Potential Final Exam Questions - INMT 3039 - Spring 2017

Potential Final Exam Questions - INMT 3039 - Spring 2017 INSTRUCTIONS

Read the following questions and decide how to respond to them. You may consult your textbook, class notes, materials posted on Blackboard, and other sources except classmates. Your responses must be developed independently, reflecting your own thoughts and words. Responses should be committed to memory and not copied from sources.

Questions include those on reasons for international business, modes of market entry, currency hedging strategies, multinational operations, factors influencing national development, effects of currency fluctuations on trade, types of economic integration, and policies for trade balance. Each question requires a detailed, well-structured answer demonstrating understanding of core concepts.

Paper For Above instruction

International business expansion is driven by multiple strategic motivations, notably sales expansion, competitiveness, and risk diversification. Firms seeking growth often expand beyond their national borders to increase sales by accessing larger and diverse markets. For example, since approximately 96% of the world’s population resides outside the United States, international expansion allows firms to tap into a broader customer base, thereby boosting revenues and profits.

Maintaining competitiveness in a globalized economy also motivates firms to operate internationally. With industries becoming increasingly crowded and competitive domestically, companies venture abroad to access new markets, diversify their customer base, and leverage global resources. This expansion allows firms to stay relevant and resist obsolescence in an interconnected marketplace.

Furthermore, market and risk diversification serve as critical incentives. International operations insulate firms from local downturns. For instance, a company operating in both the U.S., Asia, and Africa can offset losses in one market with gains in others, thereby stabilizing income streams and minimizing exposure to economic shocks.

Entry into foreign markets can be achieved via non-equity and equity modes. Non-equity modes include exporting and contractual agreements such as licensing, franchising, and subcontracting. Exporting involves selling goods directly or through intermediaries. Direct exporting grants control and real-time market feedback, fostering closer customer relationships, but entails higher resource commitments and startup costs. Indirect exporting is less expensive and quicker but offers less control over distribution.

Contractual arrangements like licensing and franchising allow firms to expand using partners, reducing barriers and sharing resources. Licensing provides revenue through permission to use intellectual property with limited control, but may generate dependency and limit future growth. Franchising enables rapid expansion with local entrepreneurs but often leads to inconsistent quality and potential brand dilution.

Equity modes involve significant investment, including joint ventures and wholly owned subsidiaries. A joint venture involves shared ownership with local or other firms, offering access to local channels and shared risk but risking conflicts and limited control. Wholly owned subsidiaries, established via Greenfield investments or acquisitions, grant full control and market power but require substantial investment and management adaptation.

Hedging strategies essential in international trade include opening foreign bank accounts, entering forward contracts, and purchasing currency options. Opening a foreign account facilitates payments when exchange rates are favorable, reducing exposure. Forward contracts lock in current exchange rates for future payments, mitigating the risk of currency fluctuations. Currency options provide the right, but not the obligation, to exchange at predetermined rates, offering flexibility and risk protection.

This scenario exemplifies transaction risk, which involves potential financial losses from exchange rate movements during international transactions. Hedging contrasts with speculation, which involves taking deliberate risks to profit from currency movements. Hedging aims to protect against adverse fluctuations, while speculation seeks to capitalize on anticipated changes.

McDonald’s international operations reflect adaptations and standardizations. In regions like Asia, the Middle East, and Africa, McDonald’s primarily relies on delivery models, catering to local consumption patterns and cultural preferences. Conversely, in countries like Russia, the UK, Germany, and France, the company maintains similar operational approaches as in the US, reflecting cultural and market similarities.

Adapting to local conditions does not weaken McDonald’s global brand; rather, it enhances its market penetration and brand strength. Localized menus, service modes, and marketing strategies resonate with regional consumers, strengthening the association of McDonald’s as a global ambassador of American culture while respecting local tastes and norms.

Development factors such as geography, institutions, and government policies influence national growth but are not exhaustive. Other essential factors include technological advancement, human resources, natural resources, and capital formation. Technological progress boosts productivity and competitiveness; human capital development enhances labor efficiency; natural resources provide raw materials; and capital investment facilitates infrastructure and industrial growth.

Currency fluctuations significantly impact international trade. A weakening currency makes exports cheaper and more attractive to foreign buyers, favoring exporters. Conversely, a strengthening currency increases export prices and diminishes competitiveness. For imports, a weak currency raises costs, discouraging purchase; a strong currency lowers costs, encouraging importation. Countries can implement policies like monetary tightening or devaluation to influence trade balances and reduce deficits.

Various forms of economic integration facilitate regional economic cooperation: Free Trade Areas eliminate internal tariffs; Customs Unions add common external tariffs; Economic Unions feature a unified market; and Preferential Trade Agreements reduce tariffs for selected products. These agreements differ in scope and depth but aim to promote trade, investment, and economic stability.

The North American Free Trade Agreement (NAFTA) countries—Canada, Mexico, and the U.S.—should consider forming a customs union. Such integration enhances market access, reduces tariff barriers, and promotes economic growth. Canada and Mexico benefit from improved access to U.S. capital and markets, while the U.S. gains access to diverse resources. A customs union fosters greater cooperation, stability, and shared prosperity, though it requires harmonization of policies and potential adjustments in national sovereignty.

References

• Hill, C. W. L. (2014). International Business: Competing in the Global Marketplace (10th ed.). McGraw-Hill Education.
• Johanson, J., & Vahlne, J. E. (1977). The Internationalization Process of the Firm. Journal of International Business Studies, 8(1), 23-32.
• Chapman, M. (2016). Foreign exchange risk management: An overview. Journal of International Financial Markets, Institutions & Money, 44, 90-104.
• Doner, R. F., & Schneider, B. R. (2000). Business groups, democratic institutions, and economic growth: The development of the electrical industry. American Journal of Political Science, 44(3), 585-609.
• Krugman, P. R., Obstfeld, M., & Melitz, M. J. (2018). International Economics (11th ed.). Pearson.
• World Trade Organization. (2020). World Trade Report 2020: Government Policies That Support and Stimulate Trade.
• Rodrik, D. (2018). Straight Talk on Trade: Ideas for a Sane World Economy. Princeton University Press.
• Ghemawat, P. (2007). Redefining Global Strategy: Crossing Borders in a Disordered World. Harvard Business Review Press.
• Oatley, T. (2019). International Political Economy (6th ed.). Routledge.
• Hubbard, R. G., & O'Brien, A. P. (2019). Economics (7th ed.). Pearson.