MAIN TOPIC 5 ✔ a reserve currency held by many central banks.

GLOBAL FOREIGN
EXCHANGE AND CAPITAL
MARKETS ✔ a transaction currency in many international commodity markets. ✔
an invoice currency in many contracts.
INTRODUCTION

Currency is any form of money in general circulation in a country. ✔ an intervention currency employed by monetary authorities in
However, foreign exchange is money denominated in the currency of market operations to influence their own exchange rates.
another country or - now with the euro - a group of countries. The
foreign exchange market (also known as forex, FX, or the currencies The most frequent traded currency pairs are:
market) is an over-the-counter (OTC) global marketplace that
determines the exchange rate for currencies around the world.
Participants in these markets can buy, sell, exchange, and speculate ✔ the U.S. dollar/euro [28%]
on the relative exchange rates of various currency pairs.

FOREIGN EXCHANGE: BASIC CONCEPT ✔ the U.S. dollar/yen [17%]

LOCATION OF THE FOREIGN EXCHANGE MARKET

✔ FOREIGN EXCHANGE (FX)
✔ London is the largest foreign exchange market (followed by New
- Means the money of a foreign country; a financial instrument
issued by a foreign country such as foreign currency, bank York, Tokyo, and Singapore) because of its strategic location
balances, bank notes, checks and drafts. between Asia and the Americas.

✔ EXCHANGE RATE ✔ Market activity first heightens when Europe and Asia are open and
again when Europe and the United States are open.
- Defined as the rate at which the market converts one currency
into another.
✔ Cross-trading: using the U.S. dollar as a vehicle currency for trades
✔ FOREIGN EXCHANGE MARKET between two other currencies.

• It refers to the mechanism in which currencies can be bought and

sold. ✔ Cross rate: the exchange rate between two non-U.S. dollar
currencies that is computed from the exchange rate of each currency
The Foreign Exchange Market in relation to the U.S. dollar
MAJOR SEGMÉNTS
✔ [Use currency A to buy currency C (US $1), and then use currency
✔ Over-the-counter (OTC) markets: those in which participants C to buy currency B.)
trade directly between two parties, without the use of a central
exchange or other third party. FOREIGN EXCHANGE TERMS AND CONVENTION

✔ Exchange-traded market (ETD): refers to a financial contract that ✔ BID (OR BUY)
are tradable onthestock exchanges.

Average Daily Volume in World Foreign - is the price at which a bank or financial aid services firms is willing
to buy a specific currency.
Exchange Markets 1989-2004.

✔ OFFER
✔ The average daily volume on forex is the total amount of currency
that is traded onthemarket each day.
- refers to the price at which a bank or financial service firm is
THE U.S DOLLAR IS THE MOST WIDELY TRADED willing to sell that currency.
CURRENCY INTHEWORLDBECAUSE IT SERVES AS:
✔ SPREAD
✔ an investment currency in many capital markets.
- the difference between the bid and the offer rates.
✔ AMERICAN TERMS ✔ OPTION: An instrument traded both OTC and on exchanges that
gives the purchaser the right (but not the obligation) as to buy or sell
- the U.S. point of view, i.e., the number of U.S. dollars per unit of a certain amount of foreign currency at a specified exchanges rate
foreign currency within a specified amount of time [more expensive but also more
flexible than a forward contract].
✔ EUROPEAN TERMS (INDIRECT QUOTE)
⮚ STRIKE PRICE: a fixed price at which the owner of the option
can buy (in the case of a call), or sell (in the case of a put), the
- the number of units of foreign currency per U.S. dollar underlying security or commodity.

TYPES OF FOREIGN EXCHANGE MARKETS ⮚ PREMIUM: The fee paid to the writer of the option.

✔ SPOT MARKET EXCHANGES-BASED VS. OVER-THE-COUNTER FX

INSTRUMENTS

- The market in which foreign exchange transaction occur on the FOREIGN EXCHANGE CONVERTIBILITY
spot, i.e., delivery within two business days following the date of
agreement to trade.
✔ CONVERTIBILITY
SPOT RATE: is the exchange rate transacted at a particular moment
by the seller of a currency. - the ability of residents and nonresidents to purchase foreign
currency with a given (domestic) currency without government
✔ FORWARD MARKET restrictions.

- Refers to the currency market for transactions at forward rates. ✔ EXTERNAL CONVERTIBILITY

FORWARD RATE: is the exchange rate at which a buyer and a - the ability of non-residents to purchase foreign currency with a
seller agree to transact a currency at some date in the future. given currency without government limitations.

- forward discount: the forward rate is less than to spot rate

✔ NONCONVERTIBILITY
- forward premium: the forward rate is higher than the spot rate.
- the inability of residents and non-residents to convert a given
FORWARD/FUTURE INSTRUMENT
currency into foreign currency because of government limitations.

✔ FORWARD CONTRACT: A contract that requires the exchange THE USES OF FOREIGN EXCHANGE
of an agree-on amount of a currency on an agree-on date and a
specific exchange rate. ✔ The role of commercial banks:

✔ OUTRIGHT FORWARD: A forward contract that is not - buy and sell foreign exchange.
connected to a spot transaction, i.e., a contact to deliver foreign
- serve as vehicles for payments between domestic and foreign
currency beyond two days following the date of agreement at the
customers. - lend money in foreign denominations.
forward rate.

✔ Business purposes:
✔ FX SWAP: Is an agreement to simultaneously borrow one
currency and lend another at an initial date, then exchanging the
- settlement of international business transactions.
amounts at maturity.
- hedging [risk reduction through loss protection].
✔ CURRENCY SWAP: Is a simultaneously buy and sell of a
- speculation [currency trading on expectations of future prices].
currency for two different dates.
- arbitrage [risk-free profit based on price differentials].
FUTURES CONTRACT: An agreement between two parties to buy
or sell a given currency at a given (negotiated) price on a particular
future date, as specified in a standardized contact to all participants in ✔ interest arbitrage
that currency futures exchange [not as flexible as a forward contract].
THE FX TRADING PROCESS
 - Countries such as Germany, Japan, and Taiwan that have the large
✔ To settle foreign exchange balances, companies may work through: balanced-of-trade surpluses held us reserves.
- Local banks
GLOBAL CAPITAL MARKETS INTERNATIONAL BONDS
- Commercial and investment banks (OTC market)

- Security exchange brokers ✔ Foreign bonds: Sold outside of the borrower’s home country but
denominated in the currency of the country of issue.
- Banks deal with each other in the interbank market, primarily
through foreign-exchanges brokers.
✔ Eurobonds: Sold in countries other than the one whose currency the
- Brokers are specialist intermediaries who facilitate transactions in bond is denominated; usually underwritten by a syndicate of banks
the interbank market by matching the best bid and offer quotas. from different countries; typically sold over the-counter.

✔ Banks’ FX dealers can trade foreign exchange: ✔ Global bond: Registered in different national markets according to
the registration requirements of each market; traded simultaneously
- directly with other dealers in numerous capital market.

- through voice brokers Eurobonds may have currency options which allow the creditor to
demand repayment in one off several currencies, thus reducing the
- through electronic brokerage systems exchange risk.

THE OVER-THE-COUNTER- MARKET:

✔ American Depository Receipt (ADR): A negotiable certificate
COMMERCIAL AND INVESTMENT BANK
issued by U.S. bank that represents underlying shares of stock of a
foreign corporation held in trust at a custodial bank in a foreign
✔ Top banks in the interbank fx markets are so ranked because of country.
their ability to: - Trade in specific market locations
✔ In addition to ADRs, there are:
- Handle major currencies

- Handle major cross trades - Global depository receipts

- Deal in specific currencies - European depository receipts

- Handle derivatives (forwards, options, future, swaps) Depository receipts are traded like stocks, with each receipt
representing some number of shares of underlying stocks.
- Conduct key market research
CONCLUSIONS:
GLOBAL CAPITAL MARKETS EUROCURRENCIES -
Eurocurrencies: Any currency banked outside its country of origin. ⮚ Approximately U.S. $1.2 trillion in foreign exchange is traded each
day.
- Eurocurrencies Market: An offshore, wholesale currency market
[started with the deposit of U.S. dollars in London banks]. ⮚ The major institutions that trade foreign exchange are the large
commercial and investment banks (over-the-counter) and securities
-Eurodollars: dollars banked outside of the United States, i.e., a exchanges.
certificate of deposit in dollars in a bank located outside of the U.S
(constitute 65-80% of the Eurocurrency market) ⮚ The U.S. dollar is the most widely traded currency in the world,
but London represents the main foreign exchange market in the
Eurocurrencies are also known as offshore currencies, while world.
currencies banked within their country of origin are known as
onshore currencies. ⮚ Some players buy and sell foreign exchange to settle trade
transactions, some for purposes of foreign direct investment, others
MAJOR SOURCES OF EUROCURRENCIES
for purposes of portfolio investment, and still others for arbitrage and
speculations.
- Foreign governments or individual who want to hold dollars outside
of the United States. - MNEs that have cash in excess of current
needs. MODULE 6

- European banks with foreign currency in excess of current need. The Strategy of International Business

Shift from micro environment to the firm itself

Shifting from the micro environment to the firm itself refers to a - Profitable Growth is the combination of profitability and growth,
strategic focus on internal factors and resources within a company more precisely the combination of Economic Profitability and
rather than external market dynamics. This shift allows managers to Growth of Free cash flows.
assess and optimize their internal processes, resources, and
capabilities to compete more effectively. Determinants of enterprise value

To increase revenue and profitability by expanding operations in ● The determinants of enterprise value are crucial factors that
foreign markets, organizations can leverage their existing strengths, collectively determine the overall value of a company:
such as brand recognition or technology, to tap into new customer
bases abroad. By adapting their products or services to suit local ● Enterprise Valuation: This is the fundamental measure of a
preferences and navigating regulatory and cultural challenges, they company's total value, encompassing factors like market
can access new revenue streams and potentially reduce costs through capitalization, debt, and various adjustments. It provides an
economies of scale or lower production costs in foreign markets. allencompassing view of the company's worth.

Action managers take to complete more effectively ● Profitability: Higher profitability is a key driver of enterprise
value, as it signifies a company's ability to generate earnings.
To compete more effectively, managers can implement several key Companies with strong profits often command higher valuations in
actions. Firstly, they should analyze market trends and competitors to the market.
make informed strategic decisions. Secondly, they can optimize
internal processes and resource allocation to enhance efficiency. ● Profit Growth: The trajectory of profit growth is also a
Lastly, fostering a culture of innovation and adaptability within the determinant. Consistent growth in profits over time indicates a
organization can help managers respond effectively to changing healthy and attractive business, which can lead to an increase in
business environments and seize opportunities for growth. enterprise value.

How organization can increase revenue (and profitability) by ● Cost Reduction: By efficiently managing and reducing costs, a
expanding their operations in foreign markets company can improve its profitability, which, in turn, can boost its
enterprise value. Effective cost control enhances a company's
Expanding operations in foreign markets can boost an organization's financial performance. Adding Value and Raising Prices: Companies
revenue and profitability by tapping into new customer bases and that can add value to their products or services and effectively raise
markets. To achieve this, organizations can adapt their products or prices often see an increase in enterprise value. This indicates that the
services to suit local preferences, access new revenue streams, and market perceives the company's offerings as more valuable.
potentially reduce costs through economies of scale or lower
production costs in foreign markets. Additionally, expanding globally ● Selling More in Existing Markets: Expanding market share
can reduce reliance on a single market, diversifying revenue sources within existing markets can enhance a company's revenue, indicating
and potentially mitigating risks associated with fluctuations in strong demand for its products. This can contribute to a higher
domestic markets. enterprise value by demonstrating growth potential.

Basic Principles of Strategy • Entering New Markets: Expanding into new markets can provide
access to additional revenue streams and growth opportunities.
Strategy and the firm Successfully entering new markets is often seen as a positive signal
by investors and can impact a company's enterprise value positively.
A firm's strategy is a comprehensive plan to achieve its goals in the
face of these conditions. Strategy defines how a firm will achieve Strategy and the Firm
long-term success.
Value Creation
• Goals is to maximize the value of the firm for owners and
shareholders • In general, the more value customers place on a firm's products, the
higher the price the firm can charge for those products.
- Profit maximization is the management of financial resources
through a range of activities to increase the profits of the company. • It was essential base to support a profitable and lasting business.
Wealth Maximization manages financial resources in such a way that Value creation for customers helps sell products and services,
there is increase in the value of shares of a company's shareholders. creating value for employees results in higher efficiency and creating
value for faster return on investment and good sales.
• Profitability
• Value is what the customer believes about the product or services to
- Profitability can be defined as either accounting profits or economic which worth to their satisfaction while the cost of the product or
profits. Traditionally, farm profits have been computed by using service is the amount, they spend to produce what they offer to the
“accounting profits”. To understand accounting profits, think of your market.
income tax return.
• Low-Cost Strategy enables the firm to sell its product/service with a
• Profit Growth lower price compared to its competitors because of lower costs of
producing products/service. For example, using the modern
technology because its innovation it will help the business/company greater profits and lower costs. Innovation is also a useful way to
to lessen the used of the manpower. While differentiation strategy, is grow your business.
an approach to make a business unique and distinct from the
competitors, in order to stand out from them and give people a reason • Human Resources- functions of recruiting, hiring, retaining and
to choose their company over others. For, example is the company of growing right-fit human resources as a key part of the support
Tesla they differentiate itself from other auto brands because their component.
cars are innovative, high-end, and battery-operated.
• Information systems- which allow the suppliers to manage their
• As a result of this, it will be their strength and serve as a own inventory.
competitive advantage in the industry using these two strategies.
Operations. Any part of a business that converts the raw materials
Strategic Positioning into a final product or service is a part of operations.

Strategic positioning is all about where a company stands in the • Infrastructure action activities- a number of activities including
market. It's how a business distinguishes itself from its competitors general (strategic) management, planning, finance, accounting, legal,
and how it is perceived by customers in comparison to other government affairs and quality management. Infrastructure usually
companies in the industry. By understanding its position, a business supports the entire value chain, and not individual activities.
can make strategic decisions that will help it succeed.
VALUE CHAIN
Porter
- A value chain is a series of consecutive steps that go into the
❖ A firm should be explicit about its choice of strategic emphasis creation of a finished product, from its initial design to its arrival at a
with regard to value creation (differentiation) and low cost. A customer's door. The chain identifies each step in the process at
firm's strategic emphasis on value creation and low cost should be which value is added, including the sourcing, manufacturing, and
clearly articulated to align its competitive approach with market marketing stages of its production. The purpose of a value-chain
demands. analysis is to increase production efficiency so that a company can
deliver maximum value for the least possible cost.
❖ A firm should configure its internal operations to support that
COMPONENTS OF VALUE CHAIN
strategic emphasis. A firm's internal operations play a crucial role in
facilitating its strategic emphasis. By configuring its internal In his concept of a value chain, Porter splits a business's activities
processes, systems, and structures to align with its strategic goals, a into two categories, "primary" and "support,". Specific activities in
company can enhance its overall efficiency and effectiveness. each category will vary according to the industry.

❖ Efficiency frontier. The efficient frontier, also known as the Primary Activities
portfolio frontier, is a set of ideal or optimal portfolios expected to
give the highest return for a minimal return. It manifests the risk-and Primary activities consist of five components, and all are essential for
return trade-off of a portfolio. adding value and creating competitive advantage:

❖ Diminishing Returns. The law of diminishing returns is an Inbound logistics include functions like receiving, warehousing, and
economic principle stating that as investment in a particular area managing inventory.
increases, the rate of profit from that investment, after a certain point,
cannot continue to increase if other variables remain at a constant. Operations include procedures for converting raw materials into a
finished product.
The Firm as the Value Chain
Outbound logistics include activities to distribute a final product to a
• Marketing and sales- include strategy like advertising, promotion, consumer.
and pricing that will increase visibility and help you reach the right
audience. Programs like customer service, maintenance, repair, Marketing and sales include strategies to enhance visibility and
refund, and exchange are examples of services that aim to maintain target appropriate customers—such as advertising, promotion, and
goods and improve the customer experience. pricing.

• Materials management- is the process of managing and Service includes programs to maintain products and enhance the
controlling the materials used in the production of goods and consumer experience—like customer service, maintenance, repair,
services. It's a critical part of the supply chain because it ensures the refund, and exchange.
quality of materials used in the production process as well as the
efficient and cost-effective use of resources. Support Activities

• R&D- can lead to innovations in your business. These may be in The role of support activities is to help make the primary activities
terms of new products and services, improved processes and new more efficient. When you increase the efficiency of any of the four
ways to interact with your customers. These innovations can result in support activities, it benefits at least one of the five primary activities.
These support activities are generally denoted as overhead costs on a
company's income statement:
Procurement concerns how a company obtains raw materials. SUPPORT ACTIVITIES

Technological development is used at a firm's research and Support activities are crucial for the smooth functioning of a firm and
development (R&D) stage—like designing and developing contribute to its overall value creation.
manufacturing techniques and automating processes.
➢ One such activity is providing inputs that allow primary activities
Human resources (HR) management involves hiring and retaining to occur. This involves procuring raw materials, equipment, and other
employees who will fulfill the firm's business strategy and help resources necessary for production.
design, market, and sell the product.
By ensuring the availability of these inputs, firms can carry out their
Infrastructure includes company systems and the composition of its primary activities efficiently.
management team—such as planning, accounting, finance, and
quality control. ➢ Information systems play a vital role in managing a firm's value
creation activities. They can alter the efficiency and effectiveness
The firm as a value Chain continued with which a firm operates by streamlining processes, improving
communication, and enhancing decision-making. For example,
• Primary Activities
implementing an enterprise resource planning (ERP) system can
integrate various functions like finance, human resources, and supply
The primary purpose of a firm is to create value for its stakeholders,
chain management into one cohesive system. This integration enables
which includes customers, employees, shareholders, and the
real-time data sharing and analysis, leading to better coordination
community. This value can be achieved through various means, each
among different departments.
with its own primary purpose.

➢ Logistics is another critical support activity that controls the

➢ The design, creation, and delivery of a product are essential for a
transmission of physical materials through the value chain. It
firm to generate value. By designing innovative and high-quality
involves managing transportation, warehousing, inventory control,
products that meet customer needs and preferences, firms can
and order processing. Effective logistics ensures timely delivery of
differentiate themselves from competitors and attract more
products or services to customers while minimizing costs. By
customers. The production process plays a crucial role in ensuring
optimizing logistics operations, firms can enhance customer
that these products are manufactured efficiently and effectively.
satisfaction by reducing lead times and improving product
Research and development (R&D) focus on improving the design and availability.
production process. Through R&D activities, firms can enhance their
Human resources are responsible for ensuring that the company has
products' features or develop new ones to stay ahead in the market.
the right mix of skilled individuals. This involves recruiting, hiring,
This continuous improvement helps firms maintain their competitive
and retaining talented employees who possess the necessary skills
edge and increase customers satisfaction.
and qualifications to contribute to the success of the organization.
➢ Marketing plays a vital role in creating value after the sale of a Additionally, human resources also play a vital role in providing
training and development opportunities for employees to enhance
product. Effective marketing strategies can increase brand awareness,
their skills and knowledge.
promote customer loyalty, and provide support services that enhance
the overall customer experience. Value after-sale service ensures
➢ Infrastructure refers to the organization's structure, control
customer satisfaction even after they have made their purchase.
systems, and culture. An effective organizational structure ensures
➢ Production is concerned with creating goods or services efficiently clear lines of communication and accountability within the firm.
Control systems help monitor performance, identify areas for
to meet customer demand while minimizing costs. Efficient
improvement, and ensure compliance with regulations. Furthermore,
production processes enable firms to offer competitive prices without
a positive organizational culture fosters teamwork, innovation, and
compromising quality.
employee engagement.
➢ Marketing and sales activities contribute to increasing the
Global Expansion, Profitability and Profit Growth
perceived value of a product by effectively communicating its
benefits to potential customers. Additionally, these activities help Expanding the Market: Leveraging Products and Competencies
firms understand customer needs better through market research and
feedback collection. Market expansion is the most important step for the development of a
business because if a company plans to expand its market, it often
➢ After-sale service and support play a crucial role in enhancing becomes the key to their success.
customer satisfaction and loyalty. When customers purchase a
product or service from a firm, they expect it to function properly and • Core competence
meet their needs. However, there may be instances where the product
requires maintenance or repair. This is where after-sale service comes The main ability for global expansion that brings profitable and profit
into play. By providing timely and efficient after-sale service, firms growth due to business expansion is to know the right research on
can ensure that their customers' issues are resolved promptly, leading target markets for business development.
to increased customer satisfaction.
• Bedrock of a firm’s competitive advantage
The company's ability to provide a product or service that is superior 2. Differences in Infrastructure and Traditional Practices
to their rival companies because it can be obtained by analyzing the
needs of the market and developing products or services that better Pressures for local responsiveness arise from differences in
meet them. infrastructure or traditional practices among countries, creating a
need to customize products accordingly. Fulfilling this need may
Location Economies require the delegation of manufacturing and production functions to
foreign subsidiaries.
Enemies in a business and location cause a decrease in the value of
the property in the company, resulting in a lower amount of profit. 3. Differences in Distribution Channels

• Each company can plan for its unique product offering and its A firm’s marketing strategies may have to be responsive to
customer services that competitors cannot match. differences in distribution channels among countries, which may
necessitate the delegation of marketing functions to national
• Creating a global web subsidiaries.

• Creating a global web presence can be a complex process, but it can 4. Host-Government Demands
open up significant opportunities for reaching a diverse and extensive
audience. It's essential to plan carefully and stay responsive to the Economic and political demands imposed by host-country
ever-changing demands of international markets. governments may require local. More generally, threats of
protectionism, economic nationalism, and local content rules (which
• Caveats require that a certain percentage of a product should be manufactured
locally) dictate that international businesses manufacture locally.
• Refers to warnings, precautions, or conditions that should be
considered when discussing a topic or making decisions. Caveats COST PRESSURES AND PRESSURES FOR LOCAL
help ensure that information is presented responsibly and that
individuals make informed decisions while understanding potential Rise of Regionalism
limitations or risks.
Traditionally, we have tended to think of pressures for local
Pressures for Cost Reductions responsiveness as being derived from national differences in tastes
and preferences, infrastructure, and the like. While this is still often
Pressures for cost reduction and local responsiveness are two critical the case, there is also a tendency toward the convergence of tastes,
factors that influence a company's strategic choices when it comes to preferences, infrastructure, distribution channels, and host-
international business. These pressures often represent a trade-off, government demands with a broader region that is composed of two
and companies must strike a balance between them. The strategic or more nations. We tend to see this when there are strong pressures
choice a company makes is often influenced by the degree of for convergence due to, for example, a shared history and culture or
emphasis it places on cost reduction versus local responsiveness. the establishment of a trading block where there are deliberate
Some companies opt for a global strategy, prioritizing cost reduction attempts to harmonize trade policies, infrastructure, regulations, and
and standardization, while others adopt a multi-domestic strategy, the like. The most obvious example of a region is the European
customizing their offerings for local markets. There are also hybrid Union, and particularly the euro zone countries within that trade bloc,
approaches that aim to balance both factors, such as the transnational where there are in forces that are pushing toward convergence). The
strategy, which seeks to achieve global efficiency and local creation of a single EU market—with a single currency, common
responsiveness simultaneously. business regulations, standard infrastructure, and so on— cannot help
but result in the reduction of certain national differences among
PRESSURES FOR LOCAL RESPONSIVENESS countries within the EU and the creation of one regional rather than
several national markets. Indeed, at the economic level at least, that is
1. Differences in Customer Tastes and Preferences
the explicit intent of the EU. Taking a regional perspective is
Customer demands for local customization are on the decline important because it may suggest that localization at the regional
worldwide in some markets, but not others. Strong pressures for local rather than the national level is the appropriate strategic response.
responsiveness emerge when customer tases and preferences differ The ability to standardize a product offering within a region allows
significantly between countries, as they often do for deeply for the attainment of greater scale economies, and hence lower costs,
embedded historic or cultural reasons. In such cases, a multinational’s than if each nation had to have its own offering. At the same time,
products sand marketing message have to be customized to appeal to this perspective should not be pushed too far.
the tastes and preferences of local customers. This typically creates
CHOOSING A STRATEGY
pressure to delegate production and marketing responsibilities and
functions to a firm’s overseas subsidiaries. However, this argument Pressures for local responsiveness (e.g., due to customers’ needs and
may not hold in many consumer goods markets. Significant preferences) imply that it may not be possible for a firm to realize the
differences in consumer tastes and preferences still exist across full benefits from economies of scale, learning effects, and location
nations and cultures. Managers in international businesses do not yet economies. In fact, it may not be possible or even realistic to think
have the luxury of being able to ignore these differences, and they that a firm can serve the global marketplace from a single, low-cost
may not for a long time to come. location, producing a globally standardized product and marketing it
worldwide to attain the cost reductions associated with experience
effects. The need to customize the product to local conditions may low costs through location economies, economies of scale, and
work against the implementation of such a strategy. learning effects; differentiate their product offering across geographic
markets to account for local differences; and foster a multidirectional
Although such customization brings benefits, it also limits the ability flow of skills between different subsidiaries in the firm’s global
of a firm to realize significant scale economies and location network of operations. How best to implement a transnational
economies. In addition, pressures for local responsiveness imply that strategy is one of the most complex questions large multinationals are
it may not be possible to leverage skills and products associated with grappling with today. Few if any enterprises have perfected this
a firm’s core competencies fully from one nation to another. How do strategic posture. But some clues as to the right approach can be
differences in the strength of pressures for cost reductions versus derived from a number of companies.
those for local responsiveness affect a firm’s choice of strategy?
Firms typically choose among four main strategic postures when 4. INTERNATIONAL STRATEGY
competing internationally. These can be characterized as a global
standardization strategy, a localization strategy, a transnational Sometimes it is possible to identify multinational firms that find
strategy, and an international strategy. The appropriateness of each themselves in the fortunate position of being confronted with low-
strategy varies given the extent of pressures for cost reductions and cost pressures and low pressures for local responsiveness. Many of
local responsiveness. these enterprises have pursued an international strategy, taking
products first produced for their domestic market and selling them
FOUR INTERNATIONAL STRATEGIES internationally with only minimal local customization. The
distinguishing feature of many such firms is that they are selling a
1. GLOBAL STANDARDIZATION STRATEGY product that serves universal needs, but they do not face significant
competitors, and thus unlike firms pursuing a global standardization
Firms that pursue a global standardization strategy focus on strategy, they are not confronted with pressures to reduce their cost
increasing profitability and profit growth by reaping the cost structure.
reductions that come from economies of scale, learning effects, and
location economies. Their strategic goal is to pursue a low-cost EXPORT AND IMPORT STRATEGY
strategy on a global scale. The production, marketing, R&D, and
supply chain activities of firms pursuing a global standardization Exporting is an effective entry strategy for companies that are just
strategy are concentrated in a few favorable locations. Firms pursuing beginning to enter a new foreign market. Importing refers to buying
a global standardization strategy try not to customize their product goods and services from foreign sources and bringing them back into
offering and marketing strategy to local conditions because the home country.
customization involves shorter production runs and the duplication of
functions, which tend to raise costs. Instead, they prefer to market a •Exporting is defined as the sale of products and services in foreign
standardized product worldwide so that they can reap the maximum countries that are sourced or made in the home country. Importing is
benefits from economies of scale and learning effects. They also tend the flipside of exporting.
to use their cost advantage to support aggressive pricing in world
markets. •Importing refers to buying goods and services from foreign sources
and bringing them back into the home country. Importing is also
2. LOCALIZATION STRATEGY known as global sourcing

A localization strategy focuses on increasing profitability by Why is importing and exporting goods important?
customizing the firm’s goods or services so that they provide a good
match to tastes and preferences in different national markets. As soon as a business starts operating internationally, there are many
Localization is most appropriate when there are substantial additional factors which can have a huge impact on its success.
differences across nations with regard to consumer tastes and Exporting and importing goods is not just the core of any large,
preferences and where cost pressures are not too intense. By successful business; it also helps national economies grow and
customizing the product offering to local demands, the firm increases expand. Each country is endowed with some specific resources. At
the value of that product in the local market. the same time, a country may lack other resources in order to develop
and improve its overall economy. For example, while some countries
3. TRANSNATIONAL STRATEGY are rich in minerals and precious metals or fossil fuels, others are
experiencing a shortage of these resources. Some countries have
We have argued that a global standardization strategy makes most highly developed educational systems or infrastructures, while others
sense when cost pressures are intense and demands for local do not. Once countries start exporting whatever they are rich in, as
responsiveness are limited. Conversely, a localization strategy makes well as importing goods they lack, their economies begin developing.
most sense when demands for local responsiveness are high but cost Importing and exporting goods is not only important for businesses; it
pressures are moderate or low. What happens, however, when the is important for individual consumers, too. Consumers can benefit
firm simultaneously faces both strong cost pressures and strong from certain products or components that are not produced locally,
pressures for local responsiveness? How can managers balance the but are available to purchase online from a business abroad.
competing and inconsistent demands such divergent pressures place
on the firm? According to some researchers, the answer is to pursue WHY DO COMPANIES EXPORT?
what has been called a transnational strategy. In essence, firms that
pursue a transnational strategy are trying to simultaneously achieve Companies export because it’s the easiest way to participate in global
trade, it’s a less costly investment than the other entry strategies, and
it’s much easier to simply stop exporting than it is to extricate oneself Importing raw materials and goods is one of the paths of increasing
from the other entry modes. the profit margins. There are number of benefits in importing the
goods, such as high quality, low prices, introducing new products to
BENEFITS OF EXPORTING the market, reducing costs, becoming a leader in the industry.

1. Access to more consumers and businesses. If you’re only doing 1. Introducing new products to the market. Many commercial
business in this country, you may be limiting the total potential businesses in India tend to make goods for the European and
profits you could earn on opportunities to expand your business American market. This is generally owing to the size of these markets
worldwide. Whether you're a manufacturer, service provider or a and the buying power of the population residing there. However,
small business, exporting allows you to tap into new markets and once a new product is presented to these two markets, it could take a
more customers, increase sales, capitalize on growth opportunities year or beyond before the product is presented to other, smaller
and reduce your dependence on the domestic market. markets. If a product produced in Australia seems striking/beneficial
to impresarios in India, they can import it and familiarize it to their
2. Diversifying market opportunities so that even if the domestic potential consumers. Thanks to the cyberspace expansion, business
economy begins to falter, you may still have other growing markets heads can now conduct market research prior to importing a precise
for your goods and services product. In case, they have completed an import course in Mumbai,
they will be able to know better all the nuances of foreign trade. Such
3. Expanding the lifecycle of mature products. If the domestic market
import courses also help business owners to determine if there is a
seems saturated for your goods and services, you can introduce them
real need in the market for such new product, thereby creating an
to new markets in other parts of the world.
effective marketing strategy in advance.
DISADVANTAGES OF EXPORTING
2. Reducing costs. Major benefit of importing is the reduction in
1. Greater initial outlay. The cost of doing direct export business is manufacturing costs. Many businesses today find importing products,
very high. It involves greater initial outlay before profits begin to parts of products and resources more affordable than producing them
flow in. So, small exporting firms cannot arrange adequate finances locally. There are numerous cases when entrepreneurs find products
for export. This system is more favorable to large firms. of good quality which are inexpensive even when the overall import
expenses are included. So instead of investing in modern, expensive
2. Larger risks. Direct exporting involves lot of risks related to machinery, entrepreneurs choose to import goods and reduce their
credit, financing, collection, rejected merchandise and after sale costs. In most cases, they are ordering large quantities in order to get
service. These risks are borne by the manufacturer alone. a better price and minimize the costs.

3. Difficulty in maintenance of stocks. The success of direct 3. Becoming a leader in the industry. One of the major benefits of
exporting depends upon the timely availability of goods in the importing products is the prospect to turn into a market leader in the
overseas markets. But the maintenance of stocks in overseas depots is industry of choice. Since manufacturing new and better-quality
an expensive proposition which is considered a big disadvantage of products is a continuous process, many businesses globally are
direct exporting. utilizing the chance to import new and exclusive products before their
competitors go ahead and do it. Being the first to import a brand-new
4. Higher distribution costs. The channel of distribution in direct product can simply help you emerge as a leader in a certain industry.
exporting may be lengthy. It has to carefully decide the most Also, learning the tricks and strategies through import course, you
appropriate channel to link the domestic operations to the overseas can further excel in international trade dealings.
channels. Presence of middlemen in the channel is unavoidable. As
middlemen charge higher margins, the cost of distribution becomes 4. Providing high quality products. Another benefit of importing is
high. related to the ability to market products of high quality. Lots of
successful entrepreneurs travel abroad and visit factories and other
5. Greater managerial ability. One of the disadvantages of direct highly professional sellers in order to find high quality products and
exporting is that it involves lot of formalities. The process of import them into their own country. If you choose to base your
documentation, shipping, financing, collection etc., require greater business on importing products, chances are you are going to get high
managerial ability on the part of the exporter. When the exporter quality products. This is due to the fact that manufacturing businesses
hick’s competence to deal with these technicalities, he cannot are very aware that their reputation largely depends on the quality of
succeed in the foreign market. the items they produce. This is a reason more to consider importing
the essence of your new business.
6. Too much dependence on distributors. A distributor is the sole
importer of the manufacturer’s products. He buys and holds large DISADVANTAGES OF IMPORTING
stocks of goods. He may be granted exclusive rights to operate on his
own account. So, the success of direct exporting depends upon the 1. Foreign exchange risk. There is the danger that there will be a
role of agents or distributors. When the functions of the distributors sudden large change in the currency exchange rate. This may result in
are not efficient, they may land the exporter in trouble. your suffering a loss if the peso falls in value.

BENEFITS OF IMPORTING 2. Piracy risk. Even if rare, this possibility must be considered. 3.
Political risk. There are many scenarios where this may be a
hindrance. For example, our government may suddenly impose a stiff
tariff on the goods you are importing. This will drive up your costs
unexpectedly. The worst case is if there is hostility between our
country and the foreign state. This may prevent you from doing
business with them.

4. Legal risk. This problem runs both ways. What may be legal or
acceptable in your country may be a criminal or civil offence in the
foreign country. It is advisable to have someone knowledgeable in
that country to guide you.

5. Cultural risk. All sorts of misunderstanding can result from

differences in beliefs and practices. This may be reduced, although
not eliminated, by taking a crash course on the country’s culture and
practices.