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Chapter 1
Introduction to International
Business
1999 West Educational Publishing
2
Managing the Risks of International Business
“THE MANAGEMENT OF INTERNATIONAL BUSINESS IS THE MANAGEMENT OF RISK”
1999 West Educational Publishing
3
Managing Risk Market entry strategy Shifting the risk Using the contract to fix
responsibility, allocate risk and price accordingly
Payment and credit risk Managing distance and
communications
1999 West Educational Publishing
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Managing Risk Managing language and
cultural differences Managing currency and
exchange rate risk
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Managing Risk Political risk? Causes? How to handle? Foreign courts and foreign
law? See DIP SpA v. Commune di Bassano p.39 challenging Italian retail licensing requirements. What result?
1999 West Educational Publishing
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Managing Risks
Currency/Exchange Rate Risks Transaction Risks
* delivery risk
* marine risk
* litigation risk- Gaskin, p.34
1999 West Educational Publishing
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Political Risks
Managing political risk Managing risk of foreign law
and courts - choice of law and forum clauses
Risk of international hostilities
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Implications for International Business Political, economic, and legal environments of a
country influence attractiveness raise ethical Issues
Attractiveness balance long-term risks with short-term
benefits of doing business in a foreign country
benefits depend on: size, wealth, future economic growth
first mover advantages identify “star” future economies
costs are affected by: political payoffs economic sophistication (may be more
costly to operate in LDCs, no infrastructure) legal framework impact on costs
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Implications for International Business
Ethical Issues human rights adherence to same standards
abroad as at home product safety work safety environmental protection
bribes Foreign Corrupt Practices Act
(1977) what is unethical is not necessarily
illegal
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Legal Systems and International Business
Legal Systems and International Business property rights
use of a resource use made of income from resource enforcement issues Public vs private action violations
protection of Intellectual Property patent: inventors’ exclusive rights to manufacture,
use, sale an invention copyright: same for authors, composers, artists,
publishers trademarks: unique designs and names, often
officially registered Paris Convention for the Protection of Industrial
Property (96 countries) WTO/GATT
1999 West Educational Publishing
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Legal Systems and International Business
product safety and product liability criminal / civil liability
contract law document that specifies
conditions under which an exchange will happen
rights/obligations of parties differences based on legal tradition
common law system civil law system
1999 West Educational Publishing
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Forms of International Business Trade International licensing of
technology and intellectual property (trademarks, patents and copyrights)
Foreign direct investment
1999 West Educational Publishing
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External or “arms-length” Modes of Entry
Firm does business overseas without investing in owned assets and own human resources in target market Exporting
Sell “domestically” produced products into foreign markets through local independent agents or directly to customers
Turnkey projects Special case of exporting for firms that
set up production plants or build facilities for others
The “exporting firm” builds the facility overseas, starts it up, turns it over to the host country owner, and then departs
Oil firms, construction firms, manufacturers
1999 West Educational Publishing
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External or “arms-length” Modes (cont.)
Licensing Licensor grants rights to licensee for use of
intangible property over a specified period in return for a fee
Intangible property: patents, inventions, formulas, processes, designs, copyrights, trademarks
Licensing agreement likely allows licensor quality assurance rights over actual use of intangible asset
If licensee sells to consumers using the licensor’s brand name, the license may also give the licensor rights to strategic brand control
Franchising Franchisor, grants franchisee use of intangibles
under the condition that franchisee follow strict rules of operating the business
Mode of operation is part of the brand image International strategic alliances
1999 West Educational Publishing
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“Internal” Modes of Entry
These involve Foreign Direct Investment Wholly owned subsidiaries
Firms owned 100% by a company in a foreign country
International joint ventures Firms that are owned jointly by two
or more otherwise independent firms; most IJVs are between two firms
One (or more) parent firms are non-resident in the host market
Ownership % may vary from majority foreign owned, to 50%-50% owned, to minority owned by the foreign firm
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Trade
Exporting Importing Subject to government
controls over trade: Tariffs non tariff barriers
Trade in services - increasing
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Intellectual Property and Licensing
Intellectual Property Rights: Copyrights: legal rights to an artistic
or written work Trademarks: the legal right to use a
name or symbol; that identifies a firm or its product
Patents: governmental grants to inventors assuring them of the legal right to produce, use and sell their invention for a period of years
1999 West Educational Publishing
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International Licensing Agreements
International licensing agreements: contracts by which the holder of intellectual property will grant certain rights in that property to a foreign firm to use for a period of time under certain conditions in return for a licensing fee
Technology transfer Franchising Agreements : licenses
to use trademark and form of business operations
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Protecting Intellectual Property Importance of IP for US trade Difficulty of combating piracy
1999 West Educational Publishing
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Legal and Political Issues in Technology Transfer Agreements
Regulated by some governments generally in Asia, Latin America,
and the Middle East terms restricted to benefit the
developing country
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Foreign Direct Investment
Ownership and active control of ongoing business concerns including investment in manufacturing, mining, farming and other production facilities
Wholly owned foreign subsidiary
Joint venture Mergers and acquisitions
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The Legal Environment in Developing Countries
How different? Examples: foreign exchange,
controls on trade, licensing and investments
Bhopal discussion Reform and privatization Transition to market
economies
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Ethical Issues
“The law is a floor…but ethical codes and personal values call on us to exceed that which is required by law.”
Do you agree? Source of ethics?
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Ethical Issues Bribes? Child labor? Different working conditions
and wages? Corporate response?
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Conclusion
Global knowledge Trade, licensing and
investment How to manage risk? Good
research, understand risk, know the law and use contract to protect you and help you manage risk.
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Web Sites www.firstgov.gov www.ita.doc.gov/ www.ciber.bus.msu.edu/busres.htm www.ustr.gov www.wto.org www.bea.doc.gov www.worldbank.org
1999 West Educational Publishing
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First Flight v. Pro. Golf, p.15 Facts: Pro Golf negotiated with
Wynn to act as sales representative in Japan. Wynn incorporated FFA in Japan. ProGolf entered into an agreement where FFA could use First Flight trademark. FFA tried to sublicense the trademark.
Pro Golf Case
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Pro Golf Case
Progolf terminated the agreement. Pro Golf learned that they had not properly registered their trademark in Japan. FFA sued for breach of contract and Pro Golf counterclaimed for royalties.
Holding: Pro Golf was permitted to terminate its Japanese sales agency with FFA because it was terminable at will.
1999 West Educational Publishing
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Pro Golf Case (cont.)
However Pro Golf was not entitled to royalties because they had not perfected their rights to the trademark under Japanese law.
1999 West Educational Publishing
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Franchising Case
Raymond Dayan v. McDonald’s p. 18
Facts: Dayan had franchise to operate McDonald’s in Paris. There was a serious problem with QSC (quality, service and cleanliness standards. McDonald’s wanted to terminate the franchise but Dayan objected.
1999 West Educational Publishing
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Dayan v. McDonald’s Corp.
Holding: After much legal maneuvering on two continents, McDonald’s was able to terminate the franchise. Dayan was able to continue his restaurants under a different name.
What is the impact of this on the franchiser?
1999 West Educational Publishing
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DIP SpA v. Commune di Bassano
“…it is sufficient to observe that rules such as those contained in the Italian Act make no distinction according to the origin of the goods distributed by the businesses concerned, that their purpose is not to regulate trade in goods…
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DIP SpA v. Commune di Bassano
And that the restrictive effect which they might have on the free movement of goods are too uncertain and indirect for the obligation which they impose to be regarded as hindering trade between member states.”
1999 West Educational Publishing
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Gaskin v. Stumm Handel Facts: Issue: Is the forum selection clause
in the contract which had been written in German designating the courts of Germany enforceable thus precluding the plaintiff from proceeding in a U.S. Court?
Yes
1999 West Educational Publishing
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Gaskin v. Stumm Handel Why did the court rule for the
defendant? What circumstances might
have altered the result? What advice do you have for
the plaintiff for the future?
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