International Strategy and Management

International growth strategyGlobal, international, multidomestic

Entering foreign marketsMarket selection, timing, operational decisions

Entry modesExporting, licensing, franchising, joint ventures, strategic alliances,

Global marketing strategyGlobal manufacturing strategy

Core Topics

GlobalizationDrivers, consequences, success factors

Global ethicsImpact on business

CultureDeterminants, impact on business

Foreign exchangeInternational human resource management

Additional Topics

Global Business TodayCharles W.L. Hill; Irwin

Textbooks

Mastering Global MarketsCzinkota, Ronkainen, and Donath; Thompson

Total Global StrategyGeorge S. Yip; Prentice Hall

Lecture / DiscussionSlides on web (before, complete)

ExercisesHill – GlobalEDGE

Case studiesSimulation: Country Manager

Interpretive Software

Pedagogy

Globalization

The way it was….Self-contained national economies, isolation, differences in govt., culture, and business systems

The way it is…Reduced barriers (GATT, tariffs), shrinking distance (technology, transportation, culture), interdependent economies• Sample slides

Globalization

Average Tariff Rates(Manufactured Products as % of Value)

1913 1950 1990 2000

France 21 18 5.9 3.9

Germany 20 26 5.9 3.9

Italy 18 25 5.9 3.9

Japan 30 5.3 3.9

Holland 5 11 5.9 3.9

Sweden 20 9 4.4 3.9

Britain 23 5.9 3.9

U.S. 44 14 4.8 3.9

Growth – World Trade & Output

0

500

1000

1500

2000

2500

1950 1960 1970 1980 1990 2000

Trade

Output(GDP)

National Composition of MNCs

1000

2000

3000

4000

5000

6000

7000

8000

Rest of World

Latin America

W.Europe

Asia Pacific

North America

1973 1990 1997 2000

U.S.A. 48.5% 31.5% 32.4% 26%

Japan 3.5 12 15.7 17

U.K. 18.8 6.8 6.6 8

France 7.3 10.4 9.8 13

Germany 8.1 .9 12.7 12

The Changing World Order

The fall of Communism in Eastern Europe and the former Soviet Union.Czechoslovakia has divided itself into two states.Yugoslavia has divided into 5 (often warring) successor states.Pro-democracy movement (suppressed) in China.Latin America has seen both democracy and free market reforms.

Driving to work: The typical “American” experience

Your carYour gasolineYour investmentsYour entertainmentYour morning snackYour news

Globalization

“Has Globalization Gone Too Far?”

Rodrik - California Management Review, Vol. 39, No. 3, Spring 1997

What are the tensions between social stability and globalization?

Globalization

The Impact of Globalization

Jobs and income

Firms move jobs to low cost countries

Countries specialize in efficiently

produced goods and import those

they can not efficiently produce

Increases income in less developed

countries

May lead to income inequality

Labor policies and the environment

Firms move to countries with weak laws

Economic progress leads to stronger laws

By creating wealth and incentives for

technology improvements, world will be

better

Tie strong laws to international

agreements

The Impact of Globalization

What makes a company global?

“What Makes a Company Global”Kogut - HBR Reprint 99106

Multinational / MultidomesticProducts differ greatly among country markets; high transportation costs, no scale economies

GlobalBenefit from worldwide volume; larger production plants (MES), larger production runs, more efficient logistics networks, higher volume distribution networks

Global Success Factors

Industry potentialTimingEntry barriersFirst mover advantage

Preempting leading positions in NICsCreate switching costsBlock access to supply chain

Arbitrage – exploiting differencesCulture, administration, geography, economics“The Forgotten Strategy”

• Ghemawat - HBR Reprint R0311E

Globalization - Exercise

globalEDGE ExerciseglobalEDGE Diagnostic ToolsGLOBE: Globalization Benchmark

Global Ethics

Guiding Principles

Three Guiding PrinciplesRespect for core human values, which determine the absolute moral threshold for all business activities.Respect for local traditions.The belief that context matters when deciding what is right and what is wrong.

“Values in Tension: Ethics Away From Home”Donaldson – HBR Reprint 96502

Global Ethical Perspective

Treat corporate values and formal standards as absolutes.Design and implement conditions of engagement for suppliers and customers.Allow foreign business units to help formulate ethical standards and interpret ethical issues.In host countries, support efforts to decrease institutional corruption.Exercise moral imagination.

Global Ethics

Incentives to be ethicalAvoid legal penalties, bad PR, employee satisfaction

Ethics and corruptionForeign Corrupt Practices Act 1977

Example

Ethics and human rightChina & Tibet

Alien Tort Statute 1789 – Unocal in Myanmar

Ethics and Corruption

After graduating, your first assignment lands you in Asia as the local director of a U.S. pharmaceutical firm. It was a small operation, but you have big plans. You hope to segment your customers, empower your workers, implement just-in-time production, and use the balanced scorecard to keep score. You figure to double your business in the first year.

But right now, you’re thinking it might have been a better idea to take that consulting offer instead.

The first million-dollar shipment of your company’s new HIV-fighting drug has just been removed from the refrigerated C-130 cargo plane. It sits on the steaming tarmac, not 30 feet away, practically melting in the midday heat. Another twenty minutes, and it’s ruined. Unfortunately, you can’t seem to clear it through customs. There is some question as to the approval process that a new product has to go through to enter the country. You’re not sure you can wait.

The friendly local customs official cruising around the airport looks from you to the metal container, trying to decide which of you is sweating more profusely. Leaning against the counter, he reviews your bills of lading and other customs documents. “Your papers look to be in order, but I am just not sure about the proper approval process,” he says. You despair. Re-opening the approval process will take time you don’t have. What should you do?!?

Fortunately, you remember the $1000 traveler’s check in your back pocket that’s supposed to pay for your apartment deposit. You walk over to the official, grab the manifest, stuff the check into the stack of papers, and hand it back to him. A smile spreads across his face. He decides that his insecurity about the approval process has lessened. “You are so thoughtful to understand. I look forward to conducting further business with you. Your cargo is cleared through customs.”

Global Ethics - Case

Hitting the Wall: Nike and International Labor Practices – HBS 9-700-047 Managing a multinational firm involves managing and exploiting differences among countries. In the case of workplace standards and environmental protection, managers have to understand the underlying tradeoffs and balance exploitation of differences with global ethics.

Hitting the Wall: Nike and International Labor Practices – HBS 9-700-047 Managing a multinational firm involves managing and exploiting differences among countries. In the case of workplace standards and environmental protection, managers have to understand the underlying tradeoffs and balance exploitation of differences with global ethics.

Culture

Culture

Culture is a system of values and norms shared among a group of people and, when taken together, constitute a design for living.

NormsSocial rules and guidelines that prescribe appropriate behavior in particular situationsFolkways:• Routine conventions of

everyday lifeMores:• Central to functioning

of society and its social life

NormsSocial rules and guidelines that prescribe appropriate behavior in particular situationsFolkways:• Routine conventions of

everyday lifeMores:• Central to functioning

of society and its social life

ValuesAbstract ideas about what a group believes to be good, right, and desirableThe bedrock of cultureHave emotional significance.• Freedom

ValuesAbstract ideas about what a group believes to be good, right, and desirableThe bedrock of cultureHave emotional significance.• Freedom

What are “American Values?”

Achievement

and success

Individualism

Freedom

Progress

Democracy

Equality

Achievement

and success

Individualism

Freedom

Progress

Democracy

Equality

Views of Another Culture

American culture

How the Americans see the French:-arrogant-flamboyant-hierarchical-emotional

How the French see the Americans:-naive-aggressive-unprincipled-workaholic

Norms and Values

French culture

Theory and empirical foundation is used in a general way to look at differences between cultures.5 dimensions

Power distanceIndividualism vs. collectivismUncertainty avoidanceMasculinity vs. femininityST vs. LT orientation

ButDon’t assume everyone in a country has the same norms and values

Hofstede’s Work-Related Values

U.S.

China

Determinants of Culture

Education

Economic Philosophy

PoliticalPhilosophy

Religion

Language

SocialStructure

Culture:Norms and

Value Systems

Culture:Norms and

Value Systems

Religion Distribution

4%5%

20%

18%

43%

10%

Christian(1.2 Billion)

Islam(1 Billion)

Hindu(500 Million)

Buddhist(250 Million)

Confucian(150 Million)

Other/Nonreligious

Impact of Religion on Business

BuddhismLittle emphasis on entrepreneurial behavior

Christianity“Protestant Work Ethic” and “The Spirit of Capitalism”

ConfucianismLoyalty, reciprocal obligations, and honesty in dealings

HinduismAsceticism may have an impact (spiritual achievements)

Caste system plays a role

IslamFavors market-based systems (free enterprise)No payment or receipt of interest

LanguageAllows people to communicateStructures the way the world is perceivedDirects attention to certain features of the world rather than others Helps define cultureCreates separatist tendencies?

Canada, Belgium, Spain, Cyprus

Non-verbal (93% of communication)Eyebrows, fingers/thumbs, hand gestures, feet, personal space, body gestures (ok, thumbs up)

Allows people to communicateStructures the way the world is perceivedDirects attention to certain features of the world rather than others Helps define cultureCreates separatist tendencies?

Canada, Belgium, Spain, Cyprus

Non-verbal (93% of communication)Eyebrows, fingers/thumbs, hand gestures, feet, personal space, body gestures (ok, thumbs up)

Education

Formal education supplements family role

in teaching valuesand norms

Focus on facts of socialand political nature

of society

Obligations ofcitizenship

For int’l business, it is adeterminant of nationalcompetitive advantage

(post-war Japan)

Medium to learnlanguage, conceptual,

and math skills

Value of personalachievement and

competition

Democracy and TotalitarianismDemocracy and Totalitarianism

DemocracyGovernment by the people, exercised either directly or through elected representatives.

DemocracyGovernment by the people, exercised either directly or through elected representatives.

TotalitarianismGovernment in which one person or political party exercises absolute control over all spheres of human life and opposing political parties are prohibited.

TotalitarianismGovernment in which one person or political party exercises absolute control over all spheres of human life and opposing political parties are prohibited.

Political Philosophy (System)

Economic Philosophy (System)

Market EconomyAll productive activities are privately owned

Command EconomyGoods and services produced, their quantity, and prices are determined by the government

Mixed EconomyParts of the economy are left to private ownership and free market mechanisms while other sectors are state-owned and have government planning

State-Directed EconomyThe state plays a significant role through its “industrial policy” and setting national goals

Market EconomyAll productive activities are privately owned

Command EconomyGoods and services produced, their quantity, and prices are determined by the government

Mixed EconomyParts of the economy are left to private ownership and free market mechanisms while other sectors are state-owned and have government planning

State-Directed EconomyThe state plays a significant role through its “industrial policy” and setting national goals

Social Structure

Individuals vs. GroupsShared sense of identificationDegree to which group is viewed as the primary means of social organizationCooperation – MIT Study

Social StratificationSocial strataSocial mobilityClass system

Individuals vs. GroupsShared sense of identificationDegree to which group is viewed as the primary means of social organizationCooperation – MIT Study

Social StratificationSocial strataSocial mobilityClass system

Cultural Change

Americanization/Westernization

Global brands

• McDonald’s in China

• Levi’s in India

• Sony Walkman in South Africa

• MTV everywhere

Countertrends• Quebec, Russia, Islamic

fundamentalism

Americanization/Westernization

Global brands

• McDonald’s in China

• Levi’s in India

• Sony Walkman in South Africa

• MTV everywhere

Countertrends• Quebec, Russia, Islamic

fundamentalism

Culture - Case

Euro Disney: The First 100 Days” – HBS 9-693-013

Planning processThe role of culture• Differences in culture vs. attitude about

culture

Adapting versus adopting – what is core?

Euro Disney: The First 100 Days” – HBS 9-693-013

Planning processThe role of culture• Differences in culture vs. attitude about

culture

Adapting versus adopting – what is core?

Foreign Exchange

Foreign Exchange & Strategy

“Note on Operating Exposure to Exchange-Rate Changes”

Luehrman – HBS 9-288-018

Example: Losses at JAL Airlines (Hill)Case: Japan’s Automakers Face Endaka – HBS 9-796-030

Impact on business model - What they sell, how they sell, where they manufacture, manufacturing processJapanese response vs. U.S. response

“Note on Operating Exposure to Exchange-Rate Changes”

Luehrman – HBS 9-288-018

Example: Losses at JAL Airlines (Hill)Case: Japan’s Automakers Face Endaka – HBS 9-796-030

Impact on business model - What they sell, how they sell, where they manufacture, manufacturing processJapanese response vs. U.S. response

Foreign Exchange Markets

Foreign Exchange Markets

The FOREX market provides the physical and institutional structure through which the money of one country is exchanged for that of another countryA foreign exchange transaction is an agreement between a buyer and a seller that a fixed amount of one currency will be delivered for some other currency at a specified rate

The FOREX market provides the physical and institutional structure through which the money of one country is exchanged for that of another countryA foreign exchange transaction is an agreement between a buyer and a seller that a fixed amount of one currency will be delivered for some other currency at a specified rate

There are six main characteristics of the FOREX markets which will be discussed

The geographic extentThe three main functionsThe market’s participantsIts daily transaction volumeTypes of transactions including spot, forward and swapsMethods of stating exchange rates, quotations, and changes in exchange rates

There are six main characteristics of the FOREX markets which will be discussed

The geographic extentThe three main functionsThe market’s participantsIts daily transaction volumeTypes of transactions including spot, forward and swapsMethods of stating exchange rates, quotations, and changes in exchange rates

Foreign Exchange Markets

Geographically, the FOREX market spans the globe with prices moving and currencies trading on a 24 hour basisMajor exchanges are located in Singapore, Hong Kong and Tokyo in the EastThen it moves to Bahrain, and London for the European areaAnd on to New York, San Francisco and Sydney

Geographically, the FOREX market spans the globe with prices moving and currencies trading on a 24 hour basisMajor exchanges are located in Singapore, Hong Kong and Tokyo in the EastThen it moves to Bahrain, and London for the European areaAnd on to New York, San Francisco and Sydney

FOREX Market Geography

0

5,000

10,000

15,000

20,000

25,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Measuring FOREX Market Activity: Average Electronic Conversations Per HourMeasuring FOREX Market Activity: Average Electronic Conversations Per Hour

Greenwich Mean Time

Tokyoopens

Asiaclosing

10 AMIn Tokyo

Afternoonin America

Londonclosing

6 pmIn NY

Americasopen

Europeopening

LunchIn Tokyo

FOREX Market Geography

The FOREX market is the mechanism by which participants transfer purchasing power between countries, obtains or provides credit for international trade, and minimizes exposure to exchange rate risk

Transferring of purchasing power is necessary because international trade and capital transactions normally involve parties in countries with different currencies yet each party wishes to transact in their own currency

FOREX Market Functions

Because the movement of goods between countries takes time, inventory in transit must be financed. The FOREX market provides a source of credit via specialized instruments such as letters of creditThe FOREX market provides “hedging” facilities for transferring foreign exchange risk to someone else more willing to carry that risk

Because the movement of goods between countries takes time, inventory in transit must be financed. The FOREX market provides a source of credit via specialized instruments such as letters of creditThe FOREX market provides “hedging” facilities for transferring foreign exchange risk to someone else more willing to carry that risk

FOREX Market Functions

The FOREX market consists of two tiers, the interbank or wholesale market, and the client or retail marketFive broad categories of participants operate within these two tiers

Bank and non bank foreign exchange dealersIndividuals and firms conducting commercial or investment transactionsSpeculators and arbitragersCentral banks and treasuriesForeign exchange brokers

The FOREX market consists of two tiers, the interbank or wholesale market, and the client or retail marketFive broad categories of participants operate within these two tiers

Bank and non bank foreign exchange dealersIndividuals and firms conducting commercial or investment transactionsSpeculators and arbitragersCentral banks and treasuriesForeign exchange brokers

FOREX Market Participants

These participants profit from buying currencies at a bid price and then reselling them at an offer or ask priceCompetition among dealers narrows the spread between the bid and offer rate contributing to the market’s efficiencyDealers on behalf of large international banks often act as market makers, often willing to stand in and buy or sell these currencies without having a counterpart with which to unload the “inventory”

These participants profit from buying currencies at a bid price and then reselling them at an offer or ask priceCompetition among dealers narrows the spread between the bid and offer rate contributing to the market’s efficiencyDealers on behalf of large international banks often act as market makers, often willing to stand in and buy or sell these currencies without having a counterpart with which to unload the “inventory”

Bid price: The price a buyer is willing to pay.Offer (Ask price): the price a seller is willing to receive.Bid-Ask spread: The amount that the ask price exceeds the bid.Market maker: A broker-dealer willing to accept the risk of holding a particular currency in order to facilitate trading in that currency.

Bid price: The price a buyer is willing to pay.Offer (Ask price): the price a seller is willing to receive.Bid-Ask spread: The amount that the ask price exceeds the bid.Market maker: A broker-dealer willing to accept the risk of holding a particular currency in order to facilitate trading in that currency.

Bank/Non-Bank Dealers

They trade amongst other banks and dealers in order to keep their inventory levels at manageable levelsCurrency trading is profitable and often contributes between 10% - 20% of a banks’ average net incomeSmall- to medium-sized banks rarely act as market makers yet still participate in the interbank market

They trade amongst other banks and dealers in order to keep their inventory levels at manageable levelsCurrency trading is profitable and often contributes between 10% - 20% of a banks’ average net incomeSmall- to medium-sized banks rarely act as market makers yet still participate in the interbank market

Bank/Non-Bank Dealers

Importers, exporters, portfolio investors, MNEs, tourists and others use the FOREX market to facilitate execution of commercial or investment transactionsSome of these participants use the market to hedge foreign exchange rate risk

Importers, exporters, portfolio investors, MNEs, tourists and others use the FOREX market to facilitate execution of commercial or investment transactionsSome of these participants use the market to hedge foreign exchange rate risk

Commercial Investment

Speculators and arbitragers seek to profit from trading in the market itselfThey operate for their own interest, without need or obligation to serve clients or ensure a continuous marketSpeculators seek all their profit from exchange rate changesArbitragers try to profit from simultaneous differences in exchange rates in different marketsA large proportion of speculation and arbitrage is conducted on behalf of major banks by traders employed by those banks

Speculators and arbitragers seek to profit from trading in the market itselfThey operate for their own interest, without need or obligation to serve clients or ensure a continuous marketSpeculators seek all their profit from exchange rate changesArbitragers try to profit from simultaneous differences in exchange rates in different marketsA large proportion of speculation and arbitrage is conducted on behalf of major banks by traders employed by those banks

Speculators & Arbitragers

Central banks and treasuries use the market to acquire or spend their country’s currency reserves as well as to influence the price at which their own currency tradesThey may act to support the value of their currency because of their government’s policies or obligations or because of commitments entered through joint float agreements such as the European Monetary System (EMS)Consequently their motive is not to profit but rather influence the foreign exchange value of their currency in a manner that will benefit their interests

Central banks and treasuries use the market to acquire or spend their country’s currency reserves as well as to influence the price at which their own currency tradesThey may act to support the value of their currency because of their government’s policies or obligations or because of commitments entered through joint float agreements such as the European Monetary System (EMS)Consequently their motive is not to profit but rather influence the foreign exchange value of their currency in a manner that will benefit their interests

Central Banks & Treasuries

Foreign exchange brokers are agents who facilitate trading between dealers without themselves becoming principals in the transactionFor this service they charge a small commissionThey maintain instant access to hundreds of dealers worldwide via open lines and at times may maintain such lines with several banks, with separate lines for differing currencies, spot and forward rates

Foreign exchange brokers are agents who facilitate trading between dealers without themselves becoming principals in the transactionFor this service they charge a small commissionThey maintain instant access to hundreds of dealers worldwide via open lines and at times may maintain such lines with several banks, with separate lines for differing currencies, spot and forward rates

Foreign Exchange Brokers

Any Questions?

Types of transactions

Transactions within this market can be executed on a spot, forward, or swap basis

A spot transaction requires almost immediate delivery of foreign exchangeA forward transaction requires delivery of foreign exchange at some future dateA swap transaction is the simultaneous exchange of one foreign currency for another

Transactions within this market can be executed on a spot, forward, or swap basis

A spot transaction requires almost immediate delivery of foreign exchangeA forward transaction requires delivery of foreign exchange at some future dateA swap transaction is the simultaneous exchange of one foreign currency for another

Inter-Bank Market Transactions

A spot transaction in the interbank market is the purchase of foreign exchange, with delivery and payment between banks to take place, normally, on the second following business day

The settlement date is often referred to as the value dateThis is the date when most dollar transactions are settled through the computerized Clearing House Interbank Payment Systems (CHIPS) in New York

A spot transaction in the interbank market is the purchase of foreign exchange, with delivery and payment between banks to take place, normally, on the second following business day

The settlement date is often referred to as the value dateThis is the date when most dollar transactions are settled through the computerized Clearing House Interbank Payment Systems (CHIPS) in New York

Spot Transactions

This transaction requires delivery at a future value date of a specified amount of one currency for anotherThe exchange rate is agreed upon at the time of the transaction, but payment and delivery are delayedForward rates are contracts quoted for value dates of one, two, three, six, nine and twelve months

Terminology typically used is buying or selling forwardA contract to deliver dollars for euros in six months is both buying euros forward for dollars and selling dollars forward for euros

This transaction requires delivery at a future value date of a specified amount of one currency for anotherThe exchange rate is agreed upon at the time of the transaction, but payment and delivery are delayedForward rates are contracts quoted for value dates of one, two, three, six, nine and twelve months

Terminology typically used is buying or selling forwardA contract to deliver dollars for euros in six months is both buying euros forward for dollars and selling dollars forward for euros

Outright Forward Transactions

A swap transaction in the interbank market is the simultaneous purchase and sale of a given amount of foreign exchange for two different value datesBoth purchase and sale are conducted with the same counterpartA common type of swap is a spot against forward

The dealer buys a currency in the spot market and simultaneously sells the same amount back to the same bank in the forward marketSince this transaction occurs at the same time and with the same counterpart, the dealer incurs no exchange rate exposure

A swap transaction in the interbank market is the simultaneous purchase and sale of a given amount of foreign exchange for two different value datesBoth purchase and sale are conducted with the same counterpartA common type of swap is a spot against forward

The dealer buys a currency in the spot market and simultaneously sells the same amount back to the same bank in the forward marketSince this transaction occurs at the same time and with the same counterpart, the dealer incurs no exchange rate exposure

Swap Transactions

Forward-forward swaps – A dealer sells £20,000 forward for dollars for delivery in two months at $1.6870/£ and simultaneously buys £20,000 forward for delivery in three months at $1.6820/£

The difference between the buying and selling price is equivalent to the interest rate differentialThus a swap can be viewed as a technique for borrowing another currency on a fully collateralized basis

Forward-forward swaps – A dealer sells £20,000 forward for dollars for delivery in two months at $1.6870/£ and simultaneously buys £20,000 forward for delivery in three months at $1.6820/£

The difference between the buying and selling price is equivalent to the interest rate differentialThus a swap can be viewed as a technique for borrowing another currency on a fully collateralized basis

Swap Transactions

Non-deliverable forwards (NDFs) – NDFs possess the same characteristics as traditional forward contracts except that they are settled only in US dollars and the foreign currency being sold or bought forward is not delivered

The dollar-settlement feature reflects the fact that NDFs are contracted offshore and are beyond the reach and regulatory frameworks of the home country governmentsPricing of NDFs reflects basic interest rate differentials

Non-deliverable forwards (NDFs) – NDFs possess the same characteristics as traditional forward contracts except that they are settled only in US dollars and the foreign currency being sold or bought forward is not delivered

The dollar-settlement feature reflects the fact that NDFs are contracted offshore and are beyond the reach and regulatory frameworks of the home country governmentsPricing of NDFs reflects basic interest rate differentials

Swap Transactions

The Bank for International Settlements (BIS) estimates that daily global net turnover in traditional FOREX market activity to be US$1,210 billion in April 2001

The Bank for International Settlements (BIS) estimates that daily global net turnover in traditional FOREX market activity to be US$1,210 billion in April 2001

FOREX Market Size

0

100

200

300

400

500

600

700

800

1989 1992 1995 1998 2001

Spot

Forwards

Swaps

Global Foreign Exchange Market Turnover (daily averages in April, billions of US dollars)Global Foreign Exchange Market Turnover (daily averages in April, billions of US dollars)

Source: Bank for International Settlements, “Central Bank Survey of Foreign Exchange and Derivatives Market Activity in April 2001,” October 2001, www.bis.org. Next survey planned for April 2004.

FOREX Market Size

Two of the three categories fell between 1998 and 2001 with spot market daily turnover falling the most, from $568 billion in 1998 to $387 billion in 2001Forward transactions increased slightly from $128 billion in 1998 to $131 billion in 2001Swaps fell to $656 billion in 2001 from $734 billion in 1998

BIS attributes the introduction of the Euro, the growing share of electronic broking in the spot market and consolidation in banking as explanations for the reduction

Two of the three categories fell between 1998 and 2001 with spot market daily turnover falling the most, from $568 billion in 1998 to $387 billion in 2001Forward transactions increased slightly from $128 billion in 1998 to $131 billion in 2001Swaps fell to $656 billion in 2001 from $734 billion in 1998

BIS attributes the introduction of the Euro, the growing share of electronic broking in the spot market and consolidation in banking as explanations for the reduction

FOREX Market Size

0

100

200

300

400

500

600

700

1989 1992 1995 1998 2001

United States

United Kingdom

Japan

Singapore

Germany

Geographic Distribution of Foreign Exchange Market Turnover (daily averages in April, billions of US dollars)Geographic Distribution of Foreign Exchange Market Turnover (daily averages in April, billions of US dollars)

Source: Bank for International Settlements, “Central Bank Survey of Foreign Exchange and Derivatives Market Activity in April 2001,” October 2001, www.bis.org. Next survey planned for April 2004.

FOREX Market Size

0

10

20

30

40

50

60

70

80

90

1989 1992 1995 1998 2001

US dollar

euro

Deutshemark

French franc

EMS currencies

Japanese yen

Pound sterling

Swiss franc

Currency Distribution of Global Foreign Exchange Market Turnover (percentage shares of average daily turnover in April)Currency Distribution of Global Foreign Exchange Market Turnover (percentage shares of average daily turnover in April)

Source: Bank for International Settlements, “Central Bank Survey of Foreign Exchange and Derivatives Market Activity in April 2001,” October 2001, www.bis.org. Next survey planned for April 2004.

FOREX Market Size

A foreign exchange quote is a statement of willingness to buy or sell at an announced rate

In the retail market (newspapers and exchange booths), quotes are often given as the home currency price of the foreign currency

Interbank quotes – professionals state forex quotes in one of two ways

The foreign currency price of one dollar• Sfr1.6000/$, read as 1.600 Swiss francs per

dollar• European quote

The dollar price of a unit of foreign currency

• $0.6250/Sfr, read as 0.625 dollars per Swiss franc

• American quote

A foreign exchange quote is a statement of willingness to buy or sell at an announced rate

In the retail market (newspapers and exchange booths), quotes are often given as the home currency price of the foreign currency

Interbank quotes – professionals state forex quotes in one of two ways

The foreign currency price of one dollar• Sfr1.6000/$, read as 1.600 Swiss francs per

dollar• European quote

The dollar price of a unit of foreign currency

• $0.6250/Sfr, read as 0.625 dollars per Swiss franc

• American quote

FOREX Rates & Quotes

The former quote is considered the “European quote” and the latter is the “American quote”Almost all European currencies, except two, are quoted the European way

The Pound Sterling and the Euro are the exceptionsAdditionally, Australian and New Zealand dollars are also quoted in American terms

The former quote is considered the “European quote” and the latter is the “American quote”Almost all European currencies, except two, are quoted the European way

The Pound Sterling and the Euro are the exceptionsAdditionally, Australian and New Zealand dollars are also quoted in American terms

FOREX Rates & Quotes

Bid and Ask QuotationsInterbank quotes are given as a bid and ask

• The bid is the price at which a dealer will buy another currency

• The ask or offer is the price at which a dealer will sell another currency

– Example: ¥118.27 - ¥118.37/$ is the bid/ask for Japanese yen

– The bank will buy yen at ¥118.27 per dollar and sell yen at ¥118.37 per dollar making profit on the spread

Bid and Ask QuotationsInterbank quotes are given as a bid and ask

• The bid is the price at which a dealer will buy another currency

• The ask or offer is the price at which a dealer will sell another currency

– Example: ¥118.27 - ¥118.37/$ is the bid/ask for Japanese yen

– The bank will buy yen at ¥118.27 per dollar and sell yen at ¥118.37 per dollar making profit on the spread

FOREX Rates & Quotes

Expressing Forward Quotations on a Points Basis

The previously mentioned rates for yen were considered outright quotesForward quotes are different and typically quoted in terms of pointsA point is the last digit of a quotation, with convention dictating the number of digits to the right of the decimal

• Hence a point is equal to 0.0001 of most currencies

Expressing Forward Quotations on a Points Basis

The previously mentioned rates for yen were considered outright quotesForward quotes are different and typically quoted in terms of pointsA point is the last digit of a quotation, with convention dictating the number of digits to the right of the decimal

• Hence a point is equal to 0.0001 of most currencies

FOREX Rates & Quotes

Expressing Forward Quotations on a Points Basis

The yen is quoted only to two decimal pointsA forward quotation is not a foreign exchange rate, rather the difference between the spot and forward ratesExample:

Expressing Forward Quotations on a Points Basis

The yen is quoted only to two decimal pointsA forward quotation is not a foreign exchange rate, rather the difference between the spot and forward ratesExample: Bid Ask

Outright spot: ¥118.27 ¥118.37

Outright forward: ¥116.84 ¥116.97

Plus points (3 months) -1.43 -1.40

FOREX Rates & Quotes

Forward Quotations in Percentage Terms

Forward quotations may also be expressed as the percent-per-annum deviation from the spot rate

• This is similar to the forward discount or premium calculated earlier

The important thing to remember is which currency is being used as the home or base currency

• For indirect quotes (i.e. quote expressed in foreign currency terms), the formula is

Forward Quotations in Percentage Terms

Forward quotations may also be expressed as the percent-per-annum deviation from the spot rate

• This is similar to the forward discount or premium calculated earlier

The important thing to remember is which currency is being used as the home or base currency

• For indirect quotes (i.e. quote expressed in foreign currency terms), the formula is

100 x days

360 x

Foward

Foward -Spot f FC

FOREX Rates & Quotes

Forward Quotations in Percentage Terms• For direct quotes (i.e. quote expressed in home

currency terms), the formula is

Forward Quotations in Percentage Terms• For direct quotes (i.e. quote expressed in home

currency terms), the formula is

100 x days

360 x

Spot

Spot - Forward f H

FOREX Rates & Quotes

Forward Quotations in Percentage TermsExample: Indirect quote

Example: Direct quote

Forward Quotations in Percentage TermsExample: Indirect quote

Example: Direct quote

p.a. 2.32% 100 x 90

360 x

105.04

105.04 - 105.65 f ¥

p.a. 2.32% 100 x 90

360 x

50.00946521

50.00946521-30.00952018 f $

FOREX Rates & Quotes

Direct and Indirect QuotesA direct quote is a home currency price of a unit of a foreign currency

• Sfr1.6000/$ is a direct quote in Switzerland

• $0.625/Sfr is a direct quote in the US

An indirect quote is a foreign currency price in a unit of the home currency

• Sfr1.600/$ is an indirect quote in the US, • $0.625/Sfr is a direct quote in the US and

an indirect quote in Switzerland

Direct and Indirect QuotesA direct quote is a home currency price of a unit of a foreign currency

• Sfr1.6000/$ is a direct quote in Switzerland

• $0.625/Sfr is a direct quote in the US

An indirect quote is a foreign currency price in a unit of the home currency

• Sfr1.600/$ is an indirect quote in the US, • $0.625/Sfr is a direct quote in the US and

an indirect quote in Switzerland

FOREX Rates & Quotes

Cross RatesMany currencies pairs are inactively traded, so their exchange rate is determined through their relationship to a widely traded third currencyExample: A Mexican importer needs Japanese yen to pay for purchases in Tokyo. Both the Mexican peso (Ps) and Japanese yen (¥) are quoted in US dollars

• Assume the following quotes:

Cross RatesMany currencies pairs are inactively traded, so their exchange rate is determined through their relationship to a widely traded third currencyExample: A Mexican importer needs Japanese yen to pay for purchases in Tokyo. Both the Mexican peso (Ps) and Japanese yen (¥) are quoted in US dollars

• Assume the following quotes:

Japanese yen ¥121.13/$

Mexican peso Ps9.190/$

FOREX Rates & Quotes

Cross RatesThe Mexican importer can buy one US dollar for Ps9.190 and with that dollar buy ¥121.13; the cross rate would be

Cross RatesThe Mexican importer can buy one US dollar for Ps9.190 and with that dollar buy ¥121.13; the cross rate would be

SS

P/1806.13 $/190.9P

121.13/$

dollar pesos/USMexican

dollar yen/US Japanes

¥¥

FOREX Rates & Quotes

Intermarket ArbitrageCross rates can be used to check on opportunities for intermarket arbitrageExample: Assume the following exchange rates are quoted

Intermarket ArbitrageCross rates can be used to check on opportunities for intermarket arbitrageExample: Assume the following exchange rates are quoted

Citibank $0.9045/€

Barclays Bank $1.4443/£

Dresdner Bank €1.6200/£

FOREX Rates & Quotes

Intermarket ArbitrageThe cross rate between Citibank and Barclays is

• This cross rate is not the same as Dresdner’s rate quote of €1.5800/£, so an opportunity exists for risk-less profit

Intermarket ArbitrageThe cross rate between Citibank and Barclays is

• This cross rate is not the same as Dresdner’s rate quote of €1.5800/£, so an opportunity exists for risk-less profit

1.5968/ $0.9045/

$1.4443/ £

£ €

€

FOREX Rates & Quotes

Citibank

Dresdner Bank Barclays Bank

End with $1,014,533 Start with $1,000,000

(3) Sell £692,377 to Dresdner Bank at €1.6200/£(4) Receive €1,121,651

(1) Sell $1,000,000 to Barclays Bank at $1.4443/£

(2) Receive £692,377(5) Sell €1,121,651 to Citibank at $0.9045/€

(6) Receive $1,014,533

FOREX Rates & Quotes

Managing Global Expansion

Managing Global Expansion

“Managing Global Expansion: A Conceptual Framework”

Gupta & Govindarajan – Business Horizons, March/April 2000, 45-54 (Reprint BH043) Globalization imperativesDegree of local adaptationLearning potentialEntry barriersCompetitive intensity

FranchisingExporting

Licensing

JointVentures

Wholly OwnedSubsidiaries

Entry Modes

ExportingShip to another country for sale or exchangeAdvantages:

Avoid cost of establishing manufacturing operationsHelp achieve experience curve and location economies

Sony TVs, Matsushita VCRs

Disadvantages:May compete with low-cost location manufacturersPossible high transportation costsTariff barriersPossible lack of control over marketing reps

Example: Heineken Beer (Hill)

Improving Export Performance

Information fromgovernment sources

Export ManagementCompanies

Exportstrategies

Export specialists who act as the export management department or international department for client firms

Bundesregierung.deMiti.go.jpExim.govIta.doc.gov

Top management commitmentStart smallEnter to learn, add to growBuild relationshipsHire locals

An Interesting Fact

Although the U.S. is the largest single market, exporting does not seem to come naturally to U.S. companies. In the U.S., exports account for 5.4% of GNP compared to 26% in Germany, 25% in Canada, and 10.5% in Japan (not most recent statistics).

Advanced Biomedical Devices, Inc.Assessment of Readiness to Export

Team In-Class Exercise (50 points)•Your team has been “hired” to evaluate ABD’s readiness to export. •Drawing on information from the case, your knowledge of factors

affecting global expansion, and what you learn from the CORE

diagnostic tool, prepare a two-page (double-spaced) memo with

your team’s assessment and recommendations. •You may structure the memo however you see fit. •Attach the CORE output as supporting documentation.•The memo is due in two hours. The break-out rooms are available.

globalEDGE – Core Exercise

Licensing

Licensor grants rights to intangible property to another entity for a specified period of time in returnAdvantages:

Reduces development costs and risks of establishing foreign enterprise

• Lack capital for venture; Unfamiliar/volatile market

Overcomes restrictive investment barriersOthers can develop business applications of intangible property

Disadvantages:Lack of controlCross-border licensing may be difficultCreating a competitor

Euro-Disney Japan

Franchising

A franchiser sells intangible property and provides guidelines for operating the business.Advantages:

Reduces costs and risk of establishing enterprise

Disadvantages:May prohibit movement of profits from one country to support operations in another countryQuality control

Joint Ventures

Advantages:Benefit from local partner’s knowledgeShared costs/risks with partnerReduced political risk

Disadvantages:Risk giving control of technology to partnerMay not realize experience curve or location economiesShared ownership can lead to conflict

Strategic Alliances

“Collaborate with your Competitors & Win”

Hamel, Doz & Prahalad – HBR Reprint 89104 Learning

Pro:Quick to executePreempt competitorsPossibly less risky

Con:Often produce disappointing results

• Overpay for firm• Too optimistic about

value creation (hubris)• Culture clash• Problems with

proposed synergies

Establishing a Wholly Owned Subsidiary

Pro:Can build subsidiary it wantsEasy to establish operating routines

Con:Slow to establishRiskyPreemption by aggressive competitors

Acquisition Greenfield

Selecting an Entry Mode

TechnologicalKnow-How

ManagementKnow-How

Wholly owned subsidiary unless1. Venture is structured to reduce risk of loss of technology2. Technology advantage transitory

Then licensing or joint venture OK Franchising, subsidiaries (wholly owned or joint venture)

Pressure forCost

Reduction

Combination of exporting and wholly owned subsidiary

Entry ModeBasis for Competition

Which Foreign Markets?

Market potentialMarket size (e.g., China vs. Taiwan)DemandCosts: Customer acquisition, infrastructureDistance:•Cultural, administrative,

geographic, economic (Comparisons – Wal-Mart in Mexico)

Learning potentialSophisticated/demanding customers?Pace of technology?

Wal-Mart de Mexico

Sam’s Club, Mexico City, 1991Per capita income $2,000

Monterrey 1993 (Laredo)Distribution problems (no NAFTA yet)Ice skates, riding mowers, leaf blowers, fishing

1994 (post NAFTA)Labels on 80,000 productsDecember: Peso crisis, 40% depreciation

By mid-1997, 373 of 1000 non-US storesDistribution centerLocal sourcing (Sony Wega $1600,$600); scaleJoint venture w/ Cifra (WalMex)

Timing of Entry

First-mover advantage.Preempt rivals and capture demandBuild sales volumeMove down experience curve before rivals and achieve cost advantageCreate switching costs

Disadvantages:First mover disadvantage - pioneering costsChanges in government policy

Costs early entrant bears that later

entrant can avoid.

Global Expansion - Cases

Citibank: Launching the Credit Card in Asia Pacific (A) - HBS 9-595-026

Preempting rivals and capturing demand, Market entry analysis, market evaluation, target market selection, product positioning issues

Xerox and Fuji Xerox – HBS 9-391-156

Importance of structural flexibility, autonomy/integration tradeoff, drivers of collaboration, multi-market contact

InternationalManufacturingStrategy

Where to manufacture?

“How to Integrate Work and Deepen Expertise”

Leonard-Barton, Bowen, Clark, Holloway, & Wheelwright – HBR Reprint 94502

Key factorsCountry: Factor costs, CAGE, location externalities, infrastructureTechnological: Economies of scale, MES, manufacturing flexibilityProduct: Value to weight ratio, universality of needs

Technological Factors

Flexible manufacturing technology Available Not Available

Minimum efficient scale High LowFixed costs High Low

Product Factors

Serves universal needs Yes NoValue-to-weight ratio High Low

Country Factors

Differences in factor costs Substantial Few

Substantial Few

Trade barriers Few Many

Differences in political economyDifferences in culture Substantial Few

Concentrated Decentralized

Favored Manufactured Strategy

Location Strategy

The Acer Group’s China Manufacturing Decision – HBS 99M009

Decentralized structure

Role of core competencies

Key considerations• Costs, market presence, infrastructure,

materials management, expats (safety, desire), labor laws, time frame, environment

PEST framework - environment

The Acer Group’s China Manufacturing Decision – HBS 99M009

Decentralized structure

Role of core competencies

Key considerations• Costs, market presence, infrastructure,

materials management, expats (safety, desire), labor laws, time frame, environment

PEST framework - environment

Manufacturing Location - Case

InternationalMarketingStrategy(Global Branding)

“The Lure of Global Branding”

Aaker and Joachimsthaler – HBR Reprint 99601

AdvantagesDisadvantagesWhen is it possible?Developing a global brandManaging a global brand

Global Branding

EMDICO (A) – HBS 9-597-029

Re-launching a global brand in an emerging market

Challenges faced by a late entrant

Impact of cultural and religious considerations on market demand and marketing strategy

Marketing program calculations

Global Branding - Case

InternationalHumanResourceManagement

“The Right Way to Manage Expats”

Black & Gregersen – HBR Reprint 99201

Benefits: Enhance management

experience, knowledge transfer, best

allocation of people, reducing turnover

Constraints: willingness to travel/live

abroad, costs, achieving equity (pay,

taxes, cost of living), impact on career

Developing an Expatriate Policy

Expatriate Policy - Case

Colgate-Palmolive: Managing International Careers – HBS 9-394-184

Leader in attention and carePre-departure, moving, financialNeeds of expat AND familyCompare C-P’s policy to your company’s policyContinuous improvementPre-departure concerns, spouse assistanceSurveys to review and reviseEffective but costlyFocus on selection