International business Study Guide

📖 Core Concepts International Business: Trade of goods, services, technology, capital, and knowledge across borders; essentially globalization. Multinational Enterprise (MNE): A firm that operates in several countries with a worldwide approach to markets, production, or operations. Foreign Direct Investment (FDI): Investment that gives the investor control over foreign operations (vs. portfolio investment, which is passive). OLI Paradigm (Dunning): Framework explaining why firms become MNEs – Ownership advantages, Location advantages, Internalization advantages. Core Competency: Unique, hard‑to‑imitate skill or capability that gives a firm a competitive edge. Entry Modes: Ways a firm can access foreign markets (exporting, licensing, franchising, joint ventures, wholly‑owned subsidiaries, turnkey projects). Risk Types: Operational, political, technological, environmental, economic, financial, bribery – each can threaten international performance. 📌 Must Remember Hymer’s FDI determinants: (1) Firm‑specific advantages from home country, (2) Desire to retain control over foreign operations. OLI components: Ownership (unique assets), Location (country‑specific benefits), Internalization (benefits of keeping activities within the firm). Exporting = sell abroad, keep production home → low entry cost. Licensing vs. Franchising: Licensing = use of IP for a fee; Franchising = licensing plus requirement to follow franchisor’s system. Joint Venture ownership: Typically 50‑50 split, creating a new legal entity. Wholly Owned Subsidiary: 100 % parent ownership, achieved by greenfield or acquisition. Key risks: Political risk = government actions; Financial risk = currency & repatriation issues; Economic risk = macro‑instability. WTO: Main global body governing trade rules; evolved from GATT. 🔄 Key Processes Choosing an Entry Mode Assess global concentration, synergies, and strategic motivations. Match firm‑specific advantages (ownership) with location benefits → apply OLI to narrow options. Hymer’s FDI Decision Flow Identify home‑country specific advantages → need for control? → Choose FDI (vs. portfolio). Setting Up a Joint Venture Identify complementary partner → negotiate equity split (usually 50‑50) → create new legal entity → allocate resources. Risk Management Cycle Identify risk type → evaluate probability & impact → develop mitigation (e.g., political risk insurance, hedging currency). 🔍 Key Comparisons Licensing vs. Franchising Licensing: Right to use IP, no system requirement. Franchising: Licensing plus mandatory operating system. Exporting vs. Wholly Owned Subsidiary Exporting: No local production, low fixed cost, limited control. Wholly Owned Subsidiary: Full local production/control, high investment. FDI vs. Portfolio Investment FDI: Investor gains control over operations. Portfolio: Investor holds securities, no control. ⚠️ Common Misunderstandings Confusing “international business” with “globalization.” Globalization is the process; international business is the activity of firms within that process. Assuming all MNEs are large. Even mid‑size firms can be MNEs if they operate in multiple countries. Thinking licensing automatically protects IP. License agreements must be enforceable in the host country; otherwise, IP can be misused. Believing WTO rules eliminate all trade barriers. WTO sets minimum standards, but countries can still apply WTO‑consistent safeguards. 🧠 Mental Models / Intuition “Ownership‑Location‑Internalization” as a three‑leg stool: Remove any leg and the MNE rationale collapses. Risk Radar: Visualize each risk as a color‑coded zone (political = red, operational = orange, etc.) to quickly assess exposure. Entry‑Mode Funnel: Start broad (export) → add control (licensing) → add partnership (JV) → end with full control (wholly owned). 🚩 Exceptions & Edge Cases Turnkey Projects: Used when a firm wants to build a facility but not operate it long‑term—rare for high‑tech, more common in heavy industry. Joint Ventures may deviate from 50‑50 when one partner provides dominant technology or capital. Licensing can be prohibited in sectors with strict national security controls (e.g., defense). 📍 When to Use Which Exporting → Test market, low capital, product easy to ship. Licensing → Low‑cost entry, intangible assets (patents, brand) with limited need for local control. Franchising → Service or retail concepts needing brand consistency and operational system. Joint Venture → Need local partner knowledge, shared risk, or regulatory requirement for local ownership. Wholly Owned Subsidiary → Want full control, protect core competencies, or operate in strategic markets. Turnkey → Project‑based, short‑term involvement (e.g., plant construction). 👀 Patterns to Recognize Control ↔︎ Investment level: More control ⇒ higher investment (e.g., subsidiary vs. export). Risk cluster: Political + economic risks often appear together in emerging‑market case questions. OLI alignment: If a firm has strong ownership advantages but weak location benefits, expect licensing rather than FDI. 🗂️ Exam Traps “Licensing always protects IP.” → May be false if host‑country enforcement is weak. “All joint ventures are 50‑50.” → Some are uneven; equity split depends on contributions. “FDI is just foreign investment.” → Forget the control element; portfolio investment lacks it. “WTO eliminates any tariffs.” → WTO allows temporary safeguards and sector‑specific exemptions. “Exporting is always the cheapest entry mode.” → Forget hidden costs like tariffs, transport, and limited market feedback. --- Use this guide to review key ideas, compare alternatives, and spot common pitfalls before your exam.