Learning Objectives At the end of this exercise, you should be able to: • LO 4.2: Explain how differences in import-export balances, exchange rates, and foreign competition determine the ways in which countries and businesses respond to the international environment. • LO 4.3: Discuss the factors involved in deciding to do business internationally and in selecting the appropriate levels of international involvement and international organizational structure. • LO 4.5: Describe some of the ways in which economic, legal, and political differences among nations affect international business. Scenario You're the owner of SolarPower, a company that manufactures solar kits that consist of a solar panel, a rechargeable battery pack, and lanterns. This product has been enormously successful in the United States with campers, hikers, backpackers, and outdoor adventurists, as well as people who simply want to keep these kits in the event of an emergency or a disaster. So far, youve only sold your solar kits in the U.S., but youre considering expanding into underdeveloped areas of the world where electricity is less reliable. The potential market is huge, but you have to make the right decisions to get in. Are you willing to take the risk? Decision Point: International Market Analysis You've done a considerable amount of research and have determined the following: Approximately 75% of the population in Ethiopia does not have electricity. • Approximately 55% of the population in Nigeria does not have electricity. • Nearly 40% of the population in Bangladesh does not have electricity. • Nearly 25% of the population in Indonesia does not have electricity. • Approximately 25% of the population in India does not have electricity. You recognize, however, that it would be wise to consider the population of those countries before determining which market(s) would have the greatest potential for your products, so you obtain that information as well. Your research reveals the following population estimates: • Population of Ethiopia: 102,000,000 • Population of Nigeria: 187,000,000 • Population of Bangladesh: 163,000,000 • Population of Indonesia: 260,000,000 • Population of India: 1,327,000,000 Based on the information presented above, calculate the number of people in each country who do not have access to electricity. Type the numbers into the equations below. When you are finished, click Submit. Decision Point: Choosing an International Market On the basis of population, it would appear that India has the greatest potential for your solar kits. However, you realize that this is a huge decision, so you decide to do more research before finalizing your decision. Which of the following factors, if true, would make you less inclined to enter the Indian market? Select an option from the choices below and click Submit. Approximately 68% of India's population lives in rural areas. The electrical grid in India suffers from frequent disruptions and disrepair. The U.S. dollar has skyrocketed in value against the Indian rupee. Submit Decision Point: Levels of International Involvement You've made the decision to go global with your solar kits, and it appears that India presents the best potential market for your products. It's time to jump into the pool, but you need to decide whether you're going to jump into the shallow end or the deep end. Consider the following levels of international involvement. Type the letter representing the level of international involvement into the correct circle on the continuum. Each correct answer is worth three points. Decision Point: Your International Organizational Structure You've determined that India presents the greatest potential for your solar kits. Now it's time to decide the best approach for launching your solar kits internationally. You recognize that there are different types of organizational strategies available to you to introduce your solar kits in India. You want to go slowly and enter this new market with minimal risk and expense. Of the following, which approach will you use? Select an option from the choices below and click Submit. Strategic alliance Independent agent Licensing arrangement Foreign direct investment Submit Decision Point: Choosing a Different Organizational Structure Foreign direct investment (FDI) and strategic alliances present the highest level of risk and investment for your business. A wiser choice at this stage of your business would be either using an independent agent to sell your domestically made products in India or a licensing arrangement in which you allow an Indian company to manufacture and market your products in India. Which of those options would you choose? Select an option from the choices below and click Submit. Independent agent Licensing arrangement Decision Point: Why You Wouldn't Hire an Independent Agent You're considering entering the Indian market through hiring an independent agent. Which of the following factors would make you reconsider your decision? Select an option from the choices below and click Submit. The Indian government is considering imposing a tariff on solar kits. The borrowing rates in the U.S. are lower than in India. The U.S. dollar has plummeted in value against the Indian rupee. Mentoring Moment: International Organization Structures Going global isn't an "all or nothing" game. Businesses can break into international markets in a variety of ways. Independent Agents Independent agents are individuals or organizations that represent your business in a foreign market. They sell your products and collect payment. This is a low-cost option because agents work on commission, but it's also low control, because they represent multiple firms and don't specialize in a particular product or market. Licensing Arrangement Under a licensing arrangement, you give a firm in the country where you want to do business the right or resources to manufacture and market your products. Resources might include your brand, patents, copyrights, technology, or operating procedures. In return, the licensee pays you a fee plus royalties based on a percentage of sales. For example, Phillips-Van Heusen licenses its IZOD brand name in India, as well as many countries in the Middle East. Strategic Alliance In a strategic alliance, each party invests resources and capital into a new business or the parties cooperate in some mutually beneficial way, and the new business, owned by the partners, divides its profits. For example, Starbucks and Tata Coffee, Asia's largest coffee plantation company, signed a strategic alliance agreement a few years ago to build Starbucks' brand in India. Foreign Direct Investment Foreign direct investment (FDI) involves making a physical investment in buildings, machinery, and equipment in another country. FDI doesn't flow in just one direction -- from the U.S. to other countries. Foreign-owned companies also invest in the U.S., such as when German automaker BMW announced a $1 billion investment in its plant in South Carolina. Decision Point: How Subsidies Will Affect Your Sales You have decided to continue on with hiring an independent agent to sell your solar kits in India. Much to your surprise, the Indian government has announced that it intends to subsidize local manufacturers of solar kits in India. How will this impact the sales of your products? Select an option from the choices below and click Submit. You will be unable to import any solar kits into India. The number of solar kits you import will be restricted by the Indian government. It will make your products more expensive in India than those of local competitors. Your solar kits will be more expensive because they are being taxed by the Indian government. Submit Mentoring Moment: Barriers to International Trade Governments can affect international business in many ways. You've just seen how a subsidy can negatively impact the price of your solar kits versus those produced by domestic firms. But subsidies aren't the only way that governments can set conditions for doing business within their borders and even prohibit doing business altogether. Tariffs are taxes on imports. These taxes make the imported good more expensive, giving a domestic producer a better chance at competing with the foreign producer. For example, India might impose a 15% tariff on imported solar kits. This would make your product more expensive for Indian consumers. Quotas put a physical limit on the quantity of a good that can be imported into a country in a given period of time. This leads to a reduction in the quantity imported and increases the market price, benefiting a domestic producer. Embargos are government orders forbidding exportation or importation of a particular product -- or even all products -- from a specific country. For example, in 2015 Russia placed an embargo on European pork over concerns about African swine fever in European wild boar. Local content laws are requirements that products sold in a country must be at least partly made there. Business practice laws encompass the regulations, policies, and procedures through which host countries govern business practices in their jurisdiction. Governments can make it easy to do business internationally, or they can impose layer upon layer of bureaucracy and incomprehensible rules to restrain trade. Think you've got it? Drag and drop each example below to an appropriate category box, and click Submit. (Note: These examples are fictional.)
Decision Point: Ordering Light Bulbs
You have hired an international agent and are ramping up production in your U.S. facility to keep up with the orders the agent has obtained. You receive an email from your purchasing manager. From: M. Gomez
We need to place a large order for bulbs for our solar kits. As you know, we import these bulbs from Japan. I have been watching the exchange rate between the U.S. dollar and the Japanese yen very carefully. The current exchange rate is $1 to 106.94 yen. However, sources tell me that the exchange rate is expected to be $1 to 115 yen very soon. Do you want me to place the order now or wait until the exchange rate changes?
Please advise how you want me to proceed.
Select an option from the choices below and click Submit.
Place the order now. Wait and place the order whenthe exchange ratechanges.
Decision Point: The Exchange Rate and Your Company
Now that you're exporting solar kits into the Indian market, you've been watching the dollar's exchange rate against the Indian rupee. Currently, $1 is worth 47 rupees.
What do you hope the exchange rate is tomorrow?
Select an option from the choices below and click Submit.
You hope that $1 will be worth more than 47 rupees tomorrow.
You hope that the exchange rate will stay the same.
You hope that $1 will be worth less than 47 rupees tomorrow.
Mentoring Moment: Exchange Rates
Strong dollar? Weak dollar? Which is good? Which is bad?
Let's start with a couple of quick definitions:
The exchange rate is the rate at which the currency of one country can be exchanged for that of another.
• A strong dollar can purchase more foreign currency. For example, if the dollar strengthened against the Indian rupee, you would be able to buy more rupees. If the exchange rate yesterday was 66.90 rupees for $1, and today it is 68.90 rupees for $1, you can buy more rupees for that same dollar.
• A weak dollar can purchase less foreign currency. For example, if the dollar weakened against the Indian rupee, you would be able to buy less rupees. If the exchange rate yesterday was 66.90 rupees for $1, and today it is 63.40 rupees for $1, you can buy fewer rupees for that same dollar.
But before you start thinking that strong dollar = good and weak dollar = bad, let's look at the effect on exports and imports.
A strong dollar means U.S. consumers pay less for imports. Let's say that a pair of shoes from India costs 3,300 rupees. If the exchange rate was 66.90 rupees for $1, you'd pay about $49.33. However, if it were 68.90 rupees for $1, those same shoes would cost only $47.89. That may not seem like a lot of savings, but if you're a large retailer and you're buying thousands of pairs, that can add up in a hurry.
What if you're exporting goods to India? A strong dollar means Indian consumers will pay more -- and that may not be good news for you. Let's say that you're exporting California wine to India. Yesterday, a bottle of Merlot cost $48.99, or 3,277 rupees. Today, when the dollar strengthened, that same bottle costs 3,375 rupees. Once again, if you're buying only one bottle that's probably not a huge deal, but if you're a commercial importer of thousands of bottles, that "strong dollar" may sting a bit.