international manager should have a college degree differ, but the best overall combination seems to be an undergraduate degree coupled with an MBA from a recognized business school.
Expatriates must have a good physical and emotional health and a good family
situation. An unhappy family life will have a negative effect on the productivity of the employee. Therefore, some firms often interview the manager and the spouse before deciding to approve the assignment. 
The dual-career trend in families is another challenge that MNEs face. If there is no supporting employment for the management’s spouse, there is a lot of dissatisfaction towards the MNE.
Another selection criterion is the motivation of the manager to work abroad and the personal commitment to the new job. Many people who are unhappy with their position at home will consider an overseas assignment, but this is not a sufficient motivation. Motivational factors are: a desire for adventure, a pioneering spirit, a desire to increase one’s changes for promotion and the opportunity to improve one’s economic status.  Researchers examined the factors that influence the willingness to work overseas and concluded that:

  • Unmarried employees are most willing to work at an overseas assignment.
  • Married couples without children or those with non-teenage children are the most willing to move.
  • Prior international experience appears associated with willingness to work as a home country national.
  • Individuals most committed to their professional careers and their organizations are prone to be more willing to work as a home country national.
  • Careers and attitudes of spouses will likely have a significant impact on employee willingness to move overseas.

Another selection criterion is leadership potential, because most expatriates have to supervise others. This is a different factor to asses, but there are a number of characteristics that are commonly sought. The following characteristics are indications of leadership potential: maturity, emotional stability, ability to communicate well, independence, initiative and creativity.
The selection procedure is mostly done through an interview.  An interview of
candidates with their spouses provides the best method of selection. Although, some MNEs use tests to help them predict who is most likely to do well on an overseas assignment. Drawbacks with this procedure are the fact that it is expensive and that many MNEs feel that tests do not improve the selection process. As a result, evaluations from peers and superiors along with an interview are most heavily relied on.
Repatriation is the process of coming home after an overseas assignment is
There are a number of reasons why managers are repatriated. The most common one is that the predetermined time assignment is due. Another is the desire to have their children schooled in the home country. If the expatriate is unhappy overseas and performs poorly, the MNE may decide to put another person on that position.
When expatriates come back, some find it difficult to adjust. There are a number of reasons for this. The home office job often lacks the amount of responsibility and authority that the expatriates had in the overseas job. Another one is that they feel that their international experience is not valued by the company and their time spent overseas seems wasted in the view of their career progress. 
Research has shown that the longer managers remain overseas, the more problems they will have when returning into operations at home. 
There are several factors that make repatriation difficult, these include:

  • They may no longer be well known among employees at headquarters.
  • Their old job may have been removed or drastically changed.
  • Technological improvements at headquarters have made their existing skills and knowledge out-of-date.

In many cases it takes 6 to 12 months before a returning manager is operating a 100 percent.
By now, some companies have developed transition strategies that are designed to smooth the path between foreign and domestic assignments.
One of these strategies is the repatriation agreement; an agreement which spells out how long the person will be overseas and what kind of job the person will be given when he/she returns. This agreement does not give any certainty about salary or the particular position but it does promise a job equal in authority and compensation to the expatriate. 
This agreement takes away a great deal of anxiety that expatriates encounter because it secures a place for them when they return.
A second strategy is to maintain or rent the home of the overseas manager. This
reduces the financial burden of the mortgage and further, they do not have to buy or rent another house when they return.
A third strategy is to assign a senior executive as a sponsor for each expatriate. This person can check whether his/her performance, compensation and career path are on track and when the expatriate returns home, the sponsor can account for a suitable position at the home company.
A fourth strategy is to keep up ongoing communications with the overseas managers. They should be aware of the situations at the home office. In this way, they will not become outsiders, but regular members of staff when they return. 
All these strategies help MNEs to maintain a proactive approach in dealing with
concerns about expatriates.
Training is the process of changing personnel behavior and attitudes in a manner that increases the probability of goal attainment. Training programs are designed to provide expatriates with the information and experience regarding local customs, cultures and work habits. By doing this, the manager will be more effectively at working with the local workforce. Managerial development is the process by which managers gain skills, experience and attitudes to become a better leader.
MNEs use a number of training and development programs, which can be grouped in two general categories:
1.  Standardized
2.  Tailor-made
Standardized training programs are general and can be used with managers
throughout the world. Examples include programs for improving quantitative analysis or technical skills that can be used universally and programs that address cultural differences on a global scale. Even many behavioral oriented concepts can be handled with a standardized program, although for specific needs of the country a tailor-made program should be conducted.
Tailor-made programs are conducted to address the specific needs of the participants and include a large amount of culturally based input. The inputs are usually provided by current expatriates or local managers, personnel and citizens in that specific country. 
The following six types of programs are most popular:

  1. Environmental briefings provide information about geography, climate, housing and schools.
  2. Cultural orientation provides information about the cultural institution, norms and values of the country.
  3. Cultural assimilators confront the participant with intercultural encounters.
  4. Language training.
  5. Sensitivity training develops attitudinal flexibility.
  6. Field experience actual sends the participant to the country to undergo some of the emotional stress.

Usually, firms use a combination of these different kinds of programs. Further some companies extend their training into including the family of the participant. This will create a support group that will work together on solving problems that arise during the overseas period.
Compensation for the overseas assignment has become an area of IHRM attention. On the one hand, the MNE wants the best person for the job, but on the other hand it wants to keep its costs down and increase profits. Sometimes, these two objectives cannot go together. When we look at the breakdown of international compensation packages, this becomes clearer.
An international compensation package includes:

  • Base salary
  • Benefits
  • Allowances
  • Tax protection

A base salary is the amount of cash compensation that an employee receives in the home country. This base salary is tied to their home country and is the benchmark against which bonuses and benefits are calculated. Recently, this base salary has become an issue when foreign firms have merges with companies abroad where salaries are significantly higher. For example, when Daimler Chrysler merged; one executive made 1.1 million a year and the other 1.6 million. So, base salary can present problems when going international.
Benefits are often a large part of the compensation package. In addition, there are a number of difficult issues which must be resolved, these include:

  • Whether or not to maintain expatriates in home country programs
  • Whether firms have the option of enrolling expatriates in host country benefit programs and/or making up any difference in coverage.
  • Whether host country legislation regarding termination affects benefit
  • entitlements.
  • Whether expatriates should receive security benefits from the home country or host country.
  • Whether the home or host country is responsible for the cost of the benefits, and whether other benefits may be used as a compensation for a shortfall in coverage.

Most MNEs include their expatriates in the company’s benefit program and the cost is not higher than it would be at home. MNEs also provide vacation and special leaves to home country managers.
One of the most common allowances is the cost-of-living allowance, which is a
payment that compensates for differences in expenditures between the home country and the location where the expatriate works. Through this compensation, the employee has the same standard of living. 
This allowance can cover over a wide variety of areas, such as:

  • Relocation expenses include moving, shipping and storage costs of personal goods.
  • Housing allowances vary between MNEs. Some will pay for the residence overseas, others will give the expatriate an amount of money each month and some will rent or help selling the house back home.
  • Education allowances for the expatriate’s children are included in most compensation packages. It covers for tuition, enrollment fees, books, transportation and school uniforms. 
  • Hardship allowance is a special payment made to those expatriates that are sent to less desirable locations such as Eastern Europe, China and some Middle East countries. These payments can be a lump sum or a percentage of the expatriate’s base compensation.

MNEs also provide a tax compensation for expatriates in the form of protection or equalization. Most MNEs use a tax equalization program: the MNE withholds an amount equal to the tax obligation in the home country and pays all taxes in the host country. Tax protection is an approach where the employee pays up the amount of taxes that has to be paid based on compensation in the home country. If then the total taxes are less in the foreign country than in the home country, the employee can keep this amount.
The most common used concept is for the MNE to determine the expatriate’s base salary and other bonuses like if he/she was living in the home country. The taxes to be paid are then compared to the total taxes to be paid on the expatriate’s income. Any  taxes above and over that amount that would have been due in the home country are then paid by the MNE.
In terms of compensation, the MNE wants to make sure that the expatriate does not have to pay more because he/she is living abroad. A compensation package is very expensive to an MNE and therefore the current trend is towards not sending employees overseas unless there is a need for their specific services.
Another trend is to keep expatriates motivated. In the process, MNEs have dropped bonuses or premiums for overseas assignments and have replaced them with lump sums. A benefit of these lump sums is that the payment is only made one time, so expatriates know this when they move to the international locale. Further, the company does not have the prospective of future payments and is not financially committed.
MNEs face a major challenge in orienting their strategy to meet the varying demands of organized labor around the world. This is caused by national differences in politics, economics and legal systems.
In managing labor relations, most MNEs use a combination of centralization and
decentralization, although some countries tend more towards centralization (US) and others more to decentralization (Europe). A number of factors have come up to explain this development, namely:

  • US companies need a close reporting system since they rely heavily on formal management controls.
  • European MNE does have to deal with labor unions at an industry level, while US MNEs need to deal with them at a company level.
  • US firms sell mostly in their domestic market and they see the overseas market as an extension of domestic operations, which is not all true for European companies.

Labor relations practices vary widely. The difference between a strong and a weak economy influences the union’s ability to bargain. Similarly, some countries are very pro-management while others are heavily union-oriented. Germany and Japan show some interesting contrasts.
Labor unions in Germany have a strong position. Union membership is on a voluntary basis, but there is one union in each industry. This union will negotiate a contract with the employers’ federation for the industry in which all aspects of a job are determined. If there is a disagreement over the contract, it is resolved between the worker and the company with the participation of a union representative. If the procedure is unsuccessful the matter will then be handled by a labor court for final settlement. Despite their power, unions have a much more corporative relationship with management than US unions do.
A strike usually occurs when a contract has run out and a new one needs to be
approved by the workers. As in the US, several agreements may be in forces which all have different termination dates. So one group may be striking or working without a contract, while another group is working under a contract.
In Japan, relationships between a union and management are extremely cooperative. According to their culture it is not appropriate to act confrontational. Labor agreements are often general and vague, but disputes about it tend to be settled in a friendly manner. Strikes are never started because the two parties cannot cooperate. They are only used to embarrass the management and almost never last longer than a week. 
Japanese unions are most active when bonuses are negotiated, that is in spring and at the end of the year. Again, these negotiations almost never result in conflicts. A reason for this is that Japanese workers subject their needs to those of the group.
Many countries, accept the US have industrial democracy, the right of employees to help decide on significant management decisions.
Industrial democracy exists in a number of forms:

  • Codetermination
  • Work Councils 
  • Shop floor participation

Codetermination is a legal system that requires employers and their employees to discuss major strategic decisions before firms implement them. This system is quite popular in Europe. On the negative side, many employees feel that they do not have enough workers input in major decisions.
Work Councils are groups that consist of employee and manager representatives and deals with matters such as improving company performance, working conditions and job security.
Shop floor participation takes many forms, including job enrichment programs, quality circles and other versions of participative management. It is widely used in Scandinavian countries and has spread to other European countries and the US.
Industrial democracy and codetermination are both very strong in Germany, in
particular in the auto and steel industries. Researchers found that codeterminism works well in Germany. Some critics have argued that there are too many people involved in decision-making and that it slows down the whole process; however this argument is rejected by a study and it seems that there are even greater efforts toward codeterminism.
In Denmark, workers have the right to participate in management on a direct as well as an indirect basis. In the direct form employees are part of semiautonomous groups that provide ideas on how to increase productivity and quality. In the indirect form there are all kinds of representatives who stand for the workers. Industrial democracy works exceptionally well in Denmark; cooperation committees contribute to openness coordination of effort and workers who feel more important.
The industrial concept in Japan is oriented towards the Japanese culture and the belief of group harmony, instead of the political philosophy in Europe. Workers are encouraged to help solving job-related problems and management is in return very receptive to worker ideas. As a result, Japanese firms face a great challenge from industrial democracy because they are the least used to using this idea. Though, they are pushed authority-sharing concepts when they are expanding to Western countries.
There are a number of HRM strategies that currently receive attention from MNEs, three of them will be addressed here:

  • Language training
  • Cultural adaptation
  • Competitive compensation

There are a number of reasons why it is important to know the language of the country where the company does business in, including:

  • There is more interaction with local colleagues and better communication with suppliers and customers.
  • It allows the manager to monitor the competition more effectively.
  • It is useful in recruiting local talent and developing good relations with local organizations.
  • It helps to learn more about the culture and how to interact socially with people.

For the moment, language training is a weak link in the development of an effective IHRM strategy.
It is very important for managers to understand the culture of the country to which they are assigned.
In preparing managers for their overseas positions, MNEs use three basic approaches:

  1. Familiarizing the manager with the cultural institutions and value systems of the country.
  2. Provide the manager with language training and a country visit.
  3. Use cultural assimilators (expensive)

The advantages of learning a local language is that a manager can speak directly to the suppliers and the customers, also it is very handy in measuring the competition. 
Anohter benefit is that it can help building a relationship with local organizations, which might come in handy in hard times.
A cultural assimilator is a programmed learning technique to learn members of one culture about another culture’s basic concepts, attitudes, role perceptions, customs and values. These assimilators are usually developed in pairs of cultures, for example to
familiarize a US manager with the German culture.
Cultural assimilators use critical incidents as a basis for the training. In these incidents the expatriate will be interacting with a host nation, the situation can be mishandled if the person is no properly trained and the event is relevant to the expatriate’s task and mission requirements. The incidents are provided by expatriates that have worked in that particular country.
Assimilators can be very expensive to create. It costs approximately 50000 dollars to develop one. However, for MNEs who send their people continually to the same overseas location it can be very cost effective in the long run.
MNEs start to evaluate the costs of sending people overseas as well as they review the costs of maintaining executive talent in the international arena. 
Compensation costs vary widely because goods and services in some countries of the world differ a great deal from others. Life in the US is fairly inexpensive when it is compared to Japan, Hong Kong, Taiwan or Great Britain. In particular the cost of living allowance for expatriates in Europe and Japan are very high and add significantly to the company’s overhead. For this reason a few MNEs are looking for local people to staff operations and thus reducing the need for expatriates.
Another problem is the amount of compensation top management talent receives when hired and especially when moved to another location. Therefore, the MNE hires these individuals and leaves them in place for extended periods of time. This is far less costly than moving the managers from one location to another.
Another trend which is currently emerging is specially designed HRM programs. It has been realized that these programs have to be tailor-made. 
This is done through comparing factors with different countries, five of these factors are:

  • Structural empowerment
  • Accelerated resource development
  • Employee welfare emphasis
  • Efficiency emphasis
  • Long-termism

None of the participating 13 countries had the same profile (they all scored differently on the 5 factors) and that reveals that countries are unique in their approach to HRM. Something else that came up is that MNEs have to focus on HRM programs that are designed to meet the needs of local personnel. A survey of over 1000 business and engineering students from Poland, Czech Republic and Hungary showed that almost two-third of the respondents said that they wanted their boss to be receptive to their ideas; 37 per cent wanted a manager who had a strong industry experience; and 34 per cent wanted a good rational decision maker as a boss. This shows that HRM is becoming more of a two-way street: both employees and employers need to adapt continuously to emerging demands. 


Country risk analysis
This analysis measuring the changes of a firm getting hit by financial, strategic or personall losses, due to a non market event, which is caused by FDI
PEST Framework
Used to identify en map out the political, economical, social and technological
conditions in the market of a certain country
Political risk is the probability that political forces will negatively affect a company’s profit or interfere with the attainability of other business objectives. The study of political risk aims at changes in the environment that are difficult to stay ahead of.
Most people think that political risk is limited to Third World countries and countries with an unstable government. However, political risk is also an issue for companies doing business in highly industrialized nations. For example, France had a policy toward limiting Japanese investment.
Further, there are cultural barriers that create or increase political risk. In Japan there is a value system which discourages to buy from foreign producers. Many MNEs have difficulties to crack the Japanese market because of this system.
Political risk is and will remain an area of concern for US MNEs because they operate in so many international markets. In dealing with this, negotiations can help to reduce problem areas.
Political risk consists of macro- and micro factors. MNEs will first investigate macro factors and then determine how the micro factors influence the risk.
A macro political risk is one that affects all foreign enterprises in the same manner. An example of macro political risk is expropriation, the confiscation of a private business by the government with little or no compensation for the owner. Expropriation was a carried out a lot in communist countries like Eastern Europe and China after World War 2 and in Cuba from 1958 to 1959. Both large and small firms felt the impact of this governmental decision.
Political boycotts can also result in macro political risk. Further indigenization laws, which require that nationals hold a majority interest in all companies, can have macro political risk as a result.
In recent years the macro political risk has changed in many nations. Former
communist countries do now encourage private investments and China joined the World Trade Organization in 2001. These developments have reduced macro political risk but, it still needs to be considered.
Micro political risk affects certain sectors of the economy or specific foreign
businesses. These risks typically come from government action in the form of industry regulation and taxes on specific business activity. For example, the US decided to put a tax on textile imports.
The degree of micro political risk is determined by a number of factors:

  • Dominance of foreign firms: Japanese car manufacturing facilities in the US are a large part of the US market and are therefore tightly watched.
  • The ease with which MNEs operations can be managed: if special skills are required, there is a small risk of takeover.
  • Retaliation: if an MNE cannot strike back, the risk increases.
  • Changing priorities of a country: if a government encourages investment in particular industries, those have low political risk.
  • Competing political philosophies: In the Russian Commonwealth are some different political beliefs (communism vs. ideology). So there are different rules applied to different industries in different locales, depending on which group has the most political influence.

There are a number of motivations that explain political risk.  A major source is the change in the political philosophy of the country’s government. This can be a result of one government being driven by another or a change in government action. But also, a change in government philosophy toward foreign investments can have an impact. For MNEs dominates a major challenge to identify these motivations and then decide how to deal with them.
There are a number of strategies used in managing political risk. A typical approach is to first forecast the risk and then reduce or eliminate those that are considered unacceptable.
There are many differences in dealing with risk. For example, there is the choice
between formal or informal procedures. Some companies use an ad hoc group to deal with these issues while others have a standing committee that is charged with the responsibility. 
However in each case, the assessment is focused on two things:

  1. The political system where the company will be doing business in.
  2. The operations to be carried out and the goods to be produced.

The MNE will determine how vulnerable it is to risk based in this evaluation. 
It is important for the MNE to know the host country’s political system because this influences economy and political risk. This explains why MNEs are careful with their investments in countries like Russia and China; there is a chance that the political climate will change and this will result in major financial losses for the MNE.
MNEs are also critical about governments that give preferential treatment to home country companies. MNEs have become more involved in lobbying both home and host governments. This resulted in free trade agreements with the US, Mexico and Canada.
Other forms of governmental action have also proved useful. For example, the US role in the Gulf War positively influenced the sales of US goods in Kuwait and Saudi Arabia.
Operations and products also face political risk. Some countries have government restrictions on local ownership. When the government requires joint ventures or local participation in operations the MNE must determine the amount of risk that comes with doing business under these conditions.
A related risk is that the joint partner will steal product knowledge or technology. For example, copyrights are not legally enforceable in China and many MNEs in the US do no longer enter into joint ventures because of this.
Some governments encourage buying only local-made products and for MNEs that are operating in this country their risk grow substantially.
In some countries collusions and forming cartels is legal. In the US this is illegal and there are antitrust laws that encourage competition. In recent years the US government has put pressure on countries like Japan to prohibit price fixing and other practices which hinder countries like the US to crack the market. 
This has resulted in new trade laws and some of the changes that have been
introduced are:

  • Companies are forbidden to fix prices.
  • Firms cannot cooperate to boycott firms trying to enter the market.
  • Dominant firms are not allowed to use their influence to force clients to  avoid competitive goods.
  • The Japanese Fair trade Commission can order a firm to sell its stock holdings in another firm, if it thinks that such action is necessary to eliminate violation of the Antimonopoly Act.

After evaluation of the political system, the company will try to express this risk in scores. The higher the total score, the more likely the MNE is to drop that country from consideration, unless there are ways to reduce the scores of some criteria. Through negotiations and deals it is sometimes possible to lower the political risk. Especially when a government is very interested in the MNE setting up operations there, the government may offer special treatment to the particular MNE which it will not offer to other companies and herewith reduces the MNEs political risk. 
There are two important steps in developing effective negotiating techniques. The first step is the evaluation of the MNEs own position and that of the other party in order to see how both interests can fit together. The second step is examination of the behavioral characteristics of the other party in order to discover their negotiation style.
An MNE can enter negotiations with a host country in order to ensure a number of guarantees like low taxes and the right to repatriate profits. Other times the negotiation will be in the direction of a potential partner, such as working out the terms of a joint venture. And there is yet another time when MNEs negotiate with a host of parties. In all these cases it is important to assess the strengths and need of all parties.
The strengths of a party are the assets and benefits that one brings to the negotiating table. An MNE could have strengths like technology, products, services, managerial expertise and capital.
A country will have strengths like political stability, sources of capital, tax breaks and an appropriate labor force. For example, the US offers all these strengths to MNEs and therefore the MNE in question will have a diminished bargaining position.
The bargaining strengths of an MNE will depend on their specific contributions. A local partner, who knows the market, has capital, a well-trained workforce and retail outlets for moving goods to the customer can be very valuable to an MNE.
A negotiation is also influenced by the needs of both parties. The host country can have a need for the technology or product that the MNE is planning to produce in that country. Moreover, as a result of these operations, exports may increase and the economy will benefit from this. Stakeholders of an MNE can also influence the negotiation.
After the strengths and needs of both parties are defined, the MNE will investigate the negotiating behaviors of the parties. When it knows how the other party negotiates, it minimizes surprises for the MNE.
The objective of a negotiation is universal (strike a deal which is as good as possible), but the way in how people negotiate is influenced by norms and values.
One of the major differences is the amount of authority the negotiator has to approve an agreement. In countries like the US and Great Britain, negotiators have the authority to make agreements on the basic arrangement. On the other hand, Japanese and Russian negotiators are often not authorized to approve agreements.
The negotiating style of the parties can also be very different. US businesspeople tend to be very practical and focus on short-term results. Businesspeople from the Far East tend to move more slowly and are focused on long-term goals.
Social customs also play an important role in negotiations. In some parts of the world it is a custom to give presents to those with whom they are doing business. To many western business people this seems awkward, which considered to be bad manners by the other party. Language is also an obstacle in negotiations. When people or documents need to be translated this asks for misinterpretations.
Written documents are used differently between cultures too. US MNEs want an
agreement to be on a detailed written document where everything is spelled out clearly while other countries just use a general more open-ended agreement and the parties then negotiate the implementation.
Three areas are important when negotiating an agreement:

  1. Acceptance zones.
  2. Renegotiation.
  3. General negotiating behavior.

An acceptance zone is an area within which a party is willing to have negotiations. It usually has to do with money, the minimum amount an MNE is willing to pay, the maximum amount the MNE is willing to pay and the amount with which they start bidding. Conversely, the other party also has an acceptance zone, but than in the terms of the amount they want to receive. 
If the acceptance zones of two parties overlap, there is common ground for negotiation. However, it is important to know that when the zones do not overlap there still can be made a proper agreement. After listening to the other party, the parties may decide to change their respective bids and adjust the acceptance zones.
When an agreement is made after negotiation the final price will never be lower than the seller’s minimum price or higher than the buyer’s maximum price.
After the negotiation an agreement is made, but this does not have to be a final
agreement. Many contracts that last longer than a year are open for renegotiations and at the end of the contract a new settlement will be made. 
An MNE must remember that when the other side feels that it gave up more than it should have the next negotiation will be tougher and the MNE should expect
During the negotiation there will be many tactics and behaviors used to gain as much as possible from the negotiation. In some countries it is common to get to know the other party before the negotiation. This is usually done over lunch, dinner or reception. Realize that already before business has to be mentioned, the work of conducting a successful negotiation has already begun.
Another common tactic is the time limit of the other party. When that party needs to build a factory in 90 days, the other party can use this information and postpone the meeting until the end of this time period. Then the party that postponed the meeting can ask for a price that is on the high side of the other party’s acceptance zone.
Another tactic used is reciprocity, which is done by Arab and US negotiators. They tend to reciprocate by trading favors. If one party gives away on an issue, the other will do the same. When the negotiator knows how likely the reciprocity is going to happen, it has a better bargaining position. This tactic is not used by all cultures. Brazilians tend to make initial concessions but then they hold their ground.
Extreme offers are another widely used tactic which is very popular with Chinese, Arabians and Russians. It is the concept of when a price of 10 million is offered, the other party asks for an outrageously higher price, let’s say 90 million. Most of the time the party gets a much more favorable bid when using extreme offers.
Non-verbal behavior is also used as a tactic in negotiations. Silent periods and facial gazing can be very effective in negotiations. Other common tactics include threats, promises, rewards, commitments and self-disclosure.
Companies take a lot of steps to ensure that their strategies can handle unexpected developments. They use two steps:
1.  Integrative and protective/ defensive techniques
2.  Joint ventures and partnerships
MNEs employ many tricks to reduce their political risk.  Some are known as
integrative techniques, which are strategies designed to help a company becoming a part of the host country’s infrastructure. The goal of this technique is to help the MNE blend into the environment and to become less noticeable as a foreign firm. One of the simplest way to do this is to use a name which is not identified with an overseas company.
Another commonly used integrative technique is to develop good relations with the host country and other political groups. In turn, the MNE will hire and promote local personnel and use them in their operations. This strategy puts the company in a safe position when the government takes any action against foreign firms.
Protective and defensive techniques are strategies that are designed to discourage a host country from interfering in the operations of an MNE. These techniques try to achieve the exact opposite of what integrative techniques try to reach; it fosters non-integration of the MNE into the local environment. 
There are different kinds of protective/defensive techniques, namely:

  • Conduct R&D at another locale and import this knowledge when needed.
  • Only use local personnel in operations that are not vital to the continuity of the facility.
  • Raise as much capital as possible from the host country and local banks.
  • Diversify production among different countries.

A low-technology production firm would use the protective/defensive technique through raising capital locally. As a result, the firm will integrate into the country and act like a local firm.
An international air carrier will use an integrative strategy by setting up local operations and using local staff. The airline will bring in a lot of people into the country but at the same time has only a few planes in that country. Further, the headquarters will not be located in that country. So if the country seizes the aircraft or increases taxes, the airline will be well-positioned.
A high-technology R&D firm does not want to become integrated in the host country and will therefore make little to no use of integrative techniques. If the company needs local employees it will try to keep them loyal to the company and not to the country. In this case, the loss will be minimized when there is an attempt to seize the firm’s R&D facilities.
An oil producing and refinery company will make strong use of both techniques. The MNE must have a good relationship with the host country because it is tapping its natural resources. There will probably be a lot of local personnel for routine jobs. The firm will also try to make as much revenue as possible because the government will not interfere with a company that produces high revenues in its country. At the same  time, the high-skilled jobs will not be performed by local workers, so that if the company is taken over, the local workers do not know how to operate the machines. 
Another way through which MNEs deal with political risk is by setting up joint ventures and partnerships. However, problems can arise if there is trouble between the partners. 
Therefore, MNEs use two strategic factors when deciding on a joint venture or
ownership arrangement:
1.  Compatibility of firm-specific advantages
2.  Safeguards against unethical behavior
Firm specific advantages (FSAs) are strengths that are specific to a firm and are
brought to the joint venture or arrangement of ownership. However, it can happen that one party takes advantage of the other, what will happen than? Many MNEs believe that if a joint venture is not working well, the government will take the side of the local company, so MNEs protect themselves from the start to prevent this from happening. For example, if the local company steals the technology and starts producing it under a different name the MNE will take revenge by finding another local partner and try to drive the initial partner out of business. 
IF the local partner uses venture capital for purposes other than discussed with the MNE, the MNE will simply put no longer money in the project.
In each case, the MNE has the change to take revenge and the local partner knows this, so is unlikely to act unethical.


International Financial management contains a number of areas:

  • Management of global cash flows
  • Foreign exchange risk management
  • Capital expenditure analysis
  • Capital budgeting

These areas are all related and a decision in one area can greatly affect the other. The goal of international financial management is to help all geographic locations to limit financial losses trough the use of the above areas. The responsibility for these areas is spread over the total organization and to be sure that every subsidiary knows what to do, financial management planning begins with a determination of parent-subsidiary relationships. 
Finance is a very important area of operations and therefore it is important to establish how the subsidiaries should be planned and controlled. One the one hand, each subsidiary should be responsible for its own planning and control, but on the other hand, there should be centralized control to ensure profitability and efficiency. 
There are three solutions in addressing this:

  1. Polycentric
  2. Ethnocentric
  3. Geocentric

The polycentric solution decentralizes decision making to the subsidiary levels and makes the MNE a kind of holding company. Decisions are made on the spot by those who have the most knowledge about market conditions and subsidiaries tend to be more flexible, motivated efficient and competitive. On the other hand, authority of the home office is reduced and the competitive attitude works as a disadvantage for the MNE; different international subsidiaries compete with each other and this result in lower overall profits for the company.
The ethnocentric solution treats all subsidiaries as extensions of domestic
operations. Management can coordinate all operations carefully. The disadvantage of this solution is that it can cause problems for the individual subsidiaries; they can feel hindered by the parent company.
The geocentric solution handles controlling decisions and financial planning on a global basis. The nature and location of the subsidiary influences controlling decisions. A second factor of influence is the gains that can be achieved by coordinating all units in a similar way.
Careful handling of global cash flows is of high importance when managing
international finances. This can be obtained through many ways, but there of the most important are:

  • Prudent use of internal cash flow
  • Use of funds positioning
  • Use of multilateral netting

Working capital is the difference between current assets and current liabilities and is used by MNEs when they need money from internal sources to expand operations or fund activities. Another way to raise internal money is by borrowing from  a local bank or the parent company. Yet another way is by having the parent company increase its capital investment in the subsidiary. The method which is most likely to be used depends on a number of factors such as government regulations regarding lending within the company. For example, when tax rates are high for a profitable subsidiary, it will lend money at low interest rates to other less profitable subsidiaries in the MNE. The logic behind this is that the profitable subsidiary does not need high interest rates, because the government will tax away most of it, and the less profitable subsidiary can
use the low interest well as to save that money for expansion. MNEs can take a lot of advantage from this lending method, but in recent years many governments have set a minimum rate that can be charged on loans within the company.
Governments have also limited the ability of a parent company to charge its
subsidiaries a licensing or royalty fee for using technology. If there were no government restrictions the MNE had more freedom in collecting funds from overseas operations and providing the MNE with a sufficient amount of money which could be distributed throughout all overseas units.
Funds positioning techniques are used to move money from one multinational
operation to another. The three most common approaches are discussed:

  • Transfer pricing
  • Tax havens
  • Fronting loans

A transfer price is the price set by an MNE at which one unit will sell a product to
another unit. A transfer price is not the same price at which a unit sells a product to the customer, but neither is it a discount price because it is an intra-firm trade. A transfer price will be determined by local regulations and will be set at an amount that is most convenient for the MNE (most profitable, cost reducing, or moving money among different subsidiaries).
An arm’s length price is the amount of money a buyer would pay for a product in a market with perfect competition. MNEs never use this kind of pricing for their units. Their objective is to maximize profits in a low tax rate country and to minimize them in a high tax rate country. By using transfer pricing, the MNE can reduce taxes. Further, the firm can concentrate their cash in a specific country. A problem with transfer pricing is that it does not correctly reflect the performance of a unit because the profit margins are manipulated. Further, this strategy discourages efficient performance by the seller because it can not sell its products with the highest possible profit margin. In recent years, countries are trying to make transfer pricing impossible by adapting their tax codes. MNEs pricing policies are first viewed by several agencies before they can be adopted. The objective is that MNEs charge the same price to their overseas units as they charge to independent third parties.
Another funds positioning technique is using tax havens, which are countries with low tax rates that are welcoming to business. This strategy is used in combination with transfer pricing: a subsidiary sells its output at a low price to a tax haven country, which sells the output at a very high price to a third subsidiary. 
A fronting loan involves a third party that manages the loan. For example, a US firm that sets up operations in China might be worried about political risk (discussed in previous chapter). To protect their investments, the parent company could deposit its funds with a major international bank that has a good relationship China and its government. In turn, the subsidiary would apply for a loan with this bank. Now it is very unlikely that the Chinese government will seizure this loan because it will endanger the relationship with the international bank, so the MNE has positioned its loans safely.
When subsidiaries do business with each other, unit A may owe money to unit B and unit B may owe money to unit A. Eventually this will be solved between the units, but to help quicken the process, clearing accounts have been set up at every location and every manager at each location is responsible to make the transfers to the needed units. This process is called multilateral netting and is the determination of the amount owed to other subsidies through multilateral transactions. After this is determined, the money is sent to a clearing account from which all units are paid.
Multilateral netting has become popular for a number of reasons:

  • Ensures the parent company that financial transactions between the subsidiaries are quickly completed.
  • Units that need to receive money have faster access to their funds.
  • Parent companies can see which units are storing up money and can tap these sources to put money in other locales.
  • Because there is made use of one clearing account, the costs of foreign exchange are minimized.

There are also some problems with multilateral netting:

  • Many governments control these operations by only allowing multilateral netting for trade transactions
  • Governments can slow down the netting process by delaying the payment for imports until goods clear customs.

Netting cannot resolve the fluctuating value of international currencies, which is of particular importance when MNEs do business with buyers who are paying in weak currencies. Therefore, MNEs often formulate a foreign exchange risk management strategy in addressing this problem.
There are a number of ways through which MNEs try to manage their foreign exchange risk. A number of areas ask for special attention when this is done:

  • Inflation
  • Types of exposure that exchange rates create
  • Hedging strategies that can minimize risk
  • Types of forecasting and reporting systems that must be developed to plan and control company response.

Every nation faces inflation. An advantage of inflation is that it can make financial liabilities attractive and it encourages buyers to purchase now while prices are lower. A disadvantage of inflation is that it affects interest rates by driving up the cost of loans and it affects the value of the local currency in the international marketplace. 
When an MNE does business in a country with rapid inflation, there are a number of strategies which it can use:

  • Rapid depreciation of fixed equipment.
  • Slower payments to sellers who are taking payment in local currency.
  • More attention to collecting current receivables, because the currency is losing value each month.
  • Holding a minimum amount of local currency, transfer the rest into more stable currencies.
  • Look for other sources of capital, local borrowers will increase interest rates to protect their ROI.

The most common forms how MNEs reduce their exposure to exchange rate
fluctuations are:

  • Translation
  • Transaction
  • Economic

Translation is the process of rephrasing foreign financial statements in the currency of the parent company. In addition, the MNE will combine the major financial statements of subsidiaries into composite statements for the parent firm, a process known as consolidation. 
Translation exposure is the foreign exchange risk that a company faces when it
rephrases foreign currency financial statements into the currency of country of the parent company. A good example of this exposure for a US MNE is when the currency of a local country weakens in relation to the dollar. This decline would negatively affect the subsidiary’s ability to buy imports from other countries with strong currencies, because it would take more of its own currency to purchase these products.
Transaction exposure is the risk the firm takes when paying bills or collecting
receivables when it knows that exchange rates are likely to change. This exposure is on both part of the seller and the buyer in international sales.
Economic exposure is the foreign exchange risk involved in pricing products or
locating investments in order to stay competitive. For example, if the yen increases value against the dollar, should a US firm that sells to Japan lower its price? The fluctuating yen/ dollar relationship creates a risk for the US firm.
Another example of economic exposure is when an MNE sells to a country with a
weakening currency. Most MNEs make their production more efficient, lower costs and continue to gain acceptable profit.
A hedge is a form of insurance that helps to minimize the risk of loss against an
unfavorable movement of an exchange rate. Most common forms of hedging are:

  • Operating financial strategies
  • Forward exchange contracts
  • Currency options

Operating financial strategies are designed to keep the effect of exchange rates on the local unit’s profitability to a minimum. In order to protect cash flows, there are two strategies designed, a lead and a lag strategy. A lead strategy calls for paying foreign currency payables before they are due if the currency is expected to rise in value and collecting foreign currency receivables before they are due if the currency is expected to lower in value. A lag strategy calls for delaying the receipt of foreign currency payment if this foreign currency is expected to rise in value and delaying foreign currency payables when the local currency is expected to lower in value.
Some MNEs use the following rule in addition to these strategies: make purchases in a weak currency and sales in a strong currency.
Sometimes debt strategies are used but they find a few drawbacks. During periods of inflation it is very expensive to borrow locally. Similar, the use of a weak local currency reduces the firm’s ability to buy from countries with a strong currency.
A forward exchange contract is a legally binding agreement between a company and a bank that states a delivery of foreign currency at a specific exchange rate on a predetermined date in the future. A positive side of this contract is that it provides safety against the decline of the buyer’s currency. On the other side, these contracts can become costly sometimes.
A currency option is like a forward exchange contract, except the buyer does not
have to exercise the option, he has the right to buy or sell a specific amount of a
foreign currency at a predetermined rate within a certain time period. The price of an option is 25,000 dollars and many firms feel that this is a reasonable price to ensure them that they will not suffer from a declining foreign currency.
Foreign exchange risk management can become very complex, especially when an MNE needs to decide on 20 subsidiaries. In creating the necessary system for
managing these decisions there are a number of steps the MNE can take:

  • Decide the type and degree of economic exposure that the MNE is willing to accept.
  • Develop the necessary competence for monitoring exchange rates and for forecasting those rates that are applicable to the identified exposures.
  • Make a reporting system that identifies the exposed accounts, measures the exposure; give feedback on the firm’s actions and the status of these decisions.
  • Include all subsidiaries in this reporting system so that each is aware of the exposure and knows what to do against it.
  • Keep senior-level management fully informed of all levels of responsibility so that every manager is able to revise the exposure risk and to adapt the strategy so that this risk can be handled more effectively. 

Capital expenditure analysis and capital budgeting are other financial areas that
receive attention. Capital expenditures are huge projects in which the costs need to be allocated over a number of years. Major acquisitions, building new plants and refurbishing existing equipment are examples of capital expenditures. Most of the time, mathematical techniques are used with the analysis including discounted cash flow techniques such as net present value (NPV) and the internal rate of return. Basic techniques like payback period and accounting rate of return are also used.
In case of an MNE, it should be decided who will conduct the analysis, the parent or the foreign unit. Mostly, the initial analysis is done by the subsidiary and then passed to the parent who modifies and approves the analysis. There might be two subsidiaries wanting to build a new plant and serve the same market. In this case they would be competitors and this is not favorable for the entire MNE. Therefore the parent company decides which unit has the highest NPV; only this subsidiary may carry out its plan.
There are differences between how a parent unit will decide on the impact of political risk and how a subsidiary will decide on this impact. The basic NPV criterion is used to review why these differences occur.
The NPV equation is: NPV= ∑ It+Ct / (1+KA)t
Where: KA= ke(S/V) + kd(1-tx)(D/V)
Definitions of the terms:
It= investment cash outlays in year t
Ct= cash inflows in year t
T= terminal date or end of project
KA= weighted average cost of capital
ke= cost of equity capital
kd= cost of debt financing
tx= tax rate
D/V, S/V= debt and equity ratios, respectively
NPV= incremental net present value for the project
The discount rate KA, investment cost and annual cash flows can result in
disagreement between the parent and the subsidiary. Political risk can also have effect on all values. A subsidiary is not concerned with the problem of foreign exchange controls in a direct way and it will discount all cash flows that are incremental from its own perspective. 
In the same way, political risk can cause the parent to increase the discount rate or required return to reflect that risk. However, if the subsidiary does not agree with this view, it will not increase the discount rate so its NPV will be higher. If foreign exchange controls are enforced the local capital markets can be cut off from the international capital market. The subsidiary might then think to lower local real interest rates, which make local investments seem attractive. However, the parent company might think more global and withdraw capital from that country to invest elsewhere.
Parent and local NPV’s can also differ because there is wrong application of the NPV framework. The most mistakes are made in choosing tx and KA. The subsidiary views the tax rate as an extra tax that it pays locally. The parent company however must also consider an extra tax after dividends are remitted.
Several problems come up when the discount rate KA is determined. It is logical that discount rates differs a few percentage points, after all inflation differs across different countries and thus the inflationary premium in the discount rate will differ. A company must calculate the real discount rate and then “gross it up” for the inflationary expectations of the relevant country.
Debt ratios may also differ between subsidiaries and the weights in the KA equation may alter the cost of capital. It is wrong to use the local real cost of debt to determine the cost of capital. If an MNE uses local debt norms and costs it doesn’t use its advantage of being a multinational. The advantage is the ability to raise debt internally where it is the cheapest. So, local debt norms and interest costs will be ignored unless government regulations restrict the use of debt funds to projects within that nation.
So, the financing options to a multinational are greater than those of a domestic firm. The MNE has the ability to raise funds where the cost is the cheapest. This results in lower overall cost.
Accept from technical evaluation, there are two institutional factors that ask for
·  Government subsidies and controls
·  Political risk insurance
Governments have influence on the profitability of a project or its financing. For
example, Canada and Australia have foreign investment review agencies that
review investments to ensure that they benefit the local economy. The result of many local content regulations is to seizure all the advantages possessed by the MNE. One of the problems with this is local ownership requirements. The parent’s viewpoint is to maximize market value, which is owned by shareholders in the home country. 

Only, when joint ventures are traded locally this solution breaks down, the problem becomes: whose market value should be maximized. The result is that minority ownership reduces political risk of expropriation and this reduces the freedom of action for the MNE. Therefore it should not come as a surprise that when political risk is lowered, minority shareholders get bought out.
However, government regulation is not always bad. The interference of most
governments creates opportunities for an MNE. For example, the British Export
Credits Guarantee Department (ECGD) is a governmental agency that lends money for export financing of British equipment and has some of the lowest costs in exporting finances as long as the borrower uses British equipment. By structuring an investment to use British equipment, an MNE can borrow money at a 3 percent discount rate instead of the market rate of 9 percent. 
Political risk insurance is in most countries available for exports and foreign direct investment. In the US the Overseas Private Investment Corporation (OPIC) was established to provide insurance for US foreign investment against expropriation, blocked funds, revolution, insurrection and war.
With political risk insurance the firm has to decide the incremental value of this
insurance. This is done by thinking of how the MNE can restructure foreign investment such as by fronting loans, or long-term contracts at high transfer prices as alternatives to political risk insurance. The final decision will reflect the best structuring of the proposal under analysis.
The international financial concepts can be applied by MNEs in a number of ways. One way is by employing a geocentric approach. Another approach is the manner in which financial analysis is used in choosing locations for overseas operations.
Because the US is a large market for international firms, many foreign companies have been worried about the value of the US dollar. This resulted in foreign firms setting up operations in the US in order to offset the competitive impact associated with having a currency which is strong against the US dollar.
At the same time US firms are moving abroad, especially because many Asian
currencies are declining and many purchase prices have fallen. Further, not only the US and European firms are going abroad, also Pacific-based MNEs try to start up operations overseas, by using direct investment and joint ventures to help open markets in Europe and the US. 
There are also other tactics useful in reducing risk like alliances and cost-cutting techniques.
Many MNEs have been joining together to share costs of high-tech projects. This sharing involves R&D expenses and also the costs of manufacturing and selling the finished products. Examples include Microsoft and Sony, and GM and Isuzu.
Cutting-costs and investing in new plant and equipment is another key financial
strategy. The latter is critical to the success of an MNE during the millennium.
Especially Japan has troubles because many car manufacturers have difficulties with finding personnel. 
Many employees refer to the three K’s: kiken (dangerous), kitsui (difficult) and kitanai (dirty). Young people prefer office jobs that do not make them exhausted at the end of the day.
Trying to deal with this problem, Nissan has built a new factory that will be far less stressful to employees. For example, they have replaced the traditional conveyor belt with motor-driven dollies. And instead of poor lights, the factory is brightly lit with natural filtered sunlight. Further, the plant is air conditioned and there has been made a great use of robots to do the dirty work and perform difficult tasks.
Other Japanese manufacturers like Honda and Toyota have also adopted a cost-cutting approach. They reduced cost while at the same time increasing the quality of their cars. This “more value for your money” concept has been of a great influence in increasing US market share and profitability.


Some MNEs have relied on their home market to generate R&D, design and production that is needed to sell their goods in foreign markets. However, many firms are finding out that they should focus on those foreign markets and on strategies to gain sales entry.
Further, many small countries realize that they should adopt export strategies to ensure the growth of their economies. Countries like Canada and Mexico have been able to tap into the triad market. They found the US a profitable market for exports and imports.
The strategy that these MNEs are following can be linked to the Porter model, although some modifications are in order. First, his ideas are examined in more detail in order to understand them better, and then it’s determined how his findings are applied to triad countries. After that, it will be determined how his ideas can be modified and applied to non triad countries.
Porter’s diamond model is based on four country- specific determinants and two
external variables. 
The four specific determinants include:

  1. Factor conditions.
  2. Demand conditions.
  3. Related and supporting industries.
  4. Firm strategy, structure and rivalry.

Factor conditions consist of:

  • Personnel quantity, skills and costs.
  • The quantity, quality, accessibility and cost of the nation’s physical resources (land, water timer, fishing grounds, etc.).
  • Stock of knowledge resources including scientific, technical and market knowledge that affect the quality and quantity of products/services.
  • The amount and cost of capital resources that is available to finance industry.
  • The cost, type and quality of infrastructure (like the transportation system, communication system and health-care system).

Demand conditions consist of:

  • The composition of demand in the home market and how well the needs of buyers in the home market precede those of buyers in other markets.
  • The size and growth rate of home demand.
  • The ways of internationalization of domestic demand.

Related and supporting industries include:

  • Presence of internationally competitive supplier industries that create advantages in industries which are further down the supply chain through efficient, early or rapid access to cost-effective inputs.
  • Internationally competitive related industries that can coordinate and share activities in the value chain when competing or those that involve complementary products.

Firm strategy, structure and rivalry include:

  • The ways in which firms are managed and choose to compete.
  • The goals that companies seek to attain as well as the motivation of personnel.
  • The amount of rivalry at the home country and the creation and persistence of competitive advantage in the respective industry.

There are also two external variables which play an important role:

  • The role of chance.
  • The role of government.

Chance can invalid the advantages of some competitors and can bring a shift in overall competitive position because of developments as:

  • New inventions.
  • Political decisions of foreign governments.
  • Wars.
  • Shifts in world financial markets and exchange rates.
  • Interruption in input costs such as oil shocks. 
  • Fluctuation in world or regional demand.
  • Major technological innovations

The government can influence all four determinants by:

  • Subsidies.
  • Education policies.
  • (De)regulation of capital markets.
  • Establishment of local product standards and regulations.
  • Purchase of products/services.
  • Tax laws.
  • Antitrust regulation.

Each of the four determinants has effect on the others and all determinants are
affected by the two external variables, role of chance and government.
However, this diamond model has found some critique. First, the Porter model was constructed based on statistical data on export shares for 10 countries. 
It is however highly unlikely that this model can be applied to other countries without modification because most countries do not have the same economic strengthor affluence as those 10 studied by Porter.
Second, the government can highly influence a home nation’s competitive advantage. Actions like tariffs or subsidies can be well intentioned but they can backfire and create a domestic industry that is unable to compete on a worldwide basis.  
Third, chance is a critical factor of influence, but is extremely difficult to predict and guard against.
Fourth, Porter’s model must be applied to company-specific considerations and not in terms of national advantage; of course, companies, not countries compete in international markets.
Fifth, Porter outlines four stages of national competitive development: factor-driven, investment-driven, innovation-driven and wealth-driven. In the factor-driven stage successful industries get advantage from the basic factors of production. Although industries are successful internationally, they compete primarily on price. In the investment-driven stage firms invest in modern facilities and work to improve these investments through modification and alteration. In the wealth-driven stage firms begin to lose their competitive advantage, rivalry declines and the motivation to interest lowers. Every country can be placed in a stage of competitive development. This has a great influence on the country’s competitive response so the placement of countries is critical. Also the logic that countries move from one stage to another is important to
Sixth, Porter contends that only outward FDI is of value in creating competitive
advantage and inbound foreign investment is never the solution to a country’s
competitive problems. This has been rejected and Rugman has found that the 20
largest US subsidiaries in Canada have as much export as import. 
Seventh, Porter views that the reliance on natural resources (the factor-driven stage) as insufficient to create worldwide competitive stature. However, Canada has a few mega firms that have turned the country’s comparative advantage in natural resources into firm-specific advantages which are sustainable.
Eighth, the role of MNEs is not adequately addressed by the Porter model.
Researchers such as Dunning have suggested including multinational activity as a third outside variable. There is a good reason to doubt whether MNE activity is covered in the “firm, strategy, structure and rivalry” determinant. 
One conclusion is indisputable in applying Porter’s framework to international business: different countries ask for different diamond constructions and analysis.
Porter’s diamond has been used as a basis for analyzing the international
competitiveness of smaller countries. First, it will be applied to Canada.
In Canadian industrial policy, two themes have recurred: export promotion for
industries in natural resources and substitution for import in the domestic arena. The Canadian market has always been too small to develop economies of scale. Hence, Canadian firms have developed large-scale resource businesses that are designed to exploit natural Canadian resources. The US government as well as the Canadian has encouraged export strategies by eliminating tariffs (US) and establishing low taxes on resources extraction, subsidizing the costs of capital and low interest loans (Canada).
Canada’s goal had been to use tariffs and non-tariff measures to protect the
development of the secondary industry. Under this approach the arrangement Canada was very inwardly focused. It relied solely on its natural resources as the base of creating wealth. 
By the 1960’s it became clear that Canada needed a more international focus. The Canada-United States Pact demonstrated that tariffs on trade between the two countries on autos and parts had to be eliminated. In this process Canadian plants gained economies of scale because they were serving North America in stead of just the Canadian market. As a result, there became a development of a Canadian US “double diamond”. This double diamond shows that the two countries are now integrated for strategy purposes into a single market.
Canadian firms have to compete with US firms now. In order, to survive this
competition they have developed highly competitive capabilities. They can no longer depend on their home country diamond and managers need a “double diamond perspective” for their strategic decisions. This double diamond is also relevant for other small, open countries.
The Free Trade Agreement has also put pressures on the Canadian subsidiaries of US MNEs. Many of them were designed to overcome Canadian tariff barriers. Now there are unnecessary and many of them are in competition with their US based parent.
At the same time major Canadian companies are working to develop a competitive position on the US and in the rest of the world. Other big companies in Canada are following and operate from a North American perspective in order to become globally competitive in a later stage. This includes viewing Canada and the US as home-based markets and integrating the use of both “diamonds” for development and implementation of strategy. This requires:

  • Developing new products that meet the demands of the US customer and Canadian customer at the same time, acknowledging that tight relationships with demanding US customers should set the style and pace of product development.
  • Drawing on support industries and infrastructure of the US as well as Canadian diamonds, realizing that the first (US) diamond is more likely to have more efficient markets.
  • Making free and full use of the resources of both countries (human and physical).

The best thing about the double diamond is that firms and governments are forced to think about strategy and public policy in a more productive way. It encourages managers from small countries to be outward looking and doing well in this double diamond is the first step toward global success.
Once a country is convinced of the advantages of the double diamond perspective it should first identify successful clusters within its borders and then investigate their linkages across the diamond. A strategic cluster is a network of firms and supporting activities within a specific region, where the leading firms compete on a global basis and supporting activities are based in the home country. A successful strategic cluster will have one or a couple of large MNEs at its center. It is not important if these are foreign- or home-owned, as long as they are globally competitive. The whole cluster
depends on these flagship MNEs. A vital component of the cluster is companies with related and supporting activities including both the private and public sector organizations. Further, they include think tanks, research groups and educational institutions.
Presently, there are several strategic clusters in Canada. There is an auto assembly and auto parts industry in Ontario and there are also strategic clusters based on banking and financial services in Toronto.
Many of the Canadian clusters are resource-based. The challenge for firms that are in these clusters is to keep adding value and to eliminate the commodity nature of Canada’s resource industries. This can be done by developing a global marketing strategy. Implementing such a strategy requires a large investment in people with strong marketing skills and the development of a global intelligence network.
In 1998 Canada is the fifth most competitive country in the world. Canada then faces the problem of raising its productivity levels; this has increased only half as fast as in the US.
Further research is needed to examine Canadian-based clusters and their competitive advantage compared with rival clusters in North America and around the world. This will require two types of work: First, the competition between firms in the same cluster in America needs its data adapted to the nature of foreign ownership and whether FDI is inbound or outbound. 
Last, the real sources of Canada’s competitive advantage are to be examined by not only statistical analysis, but also interviews with managers and fieldwork in the clusters. This research is very time consuming and expensive but the task can be made feasible by making self-audits and selecting only a few clusters for analysis. 
Porter’s diamond can also be adapted to examine strategies and international
competitiveness in Mexico. Their linkages to the US are quite different from Canada’s. One reason is that Mexico only has a few MNEs that have enough capital to invest in Canada and the US. Mexico’s strategy with North America lies more on trade than on outward FDI, while using inward FDI for boosting their internal development.
Mexico runs a negative trade balance with the world, but its balance with the US is positive. In fact, Mexico is the third largest trading partner of the US. 70 per cent of Mexico’s imports and exports are with the US. The next largest trading partner is Japan. 0,6 of Mexico’s exports goes to that country and 3.7 per cent of Mexico’s imports comes from Japan.
Mexico depends heavily on the US and is linking itself to the US diamond in a number of ways. One is by serving as a customer for outside goods. For example, the US firm Caterpillar is the main supplier of heavy road building equipment in Mexico. 
Simultaneously, Mexican firms are putting effort in expanding their links in the US market. In four years’ time their exports tripled. Many of these exports are automobiles. General Motors is one of the major producers of cars in Mexico. US firms also invest in other projects than the automotive. For hard-disk drives and textiles the US also goes to Mexico instead of Asia.
In 1965 the Mexican government established the maquiladora industry to attract
operations from foreign countries. Today, this industry is one of the country’s largest sources of hard currency earnings from exports, after oil. Most companies in the industry are US owned and although it has brought both countries major advantages, the Americans feel that the low wage rates in Mexico are causing companies to transfer work there and to fire personnel back home.
Though, it is expected that Canada and the US will keep investing in Mexico. In
contrast to Canada, which is trying to create Canadian owned MNEs that will compete worldwide, Mexico will rely on financial and technological investments from the US and Canada.
Not only Porter’s ideas should be addressed, the last decade it has become
increasingly important for firms to balance globalization (or economic integration) and national responsiveness. Globalization is the production and distribution of the similar kind of products/services on a worldwide basis. National responsiveness is the ability of MNEs to grasp different consumer tastes and to react on national standards and regulations imposed by the government and agencies.
The issues of economic integration and national responsiveness can be analyzed with the use of a matrix. The vertical axes measures the need for globalization (economic integration) and the horizontal axes measures the need to be nationally responsive. 
4 Situations are can be distinguished in this matrix. Quadrants 1 and 4 are the simplest cases. 
Quadrant 1 has a focus on economies of scale which leads to competitive strategies that are based on price competition. Mergers and acquisitions often occur in this environment.
Quadrant 4 is the exact opposite of quadrant 1. In this case niche companies adapt products to satisfy the high demand for sovereignty. Economies of scale are not important and therefore ignored.
Quadrants 2 and 3 are totally other situations. In the case of quadrant two, both
sovereignty and economies of scale are not important. This leads to strategies with an increased international standardization of products/services. 
In Quadrant 3 both sovereignty and economies of scale are very important. There is a strong need for integration in production and regional adaptations in marketing. It is the most challenging case and most successful transnational MNEs operate in this quadrant.

MNEs in every industry apply this matrix, but each does so on their own way. The following include examples from the entertainment, personal computer and automobile industry.
The Walt Disney Company is one of the most successful firms is in the entertainment industry. Disneyland Paris has national responsiveness and integration well-balanced. Many of the features in that park are also found in the other Disney parks throughout the world. The international emphasis that Disneyland Paris gives to each of its characters is an example of national responsiveness: Pinocchio is Italian, Cinderella is French and Peter Pan is British.  
Sega is another firm in the entertainment industry which is an example of integration/national responsiveness. Sega is known for its Sonic video game character and intends to develop an amusement park that will allow the company to compete with firms like Disney. It wants to use simulators that are uniform in design and character (integration), but the games can be adapted to each country (national responsiveness), depending on the entertainment interest of the local crowd.
Most PC manufacturing firms compete on technology and price. They offer state-of-the-art machines and cut their costs by outsourcing components and improving assembly
In recent years US firms have been making progress in the Japanese market by
entering the market with low-priced units that were the same as those sold in another country (integration) but at sharply lower prices (national responsiveness). Microsoft for example, has written a special software version for the Japanese market. In addition, the strengthening yen lets US PC vendors further undercut the prices of their Japanese competitors.
Every car manufacturer produces cars that can be sold around the world (integration), but in most cases the design, engineering and manufacturing is changed to the needs of different locales (national responsiveness). Ford Motors’ Mondeo provides a good example. This car has uniform engineering standards and identical production tools are used at both European and US locations so that economies of scale can be maximized. At the same time it considers national responsiveness; Europeans like manual transmissions and demand cars that handle well while Americans like automatic drive and do not necessarily have to drive easy-to-handle cars.
Honda is another example, this company bends and stretches designs to fit market demands. Therefore, cars built in the US are longer and roomier while the same car built in Japan can be smaller and more compact.
The trade-off between integration and national responsiveness is very important to MNEs. Successful ones know that they should also concentrate on national
responsiveness instead of just globalization.
Economic decision making in the US becomes more decentralized and states and
provinces get more importance. The problem arises when the institutional structure and businesses in the country cannot operate in an efficient way, relative to global competitors.
Today, the US government is responsive to interest groups and lobbies. Many groups like environmentalists and social activists have a growing power. Examples of conflicts in business lobbying occur in trade remedy laws and in inward FDI.
It has been found that US corporations use countervailing duty (CVD) and antidumping (AD) laws as a competitive strategy to set up entry barriers against rival firms. So, at the time the US government negotiated free trade with Canada, individual US corporations used CVD and AD laws to help restrict Canadian imports. This is an example of US national interests being offset by selective producer interests.
Another concern is inward FDI. Japanese FDI is growing and some Americans are
concerned with this trend. There is a clash between Washington, who wants the
Japanese FDI to be screened and reduced and the state-level activity who wants the Japanese FDI for the jobs and tax base. The same thing happened in Canada thirty years ago. So, it is seen that the private sector needs to respond to a large amount of economic nationalism and its associated protectionist inefficiencies. 
In 1989 there was a revolution in central Europe which resulted in the fall of the Soviet Union in 1991. Currently, the countries in central Europe are very poor and these nations will receive economic development probably through FDI rather than through joint ventures.  The reason that FDI will work better is that Western companies can control their proprietary advantages through FDI and do not want the risk of joint ventures. In Eastern Europe and third world countries economic efficiency is what matters and therefore their emphasis will be on globalization, not on national responsiveness.
The reason for the success of Japanese MNEs is that they benefit from a highly
centralized home market economy. They could follow globalization strategies because their cultural, religious, social and political system is much more centralized than in other triad blocs. A radical restructuring might be possible in Japan, but not In America or Europe because their economic power is much more decentralized.
Japanese will continue to use this globalization strategy, but they may find difficulties in the decentralized environments of the US and Europe because marketing skills will be much more important than production skills. If MNEs from Europe and North America can learn from their past mistakes in sovereignty they might have a potential advantage over Japanese MNEs. They could become more nationally responsive, while Japan becomes locked in a “globalization only” strategy just as the world demands more national responsiveness.


The European Union currently consists of 25 countries of which 12 use the euro as their currency.
The EU goes back to the formation of the European Economic Community (EEC) in the late 1950’s. It was founded by six members: France, West Germany (Germany was separated in East and West at that time, in 1989 the Berlin Wall fell and Germany was one country again), Italy, Belgium, the Netherlands and Luxembourg.  By the late 1990’s the EU had grown and included Austria, Finland, Great Britain, Ireland, Denmark, Greece, Spain, Sweden and Portugal. This was also known as EU-15. In may 2004, 10 countries entered the European Union: Estonia, Latvia, Lithuania, Czech Republic, Poland, Hungary, Slovakia, Slovenia, Cyprus and Malta.
The objectives of the EU are:
·  No customs duties among member states.
·  Elimination of obstacles to the free flow of import/ export of goods/services
among member states.
·  Establishment of common customs duties regarding countries outside the
·  Free movement of persons and capital within the bloc.
·  Acceptance of common agricultural policies, transport policies, technical
standards, health and safety regulations and educational degrees.
·  Common measures for consumer protection
·  Common laws to maintain competition throughout the union and to fight
monopolies and illegal cartels.
·  Regional funds to encourage economic development of certain regions.
·  Greater monetary and fiscal coordination among member states and certain
common monetary/fiscal policies.
In 1985, the EU adopted a White Paper which stated that by the end of 1992 a single unified European market should be achieved. Two years hereafter the Single European Act (SEA) was enacted. The Council of Ministers is one of the four major institutions of the EU. From every member state one minister will be part of the Council of Ministers and together they are responsible for making major policy decisions for the union. Previously, the votes had to be unanimous, but now most proposals pass with a majority of votes. Through this, the progress of economic and political integration among member countries became much faster. Will their eventually come a single European market (SEM)? This depends on the progress in the area of free movement of goods, changes in finance and banking, and the practice of government procurement.
From 1986, most customs duties between EU members have vanished. It was however possible for a country not to sell imported products because of technical, safety or other standards and regulations of that country. These country standards are phased out and substituted by common EU standards.
Administrative barriers are the refusal of food products because they contain additives and substitutes that are unhealthy for consumers. These barriers are also being replaced with common EU standards.
Fragmented local markets have been created by making use of differences in language between countries and by setting artificially high prices for goods. These differentials are being eliminated little by little with the growth of mail order houses, discount stores and e-commerce.
From 1990 there has been free movement of capital among members. There is also one equity market and stockbrokers can operate in every city within the EU. The combined capitalization of the EU is around 5 trillion; this is one-third of that of the US. This equity market has created tremendous opportunities like making it easier for companies to raise money by selling stock and giving investors more access to security issues. 
In 2002, the euro had officially replaced the local currencies. Some believe that it will challenge the dominance of the US dollar of international trade and finance. At least it has helped create new opportunities for EU businesses and foreign MNEs doing business in the EU.
EU government procurements are responsible for close to 11 per cent of the EU’s
GDP. Previously, governments awarded contracts to national firms, but with the
originating of the SEM and the Government Procurement Agreement (GPA) this is
diminishing. This resulted in greater efficiency, lower cost and a stronger economic common market. On the other hand, it should be realized that companies lose their business to other EU countries that can provide lower cost.
The EU helps Europe to compete better with the other triad members. However, there are some EU countries that are currently at a competitive disadvantage.
EU labor laws make it difficult to fire employees. US companies have much greater freedom in the lay off of personnel. This means that US employees need to stay productive in order to be certain of their job. Japanese firms treat their employees as a fixed cost and therefore see no use in firing employees. In  return, employees are grateful and willing to work hard for their companies. 
The EU used to have the highest compensation for production workers. The wage was 14 per cent higher than in the US and 15 per cent higher than in Japan. By 2000, they reversed this and had the lowest labor costs in the triad. Much of the decrease is because of a decline in the value of the euro against the dollar. But European firms were also able to negotiate better contracts with labor unions and to lobby the government successfully for more flexibility. 
EU countries were very behind with Investment spending. Rapid increases in wages in the 1980’s were not offset by increasing productivity so EU firms found themselves borrowing instead of investing. In the late 1980’s the EU government spending had risen to 50 percent of GDP (to a 30 per cent in the US and Japan). Therefore the taxes were raised, which limited funds and forced the interest rates to increase even more. Recently, government spending has been stabilized, but still there are many EU countries performing below the US level.
The educational system in the EU is not that good compared to the US and Japan. In the US a higher percentage of people attend college than in Europe or Japan. Further, the university curriculum in Europe is more theoretical than in either the US or Japan. Also, the European educational institutions are more rigid and less able to adapt to the needs of business. Therefore, European students are trained inappropriately for the European business and industry. This results in an extreme unemployment rate in the age group below 25.
So, the major challenge for Europe is to modify their educational systems so that
European students fit better in the business world. This is already partly done, by the introduction of a bachelor-master system in European universities. 
Generally speaking, the EU is weaker than Japan or the US and there is likely to be an increase in acquisition and mergers among EU firms and companies outside the union. It is also likely that new technologies will be developed and that free trade agreements are made between the EU and other European countries that make it a stronger competitive market.
The EU is going to be a very competitive market in the future and it is therefore
important for MNEs that want to do business in the EU to conduct a strategic analysis. This analysis should focus on:
·  Competitive nature of the industry.
·  Location evaluation.
Careful market segmentation, increased R&D, and the use of mergers, acquisitions and alliances have helped to build market share and to improve competitive strength and are used as specific strategies. Essential in these strategies is competitive intelligence. This is achieved through two complementary parts:
·  External gathering of information.
·  Internal analysis of infrastructure.
Information about competitors can be found in government-controlled company
registration offices (Great Britain, Denmark, and Ireland). These offices provide
financial information on registered firms. Other useful information sources include the Department of Trade and Industry (DTI), trade associations, business information services, regional and local publications. In France, Germany and Italy, much competitive information can be found at local courthouses. Chambers of commerce in these countries are also excellent source of information because these organizations work very closely with business firms, which is not the case in the US. Central databases which are created by the EU Commission can be consulted to keep aware of changes in national legislation. These possible legal barriers are very important to know about in an environmental analysis as well as cultural and technical barriers to keep foreign competition away.
After this the MNE decides how to manage their infrastructure. Prescott and Gibbons have described four types of infrastructures that can be used successfully:
A.  Coordinated infrastructure is used by companies that compete in similar
markets and business units share resources trying to increase overall sales.
(computer firms)
B.  Market coordination infrastructure is used by companies that compete in
similar markets but do not share their resources with business units.
(companies with each operation set up as a separate independent business)
C.  Resource sharing infrastructure is used by companies that compete in
dissimilar national markets but share their resources. (auto manufacturers)
D.  Autonomous infrastructure is used by companies that compete in dissimilar
national markets and do not share resources. (highly diversified MNEs)
Many companies feel that they need to expand on a global level in order to stay
competitive. For example, in the early 1990’s North American auto suppliers saw their international market share drop from 32 to 28 per cent, whereas the European share rose from 30 to 39 per cent. As a result, US firms like General Motors and Ford Motor expanded in Europe by foreign direct investment and strategic alliances. Companies in other industries did the same thing and many find that regions and municipalities are  encouraging this trend by providing investment incentives. 
Subsidiaries are important incentives, but most MNEs doing business in the EU
consider them as one element in the evaluation process. Other conditions and costs include operational costs such as labor, utilities, transportation and distance from major markets. 
The most important location factors, in order of importance, are:
·  Access to customers
·  Labor quality
·  Expansion prospects
·  Level of wage costs
·  Attractive environment
·  Access to suppliers
·  Non-financial regional assistance
·  Absence of restrictions for expansion
·  Infrastructure
·  Level of rents
·  Public transportation.
When doing Business in the EU, a few strategy issues need to be considered:
·  Overall strategic analysis
·  Feasibility of exporting
·  Value of strategic acquisitions and alliances
·  Marketing considerations
·  Manufacturing approaches
·  Management considerations
When a strategy of doing business in the EU should be formulated there should be looked at both the process of globalization through economic integration and the need for a firm to be nationally responsive. We use the matrix that was already provided in the previous part, but now we also show which firms operate in what quadrants.

“Brussels” designed a strategy for European companies to move into quadrant 1. This strategy creates natural barriers to entry for outside companies and ensures success of local competitors.
Exporting companies operate in quadrant 4. US firms will find it difficult to export to Europe and to compete on economies of scale in the face of integration by rival firms in the EU. This new nature of competition will result in foreign firms to switch from exporting to FDI.
Those firms that will continue to export to the EU will have to think of a number of matters like customs duties, taxes and product standards. Goods that are exported to the EU are subjected by customs duties and taxes at the point of entry. Most of the times, these duties are based on the estimated value of the good. Alcohol, tobacco and gasoline are subjected to excise taxes. Another matter is that of product standards. Every product that enters the EU must meet standards and technical regulations and in many cases, products have to be modified before they gain EU entry.
Strategic acquisitions or alliances are the most popular ways to gain a position in the EU. Strategic alliances have the most chance of being successful when both parties keep the following in mind:
·  When developing core businesses; acquisitions work better than alliances.
·  When a firm wants to gain entry into a new geographic market or businesses
that overlap the core business; alliances are effective.
·  Alliances between strong and weak firms do generally not work well.
·  Alliances with the ability to move beyond initial expectations and objectives are the ones that last.
·  Alliances have more chance of being successful when both firms hold the same amount of ownership.
Strategic alliances are more common then using acquisitions. There are several
important things to make these arrangements work: Each partner should complement each other. If both are good in R&D and bad in manufacturing for example, there is no synergy and they probably end up competing in stead of cooperating.  Second, the goals of each group must be spelled out carefully, because they provide the base for overall direction.
Thirdly, the employees of both firms must get to know each other and each group must understand how the other operates. Further, the parties must hold frequent meetings and develop a trust. 
As the EU comes closer to a true economic union, barriers disappear and competition will be fiercer. Therefore, marketing strategies are more focused on pricing and positioning.
The European Commission has predicted that prices of goods and services throughout the EU will decline. This will work because of 5 specific developments:
·  Decreasing costs of doing business because the barriers have been removed.
·  Opening up public procurement contracts to increase competition.
·  Foreign investment that will increase production capacity.
·  More enforcing of competition.
·  Intensified competition brought about by economic reforms.
Price will become even more important when products in the EU will be more globally standardized because customers will develop similar tastes.
Some products like Coca-cola and Marlboro have a worldwide appeal, but most
products don’t. Therefore, “plan globally, act locally” will continue to be a good saying. 
Direct marketing is probably also an interesting strategy. However, in Europe this kind of marketing is quite new and there are of number of challenges that MNEs face:
·  A universal message will not work, because consumers speak different
·  Direct-response telephone numbers in television spots is forbidden by the
German privacy laws.
·  Information about potential clients is not easy obtainable.
·  The infrastructure for this type of marketing is weak because credit cards and
toll-free numbers are still in their infancy stage. 
Because country regulations are replaced by common EU regulations and standards it will be possible to produce uniform goods in the EU. Some of the major manufacturing considerations for those that are doing business in the EU are:
·  Reducing costs.
·  Building factory networks.
·  Entering into R&D alliances.
The costs per unit can be drastically put down when the market consists of 375 million consumers. The cost of components is kept to a minimum and fixed costs can be spread over more units. Then costs per unit can be reduced and economies of scale can be achieved even when production has to be modified to local conditions. This can be done by the use of delayed differentiation, in which products are held similar until the last possible part of the assembly line where they should be adapted to local needs.
MNEs also use outsourcing and just-in-time inventory to reduce the cost of keeping inventory. Costs can also be controlled by redesigning the production process. 
MNEs in Europe are now starting to create networks of factories that produce
components and finished goods. These networks are also integrated with software that can operate in many European countries without the need for modification. They allow the company to make production and distribution decisions, while at the same time satisfying the requirements of the different legal entities in the countries where they operate.
Another upcoming manufacturing strategy is participation in R&D programs. In the EU this is done through setting up alliances to share R&D expenses or trying to get some of the expenses funded by participating in cooperative R&D programs. The EU provides funding for innovations in (bio)technology and energy. The goal fo these  programs is to encourage cooperation and to make Europe more competitive in the world market. The European Research Cooperation Agency is an R&D alliance that emphasizes projects in a wide area of fields.  
Firms that are interested in participating in these programs have to carry out six
·  Find out if the company is eligible for EU-funded programs.
·  Have knowledge of the EU rules regarding rights of ownership and the
circulation of results.
·  Choose the best location for an R&D center.
·  Determine competitors and customers who are already participating in the
·  Gather recommendations for the firm’s EU and local management.
·  Put together the company’s application for funding.
For managers it is important to consider that the EU still consists of different countries with different cultures. For example, Scandinavians find the quality of work life extremely important and the British find individual achievement important. French want a secure job and Germans place high value on both advancement and earnings. You see that there are a lot of cultural differences between the EU countries and that it is important for MNEs to have a global perspective as well as managers who are focused on country-specific needs.
Although there shouldn’t be barriers to entry the EU, it is important for international managers to know how to deal with them. The most common trade law barriers are countervailing duty laws (CVD) and antidumping laws (CD). (they have already been discussed in earlier parts). CVD is used as an entry barrier in the US and Europe makes use of AD as a barrier to entry. Both are import tariffs that are meant to protect domestic producers from dumping and subsidization by foreign governments.
There is strong evidence that both protection means are used in the US and EU. This is harming global business and goes at the expense of a liberalized trade and investment system.


The Ministry of Finance and the Ministry for economy, trade and industry had a big hand in the economic boom of Japan. The previous liberalized trade etc, and the latter controlled prices and currency.  Amakudari, which is the temporary movement of certain political figures into business, was practiced in order to have consensus between the two previously stated ministries and other major players. Even though nowadays the corporations are gaining in power, the government is still very important.
There are also other factors which underlie Japan’s success. For instance, Japanese people have a low level of individuality, a strong sense of collectivism and they also have a very high level of uncertainty avoidance. They also prefer more objective kind of decision making. In companies and also in society certain virtues such as honor and sincerity play a major role and the educational system underlies that.
Economical Japan
The economical climate in Japan is very big and competitive. Like earlier stated, the governments relationship with businesses and its unique capital market and their Keiretsu(conglomerates of powerful companies), have been pillars of their success. Japans economy, productivity and the people’s wealth, make their country the second largest economy worldwide.
For some time, Japans domestic market was/is very closed, which led to conflicts with other nations, such as the USA. Japanese firms are especially specialized in the motor vehicles sector, consumer electronics and electronic parts.  Michael porter has stated that local rivalry and customers, who are very demanding , are the main factors behind the emergence of competitive firms.
Japan and China and their FDI flows are increasing quickly, which could make them a powerhouse. The latter would enable dramatic growth in other parts of Asia. Both the countries complement each other. Japan has got the technology etc, while China offers very cheap labour. Moreover, China has got a huge market.
The following describes the business characteristics of Japan in more detail.
Through research it is shown that the power and success of the Japanese in the auto sector is the merit of their productivity. Research shows that Japanese car makers only need 55 % of time their western counterparts need to make a car. This enabled them to price the cars at a lower price. 
The following are attributes that underlie the competitiveness of the manufacturers in Japan:
First of all, the attention to quality, TQM and QC (quality circles). Moreover, there are strong linkages between the suppliers and manufacturers, (keiretsu). Also, the ability to cut cost, automation using robots and kaizen(continuous focus on improvement)
The Japanese spend a lot of money on research and development. 
An elaborated description of keiretsu is that it is a corporate grouping, in other words it is a tied groups of integrated businesses. There are two types of keiretsu, the horizontal (kinyu) and the vertical, which is the manufacturing one.  The horizontal type is characterized by a central bank and sogo shosha, which is an international trading company. The horizontal version is an ‘outdated’ version, whereas the new vertical keiretsu is headed by large manufacturing companies.
In Japan, the retailing is mainly done by many small retailers. This enables face-to face selling, however, it is very costly.  There is a kind of distribution hierarchy led by the keiretsu. However, nowadays this system is simplified, partially through the emergence of discount stores etc.
Around 25 percent of the world’s top 100 multinational companies are from Japan. The Japanese were sometimes falsely stereotyped as follows: for example, that the Japanese firms had the best managerial practices, or at the other end, the whole Japanese model has been criticized for their economical failures etc. The truth lies somewhere in between the two extremes.  
The strengths of the Japanese firms were evident till 1980 and the weaknesses started showing thereafter. The Japanese firms can be divided into two groups. The first group is that of the companies which were not too dependent on the domestic market, they sold mainly outside Japan. Examples are Honda and Sony. The other group consists of the majority of the companies, which are very dependent on the domestic market and the Japanese culture. Examples are Nippon steel and Kajima. Fruin, a researcher, has detected several distinguishing attributes of Japanese firms, which are as follows: high productivity, functional specialization and manufacturing adaptability. 
The following are the main characteristics of the Japanese management style: R&D, design, manufacturing and marketing are not so separated, lifetime employment, effective communication, managers have a more ‘teacher’ role, instead of solving a problem managers rather teach the employees how to do it well.
In the past decade, several big changes have occurred in Japan. Japan encountered difficulties as a result of the end of the economic growth, which took away their stability. These difficulties started showing at the start of the 90’s, but were masked through for example the value increase of the yen in comparison with other currencies. This economical slump has been accompanied by cultural problems between the modern way of living and the old way. This has led to a new younger generation of Japanese, who are termed as Shinjinrui( new human being). This mingling with the western cultures has also influenced the taste of the Japanese people.
The capital market has been restructured. The companies are raising capital from capital markets rather than from keiretsu share-holding and banking relationships. Private equity and venture capital are gaining popularity.
Pressure from inside Japan to deregulate has grown, combined with the changing
preferences of consumers and firms; it has led to huge increase in inward investments. European firms have also increased their FDI in Japan significantly. M&A, foreign firms buying up local firms, has been a major factor for the growing inward FDI. In order to be able to handle several difficulties, such as the growing domestic labour wage, the Japanese corporations had to restructure. Several of the major changes are described below.
The traditional system of the manufacturing and distribution keiretsu is declining. Big corporations are not giving any agreements, such as a volume of business over a long period of time, to suppliers; rather they encourage them to compete with other suppliers. This has led to cost being cut.
Also, a lot of work is being outsourced by the Japanese. Almost half of the Japanese branded cars are made outside Japan. Another change being implemented is the decline of lifetime employment and the emergence of new human resource practices.  Also, diversification strategies are being implemented.  Porter and co have analyzed the changes being implemented and have come up with a few guidelines for transforming Japanese firms:
They state that creating a long term, distinctive strategy is better than imitating close-rival strategy. Also, firms should expand the focus of operational effectiveness. Which means, improving the plant level productivity, as well as the office level productivity.  Moreover, firms should learn the role of industry strategy in structure. Also, they should shift the focus from growth to profitability. A growth focus was only possible with the traditional system (keirestu), nowadays shareholder pressure will push for profitability focus. Also, firms should just focus on their core competences and let other firms do the rest. Moreover, firms should update the Japanese organizational model, which
means that the hierarchic system has to go, as well as the traditional internal practices. Finally, Porter and co state that the Japanese firms should move away from the incremental change, they should on the other hand become more flexible.


Canada has one of the highest standards of living in the whole world.  It has a GDP of about 995 million dollars. Its main export products are food, energy and motor vehicles. Canada has been known for its food production; however the service section and major secondary industries have emerged. The main industries are located in central Canada. The western and eastern parts of the country still rely heavily on primary industries. The US has more FDI in Canada, more than any other country. Also, Canada invests a lot in the US. There are many similarities between the US and Canada, for example the consumer preferences; however there are also many difference. Canada’s economy contains mostly private companies, however some industries are characterized by government owned companies. 
Nevertheless, the trend is moving towards more privatization. The Canadian industry consists for the main part of small firms.  
The legislation in Canada is more or less the same as in the United States.  
Competition in Canada is regulated; however there are no rules which guide mergers, monopolies and acquisitions. 
Competition Act: This act prevents companies and individual persons to take actions which will result in less competition or even prevent competition.
Export permits are required if someone want to ship goods with strategic value.  
Export is one of the most popular ways to do business in Canada. 
The banking sector is dominated by six Canadian banks. All are controlled by the Central Bank. The tasks of the Central bank are as follows:  It regulates credit and currency; it is responsible for the protection of the external value of the Canadian dollar and it regulates other things such as production.
The banks act according to the Bank Act. There are two types of bank acts, the first being Schedule A and the second Schedule B.  The previous are the fully Canadian owned banks, and the latter are the foreign firms and the partially Canadian owned banks.
Canada Labor Code: this is a federal law which consists of matters such as wages etc. The Canadian workforce is heavily unionized. The working conditions are similar to the United States.  The Investment Canada Act creates a nice climate for investments from other countries
Some major multinationals in Canada are for example, Bombardier and Onex
Canada is part of the NAFTA and the United States- Canada Free Trade Agreement (FTA). The latter was made in order to eliminate tariffs and the majority of other barriers to trade.
Even though Canada is a big country, the industries have short marketing channels with direct producer to user distribution. Also the industries are very geographically concentrated. The advertising media are television, radio, magazine etc. There are many US franchisers in Canada.
Mexico is the third biggest country in Latin America. Its Economy is developing at a high speed, mostly because of new business connections with the United States. This has made the Mexican Economy the strongest in Latin America. The liberation politics of Carlos Salinas and the growing maquiladora industry are also big factors in the growing economy.
The investment climate is getting very nice. A big reason is the privatization campaign, also the new investment laws, which enables foreigners to hold major equity positions, is a big reason.
Labour is plentiful and inexpensive, however properly educated and skilled labour force is scarce in Mexico. In Mexico the labour force is heavily unionized.
Mexico is a member of the NAFTA, which reduced the trade barriers in Mexico. Also, it has as effect that the growth of several industries has increased. Mexico has been involved in several other developments in order to enable free trade and privatization. An example is the Free Trade Area of the Americas (FTAA). The above described developments have as result that the business and investment climate in Mexico are very favorable.
The petroleum industry is very important for Mexico. Also, the automotive industry is growing; Mexico is a car and truck producer. Overall it can be stated that the Mexican economy is heavily linked and dependable on the NAFTA and the United states in particular.


Non-triad nations are dependent on developing connections with the triad to prosper internationally. Although every country performs in a unique way, there are common developments. 
The three most important ones are:
1.  Privatization
2.  Attracting FDI
3.  Strategies that are designed to link the country with the triad.
Latin America is a rapidly growing region and Mexico’s experience has been very
helpful to regional integration and other Latin American countries will be following as in the Free Trade Agreement of the Americas (FTAA).
Chile has one of the strongest economies of Latin America. Its GDP grew from the 1980s and unemployment stayed at a low level. Further, the government was positive towards foreign investment and from 1974 to 1990 many companies that ones were nationalized were returned to the private sector. 
The EU is the largest investor in Chile. After that, the NAFTA countries account for the largest per cent in FDI. Most of this FDI is concentrated in select industries like the mining industry (36.4 %) and the service industry (22%). Other significant investments are made in manufacturing, transportations, telecommunications and utilities. In recent years the investment in utilities has outpaced the investment in the mining industry, this was partly because the government had invested in infrastructure. 
Chile is a relative small country and local companies therefore tend to be smaller than in Brazil or Mexico. Yet, the rapid growth of the country managed that sixteen Chilean MNEs are in the Financial Times top 100 of Latin American companies. In fact, Chile is a source of FDI to other Latin American countries.
Chile is doing well in labor. Their population is highly educated and their labor force is well-trained and skilled. About 12 per cent of the labor force is part of a union. These have increased power in the last years and achieved that employees are allowed to strike if a majority of employees approves. Also minimum monthly salaries are fixed by law and the government adjusts them on a periodic basis. 
The government assures that Chile’s economic approach will stay free market driven and therefore Chile is a favorite investment area for MNEs. In linking itself to the triad, Chile relies on exports such as copper, forestry products and fruit. 56 percent of Chile’s exports are to triad countries. 22 percent goes to other Latin American countries. Chile’s imports are also mainly from these countries.  
To put it in other words, Chile needs four double diamonds: 
1.  Chile-NAFTA
2.  Chile-Mercosur (Argentina, Paraguay, and Uruguay) 
3.  Chile-EU
4.  Chile-Asia.
The government of Brazil launched economic liberalization and reform in recent years. Most non-tariff import barriers are removed and the country moves toward trade integration, mostly with Argentina.
At the same time, Brazil has a host of problems. They have been running a trade deficit (more imports than exports) and the decision to devalue the currency has resulted in high interest rates and a slowdown of economic growth. Further, it had impact on its Mercosur partners: Argentina, Uruguay and Paraguay.
By 2001, Brazil seemed to be doing a lot better, but a number of economic encounters reduced Brazil’s economic prospects. The Brazilian Real depreciated 20 per cent in 10 months and this accounts for the country’s energy crises. The energy supply was not able to keep up with the growth in demand and this resulted in 30 per cent reduction of energy consumption, imposed by the government.
The US economic slowdown in 2001 and the economic crises in Argentina also
affected the Brazilian economy. Most Brazilian imports and exports are with these countries.
Brazil has been able to negotiate major amounts of FDI into the country. Foreign MNEs have preferred to set up operations in the largest market of Latin America, rather then have to export to Brazil and face trade barriers.
The EU is the largest investor in Brazil (46.8%) and the US is the second largest
source of FDI (24.2%)
The size of the economy, the amount of natural resources and the government’s
protecting policy have all contributed to the development of Brazil’s MNEs. 41 Brazilian companies are in the Latin American top 100. Brazil’s oil reserves have resulted in the emergence of the oil company Petrobas, which is the largest Latin American company. Brazil’s utilities and telecommunication companies are also among the largest in Latin America. Brazil is also one of the familiar examples of technology and skill transfers from MNEs to local producers. This has made Brazil a major exporter of auto parts and has allowed the development of other industries.
MNEs say that the Brazilian labor force is quite good, but many firms have to offer training because of the country’s poor educational system. From 1988 employees are allowed to strike, but there are some restrictions to it such as protection of essential services.
The government has been slow in reducing inflation and the deficit, but because of its
huge economic market it keeps attracting to MNEs. At the same time Brazil is
interested in linking itself to the US and EU markets via increased trade.
Pacific countries constitute a large geographic area and sometimes, a rapidly growing market. China for example, has the largest population in the world and in recent years the nation’s economy has done much better than casual observers realize. Exports are higher than imports and inflation and at the same time, the Chinese government has moved towards privatization and encouraging entrepreneurial efforts. The country’s economy is slightly smaller than Japan’s and about half of the US. Obviously, China is a major economic power. In particular southern China has been a very booming economy.
40 Per cent of China’s GDP comes from trade and FDI. However, critiques argue that this is not fast enough.
There are a number of reasons why MNEs want to do business in China. One is the growing market for industrial and consumer goods. Second is the rapid economy growth, which increases the country’s purchasing power as well as it modernizes infrastructure. Though, MNEs should be on their guards, because China’s government is very unpredictable and can suddenly increase political risk (for example: the Tiananmen Square massacre).
China’s labor costs are very low, about 10 per cent of that in more industrialized Pacific countries such as Taiwan. Therefore it is very popular for multinational investment. However, it has been greatly criticized for using prison labor to manufacture goods for export. The country is now making changes in human rights, but many are skeptic about China’s willingness to change.
The business environment in China is different from other Pacific countries because of its communist government. Therefore it is very important for an MNE to find a good domestic partner. Price reductions and special sales terms are unlikely to make Chinese buy products of poor quality; they simply want the best quality available.
In addition, it is important to remember that China has a predominantly planned
economy. The government determines the imports and exports. China has a great trade surplus with the US and it is very likely that the US government will limit Chinese imports.
India has one of the highest population densities in the world; 1 billion people on 1.3 million square miles. They had a quite prosperous growth in the 1990s with the highest growth in the service and manufacturing sectors. FDI was expected to be quite high, but because of high economic and political uncertainty, they fell short of expectations.
It was very time consuming and frustrating for MNEs to try and make FDI in India. However, recently the political climate has changed and the government is trying hard to attract foreign investment.
A primary attraction of India is the large middle class, this market contains over a 100 people.  The lower middle class, about 200 million people, is another significant market niche. Another attraction is the effort by the government to make things easier for foreign investors. One of the major reasons why the government has done this is because it realized that its economic growth depends on foreign capital. At the same time MNEs should remain cautious because India can change its policies back, which can result in the firm losing a lot of money. However, this chance is not so big, because India does not want to fall behind China and is therefore likely to “welcome” MNEs.
South Korea had rapid economic growth over the last 20 years. The private sector dominates business, although the government influence is considerable. Also, interest rates have been rising and there is an increase in bankruptcies.
Despite the same type of resistance to foreign firms that is present in Japan,
companies keep investing in South Korea. Most investments are made in chemicals, electronics and machinery. The reason why doing business in South Korea is so attractive comes from a growing economy and an increase in disposable income. The disadvantages of doing business here is the difficulty to break into the market and to develop alliances that can compete with local companies.
Names that come from South Korea are Samsung, Hyundai and Daewoo and they are one of the largest developing MNEs in the world.
Korean Chaebols: diversified conglomerates, which are very traditional and family owned. However, the trend is now moving towards privatization. The Korean chaebols and the Japanese sogo shosha are similar in development (early governmental support etc.)
MNEs face labor shortages and there are laws that provide labors with minimum
working conditions, collective bargaining and labor arbitration disputes.
Liberalization policies:
These are governmental policies which move toward free trade and privatization of state owned firms etc. Lower and eliminating trade barriers and tariff is part of these policies
Because of labor unrest in recent years, wages have been pushed up and this resulted in the increase in the cost of exported goods, and therefore some firms saw their sales drop immensely. Now, Korean companies are trying to become productive again and efforts are designed to protect the local market and to generate exports. This resulted in South Korea regaining a competitive status and linking itself strongly to the triad.
Singapore has seen strong economic growth, but had a bit of a downturn in 2001 (due to the US). At that time, the government encouraged foreign investment and made it easy for MNEs to enter business in Singapore. Investments were made heavily with the US as Singapore’s largest investor.
Productivity has been rising sharply and therefore it is difficult to find good personnel (everyone already has a job) and unemployment is extremely low. Most workers in industrial plants are in a union, but there has been some unrest because there is talk of paying new employees a lower wage than existing personnel. Because of its geographic size and limited labor force, Singapore is required to pick the right business niches. The main targets of interest are: manufacturing, transportation and financial services.
Africa is the continent which hosts the worlds least developed pack of countries. It is, then, not surprising that the inward FDI is very low, because the investment climate is very bad in Africa. Also, political instability, weak infrastructure, very poor skilled labour force etc have aso a hand in the low FDI and economic growth of Africa.  The small amount of FDi which flows into Africa is mainly attracted by some of the resources which can be found in Africa. Examples are gold, oil, diamonds and platinum.
Flying Geese model
This is a model, which suggests that Asian countries are following Japan in the sense of the development paths. However the other Asian countries are at different stages along this path. They follow the lead of Japan.
Eastern Europe has moved from a communist to a market system. This has resulted in a lot of downfall. National currencies have lost their value, purchasing power has declined, agricultural and industrial outputs have declined and unemployment has risen. The region needs FDI from triad members and needs to access their markets for exports. 
Eastern Europe faces two major challenges:
1.  Resisting the temptation to fall back in communism to control inflation and
2.  Accept that FDI brings foreign ownership and control of local operations,
which Eastern Europeans are not accustomed to. 
In 1991 the Soviet Union did not exist anymore and instead there came:
“Commonwealth of Independent States”. Russia has a huge size and a very bad
economic condition and therefore has the most difficulty in facing the above
Russia is currently undertaking price reform. In many areas the free-market forces takes over: no more administered prices and subsidies. These developments had major effects on the economy. It even got worse. By the end of the 1990s Russia’s foreign debt had risen from 115 billion dollars to 145 billion dollars. When the International Monetary Fund helped, the economy recovered substantially. Also the high price of oil had allowed the government to finance infrastructure, which was very much needed.
Privatization of the industry is also a major undertaking. This is the key to economic growth but progress in this area is difficult because management skills and capital are lacking.
There are some MNEs doing business in Russia, but the FDI from the triad is relatively small and it will remain so until profits are proportional with the political risk in Russia. Joint ventures are also rising within Russia, for example Aeroflot, a major Russian  Airline, has 42 joint ventures.


Concerning  the  future,  MNEs  are  confronted  with  grand  changes  in  the  international business environment. Especially the area of the creation of effective strategies is one of great importance and needs to be considered by multinationals when doing business in the future. Companies now engage in “going where the action is” and establish new business  relationships  with  suppliers,  customers,  competitors,  and  gov ernments  in order to increase their efficiency. This often leads firms to implement location-focused
Location-focused strategies include several important factors, such as:
·  Going  international  is  essential,  if  a  company  strives  for  success.  Setting  up their operations in different countries allows them to stay competitive, conduct research, and observe their competitors. By doing so, the firm has the ability to maintain a good overview over its market and the occurring changes.
·  If a business decides to establish their operations in several different nations, it may help them to gain knowledge and experience which they can adapt in other markets.  This  additional  know-how  provides  further  benefits  to  the  company insofar that the firm is likely to adapt this strategy in other locations where small companies have been profitable.
·  Companies  that  expand to other countries sometimes have multiproduct-lines which  are  also  called  “centers  for  excellence”  and  may  be  spread  worldwide. These centers help firms to achieve global leadership for certain product lines and determine the degree of globalization of an enterprise.
In order for a firm to create and employ new strategies, research is an important factor. Sometimes  research  may  be  based  on  a  very  broad  range,  and  as  a  result  some theories cannot be generalized and applied to certain situations.
Research  theories  may  be  created  in  different  ways.  One  is  to  build  up  theories  first and then test it. Another way is to test theories in order to reconfirm earlier findings.
The answer to the question of how and why MNEs succeed may be given by research that  concentrates  on  strategies  of  companies.  Furthermore,  research  also  acts  as  a tool to help understand and forecast future developments in the economic environment.
Strategic  Fit  –  the  idea  in  strategic  management  that  an  enterprise  should  align  its resources so that it matches with the environment.
Firm-Specific  Advantages  (FSAs)  –  Certain  benefits  or  strengths  of  a  company, which  create  its  competitive  advantage.  Factors  such  as  equipment,  employees,  or technology may be relevant in creating FSAs.
Country-Specific  Advantages  (CSAs)  –  Strengths  of  a  country  that  are  based  on factors  such  as  geographic  location,  workforce,  resources,  cultural  factors, governmental  policies,  industrial  clusters,  its  competitive  environment,  and  other characteristics.
Often, multinationals create their strategies based on the relations between FSAs and CSAs that are available for the company. 
When it comes to strategy formulation, a competitive advantage matrix may be helpful. With  this  tool,  relative  strengths  and  weaknesses  of  FSAs  and  CSAs  can  be discovered.  For  example,  if  a  business  holds  strong  firm-specific  advantages,  and  if there  are  also  strong  country-specific  advantages  available,  a  business  has  a  grand possibility of reaching a competitive advantage compared to its rivals.
In  the  competitive  advantage  matrix,  especially  the  strategies  of  cost  leadership, differentiations, and focus are of importance. More factors that need to be taken into account  are  that  if  there  are  changes  in  the  trading  environment,  this  will  have  an influence  on  the  relative  CSAs  of  the  company.  Furthermore,  if  the  enterprise  is structured as a conglomerate, it may be functional to position each division or product line independently since they might need different kinds of strategies.
Future strategies have many new aspects that are of grand importance:
·  Strategies  tend  to  be  based  increasingly  on  trust  and  shared  support  of
companies,  rather  than  on  old-fashioned  business-client  relationships  in  which firms simply set conditions of conducting business without collaboration. This helps meeting the needs of the businesses’ customers, suppliers, and competitors.
·  Many companies will reduce the amount of suppliers in order to build up a group of trustworthy  and  reliable  business  relationships,  and  thereby  give  the  suppliers more  responsibility.  A  close  working  relationship  facilitates  understanding  each other’s strategies, thus working problems can be minimized.
·  Network partners may be helpful when developing new materials and components
for the firm. 
·  Sellers  will  interact  more  directly  with  their  customers  in  order  to  build  up  good relationships.
Flagship  Firms  –  MNEs  that  are  globally  competitive  and  act  as  international benchmarks. In a flagship firm, customers and the company usually have a close relationship which is a crucial factor in business to be successful.
·  Joint ventures, technology transfers, as well as market sharing agreements are
common  networks  that  are  increasingly  created  between  international
competitors to improve business.
·  Governments  become  more  and  more  important  because  they  may  help
support  legislations  concerning,  for  example,  workforce,  technology
development, and exports. 
Five Partners – a network arrangement that includes a flagship firm, key suppliers, key competitors,  key  customers,  and  non-business  infrastructure  (e.g.  universities, governments).
When  dealing  with  the  international  environment,  political  factors  need  to  be considered  since  they  may  grandly  effect  actions  taken  by  multinationals.  Some  of those factors are:
·  Open  markets,  in  which  free  trade  is  possible,  are  often  favored  by
businesspeople. Contradictorily, they are supporters of policies that give foreign
firms a large disadvantage.
·  Some foreign companies are trying to convince their governments to negotiate better  access  to  the  US  market  in  order  for  the  companies  to  be  able  to,  for example, expand their trade relations, as well as enjoy less trade barriers.
·  Political  risk  is  another  factor  that  affects  international  business.  Especially smaller  nations  tend  to  increasingly  apply  free-market  models,  engage  in privatization, and support foreign investment in order to improve their economic situation. There is a possibility to decrease political risk by collaborating in free trade agreements.
In  general,  the  economic  environment  provides  a  lot  of  opportunities  for
·  There  is  increasing  privatization  taking  place  in  several  countries,  which  gives companies the potential to acquire already existing businesses, and therefore gain additional profits.
·  The development of new goods and services will support the establishment of new markets since customers are constantly interested in the latest developments.
·  Competition is increased by the growing use of the internet worldwide. As a result, costs are lowered and new potential customers all over the world can be attracted.
·  The  realignment  and  reorganization  of  markets  are  helpful  instruments,  if companies have problems staying competitive in the fast-changing economies. 
·  Exports are essential for many firms. Costs may be lessened due to lower wages in  foreign  countries,  foreign  markets  are  being  opened  up,  and  the efficiency  in several businesses is being enhanced.
Overall, in order to be successful, MNEs should create their new strategies according to the particular market they are operating in.
When dealing with international business, frameworks created by different institutions may sometimes be contradictory. For example, the NAFTA, as well as the EU strive for trade and investment liberalization, and a safeguarded business environment for their member nations. This action singles out third country companies and makes  trade with them  more  difficult.  In addition, when comparing the NAFTA and the EU, it becomes clear that the EU is much more integrated in economic, political, and social matters. 
International Business – consists of international transactions (e.g. trade (exports and imports) and foreign direct investment). It is very useful in order to satisfy the needs of companies and private households.
Multinational  Enterprises  (MNEs)  –  these  are  organizations  that  have  their headquarters in one particular country, but do business in one or more other country. This  creates  an  extended  arena  for  international  trade since  it  supports international business. 
Exports – these are goods and services that are being produced in one country and then  traded  to  another  country.  In  order  to  maintain  a  positive  balance  of  trade,  a company should always export more than it imports.
Imports – this includes goods and services that are being produced in one country and then  brought  in  by  another  country.  In  case  of  imports  exceeding  exports  in  one country, a trade deficit will be the result on the nation’s trade balance.
The basis of international business is trade which contributes to the understanding of MNE strategies and practices. The world’s most exporters are also the world’s biggest importers. Exports  and  imports  are  the  motor  of  international  trade  and  enhance  worldwide interaction  among  countries  and  businesses.  If  they  were  to  decrease,  the  world economy would suffer grandly from that.
Foreign Direct Investment (FDI) – FDI are equity funds invested in other countries by MNEs. 
FDI is often used by organizations to gain a foothold in other markets by obtaining firms in different countries or by operating in foreign markets.
Especially  companies  from  the  US  have  invested  greatly  into  several  countries (Western Europe, Latin and North America and Japan). FDI is an essential factor when it comes to international trade because it helps, for example, less developed countries to establish worldwide trade relationships.
Triad – these are geographic areas (the US, the EU and Japan) that play a crucial role in international trade. They are responsible for most of the trade and investments that take  place  worldwide.  Further,  when  the  US  is  important  as  a  triad  member,  Mexico and Canada are usually included into the considerations.
North  American  Free  Trade  Agreement  (NAFTA)  –  The  NAFTA  is  a  free  trade agreement between the US, Canada and Mexico which was founded in 1994. It has the purpose to abolish trade and investment barriers between those three nations.
Concerning  the  triad,  the  US  has  the  world’s  largest  economy.  Followed  by  the  EU,  whose  collective  GDP  is  larger  than  that  of  the  US  or  Japan.  Japan  is  the  greatest economy in Asia and is a grand investor into the US and the EU. Countries from the triad practice more trade and FDI than any other economy.
The  global  environment  has  rapidly  been  changing  in  recent  years  and  the
reasons for this fact are:
A -   A slowdown in the triad economies
B -   The introduction of additional trade regulations
C -   The impact of technology
D -   More small and medium-sized multinationals
A  -  In  the  1990s  the  US  held  a  fast  growing  and  healthy  economy  and  became  the most competitive nation in the world. After the Clinton-era, the triad and other countries started to suffer from economic problems. 
Organization  for  Economic  Cooperation  and  Development  (OECD)  –  an
organization with 30 moderately wealthy member countries that assists its members, if economic  difficulties  evolve.  This  is  done  in  form  of  a  forum  in  which  economic problems and their solutions may be discussed.
B – The development of a liberalization in trade and investment helped organizations in the triad countries to improve their profits in open markets. In case of a trade conflict between  countries,  international  organizations  were  formed  to  regulate  international trade.
World  Trade  Organization  (WTO)  –  the  WTO  is  a  worldwide  organization  that  was founded  in  1995.  It  deals  with  the  rules  of  trade  and  smoothing  out  conflicts  among member countries; furthermore, the WTO is allowed to enforce its decisions.
General Agreement on Tariffs and Trade (GATT) – the GATT is a trade organization that  was  created  in  1947.  Its  purpose  was  to  liberalize  trade  and  negotiate  trade concessions among member countries
Nowadays  the  WTO  implements  the  provisions  of  GATT.  If  conflicts  arise  among member  countries,  the  WTO  supports  problem  solving.  If  nations  disagree  with decisions made by the WTO, harsh consequences such as trade retaliation may be the result.  Due  to  trade  liberalization  though,  disputes  among  countries  should  be eliminated because it encourages international business transactions. 
C  –  Technology  is  a  constantly  developing  area  and  especially  communication technology is of great importance to many businesses and in certain markets. The use of computers, the internet, as well as cellular technology makes it possible for firms to remain  in  continuous  contact  with  their  office  and  their  customers.  This  enhanced communication is essential for individuals since it eases conducting business. Through  technology  the  production  of  goods  and  services  is  enhanced.  Shorter production periods as well as less defect goods can be ensured due to the “Six Sigma” quality programs. These are quality measurements that have been created in order to ensure high quality, as well as remove performance difficulties.
D – Small and medium-sized enterprises (SMEs) – the definition varies depending on the country. In the US, SMEs have up to 500 employees; in Japan SMEs in industry have up to 300 employees, those in the wholesale industry have up to 150 employees, and those in the retail industry up to 50 employees. In the EU SMEs employ between 11  and  200  individuals  and  the  company’s  sales  are  less  than  40  billion  US  $.  The World Bank benchmark for developing countries is set from 11 to 150 employees, and sales of under 5 billion US $.
Due  to  the  fact  that  many  SMEs  have  a well-trained workforce, are highly innovative and apply the latest technology, they can compete effectively and are very flexible in comparison  to  larger  firms.  These  points  are  important  for  SMEs  because  they  rely heavily on their customers and therefore focus on cost control and quality. 
Facts about MNEs:
·  Mainly, MNEs earn their revenues either within the country they are located
in or by selling in locales that are close by.
·  MNEs  need  to  implement  strategies  that  are regionally applicable and not
worldwide  in  order  to  be  successful.  They  need  to  carefully  adapt  their
strategies to the local markets. MNEs should also have a high sensitivity to
local consumers rather than having only one global strategy. This is due to
differences  in  countries,  their  cultures,  and  therefore  their  needs  and
·  Achieving sustainable long-term profits or building political advantages has
become  impossible  for  MNEs  because  of the grand rivalry among firms in
regional  and  triad  competition.  A  possible  solution  of  this  problem  is  for
enterprises  to  engage  in  strategic  alliances  (explained  below)  in  order  to
penetrate local markets and increase profits.
·  MNEs  have  to  alter  their  products  for  regional  markets  in  order  to  receive adequate  profits.  Depending  on  the  preferences  of  certain  countries,  the product needs to be adapted to them.
·  An MNE’s success is mainly drawn from creating and executing strategies
on a regional and local basis.
Strategic Alliance – this is a relationship between two or more businesses in order to attain  a  communal  advantage.  This  has  become  popular  since  MNEs  started  to recognize the importance of creating regional and local strategies.
In order for a business to stay competitive it needs to be continuously innovative. The ability of a firm to gain success by doing so depends on four determinants developed by Michael Porter:
·  Factor  conditions:  Land,  labour  and  capital.  A  country  will  export  goods  and services  that  make  most  use  of  the  factor  conditions  with  which  it  is  moderately well  supplied.  If  a  country  has  a  rather  large  and  uneducated  workforce,  more goods will be exported that are extremely labour-intensive. If the workforce is very well  educated,  more  goods  and  service  will  be  produced that tap the intellectual capabilities  of  the  employees.  Factor  conditions constantly need to be upgraded for upholding a competitive position.
·  Demand  conditions:  According  to  Porter,  a  country’s  competitive  edge  is
maintained  in  the presence of a strong local demand for  its goods and  services. This helps the seller understand what buyers wish for. Moreover, a local seller is more sensitive to impending changes and can therefore adjust and innovate for the market before more distant competitors can take action.
·  Related  and  supporting  industries:  Suppliers  that  are  closer  located  to  the producer  often  offer  lower-cost  inputs  that  are  not  provided  to  more  distant competitors.  Additionally,  suppliers  have  a  good  understanding  of  the  industry environment and therefore can both forecast and react to changes. By sharing this information with the producer, a competitive position can be maintained.
·  Firm  strategy,  structure,  and  rivalry:  A  firm’s  managerial  system  (domestic rivalry, management, organization, and the establishment of a firm) plays a major role for a national advantage. Furthermore, a company’s managerial system needs to  be  adapted  to  the  specific  country  where  it  is  applied.  If  the  management practices  of  industries,  which  are  supported  by  the  national  environment,  are suited  to  their  industries’  sources  of  competitive  advantage,  nations  tend  to perform  well.  Moreover,  national  goals  are  important  since  the  preferences  of nations  differ. Some favour rapid results, some long-term development. The fact that countries with leading world positions often have many local rivals shows that domestic rivalry should also be taken into account.
·  Domestic  rivalry  supports  improvements  in  the  other  three  influences  (factor conditions,  demand  conditions,  and  related  and  supporting  industries)  and geographic  concentration  enhances  the  relations  of  the  four  separate determinants.
Strategic Management – managerial actions including strategy formulation,
implementation, evaluation, and control. Also assessment of organizational strengths and weaknesses and environmental analysis of internal and external circumstances is a task in strategic management.

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Summary Fundamentals of Strategy van Johnson en Whittington

Summary Fundamentals of Strategy van Johnson en Whittington

Summary Fundamentals of Strategy by Johnson & Whittington, written in 2015, donated to WorldSupporter

Chapter 1: Introduction Strategy

Strategy: Long-term direction of an organisation.

Corporate level strategy: is concerned with the overall scope of an organization and how value is added tot he constituent businesses of the organizational whole.

Business-level strategy: is about how the individual businesses should compete in their particular markets.

Operational strategies: are concerned with how the components of an organisation deliver effectively the corporate- and business-level strategies in terms of resources, processes and people.

Strategy statements

Should have three main themes: the fundamental goals (mission, vision, or objectives) that the organisation seeks; the scope  or domain of the organisation’s activities; and the particular advantages or capabilities it has to deliver all of these.


Relates to goals, and refers to overriding purpose of the organisation. ‘What business are we in?’


This too relates to goals, and refers ti the desired fighter state of the organization. ‘What do we want to achieve?’


These are more precise and ideally quantifiable statements of the organisation’s goals over a period of time. ‘What do we have to achieve in the coming period?’


An organisation’s scope or domain refers to three dimensions: customers or clients; geographical locations; and extent of internal activities (‘vertical integration’). Second, which activities to do internally themselves (vertically integrate) and which to externalize to subcontractors.


This part of a strategy statement describes how the organisation will achieve the objectives it has set for itself in its chosen domain.

Exploring strategy model

includes understanding the strategic position of an organization; assessing strategic choices for the future; and managing strategy in action

Strategic position

concerned with the impact on strategy of the external environment, the organisation’s strategic capability (resources and competences), the organisation’s purpose and the organisation;s culture.

Strategic choises

The options for strategy in terms of both the directions in which strategy might move and the methods by which strategy might be pursued.

Chapter 2: The environment

This chapter provides frameworks for analysis changing and complex environments. These frameworks are organized in a series of layers:

The macro-environment is the highest-level layer. This consists of broad environmental factors that impact to a greater or lesser extent on almost all organisations. Here the PESTEL framework provides a wide overview and builds scenarios how the macro-environment might change, i.e what are the key drivers for change.

  • Politics highlight the role of the state and other political forces
  • Economics refers to macro-economic factors such as exchange rates, business cycles and differential economic growth rates around the world.
  • Social influences include changing cultures and demographics.
  • Technological factors refer to influences such as the internet, nano-technology or the rise of new composite materials.
  • Ecological stands specifically for green environmental issues, such as pollution, waste and climate change.
  • Legal embraces legislative and regulatory constraints or changes.

It is important to not include every possible factor. Rather think of the key drivers for change, the environmental factors that are likely to have a high impact on the future success or failure of strategy.

When the business environment has high levels of uncertainty arising from either complexity or paid change, it is impossible to develop a single view of who environmental influences might affect an organisation’s strategy. Therefore it is necessary to build several scenarios. Scenario building consists out of the following five basic steps:

  • Defining scenario scope refers to the subject of the scenario analysis and the time span.
  • Identifying the key drivers for change uncover issues that have a major impact upon the future of the industry, region or market.
  • Developing scenario stories knit together plausible stories that incorporate both key drivers and other factors into a coherent story.
  • Identifying impacts it is important for an organisation to carry out robustness checks in the face of each plausible scenario and to develop contingency plans in case they happen.
  • Establishing early warning systems identify indicators that might give really warning about the final direction of environmental change, and at the same time come up with systems to monitor these.

Industry (or sector) form the next layer that provide you with frameworks to analyse the environment. An industry is a group of firms producing products and services that are essentially the same, they can also be describes as sectors (especially in public services). Industries and sectors are often made up of several specific markets. A market is a group of customers for specific products or services that are essentially the same.

Porter’s Five Forces Framework helps identify the attractiveness of an industry via five distinct forces:

  • The threat of entry how easy it is to enter the industry influences the degree of competition. Barriers to entry are the factors that need to be overcome by new entrants if they are to compete in an industry. Five important barriers to entry are:
  1. Scale and experience Access to supply or distribution channels
  2. Expected retaliation
  3. Legislation or government action
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