BS3939 – A
 
International Business Environment
   
School BHMS
Course BA Global Management
Stage  
Academic Year  
Semester  
   
Time (main cohort) 2 Hours
Time (SAA Student) N/A
No. of Pages (including cover sheet) 4

 

Instructions to Candidates  
 
Please answer ALL the questions
 
 
 
 

 

Special Stationery (if applicable)
 
Use the provided RGU exam booklets
 
 
 
 

 
 
 
 
 
 
 
 
The comments/responses in this paper are not conclusive. They are meant to provide you with information for you to construct your own response or answer.
 
SECTION A: The Multinational Enterprise
 
Question1:
 
To help formulate the strategic options of the MNE, it is useful to identify the relative strengths and weaknesses of the CSAs and FSAs they possess. The FSA-CSA matrix provides a useful framework for discussion of these issues. Read the case study on Canon below and answer the following questions:
 

  1. Why do firms become MNEs? Provide a list of reasons.

 
Firms become multinationals for a number of reasons. Some of these include the
following: (a) a desire to protect themselves from the risks and uncertainties of the
domestic business cycle; (b) a growing world market for their goods or services; (c) a
response to increased foreign competition; (d) a desire to reduce costs; (e) a desire to
overcome tariff barriers and (f) a desire to take advantage of technological expertise by
manufacturing goods directly rather than allowing others to do it under a license
agreement.
 

  1. What are Canon’s FSAs?

Consider:

  • Product or process technology
  • Proprietary technology due to research and development activities.
  • Managerial, marketing, distribution skills or other skills specific to the organizational function of the firm.
  • Product differentiation, trademarks, or brand names.
  • Large size, reflecting scale economies.
  • Large capital requirements for plants of the minimum efficient size.
  1. What are Canon’s CSAs in its home or host country (if any)?

Consider:

  • Natural resources (minerals, energy, forests, land….)
  • Efficient and skilled, relatively low-cost labor force.
  • Trade barriers restricting imports.
  1. In what quadrant of the FSA-CSA matrix do you see Canon based on the information provided in the case and your identification of the FSAs and CSAs? Provide arguments for your choice.

Consider:
Quadrant 1:

  • Quadrant 1 firms are generally resource based and/or mature, globally oriented firms producing a commodity-type product. Given their late stage in the product life cycle, production FSAs flowing from the possession of intangible skills are less important than the CSAs of location and energy costs, which are the main sources of the firm’s competitive advantage.
  • Quadrant 1 has mature multinationals or product lines determined more by CSAs than by FSAs. By improving potential FSAs in marketing or product innovation and increasing value added through vertical integration, the quadrant 1 firm can move to quadrant 3, where its profit- ability should be enhanced.

Quadrant 2:

  • Quadrant 2 firms represent inefficient, floundering firms with no consistent strategy, nor any intrinsic CSAs or FSAs. These firms are preparing to exit or to restructure.
  • In quadrant 2 there is no alternative but to restructure or to eventually leave the market.
  • Quadrant 2 can also represent domestically based small and medium-sized firms with little global exposure.

Quadrant 3:

  • Quadrant 3 firms generally can choose to follow any of the generic strategies listed above because of the strength of both their CSAs and FSAs.
  • A quadrant 3 firm can benefit from strategies of both low cost and differentiation. Such a firm is constantly evaluating its production mix.
  • As a product line matures and then declines, it eventually graduates to quadrant 2.
  • However, by adopting new product lines, developing dynamic organizational capabilities, and maintaining an effective strategy, the firm can maintain its overall position in quadrant 3.

Quadrant 4:

  • Firms in quadrant 4 are generally differentiated firms with strong FSAs in marketing and customization. These firms follow basically a differentiation strategy.
  • In quadrant 4 the FSAs dominate, so in world markets the home-country CSAs are not essential in the long run.
  • A quadrant 4 firm that has strong FSAs in marketing (customization) can operate globally without reliance on its home-market CSA, or the CSAs of the host nation.
  • For such a firm, quadrant 4 does not signal a CSA weakness; the CSA is not relevant.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Figure 1: CSA-FSA Matrix, Rugman A. & Collinson S 2012. International Business, 6th edition, Pearson Education Group
Canon
Canon is one of the world’s leading camera and printer firms, but this has not always been true. For many years Canon followed the leaders and worked to improve its technology. However, in recent years the company has taken the lead against firms such as Leica in cameras and Xerox in photocopiers. It is a “global” firm with 27.1 percent of its sales in North America, 41.0 percent in Asia, and 30.9 percent in Europe in 2009.27
Today Canon is in the top three in all of its major business lines, and its original product, cameras, now accounts for less than 10 percent of sales. However, the firm is the world leader in both single-lens reflexes and compacts, and earns almost one-third of its income from copiers. And to maintain its momentum, Canon has adopted a two-pronged strategy.
First, it is seeking to maintain profits by cutting costs in its core business by making suppliers more efficient and by shifting work to factories in Taiwan, in order to reduce the high cost of building some of its products in Japan.
Second, Canon is moving into the digital age by cultivating alliances with companies that know the networking and computer world better than it does. For example, Canon has teamed with Hewlett-Packard, one of its major competitors, to build laser printers. The company is also looking into developing smart printers with personal-computer-like abilities, including electronic mail, and printers that produce high-quality photo prints on plain paper. Quite clearly, Canon believes that its future rests with the continued development of innovative products that draw on its core competencies in the optical field.
Edward W. Desmond “Can Canon Keep Klicking” Fortune, February 2, 1998, pp. 98-104
Canon, Annual Report, 2009
 
 
 
SECTION B: Foreign Direct Investment (FDI), International Politics & Finance
Question 2:
Economic integration is the establishment of transnational rules and regulations that enhance trade and cooperation among countries. Using examples to support your answer, discuss how MNEs can use FDI and strategic alliances to benefit from economic integration.
Economic integration is the establishment of transnational rules and regulations that permit
economic trade and cooperation among countries. Effective integration brings about trade
creation, although in some cases these efforts have resulted in trade diversion. There are five
levels of regional economic trade integration: free trade areas, customs unions, common
markets, economic unions and political unions. The most successful examples have been the EU and the North American Free Trade area.
Multinational enterprises (MNEs) use a variety of strategies to benefit from integration
efforts. One is strategic alliances and acquisitions by which they are able to surmount the
economic wall and gain an inside position in the economic alliance or free trade area. The
other strategy is through the localization of operations by focusing on products, profits,
production and management. The MNEs typically use both of these strategic approaches.
 
Question 3:
In what way can MNEs utilize foreign and international financial markets to finance international operations?
When an MNE wants to expand operations or fund activities, one of the simplest ways
of obtaining the needed monies is by getting them from internal sources such as
working capital, which is the difference between current assets and current liabilities. A
second way is by borrowing from a local bank or from the parent company. A third way
is by having the parent company increase its equity capital investment in the subsidiary.
In turn, the subsidiary can pay the parent dividends on the investment
SECTION C: International Trade
Question 4:
Outline the following trade theories and discuss their strengths and limitations:

  1. Theory of absolute advantage
  2. Theory of comparative advantage
  3. Factor endowment theory (Heckscher-Ohlin theory)
  4. International product life cycle theory (IPLC)
  5. Why do nations trade? One of the earliest, and simplest, answers was provided by

mercantilism, which holds that a government can improve economic well-being by
encouraging exports and stifling imports. A more useful explanation is provided by
trade theories, which focus on specialization of effort. The theories of absolute and
comparative advantage are good examples.
 

  1. The theory of absolute advantage holds that by specializing in the production of goods

they can produce more efficiently than anyone else, nations can increase their economic
well-being. Even this simple model of absolute advantage has several dramatic
implications. First, if a country has an absolute advantage in producing a product, there
exists a potential for gains from trade. Second, the more a country is able to specialize
in the production of the good it produces most efficiently, the greater are its potential
gains in national well-being. Third, within one country the competitive market does not
evenly distribute the gains from trade.
 

  1. The theory of comparative advantage holds that nations should produce those goods for

which they have the greatest relative advantage. Thus, there are gains from trade
whenever the relative price ratios of two goods differ under international exchange from
what they would be under conditions of no trade. Trade provides greater economic
output and consumption to the trade partners jointly as they specialize in production,
exporting the goods in which they have a comparative advantage and importing the
goods in which they have a comparative disadvantage.
 

  1. In recent years, more sophisticated theories have emerged that help clarify and extend

knowledge of international trade. The factor endowment theory holds that countries will
produce and export products that use large amounts of production factors that they have
in abundance, and will import products requiring large amounts of production factors
that are scarce in their country. The theory is useful in extending the concept of
comparative advantage by bringing into consideration the endowment and cost of
factors of production. The theory also helps explain why nations with relatively large
capital such as the Netherlands, which have relatively more capital than labor,
specialize in capital-intensive goods.
 

  1. There are some weaknesses in the factor endowment theory. One is that some countries

have minimum wage laws that result in high prices for relatively abundant labor. As a
result, the country may find it less expensive to import certain goods rather than to
produce them internally. Another weakness is that countries like the United States
actually export relatively more labor-intensive goods and import capital-intensive
goods, an outcome that appears surprising. This result, known as the Leontief paradox,
has been explained in terms of the quality of labor input rather than in terms of just
man-hours of work. The United States produces and exports technology-intensive
products that require highly educated labor. These problems with the factor endowment
theory help us understand why no single theory can explain the role of economic factors
in trade theory.
 

  1. Another theory that provides insights into international trade is Vernon’s international

product life cycle (IPLC) theory. This holds that production of a product with new
“know-how” is initiated by the parent firm, then by its foreign subsidiaries and finally
anywhere in the world where costs are lowest. The theory helps explain why a product
that begins as a nation’s export often ends up becoming its import. The IPLC theory has
two important tenets: (a) technology is a critical factor in creating and developing new
products and (b) market size and structure are important in determining trade patterns.
 

  1. The IPLC theory is useful in helping to explain how new, technologically innovative

products fit into the world trade picture. However, because innovative products are
sometimes rapidly improved, it is important to remember that one or two of the versions
may be in the standardized product stage, while other versions are in the maturing stage,
and still others are in the new product phase.
 

  1. Other factors that greatly influence trade theory include government regulation,

monetary currency valuation and consumer tastes.
 
Question 5:
What kind of trade barriers exist and what kind of effect to they cause?

  1. Some of the most common reasons for trade barriers include the following: (a) to

protect local jobs by shielding home-country business from foreign competition; (b) to
encourage local production to replace imports; (c) to protect infant industries that are
just getting started; (d) to reduce reliance on foreign suppliers; (e) to encourage local
and foreign direct investment (FDI); (f) to reduce balance of payments problems; (g) to
promote export activity; (h) to prevent foreign firms from dumping and (i) to promote
political objectives.
Question 6:
Exchange rate risk is the probability that a company will be unable to adjust prices and costs to offset changes in the exchange rate. Evaluate the advantages and disadvantages of the strategies an MNE could adopt for managing currency risks.
 
Exchange risk is the probability that a company will be unable to adjust prices and costs to
offset changes in the exchange rate. There are a number of ways of protecting from
exchange risk: exchange risk avoidance, exchange risk adaptation, risk transfer and
diversification.
 

  • Risk avoidance: avoid foreign currency transactions.
  • Risk adaptation: this strategy includes all methods of “hedging” against exchange rate changes.
  • Risk transfer: the use of an insurance contract or guarantee that transfers the exchange risk to the insurer or guarantor.
  • Diversification: spreading assets and liabilities across several currencies.