Ib Revision Question

8/12/2019 Ib Revision Question

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INTERNATIONAL BUSINESS EXAM Page 1

Section A

1stparagraph

a. Regional economic integration is the merging of economic policies of two differentareas. This process is used to create a more stable economy while lowering prices for

consumers.

b. Emergence of single market does not only create opportunity for business but alsopossess a certain number of threats.

c. The disadvantages of economic integration are the increase of trade barriers with non-member countries, trade diversion, and national sovereignty.

d. This can hurt the other countries that normally trade with the member countries,leading to higher prices or even shortages of some goods.

e. Member nations also lost some of their power to affect the economy in their owncountry.

f.

While nation as a whole might benefit from the regional free trade agreement, certaingroup may lose.

g. Price competition throughout the European Union and NAFTA will increase due tothe low barriers to trade between the countries.

h. This can be seen when the same model Volkswagen Golf cost 55% more in GreatBritain than Denmark and 29% more in Ireland and Greece before 1992.

i. The price different will disappear in the single market.j. This will be a threat for any firm to do their business in EU and NAFTA countries.


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k. To overcome this, the firms must take the advantage of the opportunities offered bythe formation of the single market to rationalised their production structure and reduce

their cost.

2ndparagraph

a. The second disadvantage of economic integration will give threat to firm outsidethis trading area.

b. This happens in the EU where plenty of companies have been limited by high coststructure in their ability to compete with North America and Asian firms.

c. The creation single market and the increasing competition in the EU is beginningto produce serious attempts by EU firms to reduce the cost structure using

rationalization.

d. These tend to transform EU companies into efficient local competitors.e. To protect from this threat, non EU firm need to be fully prepared to face

European competitors by reducing their own cost structure.

3rdparagraph

a. The last disadvantage of economic integration is the threat of being shut out of thesingle market through the creation of the trade fortress.

b. The regional economic integration can lead to the fortress mentality.c. This policy is against the free trade philosophy and the creation of any fortress in

Europe is not accepted.

d. However, there are signs that EU may raise barriers to imports and investments incertain political sensitive areas such as car industry.

e. This will give a bad impact to other European countries who are not the members ofEU

f. To protect from this, the non EU firm are advice to setup their own EU operation tobe on the same line as the EU.

g. Hence, the fortress for Malaysian will not give bad impact to the European countries.4thparagraph

a. Economic integration brings a lot of disadvantage when the EU is increasingly able tointervene and impose conditions of company who are doing mergers and acquisition.


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b. This will be a threat as it limits the ability of companies to pursue their own corporatestrategies to achieve their objectives.

c. The commission may require certain concessions from the firm as a pre-condition forthe merger and acquisition to proceed.

d. Through this the commission is trying to maintain the level of competition in thesingle market.

e. Other than that, Language barrier and economic integration.f. Solution- compromising the language adaption.


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Question 2

b) Type of competitive pressures when a firm competing in global market place and how to

respond to this pressure.

1. paragraph 1

a. 2 types of pressures including pressures for cost reduction and pressures for localresponsiveness

b. It affects the firm ability to realise location economies, Experience effect, leverageproduct to transfer competencies and skills within the companies.

c. Responding to pressure for cost reduction requires the firm to try to minimize its unitcosts.

d. Responding to pressures for local responsiveness refers to a firm differentiates theproduct offering and marketing strategies for different countries to meet the diverse

demand from national differences in consumer taste and preference, government

policies, and distribution channels.

2. Paragraph 2

a. Responding to pressures for cost reduction requires the firm to try to lower the cost ofthe value question for the product.

b. This happen when the company produce product in mass at optimum location torealise the learning effect, location economies and economies of scales.

c. They can outsource some functions to low cost foreign countries to reduce theoperation costs.

d. Countries like India and Vietnam is a good examples of location for multinationalcompanies to setup the operation to reduce operation cost.

e.

They are 4 types of cost reduction pressures which are intensity in producingcommunity product, intensity where major competitors are based in low cost location,

persistent access capacity and where customer are powerful and face low switching

cost.

f. Intensity in producing commodity types of product is where differentiation on knownprice factors is difficult. Price become the main weapon.

g. Universal needs happens when the taste and preference of consumer in differentcountries are the same.


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3. Paragraph 3

a. Pressures for cost reduction also involve competitors having their operation in thelow cost country, persistence access capacity and when customers are powerful and

low switching cost.

b. For example, Apple should decide to setup their operation in India which has cheaperlabor cost to create competitive advantage.

c. To face this pressures, firm can adopt global standardization strategy to increaseprofitability and profit growth by reaping cost reduction which comes from the

learning effects, location economies as well as economies of scales.

d. Firm activities such as production marketing and R&D should be focused on a fewlocations with cost advantage.

e. In this strategy, product customization and marketing strategy to local condition needto be reduced due to high cost.

f. Standardization of the product will be advisable for economies of scaleg. This strategy is the most effective when a pressure for cost reduction is high and

demand for local responsiveness is low.

4. paragraph 4

a. Pressures for local responsiveness involves 4 main elements which are difference incustomers taste and preference, difference in infrastructures and traditional practice,

difference in distribution channels and lastly, host government demand.

b. Pressures for local responsiveness take place when customer taste and preference aredifferent in different countries.

c. For example, the creation of world cars where general motors, Ford and Toyota willsells the same cars in the whole world.

d. However, this strategy does not work since a different country has differentpreferences for their vehicles.

e. For example, North American is preferred to buy a pickup truck as family cars.f. The same issues happens for McDonalds, KFC, and F&N company when they need

to adapt to the local preference.

g. For example McDonalds introduced Bubur Ayam Mcd for Malaysian localpreference.


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h. Difference in infrastructure and traditional practice requires the customization ofproduct accordingly.

i. For example in Britain, the British people drive on the left hand side of the roadcreating a demand for a right hand drive cars while in france, the demand is more on

the left hand drive car.

j. Difference in distribution channels happens in different types of countries includingBritish, Japanese and US system.

k. For example, in Brazil, supermarket are account for 36% of food retaining, in Poland18% while in Russia is less than 1%.

l. Host government demand also leads to pressures for local responsivenessm. For instance, the pharmaceutical companies need to follow local critical testing,

pricing rule and registration procedure to follow local rules.

n. To respond to this, company adopt localization strategy by customizing the firmgoods and services to make the taste of local customization. And hence increase the

value of the product in the local market.

o. However, this strategy need to conducted efficiently to gain high profitability.


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Question 3

a). Why joint venture is not a good idea

1stparagraph

a. A joint venture refers to establishing a company that is jointly owned by 2 or moreindependent firms.

b. For example Fuji Xerox was setup based on joint venture by Xerox and Fuji Photo.c. Most of the joint venture is a 50-50 where each party holds a 50% ownership stake to

share operation control.

d. This share can change from time to time.e. For instance now after 2001, Fuji has majority 75% shares while Xerox holds 35%

2ndparagraph

a. Joint venture is a very famous strategy that many firms adopt to expand their businessin the whole world.

b. However joint venture does have major disadvantages that can affect the partnershipnegatively.

c.

Firstly, through joint venture, company will risk giving control of its technology to itspartner.

d. This can be seen when a joint venture involves sharing of resources includingemployees, financial, infrastructure, business strategies as well as technology used.

e. For example in 2002, Boeing and Mitsubishi proposed to joined together to build anew body jet for the model Boeing 787and this create fear that the Japanese will steal

away its commercial airline technology.

f. One option will be to hold majority ownership in the venture to minimize the risk andthis allow dominant partner to have greater control over its technology.

g. It is difficult to find a partner who will take smaller ownership.h. Hence, this shows whay joint venture is a not good idea for long term prospect


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3rdparagraph

a. Another disadvantages of joint venture is that it does not give a firm a good controlover the subsidiaries that it might need to realize experience learning curve and

location economies.

b. Joint venture also does not give the firm tight control over foreign subsidiary thatmight need to engage in global attack against its competitors.

c. This will make it difficult for a firm to understand the whole business structure of theentire company that allows it to remain competitive in global level.

d. Example of Texas Instruments gets into Japanese semi-conductor market.e. When TI establishes their operation in Japan, it was done to analyse the Japanese

market share and limiting their cash available for invading TIs global market.

f. However, for this to happened, a TI subsidiary in Japan need to be prepared to takeinstruction from headquarters even to run at a lost if necessary.

g. Hence, if any joint venture partner are willing to accept such condition, it will benecessary for them to accept negative return on investment

h. It is impossible to have control over the decision hence joint venture will not be goodidea to enter foreign market.

4thparagraph

a. The last disadvantages of joint venture is the share ownership agreement can causebattle and conflict for control if both companies have different objective

b. For example, the aims of Xerox and Fuji Photo joint venture is to give themanagement rights to determine it own strategy.

c. However, conflict of interest regarding the strategies and objective can happens due todifference nationalities and other factors

d. Most of the case, when this happen it leads to dissolution of the venture.e. For example when a foreign company partner with a local company, the foreign

company will depend less on the local partners expertise when they have better

understanding on the local market.

f. The foreign company will demand more control over the strategies and hence conflicthappens.

g. This justify why joint venture is not a good idea when entering a foreign market.


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Question 3

b) Why firm take a reactive approach to exporting rather than proactive.

1stparagraph

a. The international market is always bigger than a firm domestic market whereexporting is always a good way to increase the revenue and profit.

b. Through expanding market size, exporting allows the company to achieve theeconomies of scale and thus reducing unit cost.

c. Exporting can be defined as selling locally produced product to overseas.d. Many firms tend to be proactive when finding opportunities for profitable exporting.e. Reactive firm do not consider exporting unless their domestic market is saturated and

access productive capacity.

f. It is a better option for companies to be more proactive to seek export opportunities2ndparagraph

a. Most medium size and small firms tend to be reactive due to many reasons.b. The first reason is they are not familiar with the foreign market opportunities.c.

By not doing much analysis, these companies do not have much informationregarding how big is the opportunities and where they might be.

d. Hence, that explains why certain local company fails to expand their business tooverseas since they wait for their domestic market to be saturated first.

e. The failure to understand the potential opportunities becomes the barrier to manysmall and medium size firms to exporting.

f. Not all local firms are able to gain market saturation in their local domestic marketbut they choose not to consider to expand their products towards foreign market

which can eventually have high potential for success.

g. For example Indomie from Indonesia is able to expand its product to other countriessuch as Malaysia when they realized the market demand of Malaysian for instant

noodles.

h. There are also many local companies in Indonesia producing the same product butthey become reactive because they do not have enough information on foreign market

opportunities.


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3rdparagraph

a. Besides, many medium and small size companies prefer to take reactive approach toexporting rather than proactive approach is due to the complexities and mechanics of

exporting to different countries with different culture and regulation.

b. This complexity involves language, legal system, currency, culture, business practiceas well as local customer taste and preference.

c. These differences become the barrier to use proactive approach as it might be difficultto market their product which might not suit the foreign countries preference.

d. For example in US, the exporters only account for less than 5% that export theproduct to foreign countries despite having numerous products and brands in the

country.

e. In US, famous companies like Coca-Cola, Doritos, Frito Lays, Subway and BurgerKing are the ones that use proactive approach to seek market opportunities.

f. They are able to adapt to the foreign countries complexities and take the risk.g. There are plenty of small and medium size firm in US that prefers to focus on

domestic market before considering exporting their product outside.

h. For these firms, they will need high consideration regarding complexities of theforeign countries before making any decision.

4thparagraph

a. Last reason for firms not being proactive is neophyte exporters creating problem whendoing business abroad and this give them a hard time when doing export in the future.

b. They may be less experience and have many problems including poor distributionprogram, poor market analysis, low understanding of competitive condition and poor

promotion.

c. These types of exporters take certain thing for granted including the time andexpertise that is required to develop their business in the foreign market.

d. In real, companies need to learn plenty of things regarding export such as traderegulation and business practise before making the final decision.

e. Hence, that explains why these is a small and medium size firms take a reactiveapproach to exporting rather than proactive.


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f. For example, company like ford, KFC and Mcdonalds take a quite sometime tounderstand international business condition before expanding their business to the

selected countries.


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SECTION B

Case StudyFDI and trade barriers

1

st

paragraph

a. FDI is an important tool that is use by firms to invest directly to produce or market theproduct in foreign countries.

b. When any firm does FDI, they become multinational companies which operate inmany countries.

c. There are 2 types of FDI which are greenfield investment and acquisitiond. Greenfield investment refers to establishing a new operation in foreign countries for

example when Apple Inc, Toyota, and Wallmart setup their operation in foreign

countries, it can be refers as greenfield investment

e. Acquisition or mergers refers to combining with the existing companies in the foreigncompanies to setup the operation in the foreign countries.

f. This acquisition can involve minority stake or full out right stake.g. Examples of acquisition that happens in Malaysia is when KIA Motors merged with

Naza Holdings to setup the car industry in Malaysia.

2ndparagraph

a. Some firms prefer acquisition than greenfield investment since it is quicker to executeusing the expertise and the resources owns by existing companies.

b. It will be easier and less risky for a firm to obtain assets rather than build them upfrom scratch.

c. Besides, the firm believe that they can increase the efficiency and effectiveness of anacquired unit by transferring capital technology and management skill.

d. Most firms choose FDI due to limitation of exporting and licensing.e. Exporting involve producing goods at home and send them to other countries.f. However, exporting are always constraint by transportation cost and trade barriers.g. When transportation cost are high, it become unprofitable for the firm to ship their

product to other countries.

h. For example, Coca-Cola company setup their factory in Shah Alam, Malaysia ratherthan exporting them from the parent company.


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i. It will be more costly to transfer the product all the way from America to Malaysiaand the price of Coca-Cola drink will be more expensive.

j. The limitation of licensing causes firm to do FDI.k. Licensing has 3 major weaknesses for foreign market.l. Licensing results in a firm giving away its technological expertise to foreign

competitors.

m. It does not give a firm the right control to the firm over manufacturing, marketing andstrategy in the foreign firm.

3rdparagraph

a. There are many barriers to trade which make it difficult for a firm to setup theoperation in particular countries.

b. These trade barriers involve tariff and non-tariff barriers.c. The tariff can be referred as tax levied on imports or exports which false into 2

categories which are specific tariff ad valorem.

d. Specific tariff refers to fixed charge for each goods imported why ad valorem tariffcan be referred to as tax levied for a proportion of imported goods.

e. Tariff is placed on imported goods to protect domestic producer from foreigncompetition by raising the price of imported goods.

f. For importers, tariff barriers can make it difficult to bring goods into a country. Theimporter may be forced to import less because the tariff barriers cannot be afforded

otherwise, and it may need to charge more for the goods to make importing

worthwhile.

g. Tariffs are designed to force importers to do this to level the field between domesticproducers and importers,

h. Allowing costly domestic producers to compete with importers who may be able tobring in goods at lower cost.

i. That explains why imported cars such as Volkswagen, Audi, BMW and Mercedes aremore expensive in order to protect local cars which are proton and perodua.

4thParagraph

j. Non-Tariff Barriers (NTBs) refer to restrictions that result from prohibitions,conditions, or specific market requirements that make importation or exportation of

products difficult and/or costly.


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k. Examples of non-tariff barriers involve Licenses , import quotas, voluntary exportrestraints, local content requirements

l. Under a quota, the government sets an annual amount of a good that another countrycan export to it. For example, the government might decree that the country may only

import five million tons of steel per year.

m. A license is granted to a business by the government, and allows the business toimport a certain type of good into the country.

n. For example, there could be a restriction on imported cheese, and licenses would begranted to certain companies allowing them to act as importers.

o. This creates a restriction on competition, and increases prices faced by consumers.p. Voluntary Export Restraints (VER) This type of trade barrier is "voluntary" in that it

is created by the exporting country rather than the importing one.

q. Avoluntary export restraint is usually levied at the behest of the importing country,and could be accompanied by a reciprocal VER. For example, Brazil could place a

VER on the exportation of sugar to Canada, based on a request by Canada. Canada

could then place a VER on the exportation of coal to Brazil.

r. This increases the price of both coal and sugar, but protects the domestic industries.s. Local Content Requirement places a quota on the number of goods that can be

imported, the government can require that a certain percentage of a good be made

domestically.

t. For example, a restriction on the import of television might say that 25% of thepieces used to make the television are made domestically, or can say that 15% of the

value of the good must come from domestically produced components.

5thParagraph

u. There are also cultural barriers that lead to trade barriers.v. Religion if you market a product that is not accepted by the dominant religious

group, you might harm your company considerably.

w. For example, if selling into the Malaysia, how much have you researched shariacompliance and the concept of "halal"?

x. Educational standards: when marketing a product, you must consider the literacy rateof a country. If a big portion of the population cannot read, ads with a lot of texts will

not have the desired effect.
http://www.investopedia.com/terms/v/voluntary_export_restraint.asphttp://www.investopedia.com/terms/v/voluntary_export_restraint.asp


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y. Cultural mores: if a certain product or action is not done in a certain country, there isthere any use in trying to launch it there? Think skimpy bikinis in Islamic countries.

6thParagraph

a. Economic conditions: your success, and not to mention your image, can suffer greatlyb. If you dont take the economic limitations of the targeted market into account.c. If people cannot buy on credit or are going through tough financial times, marketing

high-end products might scare of customers.

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