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International Management
Centre for Financial and Management Studies,
SOAS, University of London
First edition 2006, revised 2007, 2009, 2010, 2011, 2013
All rights reserved. No part of this course material may be reprinted or reproduced or utilised in any form or by any electronic, mechanical,
or other means, including photocopying and recording, or in information storage or retrieval systems, without written permission from the
Centre for Financial & Management Studies, SOAS, University of London.
International Management
Course Introduction and Overview
Contents
1
Course Objectives
2
2
2
3
2
4
2
5
Learning Outcomes
4
6
Study Materials
4
7
4
8
Assessment
Specimen Examination
International Management
Course Objectives
Welcome to the course International Management. In a rapidly changing
world, companies that operate across national boundaries are increasingly
the norm: domestic businesses serving local markets tend to be smaller, less
innovative, less profitable, than those that roam the world searching for
favourable opportunities. On the other hand, there are bigger hazards in
unfamiliar territories and intelligence is required to assess markets, capital
requirements, financing methods, risk, marketing techniques, and organisational forms, to enable the opportunities to be seized.
This course aims to provide frameworks, techniques and examples to help
you participate successfully in the exciting and risky world of international
business.
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International Investment
1.1
1.2
International Investment
1.3
Unit 2
2.1
2.2
International Strategy
2.3
Entry Strategy
2.4
Case Studies
2.5
Unit 3
3.1
3.2
Beyond Offshoring
3.3
Case Studies
3.4
3.5
Unit 4
International Marketing
4.1
Marketing Mix
4.2
Global Marketing
4.3
Case Studies
4.4
Unit 5
International Organisation
5.1
Introduction
5.2
Organisational Architecture
5.3
5.4
Case Studies
5.5
5.6
Unit 6
6.1
Investment Decisions
6.2
Financing Decisions
6.3
Money Management
6.4
6.5
Case Studies
6.6
Unit 7
7.1
7.2
Company Strategy
7.3
Case Studies
7.4
Unit 8
8.1
International Management
8.2
8.3
Country Risk
8.4
A Strategic Perspective
8.5
Summary
8.6
The Examination
Learning Outcomes
When you have completed your study of this course, you will be able to
analyse the principles underlying decisions to invest in countries other
than the home base
discuss the basics of business strategies of cost advantage and
differentiation
explain the analysis behind decisions about where to locate production
operations
explain some of the reasons why marketing and pricing strategies can
succeed or fail according to the conditions in different countries
identify the variety of structural arrangements available to the
international business
analyse the options for dealing with currency risk in an international
project or business
analyse the elements that make a location suitable for investment
projects
list and define the types of political risk involved in establishing a
business in another country.
Study Materials
In addition to the eight units of the course guide, this course has a range of
case material compiled in a two-volume collection of Case Studies. There is
also a collection of articles and extracts from other sources in a Course
Reader.
You will read parts of a textbook written by Charles Hill, who is
Professor of International Business at the University of Washington,
and has worked extensively as a consultant to international firms:
Charles Hill (2011) International Business: Competing in the Global
Marketplace, Eighth Edition, New York: McGraw-Hill International.
Where there are gaps in the textbook coverage, these will be supplemented
by articles reprinted in the Course Reader.
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successfully on the global stage, and some that have not, and to provide the
analytical ideas and applied skills you need to contextualise and evaluate
those experiences. After completing this course, you should be able to test
the utility of the various frameworks and strategies in the light of several
experiences of business internationalisation, in terms of the lessons they
offer, both positive and negative.
To facilitate your learning, there are many Review Questions and Exercises
in the units. You will get feedback and advice on your progress with the
course in the comments on your assignments, and to help you prepare for
the final examination there is a Specimen Examination Paper.
Assessment
Your performance on each course is assessed through two written
assignments and one examination. The assignments are written after
week four and eight of the course session and the examination is written
at a local examination centre in October.
The assignment questions contain fairly detailed guidance about what is
required. All assignment answers are limited to 2,500 words and are marked
using marking guidelines. When you receive your grade it is accompanied
by comments on your paper, including advice about how you might improve, and any clarifications about matters you may not have understood.
These comments are designed to help you master the subject and to improve
your skills as you progress through your programme.
The written examinations are unseen (you will only see the paper in the
exam centre) and written by hand, over a three hour period. We advise that
you practice writing exams in these conditions as part of your examination
preparation, as it is not something you would normally do.
You are not allowed to take books or notes into the exam room. This means
that you need to revise thoroughly in preparation for each exam. This is
especially important if you have completed the course in the early part of
the year, or in a previous year.
Preparing for Assignments and Exams
There is good advice on preparing for assignments and exams and writing
them in Sections 8.2 and 8.3 of Studying at a Distance by Talbot. We recommend that you follow this advice.
The examinations you will sit are designed to evaluate your knowledge and
skills in the subjects you have studied: they are not designed to trick you. If
you have studied the course thoroughly, you will pass the exam.
Understanding assessment questions
Examination and assignment questions are set to test different knowledge
and skills. Sometimes a question will contain more than one part, each part
testing a different aspect of your skills and knowledge. You need to spot the
key words to know what is being asked of you. Here we categorise the types
of things that are asked for in assignments and exams, and the words used.
International Management
All the examples are from CeFiMS examination papers and assignment
questions.
Definitions
Some questions mainly require you to show that you have learned some concepts, by setting out
their precise meaning. Such questions are likely to be preliminary and be supplemented by more
analytical questions. Generally Pass marks are awarded if the answer only contains definitions.
They will contain words such as:
Describe
Define
Examine
Distinguish between
Compare
Contrast
Write notes on
Outline
What is meant by
List
Reasoning
Other questions are designed to test your reasoning, by explaining cause and effect. Convincing
explanations generally carry additional marks to basic definitions. They will include words such as:
Interpret
Explain
What conditions influence
What are the consequences of
What are the implications of
Judgment
Others ask you to make a judgment, perhaps of a policy or of a course of action. They will include
words like:
Evaluate
Critically examine
Assess
Do you agree that
To what extent does
Calculation
Sometimes, you are asked to make a calculation, using a specified technique, where the question
begins:
Use indifference curve analysis to
Using any economic model you know
Calculate the standard deviation
Test whether
It is most likely that questions that ask you to make a calculation will also ask for an application of
the result, or an interpretation.
Advice
Other questions ask you to provide advice in a particular situation. This applies to law questions
and to policy papers where advice is asked in relation to a policy problem. Your advice should be
based on relevant law, principles, evidence of what actions are likely to be effective.
Advise
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Provide advice on
Explain how you would advise
Critique
In many cases the question will include the word critically. This means that you are expected to
look at the question from at least two points of view, offering a critique of each view and your
judgment. You are expected to be critical of what you have read.
The questions may begin
Critically analyse
Critically consider
Critically assess
Critically discuss the argument that
Examine by argument
Questions that begin with discuss are similar they ask you to examine by argument, to debate
and give reasons for and against a variety of options, for example
Discuss the advantages and disadvantages of
Discuss this statement
Discuss the view that
Discuss the arguments and debates concerning
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Further information
The OSC will have documentation and information on each years
examination registration and administration process. If you still have
questions, both academics and administrators are available to answer
queries.
The Regulations are available at www.cefims.ac.uk/regulations.shtml,
setting out the rules by which exams are governed.
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UNIVERSITY OF LONDON
Centre for Financial and Management Studies
MSc Examination
Postgraduate Diploma Examination
for External Students
91DFMC248
INTERNATIONAL MANAGEMENT (CHINA)
International Management
Specimen Examination
The examination must be completed in THREE hours.
Answer THREE questions, selecting at least ONE question from EACH
section. The examiners give equal weight to each question; therefore, you
are advised to distribute your time approximately equally between three
questions.
International Management
Section A
(Answer at least ONE question from this section)
What are the main ways in which you can answer the question:
what business is this company in?
Illustrate your answer with examples.
What are the main issues involved when a company chooses how
to enter a new country market? Illustrate your answer with examples of successful and unsuccessful entry strategies.
Write notes on the following and how the terms are used in international business?
a Market segments
b Price discrimination
c Intermediaries
d Viral marketing
Section B
(Answer at least ONE question from this section)
Why was Carrefours entry into Japan a failure, while its entry
into other Asian markets was successful?
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International Management
Unit 1 International Investment
Contents
1.1 The Economics of International Investment
3
5
8
1.4 Conclusions
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Unit Content
In this unit you will be presented with two of the fundamental questions
about international business:
Why do individuals and companies invest in other countries?
What forms can that investment take?
The unit then moves on to the major form of investment merger and
acquisition (M and A) and introduces the strategic reasons for and options
in M and A activity. These three issues will form the foundation for much of
the rest of the course.
Learning Outcomes
When you have completed your study of this unit and its readings, you will
be able to
analyse the principles underlying decisions to invest in countries other
than the home base
judge the relevance of each method of international investment
foreign direct investment and portfolio investment
discuss the fundamentals of merger and acquisition strategy,
including investment for market growth, synergy and diversification.
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1.1.1 Investment
It is conventional to define international investment as the purchase of real
and financial assets in a country other that that of the investor. It is also
usual to define investment as an intertemporal transaction that is, a
payment made in one period for an expected return in some future period.
The only difference between a domestic and an overseas investment is the
degree of risk and uncertainty involved.
Your first reading is from a textbook, International Economics, by Hendrik
Van den Berg. In this reading, the author develops a two-period model of
consumption and investment, explaining that an equilibrium point balancing consumption and investment occurs, which reflects the economy as a
wholes preference for consumption now against consumption in the future.
He then goes on to show that if there are better investment opportunities in
another economy, investors will transfer some of their asset purchases there.
This investment is financed in period 1 through a trade surplus, and in
period 2 a trade deficit. This simple equilibrium model shows the relationship between investment and trade. It also demonstrates that savings levels
vary across countries and over time, therefore the funds available for investment, at the economy level, vary between countries.
Van den Berg then develops a partial equilibrium model for savings between two countries. What this model shows is that if there is no restriction
on the flow of savings, differences in returns will be eliminated by the flow
of loanable funds to the country where interest rates are highest, producing
a gain for those whose funds were previously lent in the lower-interest
country and a loss for those whose funds were previously invested in a
higher-interest country, but that overall there is a net gain in welfare. As a
simple summary, this is the argument for a free flow of funds among countries, together with an explanation for the resistance to the free flow of funds
from those who own financial assets in the higher-interest countries.
Reading
Now, please read Van den Berg, Chapter 10, sections 10.2 A General Equilibrium Model
of Inernational Investment, and 10.3, A Partial Equilibrium Model of International
Savings, making notes as you read on the main points raised in the section above.
Then you should read section 10.4, Risk Reduction through International Diversification,
where the argument is simply that international investment allows investors to gain the
rewards from investing in the places where returns are highest and that building a
portfolio of investments in many countries allows them to smooth the risks.
International Management
So far, you have been studying, mainly, a two-period model, which would
predict that international investment, given the free flow of funds, would
equalise the return on assets throughout the world, as funds flowed to
where they could get the best returns. In countries where capital is relatively scarce and therefore returns high, investors would buy assets until a
global equilibrium return is reached. In such a world, corporate as well as
individual investment strategies would be relatively simple: find those
investment opportunities where equilibrium has not yet been reached and
returns will be higher than those investment opportunities where there is
equilibrium.
Reading
Please turn to the Reader and study Van den Bergs Section 5.3 setting out the Solow
Growth Model, Section 10.5 on his use of Solows model and Section 10.7, where Van
den Berg turns to the reasons why investment does not flow as freely as the simple
model might suggest.
Make notes on the important issues raised in each section, and list the reasons
given for the impediments to investment flows.
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These issues are dealt with in an introductory way, and we will come back
to them in subsequent units.
To make sure you have understood this chapter, look at the summary at the
end of it. This course is designed from the perspective of business decisionmaking, so not all of the elements of the chapter, especially those that argue
for the welfare-maximising effects of international investment, will be
relevant to you. It is not the purpose of this course to justify or criticise the
investment behaviours of corporations or individuals.
International Management
Exercise
Now that you have seen the direction of flows, can you note what are the possible
explanations for these trends?
One explanation for the large flows to the European Union and the USA is
the desire by companies to get over tariffs and other protectionist trade
restrictions.
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Table 1.1
Host region/economy
World
Developed Countries
Europe
European Union (25)
EU15
France
Germany
Italy
Luxembourg
United Kingdom
New 10 European states
Czech Republic
Hungary
Poland
United States
Japan
Developing Economies
Africa
Egypt
Morocco
South Africa
Sudan
Latin America and the Caribbean
Argentina
Brazil
Chile
Colombia
Mexico
Asia and Oceania
West Asia
Turkey
South, East and South East Asia
China
Hong Kong, China
India
Indonesia
Korea, Republic of
Malaysia
Singapore
Thailand
South East Europe & Commonwealth of Independent States
Russian Federation
Romania
Kazakhstan
a
b
Revised data.
Preliminary estimates.
2003a
637.8
441.7
349.1
327.6
42.5
27.3
16.4
83.8
27.4
12.5
2.1
2.1
4.6
56.8
6.3
172.1
17.2
0.2
2.3
0.7
1.3
48.0
1.7
10.1
4.4
1.8
12.8
106.9
11.9
1.8
94.7
53.5
13.6
4.3
0.6
3.8
2.5
9.3
1.9
24.0
8.0
2.2
2.2
2004a
695.0
414.7
3 258.2
259.1
231.4
24.3
38.6
16.8
67.2
77.6
27.8
4.5
4.6
12.6
96.9
7.8
243.1
13.7
1.3
0.9
0.8
1.5
68.9
4.1
18.2
7.6
3.1
17.9
155.5
17.6
2.7
137.8
60.6
34.0
5.3
1.0
7.7
4.6
16.1
1.4
37.2
12.6
6.4
5.4
2005b
896.7
573.2
449.2
446.3
407.7
48.5
4.9
13.0
13.4
219.1
37.7
12.5
6.0
8.7
106.0
9.4
373.5
28.9
4.1
1.2
7.2
2.1
72.0
4.2
15.5
7.0
4.5
17.2
172.7
26.5
4.8
146.2
60.3
39.7
6.0
3.5
4.5
4.2
15.9
3.7
Growth rate %
29
38
74
72
76
99
NA
23
80
182
36
181
30
31
11
21
13
55
226
38
803
40
5
3
15
8
48
4
11
51
77
6
0
17
12
242
42
9
1
159
49.9
26.1
5.2
5.4
34
109
19
0
Source: UNCTAD
International Management
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global economy, such as the dot-com crash and the financial crisis of 2007
08. To see the effect of this, please now study Figure 1.1, which shows the
value of M and A deals, by value and by region, from 2000 to 2008.
When studying the data the following points are worth noting:
the effect of the financial crisis: leveraged buy-outs have by and large
witnessed the biggest decline, while government activities such as
government investments in financial institutions, investment by government-controlled corporate and sovereign wealth funds are less
affected.
Asia-Pacic
Europe
33
12
13
Total value
($US trillion)
5
19
18
19
15
18
19
4
32
33
40
37
38
39
39
41
Americas
Year
Share of crossborder ows %
58
56
2000
23
2
49
45
47
46
2001
2002
25
25
46
42
40
2003
2004
2005
2006
2007
2008
28
29
29
29
41
35
At the end of this section you might like to consider whether the above
points signal the end of the most recent wave of M and A activity; or are
we about the see the beginning of a new wave, involving new investors,
often state-led, and from different regions?
International Management
Reading
Turn now to the Reading Merger Strategy, a chapter from a textbook by Patrick
Gaughan. In it, the author explains the main reasons and strategies for mergers.
As you read the chapter, you should make notes covering the main issues involved.
Patrick A Gaughan
(2002) Chapter 4
Merger Strategy,
reprinted in the Course
Reader from Mergers,
Acquisitions and
Corporate
Restructurings.
Synergy
A concept often used in merger strategy is synergy. Gaughan defines three
types of synergy that can result from a merger. The first is the increase in
value of the newly combined company, above the combined value of the
prior-to-merger companies, less any merger expenses:
Net Acquisition Value = [VAB (VA + VB)] (P + E)
Where VAB = the combined value of the two companies
VB = the market value of B
VA = As measure of its own value
P
Diversification
A second motive for merger is diversification. Diversification can produce
conglomerates, which consist of a portfolio of unrelated businesses. Many
fourth-wave mergers were of this type, and they were followed by a period
of deglomerisation, where buyers could add value by demerging unrelated
businesses from their conglomerate parents, because the conglomerate
management could not be successful in a range of unrelated activities.
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Economic motives
Mergers enable integration, either horizontal (between companies doing
similar things) or vertical (among companies at different stages in the
supply chain). Horizontal mergers are generally pursued to gain market
share and market power. Vertical integration offers the chance to
gain control over supplies (for example, the acquisition of oil
and gas rights)
gain cost advantages by internalising a supplier
reduce transaction costs
acquire specialist inputs previously bought in the market.
Gaughan also covers a variety of other motives, including the desire to
improve the quality of management by acquisition, improve research and
development capabilities, distribution networks and tax advantages.
You should now have a grasp of the basics of merger strategies. In general,
you should remember that mergers do not automatically result in improved
profitability because
the premium paid may be too high
the managers may have overstated the case for the merger and the
value of the merged entity (the hubris hypothesis)
the management skill required to make the new company work may
be lost after the merger as managers leave the target company
synergies are not realised.
Gaughan wrote another book after the one you have been reading from,
called Mergers: What Can Go Wrong and How to Prevent It2, based on analysis
the fifth-wave mergers. In that book he advocates joint ventures as a less
risky strategy, especially when the purpose of the merger is to acquire a
market presence in an overseas territory. We will return to the question of
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International Management
the best entry strategy in Unit 2 and to the reasons for success and failure of
mergers when we look at the case of DaimlerChrysler, in Unit 5.
1.4 Conclusions
In this unit you have been introduced to some of the economic analysis
underlying the question of why companies decide to acquire assets in
another country. You have also seen that stark economic calculations of costs
and returns are not the sole explanation for the decisions to acquire foreign
assets, and that institutional factors and trade and other rules and regulations also affect the decision.
You have also seen that M and A, one of the main ways in which companies
can acquire assets in another country, has a wave pattern but is in trend
growth and has spread from the USA to the rest of the world. However, the
effects of M and A on a companys profitability are not guaranteed to be
positive. In many cases the combined value of the new company is less than
the separate values of the old ones.
In the next unit we turn to the question:
What strategies must managers adopt to ensure that the international
expansion of their company is profitable?
Unit 2, then, is concerned with the choice of entry strategy. The unit after
that considers practical questions about production and sourcing in countries other than the home base.
Review Questions
To help you to review this unit, make sure that you are able to answer the following ten
questions, based on the readings.
1.
2.
3.
4.
What does the Solow model offer as an explanation for the fact that returns to
investment do not always decrease?
5.
Why is international investment smaller than it should be, if the equilibrium model
was correct?
6.
7.
What are the main reasons for the growth of Multinational Enterprises?
8.
9.
What are the main types of synergy that can result from mergers and
acquisitions?
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