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Chapter 1: Corporate Challenges
Chapter 1: Corporate Challenges
INTRODUCTION
The major changes that have taken place in the last two centuries are introduced, as are the challenges
that will be facing globally oriented businesses functioning as economic surrogates of society in the
twenty-first century.
1. How the world has changed. Were one to ask how many changes have occurred in the past 200
years, it would be possible to list an almost endless number, beginning with the invention of the
telephone and combustible engine and ending at the end of this millennium with the computer, space
travel, genetic engineering, and artificial intelligence.
At a very personal level, the world has come a long way since the days of the fan and wood- burning
stove as means of climate control and flags, smoke signals, and the pony express as means of
communication.
2. There have also been macro changes in the past century. Demographic patterns of growth and
development have forged a path from rural life barely touched by urban communities to the point
where the populations of most societies live and work within an urban- suburban environment and
surrounding rural communities either provide complementary services or sink to the status of economic
backwaters.
3. An evolution in behavioral ideologies. Major political, social, and economic philosophies have
emerged in that same time frame to postulate the key theories of human organization and behavior that
order society today. Most belief systems regarding resource development and allocation, wealth and
income creation and distribution, political structures, and social interaction stem from ancient ideas
articulated into working theories in the nineteenth and twentieth centuries.
4. Technology and control over resources. It can probably be argued that two factors can be given
credit for bringing about many of the changes, constructive as well as destructive, that have affected
humanity. The first factor is a long-term movement toward the concentration of resource development
and use and the organization and conduct of economic activity in the hands of monolithic, globally
oriented private sector businesses known as multinational or transnational corporations. The second
factor is the accelerating pace of technological change. It is reasonable to suspect in this connection that
the momentum of technological change is being increasingly fueled by market-driven corporate
entrepreneurial initiatives, with infrastructure support provided by governments.
5. The force of private enterprise and the state as surrogate of society. The channeling of effort in most
areas of the world to achieve market-driven goals is accelerating economic growth and development in
many societies which a few years ago might have been consigned to perpetual under development. It is
also altering traditional ideas about relationships between the individual, the community, the corporate
business, and the sovereign state. The concern is whether there will be room for the state to continue,
as it has in the past century, as the surrogate of society if private business becomes responsible by fiat
for operating an economy and its competitiveness on a global scale.
B. BUSINESS IN A CHANGING WORLD
1. Fuzzy distinctions between domestic and international business. Separating business into domestic
and international components for discussion purposes is largely irrelevant today.
Businesses become large and prosperous when they adopt global vision and strategy in matters ranging
from the allocation of resources to the production and marketing of their goods and services. The option
of staying small and thinking “local” can be fatal. Even the smallest community-oriented enterprises
wittingly or unwittingly rely on the global sourcing of the goods and services they sell. Knowledgeable
local retailers and wholesalers will routinely attend the major trade shows where their industries are
featured in order to remain current and competitive.
2. Big business is a relatively new phenomenon. There were few large privately owned businesses in
the United States or in the world before the American Revolution or before the Industrial Revolution in
Europe. The few large commercial entities that did flourish did so under close government control or
ownership. Interestingly, among the first enterprises to operate fairly autonomously of government
control were financial institutions, perhaps because many of them started as offshoots of powerful and
aristocratic titled families who acted as moneylenders to their royal overlords.
3. Private ownership is a contemporary idea. The concept of private ownership also was not clearly
established, even in land ownership, until the 19th century. Acceptance of the idea that the factors of
production could be owned by private stockholders and could be worked by private citizens hired and
supervised by professional managers on behalf of those stockholders became rooted in the United
States after 1800 and then spread to other areas.
4. Privatization is a trend. The trend today, following the dynamic growth of private enterprise in the
nineteenth and twentieth centuries, is to encourage even more privately owned and controlled
business. This is a response to observations that a government does not have the where-withal to
micromanage society. It is also a response to a general feeling that the management of human resources
enjoys greater efficiency when left in private hands.
5. The global vision thing. Even the smallest business establishments in the smallest towns are directly
impacted by world events influenced by multinational businesses and governments. The time when a
growth-oriented enterprise could base itself and operate within the borders of a single country and
prosper is probably over. Corporate growth and survival today require a global perspective and strategy.
The principles of business behavior in a global environment are as important to master today as
economics, accounting, and mathematics if managers of economic enterprise are to succeed in this new
arena of global competition, interaction, and interdependence.
1. Six billion and growing. More than 6 billion people inhabit the planet today compared with about 1.5
billion 100 years ago or about 4.4 billion in 1980. This makes the world a more crowded place in which
to live, work, and play. Until this decade, total world population had been growing at an increasing
annual rate until it peaked in the 1980s at about 2%. The current annual rate of population growth is
1.7%.
2. World population will grow, decline, or stay the same? There is a division of opinion as to whether or
not global population growth has peaked. An extreme-case scenario at a 2% annual growth rate would
mean a doubling to more than 12 billion people by the mid- 2030s. More conservative scenarios see the
world's population peaking at less than 9 billion people by the mid-2050s. There is also a doomsday
scenario that suggests the start of a precipitous decline as societies industrialize and families bear fewer
children. One may indeed observe among those countries that have high-income populations, or are
moving rapidly to become high-income societies, a real consistent decline in their birth rates.
3. Population pressure on resources and facilities. Whatever direction population will take, any change
must be anticipated by government and the private sector to enable societies to maintain and improve
the living standards of their constituencies. A stationary or expanding population will call for more
efficient utilization of resources and considerable investments in education, technology development,
and expansion of business and employment. A declining population will require serious planning to
provide social services for greater numbers of the aged and infirm while still maintaining economic
growth and development momentum.
4. The major challenge for the next 50 years. The major challenge for the 21st century will probably be
to support the large and increasing populations with enough resources and infrastructures to sustain
economic growth and development without destroying the environment.
5. The smallest and largest countries of the world. The World Bank lists 209 countries. Some are tiny,
like Grenada with population over slightly more than 92,000. Some have large populations, like China
and India.
6. Who is growing and who is not? Popular literature still talks about “industrial” societies and
“developing” countries. The World Development Report classifies countries as low- income, middle-
income, and high-income economies. All areas with an annual per capita gross national product (GNP) of
more than $9,000 are included among the high-income countries.
7. The richest and the poorest. The five richest industrial countries in terms of annual per capita GNP
are Switzerland, Japan, Denmark, Norway, and the United States. The five poorest countries are
Rwanda, Mozambique, Ethiopia, Tanzania, and Burundi.
1. Part of the world is developing rapidly. Many developing nations are rapidly moving their economies
ahead and are catching up with high-income societies, many of which are themselves surging ahead. In
many areas, people are better off today than ever before and have been enjoying the fruits of sustained
economic growth and development for several decades.
2. Part of the world remains an economic backwater. Unfortunately, the level of material affluence
seen in parts of the world has not spread to many countries in Asia, Africa, Latin America, and the
Caribbean. There has even been some economic regression in parts of Eastern Europe and in the new
republics of the former Soviet Union. With incomes rising rapidly in so many countries, the gap between
the so-called “haves” and “have-nots” remains glaring. In short, everyone in the world may be getting
richer, but the rich are becoming richer faster.
3. Two-class societies. The trend in income distribution patterns in many parts of the world is toward
greater inequality. Globally, an average of 30% of all populations accounts for 70% or more of earned
income. Income inequality is more askew among poorer countries and least askew in the higher income
Scandinavian nations. Some countries, such as Cuba, have achieved income equality but nevertheless
remain poor.
4. Changes in the income gap over time. It is interesting that the ratio of “rich to poor” societies has not
really changed over the years. Some areas have indeed become developed, but they tend to be
geographically and demographically small units like Singapore. Somewhat larger nations, like Taiwan
and South Korea, have developed, to be sure, but mainly by virtue of their special relationship with the
United States. In most other cases, the distance between the affluence of a small part of the global
village and the relative poverty of many of its parts remains great.
E. GLOBAL CHALLENGES
CORPORATE RESPONSIBILITY
The charge to multinational corporations in this era seems to have evolved to include three areas of
responsibility that are much broader and complex than their nineteenth century focus on economic
power and domination for the sole benefit of their owners. John Rockefeller and Henry Flagler grew
their oil, real estate, and railroad empires without much regard for the constituencies they served and
the environments they affected.
1. The Three- Cornered Hat Concept Things are different today. A large corporation today can be said to
wear a three-cornered hat that shelters all its constituencies. Each corner reflects an area of critical
responsibility.
a. Obligation to the stockholders. The first area of corporate endeavor is to protect the interests of its
stockholder owners by making its best efforts to generate reasonably expected returns on their
investment. This is an important activity because not only must earnings be created to meet stockholder
expectations, but additional earnings must be forthcoming to help keep the business going and growing
and to meet its two other significant obligations or responsibilities.
b. Obligation to the human resources. The second area of responsibility is to the employees, the human
resources without which the enterprise cannot exist. It is now generally recognized that companies have
an obligation to provide a safe and wholesome working environment, with equal pay for equal work
along with a compensation package that allows human resources a commonly acceptable standard of
living and a fair opportunity for advancement.
c. Obligation to the community. The third area of responsibility is to the communities that corporations
serve through the production and sale of their goods and services and in which they operate. The idea
that businesses can pollute environments and physically harm people is rapidly becoming universally
unacceptable. No argument is made for banning noxious processes and driving under companies that
produce important products. The argument is that these processes must be changed through new
technologies to eliminate environmental and human damage and that private enterprise must be held
accountable for making the necessary changes.
PEOPLE ISSUES
The continued success of private multinational enterprise may depend upon how well these nerve
centers of economic activity address the basic needs of all societies. Global business’s big challenge will
be to successfully meet those needs and still be able to turn a profit. The fundamental problems that
directly affect the individual, the community, and society at large (to name a few constituencies) are
education, food and energy, healthcare, income and employment, money and banking, shelter,
transportation and communications, and welfare and social services.
1. Education. The great majority of the world remains undereducated and functionally illiterate.
Existence of and access to college- and university-level programs are limited.
2. Food and energy. The industrialization of food production coupled with advances in the agricultural
sciences has enabled supplies to keep pace with population growth. Yet food distribution and availability
remain problems in many areas where low-income societies are unable to meet local demand through
domestic production and cannot afford foreign imports.
3. Healthcare. This remains an eyesore in many countries. Human longevity in the richer areas reaches
an average of 80 years in comparison to 40 to 50 years in the poorest societies.
4. Income and Employment. It is estimated that unemployment rates for industrial countries range from
2 to 15% depending on the country and the state of its economy.
5. Money and Banking. The world of credit and finance, as it known in many high-income countries, is
beginning to expand its ground in the rest of the world. The pace of expansion will have to quicken if
demand is to be stimulated to encourage investments to spread faster to developing areas. A
comprehensive technology-intensive financial sector can be continually tapped as a resource for
investment funding is critical to accelerating the economic growth and development of countries
6. Shelter. It is estimated that over 50% of people in developing areas live without permanent shelter. In
terms of solid numbers, this means that two billion people sleep in makeshift dwellings without running
water or heating, cooking, and sanitary facilities.
7. Transportation and Communications. Mass transit and intercity transit for goods and people are well
established in developed countries, but they are woefully lacking in the Third World.
8. Welfare and Social Services. Social security insurance and all sorts of other social services and
annuities which have been taken for granted for so long among industrial nations barely exist in many
developing areas. There, the extended family is the major source of welfare and social service for non-
self-supporting individuals such the very young, the aged, and the infirm.
CORPORATE CHALLENGES
1. Turning problems into opportunities. Multinational businesses might, at first blush, take the position
that problems faced by much of the world are too great to be resolved by the private sector and that
they should stick to the traditional bread-and-butter markets of the industrial countries. However, the
rush by large corporations to tap Third World markets anywhere they may exist testifies to the fact that
a potential exists for both market share and profits.
2. Taking the long view. Investors and professional managers are taking the long view that these new
markets will someday be industrialized and prosperous. It is therefore the responsibility of the
multinationals to maintain a presence in and to participate in the economic growth and development of
all emerging regions.
3. The environmental challenge. It is clear that the processes of economic change impact the
environment. How long the planet can continue to endure the battering of its infrastructure is a matter
of argument. There is nevertheless general agreement that technologies must be developed and
brought into play that will minimize environmental damage and perhaps even repair damage already
done. Hence, corporate actions will have to balance stockholder enthusiasm and financial viability with
the need to operate environmentally friendly businesses.
4. The resource and technology challenge. There is a school of thought that maintains that resources
are finite. That may not be the case however. The material resources employed in the distant past are
no longer utilized in the same manner today. Ships were once made of wood and used human labor for
locomotion. Today, they are made of plastic and steel and are propelled by diesel fuel or nuclear energy.
The plastics industry itself is a testament to the creation of synthetic resources as a function of the
development of new technologies. Developing and then implementing these new technologies to meet
the needs of a changing world is probably one of the more daunting tasks faced by the multinationals.
Successfully accomplishing those tasks will require the cultivation of a critical mass of skilled and
educated human resources.
1. Developed countries. Nations whose economies are expanding more slowly and whose incomes are
significantly higher than those of other countries. Examples would be the United States and Japan.
2. Developing countries. Nations whose economies are expanding faster than those of their more
mature, industrialized partners. They are some-times called newly industrializing countries. An example
would be Malaysia. Most of the world’s developing countries are classified by the World Bank as “low-
income,” “lower middle-income,” and “high middle- income” states.
3. Globalization. A process of corporate enterprise that involves the procurement of resources from the
best available source worldwide and the production and sale of goods and services in the widest
possible markets.
4. Key people issues. Education, food, energy, healthcare, income, employment, money and banking,
shelter, social services and welfare, transportation and communications, a pollution- free environment.
7. Micro changes. Changes that affect a part of society (e.g., a single family, community, or business
enterprise).
8. Multinational company. A corporation that produces and sells its goods and services in many
countries simultaneously.
10. Privatization. A process of transferring the ownership of assets and the factors of production from
the state to the private sector.
11. Technology. Ideas brought together into applications to create new goods and services or to
improve on existing goods and services.
12. Three-cornered hat. A corporation’s three basic areas of responsibility: an obligation to reasonably
maximize stockholder returns, an obligation to provide its human resources with an adequate standard
of living, and an obligation to behave for the common good of the communities it serves.
1. Capitalism. This philosophy posits that societies should be less macro- and micromanaged by
governments. It suggests that more faith and reliance should be placed in less regulated and controlled
approaches to human affairs. The conceptual basis of capitalist thinking can be traced from the 17th and
18th century physiocrats and mercantilists through Adam Smith, Thomas Malthus, and David Ricardo in
the late 1700s and early 1800s to John Stuart Mill in the mid-1800s and finally to Keynes in the 1900s.
These ideas call for a fundamental freedom of entrepreneurial action in which the role of government is
minimized except to encourage and protect private sector economic activity. Several neo-Malthusian
and Darwinesque theories have emerged in recent decades. They suggest that the key to organized and
continued economic growth and development may be through more “laissez-faire” non-interventionist
public policies in which the private sector is given maximum latitude in determining the course of
economic affairs. This could even be at the expense of pulling away support systems from less fortunate
populations. Societies would self-manage their populations. Only the best, the strongest, and the ablest
would survive the bloodied and bared fangs of this economic liberalism.
2. Communism. Often called socialism, this philosophy perceives the tasks of economic growth and
development as the obligatory domain of government in representing the state in discharging its
responsibilities to the people living within its borders. The factors of production are to be owned and
managed by the state through special government agencies to reach prescribed goals such as full
employment at a given standard of living. Communist ideology is as old as capitalist philosophy. Karl
Marx and Friedrich Engels were its cardinal advocates in the nineteenth century, although its ideas can
be traced back through Hegel, Kant, and Hobbes to Plato. It remains today a doctrine of sociopolitical
order in many parts of the world. The private sector may exist and indeed prosper, but only in a manner
subordinate to state policy.
3. The Mixed Economy. A more pragmatic and balanced philosophy has evolved in the last 30 years. It
seeks to synthesize the extreme positions of capitalism and communism. It accepts the socialist
proposition that larger and more interdependent population groupings need more comprehensive and
interactive central planning to harmonize human affairs for the good of everyone. Hence, a certain
amount of central government planning, intervention, and even ownership of productive assets may be
essential. However, it also embraces the capitalist notion that the productive capability and capacity of
society are best stimulated when left in the hands of private entrepreneurs who know best how to
manage risk and wrestle with unpredictable market forces. The mixed economy calls for more public
and private sector cooperation. It allows for a balance between public and private policy. Government is
charged with the responsibility of macromanaging the economy to reduce the friction and discord that
result from totally unregulated activity. Private capital would be charged with the obligation of
micromanagement by generating market-inspired and profit-oriented enterprises.
Large corporate enterprises among the world’s high-income countries tend to classify themselves as
multinational in the sense that they function in many countries simultaneously. It is not unusual for their
annual reports to indicate that they have planted and office locations in 30 or 40 countries and
distributorship arrangements in many more. Many of these companies call themselves “global”
businesses.
Despite the very wide scope of their activities most large enterprises organize their affairs along three
overlapping modes. Companies function as ethnocentric, polycentric, or geocentric (global)
organizations. Each system involves a set of attitudes that impact a company’s management of human
resources, research and development, production and purchasing, marketing and sales, and finance and
accounting.
1. Ethnocentric Corporations.These are large businesses whose equity base is usually concentrated in a
given geographic area (e.g., the United States). Corporate stockholders and stockholder groups are
mostly of a single national origin. Corporate boards of directors also tend to reflect a particular national
ethos. This creates a strong inclination for top management to develop and implement policies and
programs that are skewed to the needs and wants of the national community hosting the corporate
center without giving the same equal weight to international markets and opportunities.
investments overseas through the widespread use of expatriates, employees from the home office who
are assigned to duty tours with the company’s foreign affiliates.
Ethnocentric organizations tend to jealously guard their research and development facilities and efforts
by concentrating all work in the domestic market. The R&D effort is geared to generating new
technologies to create new products geared to meeting home market demand. Products found suitable
for and successful in the domestic market may then be marketed overseas.
The classical view of managing these functions has been to centralize them in the home country to avoid
logistic problems. There was, and there still remains, a generalized feeling that the domestic resource
base is large and diverse enough to accommodate most material needs. Sourcing materials from within
therefore makes good sense, good politics, and good economics. Ethnocentricity in production and
purchasing is not an exclusively American experience. Its practice was common in European societies
impacted by the Industrial Revolution and their quest for world empire through the processes of
colonization. Countries like England and France had passed laws encouraging the manufacture if finished
or semi-finished goods in exchange for raw materials from vassal states (colonies) thatwere forbidden to
engage in value-added production. Hence, the practice of single- source purchasing, and single-nation
production quickly became obsolete. Corporations came to realize that productivity, followed by
enhanced competitive positioning, led to greater profits. It was noted that productivity always seemed
to rise as enterprises engaged in multiple-source purchasing, outsourcing, and by having multinational
production facilities.
The classical ethnocentric organization relied on domestic brand and product managers to develop the
plans and budgets that would be executed by highly trained sales forces primarily in the domestic
market. Whatever worked at home would then be replicated in overseas markets through a network of
import distributors, import agents, contract manufacturers, licensees, and a few joint venture
arrangements and wholly owned subsidiaries.
An ethnocentric attitude can also be detected in financial and accounting practices. U.S. rules and
procedures vary in concept and substance from those practiced in many other countries. The GAAP
(General Accepted Accounting Procedures), a standard in North America, requires modification or
reconciliation with systems used in other societies. Definitions of financial agency, assets and liabilities,
appropriate debt-equity relationships, and the nature and use of interest,to name a few, are ideas not
universally shared. Difficulties in achieving cross- border corporate cooperation arise when managers
insist upon having affiliate financials mirror home office methodologies. There is also a tendency to
require all foreign-source earnings to be repatriated as rapidly as possible. More often than not, an
ethnocentric company regards foreign markets as cash cows that can be fed technology and know-how
already in use at home and then milked for sheer profit.
2. Polycentric Corporations. These companies tend to organize themselves in a conglomerate mold with
far-flung and diversified operations in many different parts of the world. The focus of effort is less upon
the development of core businesses to achieve overall market share and earnings and more on
allocating bottom line responsibility to regional affiliates, whatever their particular enterprise might be.
Polycentric corporations tend to depend on the host country nationals for most executive positions. In
foreign markets. Senior positions may or may not be reserved for home country expatriates. Implicit in
this approach is the belief that host country nationals are more qualified to the needs of the local
culture and are better connected with their society’s power structure. While some home office training
and indoctrination are usually provided, the foreign affiliate is usually left to its own devices as long as it
continues to generate prescribed financial returns and reaches its announced goals.
Polycentric organizations tend to establish technology and research anddevelopment facilities in many
countries in order to tailor their efforts to the needs of the local market. The R&D effort is geared to
generate new technologies to create new products geared to meet individual national market demand.
Products found suitable for and successful in one market may then be introduced elsewhere, although
that usually happens on an ad hoc basis and does not follow a given policy. This is the approach taken by
Colgate-Palmolive in the development of its technology centers in key areas of the world.
The polycentric approach is to decentralize these functions down to the local level, with an emphasis on
local sourcing and with little control or oversight from the home office. It is only in recent years that
practice has shifted to global sourcing (best-source purchasing). The idea of local sourcing differs little
from its ethnocentric partner, home country sourcing, where the goal is to avoid logistic problems. As in
home country sourcing, buying materials locally makes good sense, good politics, and good economics.
A polycentric organization allows for a diversity of marketing strategies, each suited to a particular area.
A home country marketing plan might be used, but it often has been altered beyond recognition to suit
the local environment. Reliance is less on home country brand and product managers to develop and
implement plans and budgets than on host country marketing executives.
Polycentric companies typically shift responsibility for financial accountability to their foreign affiliates.
Local standards may be applied if bottom line performance can be translated back into a meaningful
earnings picture for the parent company. The need to require all foreign-source earnings to be
repatriated as rapidly as possible is not as urgent for polycentric corporations. This may in a sense reflect
the greater national diversity of their major stockholder groups, whose residency may not be
concentrated in any one country.
3. Geocentric Corporations. These companies tend to organize themselves around a single decision-
making center that regards the world as a single market to be approached with a unified strategy that
does not necessarily reflect the interest or the image of a single national group or perspective.
Geocentric corporations tend to seek, develop, and then manage the most qualified human resources
available from anywhere in the world. They are not committed to either home or host country nationals
for any particular position within their operations. Thus, senior positions may or may not be reserved for
home country or host country nationals.
Geocentric organizations tend to establish technology and research and development facilities in many
countries of the world to meet global objectives. The R&D effort is geared to generate new technologies
to create new products gearedto meet specific market demand that may exist in many countries
simultaneously. Products like wireless communication devices (cellular telephones) are developed to
attract buyers and users in a global setting based upon a commonality of demand.
The geocentric approach is to centralize decision making in these functions to maximize global sourcing
opportunities, referred to above as “global best-source procurement.” Host and home country sourcing
is de-emphasized except when it becomes politically necessary or when it can be shown that local
sourcing makes the most sense on a cost-benefit analysis basis.
A geocentric organization encourages the development of a single global strategy designed to achieve a
worldwide target and market share. The single- strategy approach might still allow for different
marketing strategies spun off from the master plan, each suited to a particular area. A home country
marketing plan might be used, but it often will be altered beyond recognition to suit the global
perspective. Reliance is less on home or host country brand and product managers and more on
managers with global profit-and-loss responsibility to develop and implement plans and budgets.
Geocentric companies typically shift responsibility for financial account- ability to the decision-making
center, wherever that might be. Criteria for financial performance are how well disparate parts of the
enterprise throughout the world contribute synergistically to the well-being of the whole. It might be
acceptable, for example, for the U.S. affiliate to lose money in order that the Mexican affiliate show a
profit, hence encouraging some transfer pricing policies, if, in the final analysis, the overall after-tax
profitability of the entire geocentric enterprise is enhanced. The need to require all foreign-source
CHAPTER 3:
"INTERNATIONAL BUSINESS OPERATIONS"
INTRODUCTION
International business operations covers a range of activities from import-export transactions to foreign
direct investments and foreign portfolio investments. Some of these operations are oriented toward the
production and marketing of goods and services while some are financially oriented and deal with the
cross-border movement of funds.
BREAKDOWN OF INTERNATIONAL BUSINESS OPERATIONS
LICENSING
International licensing is an arrangement whereby a foreign license buys the rights to manufacture
another firm's product in its country for a negotiated fee. This fee is usually distributed through royalty
payment based on units sold.
ADVANTAGE
1. No development cost and risk
DISADVANTAGE
1. No control over business operations
2. Inability to coordinate strategic moves across countries
3. Potential loss of control of technological know-how to foreign countries
FRANCHISING
Franchising is similar to licensing, although it tends to involve much longer-term commitments than
licensing. A franchising agreement involves a franchisor selling limited rights for the use of its brand
name to a franchisee in return for a lump sum payment and a share of the franchise's profits.
ADVANTAGE
DISADVANTAGE
STRATEGIC ALLIANCES
These are intercorporate agreements between two or more companies designed to achieve various
degrees of vertical and horizontal integration. Horizontal and Vertical integration are competitive
strategies that companies use to consolidate their position among competitors.
The distinguishing feature of a strategic alliance lies in its informality. No formal mergers or acquisitions
are involved. The strategic alliance is a temporary marriage of key human and other resources from the
partnering firms. Once objectives are reached, it is normal for the alliance to end.
Foreign direct investments (FDIs) are made by companies into foreign markets for the purpose of
owning or co-owning, controlling, and managing a business enterprise with market share and earnings
objectives
OBJECTIVES
VERTICAL INTEGRATION establishes control over sources of production (e.g., supplies, technology,
financing, labor, and other resources). It can also be used to create control over distribution, marketing,
sales, and after-sales service
CATEGORIES
JOINT VENTURE refers to that kind of business which is formed when two businesses combine together
and meet their different skill set to achieve a common business objective.
WHOLLY OWNED SUBSIDIARIES is a corporation whose equity is almost or entirely wholly owned by
another corporation. The investing company becomes known as the “parent", and the subsidiary is
colloquially called the “sub”.
EXPORTING
Exports are the goods and services produced in one country and purchased by residents of another
country (i.e., if it is produced domestically and sold to someone in a foreign country, it is an export).
NOTE: Exports are one component of international trade. The other component is imports. They are the
goods and services bought by a country's residents that are produced in a foreign country. Combined,
they make up a country's trade balance. When the country exports more than it imports, it has a trade
surplus. When it imports more than it exports, it has a trade deficit.
FOREIGN PORTFOLIO INVESTMENT
A foreign portfolio investment (FPI) is an investment in foreign-based securities (stocks and bonds). The
objective is to generate income through interest, dividends, and capital gains. The larger portion of
international investment flows in the world today are FPIs.
CONTRACT MANUFACTURING
Business model in which a firm hires a contract manufacturer to produce components or final products
based on the hiring firm's design. A contract manufacturer is a manufacturer that enters into a contract
with a firm to produce components or products for that firm . It is a form of outsourcingNOTE:
Companies enter into contract manufacturing (sometimes called contract-filling operations) when
circumstances stop them from producing the product or products reasonably close to their markets,
when market access is denied, or when their own costs are higher than having the goods made by
someone else