International Business Questions - Assignment Example

1) ANSWER a) As per PPP theory, the rate has to be 2.80/3.70, which is equal to 0.76 b) As indicated in PPP theory, the one year forward $/£ rate will be 3.10/4.65, which is equal to 0.67$/£. (c) According to the relationship of International Fisher effect and as dollar is appreciated more in relation to pound, the British will have higher interest rates than USA. By using the formula (S1 - S2)/S2 x 100 = i£ - i$, the equation i£ can be solved. Here, S1 = 0.76, S2 = 0.67 and I$ = 10, which yield a value of 23.4%, for the British rates. (Ch. 09 – The Foreign Exchange Market, n.d.) ANSWER 2: In the given situation, the best option would be to wait till the month of December, and then convert ¥400,000 at the spot rate at that time, which can be assumed as $1 = ¥100. In this particular case, one would have $4,000 in the middle of December. If the current 180 day forward rate is lesser than 100¥/$, then, it might be preferable to have a forward contract, because it would lock the rate at a better level than before, as well as reduce the risk. However, if the rate is more than ¥100/$, then whether to wait and watch what the spot does or lock the forward rate, would entirely depend on the person’s risk aversion. A third possibility might also be considered. One could borrow money from any bank, which can be paid back by the ¥400,000, and could receive (400,000/1.03 = ¥388,350 borrowed), and then convert it at present time to US Dollar (388,350/130 = $2,987). This amount can be invested in US Dollars in a US account. But, in order to make it favorable, one would need to make a lot of interest (4,000 - 2,987 = $1,013) that would turn out to be at an annual rate of 51% ((1,013/4000) * 2). If these interest rates can be locked, then it would also reduce the exchange rate risk. However, what should be done is entirely dependent on the available interest rates, the available forward rates, the amount of risk the person willing to take, and also how certain the person is about the spot rate in the month of December would be ¥100 = $1. (Ch. 09 – The Foreign Exchange Market, n.d.) ANSWER 3: Fixed exchange rates are based on arguments regarding speculation, discipline, uncertainty, along with the lack of connection in between exchange rates and trade balance. The need to maintain the fixed exchange rate parity in terms of monetary regulation ensures that money supplies at inflationary rates are not expanded by the governments. A fixed exchange rate regime, in terms of speculation, prevents the speculation possibility. In times of uncertainty, a fixed rate regime actually introduces the degree of certainty by reducing the volatility in the exchange rates, in the international monetary system. Also, in case of trade adjustments, the closeness of the link in between the trade balance and the exchange rate is often questioned by the critics. Floating exchange rates consist of two elements, namely, automatic adjustments of trade balance and the autonomy of monetary policy. In terms of monetary policy autonomy, it is often argued that the monetary policy autonomy is given by the floating exchange rate regime. Under the system of fixed rate, the ability of a country either to contract or expand its money supply as it expects to be fit, is actually limited by the requirement to maintain exchange rate uniformity. In terms of trade balance, under the system of Bretton Woods, in a condition where a particular country develops a permanent deficit in balance and fails to correct it through domestic policy, the currency devaluation would be agreed by IMF. According to the critics of this system, the adjustment mechanism is able to work more smoothly under the floating exchange rate regime. They also argue that when a country runs trade deficit, the imbalance in between the demand and supply of the currency of that particular country in the foreign exchange market, leads to exchange rate depression. It is able to correct the trade deficit by making the imports more expensive and the exports relatively cheaper. It can be inferred that it is entirely dependent on the personal opinion to seek which system is favorable for international business. However, it is quite a known fact that a fixed rate regime that is modeled after Bretton Woods system, does not work. Nonetheless, a different system of fixed rate regime might prove to be more enduring, which provide capability to promote the kind of stability required to facilitate increased rapid growth in the international investment and trade. (Hill C. W. L., 2008, G) ANSWER 4: Lets assume that the dollar value of all the three debts be $100. Case1. (Borrowing USD from Security Pacific Bank at 8%): Amount payable after 1 year: $108 Case2. (Borrowing £ from Midland Bank at 14%): Amount payable in dollar after 1 year = $114 Final dollar equivalent payable after conversion = 114*0.95 = $108.30 Case3. (Borrowing ¥ from Sanwa Bank at 5%): Amount payable in dollar after 1 year = $105 Final dollar equivalent payable after conversion = 105*1.05 = 110.25 So, the US Dollar loan from Security Pacific Bank will be the best loan. (2) ANSWER 1: The theory of competitive advantage in relation to the given differences in between the countries suggests that there should be different activities in the countries, which can be performed in the most efficient manner. In the absence of any barriers in respect to costs and trade, it is quite likely that a number of industries will expand itself outside the countries, which provide the best factor endowments. If a firm is located in the sub-optimal location, then it has to expand internationally or else, switch to some other industry, where the factor endowments will be favorable. However, the firms located in such countries, where factor endowments are favorable for the particular industry, the need for expanding internationally will not arise. The firms might simply focus on domestic market. But, if the firms need to expand outside the national boundary, then it will have to do it through exporting and licensing, and generally not undertake FDI. Therefore, there are a number of firms that that can sustain itself without expanding internationally. (Hill C. W. L., 2008, F) ANSWER 2: Strategic Positioning is really important for a firm in order to establish a viable intra-organizational management network. A firm should be explicit about the choice of strategic emphasis like the differentiation and the cost. It is also very important for the firm to configure the internal operations like marketing, manufacturing, logistics, human resource and information systems, as per requirement. The primary activities involved in the process are designing products as well as product processes and creating a good production. It is really impossible for a firm to succeed without proper sales and marketing. Another important primary activity is customer service; it can be achieved by solving the problems of the customers and providing after sales support and service. The firms should also pay attention to the support activities like human resources, logistics and information systems, which can influence their competitive advantage. (Strategic Positioning, n.d.) ANSWER 3: In order to expand internationally, the firms need to employ International strategy, which are three types, namely, Multidomestic Strategy, Global Strategy and Transnational Strategy. In case of Multidomestic Strategy, the strategy along with operating decisions is actually decentralized to the strategic business units or the SBUs in each of the country. The products and the services are modified according to the local needs and the business units in each of the country are independent of one another. The products in Global Strategy are standardized across the national markets and the decisions regarding the business level strategies are taken in the home office. The strategic business units are also interdependent in this case. Transnational Strategy tries to achieve both local responsiveness and global efficiency. There is strong central control to achieve efficiency and there is decentralization to maximise profit in the local market. The firms make a choice in between these three types of strategies, in order to grow internationally. (International Strategy, n.d.) (3) ANSWER 1: In present time, often companies’ partner with potential competitors in order to sustain and grow in the industry and this partnership is mutually beneficial. This type of strategic alliance is mainly practiced by midsized or small enterprises, in order to improve their productivity, quality and the resultant competitiveness. This is highly advantageous for the firms that are potential competitors and through alliance they can maximise their individual profits as the targeted customers get unified. Strategic alliances with potential competitors enable knowledge transfer, technology transfer, product development and the rise in the production. This can also influence the marketing strategy as all the companies advertise for the single product, which reduces the marketing cost and also is able to reach more targeted customers. (Ahmed Dr. S. M., n.d.) ANSWER 2: The need for control over foreign operations varies with the core competencies and the strategies of the firms. Therefore, the firms need to choose the entry mode according to their core competencies. The firms need to decide which overseas market to enter, the time of the entry along with the strategic commitments. Types of entry modes that depend on the core competencies are Licensing, Exporting, Joint Ventures, Franchising, Wholly Owned Subsidiaries and Turnkey Projects. If a firm is good at technological knowledge, then, it should avoid joint ventures and licensing. It will be beneficial for the firm use wholly owned subsidiary. In comparison, if a firm is sound in management then the firm’s valuable asset is the brand name. In this case, the firm can benefit if it opts franchising. Often, joint ventures happen to be more politically acceptable if the core competency is the management. (Core Competencies and Entry Mode, n.d.) ANSWER 3: In case of Licensing Agreement, the licensor grants the rights to intangible property for a specific time period to another entity, in terms of getting royalty. In strategic foreign alliance, licensing propriety technology to the foreign competitors is beneficial as it reduces the risks and well as development costs. This type of agreement also proves beneficial for the firm’s competitive advantage as it works in unfamiliar as well as politically volatile market. Though Licensing overcomes the barriers of investment, others can develop their business based on the technology of the firm, as there is lack of control over the technology. (Licensing and Franchising, n.d.) (4) ANSWER 1: In this case, the exporter residing in Washington should recommend the importer residing in Philippines to apply for a loan to Eximbank. Eximbank has the facility of direct lending operation, through which the bank lends dollars to the foreign borrowers, for using the amount in purchasing export goods from United States. The borrower in Philippines can use the loan amount to pay to the supplier in United States and repay back the loan with interest to Eximbank. The Eximbank or Export-Import Bank is an independent agency of United States government, which provides financing aid in order to facilitate imports, exports along with the exchange of various commodities in between United States and other countries. (Hill C. W. L., n.d., A) ANSWER 2: Exporters always prefer to get Letter Of Credit from the importers when the importer fails to pay the cost immediately. However, if the importer is in the position where he or she can strongly bargain, then the importer might have to forgo the Letter Of Credit. When this situation arises, the exporter is exposed to the risk that the foreign importer might fail to pay the amount. Therefore, the exporter can buy export credit insurance to negate this possibility. Export Credit Insurance in United States of America is provided by FICA (Foreign Credit Insurance Association). In the case of luxury yacht, if the importer fails to make the necessary payment, Canada laws that are clearly defined, will make it easier for the exporter in California to go after the importer in Canada. But, it is not so easy to go after the importer residing in Ukrainian Republic. It should also be taken into account that the market is more competitive in machine tools than that of yachts. Therefore, there is a chance for the exporter to lose the sales of machine tools, if it insists for Letter Of Credit. (Hill C. W. L., n.d., A) ANSWER 3: While analyzing the pros and cons of in house manufacturing and outsourcing, it can be clearly stated that in house manufacturing is definitely a better option as the technological details remain protected within the firm. It is also effective in reducing the risk of currency appreciation and the rising costs from the independent suppliers. Specialized asset investment also makes the firm dependent on the specific suppliers and improved scheduling is also available. However, outsourcing is also beneficial in some aspects, particularly when the product fails in the market, as the production cost is non recoverable, therefore, the supplier will bear the cost. Flexibility can also be achieved if the better part can be bought or designed. Outsourcing is also effective in lowering down the coordination and organizational costs. It can be inferred that though manufacturing is a slightly preferable option, outsourcing is better in this case. (Hill C. W. L., n.d., B) (5) ANSWER 1: In spite of the fact that diapers serve same functions for the babies across countries and the technical standards can also be similar, but, bodily functions might not be similar and can vary across different cultures. Therefore, the advertising message needs to be altered as per attitudes to be successful in the particular country. For example, a male changing diaper might prove successful in one country but it might be misinterpreted in some other culture. The noise level that is created by the advertisement might differ in Brazil from that of USA. Though the price elasticity and local demand might affect in deciding the pricing in Brazil, but it should not be left to the local managers’ sole discretion. As it is a global business, the firm might be competing with the same competitors in Brazil, just like in any other country. Therefore, the decisions regarding price of one country, might affect the competition and pricing in other markets, too. Likewise, this USA firm might also want to decide same price across the South American countries, so, the firm needs to decide the price and not leave it totally to the local managers. (Hill C. W. L., 2008, D) ANSWER 2: Dispersion of activities does make sense. Products are produced in the location where there is lowest cost and it is marketed by those people who are quite familiar with the local conditions. The coordination task is tremendously complex and perhaps the information that is required for the successful commercialization is not effectively communicated amongst correct people. In order to improve the mentioned condition, better cross functional integration in regard to new development of product is required that can improve the product commercialization along with the development of the product. (Hill C. W. L., 2008, D) ANSWER 3: In a polycentric staffing policy, the host country nationals are required to be recruited in order to manage the subsidiaries, and the parent country nation occupies the key position at the corporate headquarters. It is appropriate for those firms which utilize localization strategy. Advantages of this policy are that it is not so expensive to implement and the cultural myopia is alleviated. Disadvantages are, it limits the career mobility and it also isolates the headquarters from the foreign subsidiaries. Ethnocentric staffing policy is appropriate for the firms utilizing international strategy. In this, the key management positions are occupied by parent country nationals. Its primary disadvantages are that it can lead to cultural myopia and it can also produce resentment in the host country. Advantages of this policy are that it can unite culture and it is also effective in transferring core competencies. Geocentric staffing policy, appropriate for the firms utilizing transnational or global strategy, is a policy where regardless of nationality, best people are employed for the key jobs. Efficient usage of human resources and building strong cultural as well as informational management network are its advantages, whereas, expensive implementation and a chance of national immigration policies limiting the implementation, are its disadvantages. (Hill C. W. L., 2008, E) (6) ANSWER 1: Accounting is the business language through which the firms communicate their financial positions. Accounting standards differ from one country to the other, which makes it really difficult for the creditors, investors and governments to evaluate the firms. IASB or International Accounting Standards Board has attempted to establish a common accounting system across the countries. Accounting system of a country develops in response to the local demands for the accounting information. It is influenced by economic and political ties with the other countries, the relationship in between the providers of capital and business, a country’s economic development level, inflation level of a particular country and the established culture in a particular country. The difference in the above mentioned variables in between the countries result into different accounting systems in different countries. (Hill C. W. L., 2009, C) ANSWER 2: Subsidiaries of the multinational companies are separate entities but their economic entities are not separate. Transactions amongst the members are not of a particular corporate family is not included in the combined financial statements, but, the liabilities, assets, revenues and the expense statements with the external trade parties are included. The law has restricted the inclusion of the transaction statements amongst the members. (Hill M. G. and Irwin, 2005) ANSWER 3: In the financial analysis, the success of international business is largely dependent by the scale to which a particular firm achieves goals of flexibility, efficiency and learning. In most of the cases, it is really difficult to excel in all the three areas at one time. It has been observed that a firm might excel at flexibility, while other might stand out in efficiency and the third one might be outstanding in learning. By efficiency, the firm’s activities and the cost of operations are measured. Flexibility determines the opportunities and local resources of the firm along with measuring how unique the products are. By learning, the brand name, proprietary technology and the management capabilities are determined. These three variables determine the sustainability of a particular firm in the global market. (Cavusgil, Knight and Riesenberger, n.d.) List of References: Ahmed Dr. S. M., (no date), Partnering With Potential Competitors, Partnering and Strategic Alliances, retrieved on February 19, 2009, from Cavusgil, Knight and Riesenberger, (no date), Ch.11 – Global Strategy and Organization, International Business: Strategy, Management and the new Realities, retrieved on February 19, 2009, from Ch. 09 – The Foreign Exchange Market, (no date), retrieved on February 19, 2009, from Core Competencies and Entry Mode, (no date), Entry Strategy and Strategic Alliances – Ch. 14, retrieved on February 19, 2009, from Hill C. W. L., (no date, A), Ch. 13 - Exporting, Importing, and Countertrade, Global Business Today, retrieved on February 19, 2009, from Hill C. W. L., (no date, B), Ch. 14 – Global Production, Outsourcing, and Logistics, Global Business Today, retrieved on February 19, 2009, from Hill C. W. L., (2009, C), Ch. 19 – Accounting in the International Business, International Business 7e, retrieved on February 19, 2009, from Hill C. W. L., (2008, D ), Ch. 15 – Global Marketing and R and D, Global Business Today, retrieved on February 19, 2009, from Hill C. W. L., (2008, E ), Ch. 16 – Global Human Resource Management, Global Business Today, retrieved on February 19, 2009, from Hill C. W. L., (2008, F), Ch. 11 – The Strategy of International Business, Global Business Today, retrieved on February 19, 2009, from Hill C. W. L., (2008, G), Ch. 10 – The International Monetary System, Global Business Today, retrieved on February 19, 2009, from Hill M. G. and Irwin, (2005), Ch. 19 – Accounting in International Business, International Busienss 5e, retrieved on February 19, 2009, from International Strategy, (no date), retrieved on February 19, 2009, from Licensing and Franchising, (no date), Entry Strategy and Strategic Alliances – Ch. 14, retrieved on February 19, 2009, from Strategic Positioning, (no date), Strategy of International Business – Ch. 11, retrieved on February 19, 2009, from Read More