Financial Management

Question 1:
Discuss the various ways that firms expand internationally. Discuss the advantages and disadvantages. Make sure to comment on the issues of risks and extent of control for each of the strategies.

Answer:
Overview: Today's global market demands global action, yet, according to the Department of Commerce (DOC), fewer than 10 percent of manufacturing and service companies is involved in international trade. However, like it or not, you're probably already competing globally foreign-owned companies are competing with you in your "domestic" markets. You can turn global competition to your advantage by tapping markets and labor supplies across international borders yourself a process that is simpler than you may believe.

Why Compete Globally? Becoming involved in international trade can help business:

Enhance domestic competitiveness by finding less-expensive suppliers Increase sales and profits Gain global market share Reduce dependence on existing markets and suppliers Extend the sales potential of existing products with relatively low development costs Stabilize seasonal or cyclical market fluctuations Enhance potential for corporate expansion

Methods/Ways of Doing Global Business There are several methods you can use to enter a foreign market, including exporting, importing, licensing, joint ventures and off-shore production. If you have an existing business that creates a tangible product, exporting is the most common method. Start-up costs and risks are limited, and profits can be realized early on. If you are beginning a new venture, the other choices are options that may reduce some of the start-up risks.

There are two basic ways to export: directly or indirectly. A. Direct Exporting In direct exporting, your company finds a foreign buyer and then makes all arrangements for shipping your products overseas. This method requires a lot of footwork and infrastructure, and entails more risk, but the potential profit rewards are often higher. If you choose to export directly, you have several options: Sales Representatives/Agents -- Essentially, you hire foreign-based representatives or "agents" who work on a commission basis to locate buyers for your product, just as you would domestically. Distributors -- You strike a deal with a foreign distributor, who purchases merchandise from you and resells it with a markup. The distributor maintains inventory and provides after-sales service to the buyer. B. Indirect Exporting Your company uses an export intermediary to perform most of the details of the export arrangement. Many small businesses choose this option, at least at the outset. There are several types of export intermediaries: Commissioned agents - These are brokers who link your product or service with specific foreign buyers, allowing the primary company to fulfill the order and handle packing, shipping and export documentation. Export Management Companies (EMCs) and Export Trading Companies (ETCs) -- These companies operate in the country where the goods are to be exported. EMCs generally represent your product to promote it to other prospective overseas purchasers, while ETCs usually work according to demand, finding a need and sourcing your product for foreign buyers. Both types of companies usually take care of all aspects of the export transaction (including conducting market research, promoting your product overseas, accessing proper distribution channels, and locating foreign distributors), making them a viable option for smaller companies that lack the time and expertise to break into international markets on their own. EMCs and ETCs usually operate on a commission basis, although some work on a retainer basis and some take title to the goods they sell, making a profit on the markup. Importing and exporting can be done on any scale from a tiny home office or from the World Trade Center. You don't need a license from the United States government in order to do international trade, but the country with which you do business may require a license. What you do need is an international business plan.

Advantages and Disadvantages: Advantages

Faster growth: Firms that have operate internationally tend to develop at a much quicker pace than those operating locally

Access to cheaper inputs: Operating internationally may enable the firm to source raw materials or labor at lower prices Increased quality and efficiency: Exposure to foreign competition will encourage increased efficiency. Doing business in the international market allows firms to improve the quality of their product in order to gain a competitive advantage. New market opportunities: International business presents firms with new market opportunities. These new markets provide more opportunities for expansion, growth, and income. A bigger market means more customers, increased revenue, a larger profit margin, and allows the business to realize economies of scale. Diversification: As the firm diversifies its market, it becomes less vulnerable to changes in local demand. This reduces wild swings in a company's sales and profits.

Disadvantages Increased costs: There are increased operating expenses including the establishment of facilities abroad, the hiring of additional staff, traveling of personnel, specialized transport networks, information and communication technology.

Foreign regulations and standards: The firm may need to conform to new standards. This may require changes such as in the production process, inputs and packaging, incurring additional costs.

Delays in payments: International trade may cause delays in payments, adversely affecting the firm's cash flow.

Complex organizational structure: International business usually requires changes to the firms operating structure. Training/retraining of management may be necessary to facilitate restructuring. However, where there is a clear opportunity and well-designed strategy, we have seen many small businesses create significant value in their global operations.

Global Expansion Challenges Small businesses face three major challenges when going global: Language, culture and regulations are often difficult barriers. Small businesses often underestimate the resources and investment required to surmount those barriers. In-country personnel with the experience and skills to navigate these challenges are hard to find, and can be expensive to add to your team.

Leadership must invest significant time and energy. Running a satellite operation in Brazil or China may take an order of magnitude more time and energy from a leadership team than running the same operation would take in Pittsburgh. Oftentimes a key leader must move overseas to manage the foreign operations. In a small business this may be a critical drain on U.S. talent.

Success factors may not translate globally. At the end of the day, what works well in the U.S. may not work well overseas. For example, Europe population densities are significantly higher than in the U.S., which means space is at a premium and the populations are much more urbanized. As a result, big box stores, with a lot of shelf space and a myriad of SKUs, have been difficult to build in Europe. This greatly impairs the ability of niche SKU manufacturers to gain widespread distribution and build scale.

A small business global strategy must address these challenges upfront to have any chance at success.

Global Expansion Approaches There are several routes to successful global expansion: Leverage existing customer relationships If you are a valued supplier to a key customer with global operations, that customer may serve as a springboard to global expansion. You should explore whether the customer's needs are being well-served overseas, and if not, if they are willing to allow you to serve them in those markets. If your products and relationship with them are truly distinctive and add value, they may be willing to partner with you and bring you along the overseas learning curve. They may even be willing to invest alongside you and/or help minimize your risk with favorable contract terms. Build on your existing intellectual property (IP) Another source of global expansion success is some differentiated and protectable product, process or brand. Patent or trademark protection is best, as trade secrets are difficult to protect and brands can be copied. For this route, you might target jurisdictions with strong histories of protecting IP. Link up with trusted local partners We have seen small businesses do well overseas when they have connected with local manufacturers or distributors they can trust. Aligning objectives, incentives and expectations, and creating transparency and visibility between both partners, is critical. Often, you can look to overseas customers to help make the connection between U.S. and local companies that can result in trusted partner relationships. Global expansion can be a gamble, but we have seen each of these approaches greatly increase the odds of success.

Question 2:
What role can geography play in strategizing about innovation and technology? Discuss the major impediments to innovative efforts.

Answer:
Globalization and the advent of information and communication technology (ICT) change the role of spatial distance in innovation activities. Geographical proximity used to be seen as a necessary condition to share tacit knowledge and to enhance trust between innovators; now this approach is being challenged by claiming that the role played by spatial distance diminishes with time. The aim of this paper is to present territorial innovation models as examples of theories based on assumptions of a crucial role of local environment and spatial distance in innovation processes and to present arguments against the said assumption. The paper concludes advocating the encouragement to cooperate both within the local network area and with distant partners and the creation of territorial innovation models as open systems engaged in interactive learning by global connectivity. Introduction Innovation has become of great importance to entrepreneurs, governments, and scientists, since it has been recognized as the key factor to the growth and competitiveness (Neely/Hill 1998). This growing significance of innovation has resulted in more research on the locus of innovation. Scholars try to determine the most suitable scale to sustain innovation-based learning economies (local, regional, national, international levels etc.).

The role of geographical proximity in innovation In terms of proximity, a fundamental contribution to the literature on innovation was made by the French School of Proximity Dynamics in the 1990s, according to which there are different forms of proximitys dimensions (cognitive, organisational, social, institutional, geographical (Boschma 2005)). In this paper, we consider proximity in the geographical sense, defined as the spatial distance between actors. The studies dedicated to innovation proved that innovation and knowledge capital are highly concentrated in a minority of urban regions. It is established that essential elements of the innovation became regionalised and proximity boosts the occurrence of innovation (Doloreux/Parto 2005). Simmie (2003) believes that the reasons for this are tacit knowledge and experiences which are concentrated in a particular place and have low mobility. Sharing them requires socials networks.We can identify two types of knowledge the tacit one and the codified (explicit) one. Polanyi (1966) developed the notion of tacit knowledge. He summarised the essence of tacit knowledge in the phrase "we can know more than we can tell" (Polanyi 1966: 4). Tacit knowledge is difficult to articulate and is shared through interactive social networks (face-to-face relations). Codified knowledge can be formally articulated and easily transmitted to others without the need of direct social interactions (e.g. by books, documents, procedures etc.). One of the reasons why geographical proximity matters in innovation is because tacit knowledge can be shared easier when actors of the innovation process are in appropriate distance to each other. This localized interactions can likewise be reinforced by socio-cultural values such as routines and norms which are embedded in a geographical area. Sharing and understanding tacit knowledge demand common social and cultural comprehension without it, relations between actors involved in the innovation process can be blocked (some types of information would be hard to interpret (Doloreux 2002)).

Innovation systems and evolution To understand the innovations system approach, it is important to understand the underlying economic thoughts, which are evolutionary economics and stand in opposition to neoclassic economic theories. Neoclassic growth theory has been constrained by theories based on mechanical concepts of equilibrium (Nelson, 1995) and is also blind to the important role of the institutional frameworks that set the rules for the economy. While neoclassical economic theory assumes full information and independent utility functions, evolutionary economics builds on uncertainties, expectation, and also some sort of systematic selection mechanism that opens up for a broader understanding of what is actually happening at the micro level, and not simply policy leanings based on aggregate models (Georghiou and Metcalfe, 1998).

The evolutionary perspective leads to an understanding that sees the variations among firms and technologies i.e. why some firms actively participate in emerging technologies such as carbon capture and storage, even though there are major uncertainties about whether it will ever reach a commercial stage. Naturally, the ETPs are not addressing national system of innovation, nor are they necessarily addressing technological systems. Scholars of technological systems developed in the 1990s have said that it is the institutional framework that defines a technological system (Carlsson and Stankiewitz, 1991). But then, how can the ETPs be technological systems? The reasoning must necessarily be that the ETPs are more than technological systems, perhaps evolving from 4networks, but indeed institutionalized. The important works of (Malerba et al., 1997,Malerba, 2002,Carlsson and Stankiewicz, 1991) address the varieties in institutional frameworks according to the technology in play and maturity stage. Sectoral systems of innovation could be another choice. The various concepts all address important issues related to system thinking, and it is obvious that a theory needs to combine work at different levels of aggregation. Major impediments to innovative efforts How do you transform an opportunity into an idea? Well, the first thing is to get comfortable with the belief that any old ideas wont do. What were interested in are disruptive ideas; that is, ideas with the power for great impact and influence. Ideas that challenge assumed boundaries and inspire a sense of whats possible. In my experience, however, most ideas

The Logical Innovators Challenges To avoid:

The argument that if I cannot do everything, then I cannot and I am not obliged to do anything. Striving after perfection in the belief it can be achieved Equivocation (regarding meaning and truth) Self-deceit through covert shifts between substantial and tautological interpretations of words Self-contradiction (concerns validity). If tolerated, then literally, anything goes. Accepting that the antecedents of something must be the same as itsfulfilment (The Genetic Fallacy)

Asserting that differences of degree cannot become differences of kind (The Black is White Slide) Putting falsely positive/negative faces on things accentuating the positive/negative putting false faces on quantities e.g. % of what, watching the mathematical properties of percentages, pictorial presentations (area vs. volume), distinguishing cause and effect (Source: Flew, 1975)