Master of International Management

Dirk Boehe
[email protected]
Managing International Trade

abs.um6p.ma
Managing International Trade – An Overview

I. Trade Theories

III. Foreign Exchange, Managing

II. Export Market Selection
Trade Risk, &Trade International & Interntional Marketing
Financing Trade

IV. Managing The Global

Value Chain

2
 II. 1. Exports versus FDI
Export Market
Selection & 2. Export Market Selection
Interntional
Marketing
3. Global Marketing Research
for Export Markets

3
Mahindra &
Mahindra
in South Africa
Ivey Case #11547
Assignment questions

(1) Which option should Shah choose and what should he recommend to the board of
directors?
(2) What is your assessment of M&M’s experience with its South African sales subsidiary to
date?
(3) How attractive is the South African auto market in terms of size, growth & profitability?
Problem Statement – TOSCA

Trouble - What makes this problem real?

Owner - Whose problem is this?

Success criteria - What will success look like?

Constraints - What are the limits on the solution space?

Actors - Who has a say in the way we solve this problem?

è Use the TOSCA Worksheet

What is Shah’s Dilemma or Trade-off?

“Each option involved High

Reconcile
tradeoffs. They have to be opposing
choices?
evaluated…” (Said Shah, p.1)
Co
ns
t
“The board would be …… rain
……. .. ts
interested in understanding
the tradeoffs involved in each
of the four options…These are
quantitative ….the limitus test
would be qualitative” (p.11) Low

Low High

…..
Should Shah choose export strategies (CBU or CKD) or
should he choose an FDI strategy (manufacturing)?

How can we analyse these market choices?

Build an issue tree!

Source: Garrette B, Phelps C, Sibony O. Cracked It!: How to Solve Big Problems and Sell Solutions like Top Strategy Consultants. Cham :
Springer International Publishing : Imprint: Palgrave Macmillan, 2018. 8
 like Top Strategy Consultants. Cham: Springer International Publishing: Imprint: Palgrave Macmillan.
Source: Garrette B, Phelps C, Sibony O. 2018. Cracked It!: How to Solve Big Problems and Sell Solutions
Mutually Exclusive and Collectively Exhaustive (MECE)

(1) “Collectively Exhaustive means that we have identified all possible conditions to
provide logical support for the hypothesis”
à Are the conditions – if supported – sufficient together to recommend that your hypothesis
should be accepted?
à Are they sufficient to answer your issue tree questions?
Check:
§ Ask this question: Does an “Others” category exist?
§ Example: UG Students, PG students – Are these two categories collectively exhaustive?
§ Suppose all conditions hold and still argue against the hypothesis.
(2) Mutually exclusive means that the conditions must not overlap.
§ Example: UG Students, PG students, MBA students – are these three categories mutually
exclusive?

9
 like Top Strategy Consultants. Cham: Springer International Publishing: Imprint: Palgrave Macmillan.
Source: Garrette B, Phelps C, Sibony O. 2018. Cracked It!: How to Solve Big Problems and Sell Solutions
Mutually Exclusive and Collectively Exhaustive (MECE)

Cartesian Rules:

1. Accept nothing for true without questioning it thoroughly. (“critical thinking”)

2. Divide each issue into parts until you find adequate solutions to each
elementary issue. (disaggregation of problems)
3. Conduct analyses by starting with the simplest issues and ascending step by
step to reach more complex issues, while keeping a sense of order and
priority, especially when considering disconnected issues.
4. Make sure nothing is omitted.

Source:
Garrette B, Phelps C, Sibony O. Cracked It!: How to Solve Big Problems and Sell Solutions like Top Strategy Consultants. Cham : Springer International Publishing : Imprint: Palgrave Macmillan, 2018. 10
LIBRARY LINK
Exports and/or FDI?
How can economic theory inform
decision-making for Mahindra &
Mahindra?
 exporting
Additional sunk costs of
Fixed cost of production

???
When do firms switch from domestic sales to exporting?

Source: Helpman E. Understanding Global Trade. [Electronic Resource]. Cambridge, Mass. : Belknap Press of Harvard University Press, 2011.
Implications

• Exporters are larger

… due to economies of scale and a redistribution of (domestic)
market shares in favor of more productive exporters.
• Exporters employ more people
… because they are larger.
• Exporters pay higher wages
…because they are more productive than non-exporters and
thus generate higher profits (part of which can be redistributed to
employees)
 Source: Helpman E. Understanding Global Trade. [Electronic Resource]. Cambridge, Mass. : Belknap Press of Harvard University Press, 2011.
How may trade liberalization affect the profitability of
domestic and export firms?
• FTA between the US and Canada
raised labor productivity by >7%
• …in industries facing high import
competition, the productivity
increased by ˜15%
• These productivity gains were due to
market share reallocation (less
productive firms exit, more productive
firms increase their market share)
When do firms switch from exporting to FDI?

Helpman E. Understanding Global Trade. [Electronic Resource]. Cambridge, Mass. : Belknap Press of Harvard University Press, 2011.
• Shipping costs Advantage
of proximity
• Other costs of trade (trade barriers)
• Manufacturing costs abroad
• Manufacturing costs at home
• Sales volume in foreign market
Fixed cost of establishing
a plant overseas
Proximity x Concentration Trade-off
• Proximity: saves shipping costs
• Concentration of manufacturing at home:
saves manufacturing costs abroad
(fixed costs & economics of scale)
• Such costs are industry-specific.
Proximity – Concentration trade-off

Helpman E. Understanding Global Trade. [Electronic Resource]. Cambridge, Mass. : Belknap Press of Harvard University Press, 2011.
in times of trade restrictions
• Trade restrictions à increasing import taxes
• Exporters’ variable costs increase
• Exporters’ profit curve flattens (slope
decreases)
• FDI is superior to exporters earlier
(point Y moves to the left à Y*) Profits from export sales
with trade restrictions
• In general, different slopes of the export or
subsidiary sales curves reflect different Y*
variable costs, e.g.
• wages,
• freight & insurance,
• trade barriers,
• risks arising from
weak property rights protection
Internalization Theory

Source: Rugman, Alan M. "Inside the Multinational Network." New York: Columbia (1981).
Export if: C + M* < C* + A* (Exporting cheaper than FDI)

FDI if: C* + A* < C + M* (FDI cheaper than exporting)

§ Production costs in home country ( C)

§ Production costs in host country (C*)
§ Export marketing costs (M)
§ Information costs (A*)
§ Knowledge dissipation costs (D*)
 Helpman E. Understanding Global Trade. [Electronic Resource]. Cambridge, Mass. : Belknap Press of Harvard University Press, 2011.
Slope of curve represents
variable manufacturing costs

Fixed cost of domestic production

Additional fixed cost of exporting

Flatter slope reflects variable
cost of exporting due to
Additional fixed cost of logistics / freight, import taxes
establishing a plant in a foreign
market is higher than fixed costs
of exporting and domestic
production.
What will firms with

Helpman E. Understanding Global Trade. [Electronic Resource]. Cambridge, Mass. : Belknap Press of Harvard University Press, 2011.
different levels of
productivity do?

• What will the least

productive firms do?
• What will firms with
intermediate
productivity do?
• What will the most
productive firms do?

? ? ? ?
 trade costs (X)

+ fixed costs (FDI)

Under what
conditions does

more beneficial?
production become
exporting or foreign

Marginal costs foreign production

Marginal costs home production +

Sources: Head, K., & Ries, J. (2004). Exporting and FDI as alternative strategies. Oxford Review of Economic Policy, 20(3), 409- 423.
Helpman E. Understanding Global Trade. [Electronic Resource]. Cambridge, Mass. : Belknap Press of Harvard University Press, 2011.
Institutions and the Export vs FDI choice
Why do some firms switch from trade to FDI?
− Institutional Reasons
• Under uncertainty, import-export contracts may not be fully honored.
• Uncertainty: contract enforcement, misbehavior by the trade partner (e.g.,
illegal behavior, opportunism), political/social/economic instability, etc.
• If firms trade frequently and if contract violations may hurt either trade
partner significantly, they have an incentive to vertically integrate value-
chain activities across borders by foreign direct investment (FDI).
• Thus, FDI and intra-firm trade replaces export-import trade between
legally independent firms.
 Source: Peng, Global Strategy, 4th Edition. © 2017 Cengage. All Rights Reserved. May not be
What do institutions do?

scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

(Well-functioning) Institutions reduce uncertainty!

How do institutions reduce uncertainty?

o Relational contracting: Informal, relationship-based, personalized
exchanges
o Arm‘s length transaction: Formal, rule-based, impersonal exchange
with third part enforcement.
Exports versus FDI – Institutional Perspective

Sprinbok Delhi
Ltd. Ltd.
• R&D Distributes
• Brands Export Product Flow
products received
• M&A from Springbok
• Networks Payment flow Ltd. in India

South Africa India

FDI = Internalization of markets
Multinational Corporation
Sprinbok Springbo
Ltd. k India
Ltd.

• R&D Distributes
• Brands Internal Product Flow products received
from Springbok
• M&A Ltd. South Africa
• Networks Internal Money Transfer in India

South Africa India

Why do firms switch from exporting to licensing or FDI?
Internalization Theory

Source: Rugman, Alan M. "Inside the Multinational Network." New York: Columbia (1981).
International transaction costs – i.e. the costs of doing business in foreign markets –
tend to be higher than domestic transaction costs – because in some case it is more difficult to
enforce laws and regulations across national borders.

3 basic entry moder choices:

1) Direct Exports (without control over sales channel abroad) = MARKET (low control)
2) Lisensing, franchising, joint ownership of foreign operations = HYBRID (medium control)
3) Wholly owned subsidiary = HIERARCHY (high control)
è intrafirm trade - international trade between two subsidiaries in two countries
controlled by the same MNE
Empirical Evidence Exports & FDI
Which patterns do you observe? Why?
What does empirical evidence tell us about the
relationship between exporting and FDI?
Explain your observations (why does this happen?)

Source: Conconi, P., Sapir, A., & Zanardi, M. (2016). The internationalization process of firms: From exports to FDI.
Journal of International Economics, 99, 16-30.
 LEARN, DARE & CARE

Exercise:

Mahindra& Mahindra in South Africa

(Ivey Case 11547)

Focus on this question:

Which option should Shah choose?

How?

• Use the problem-solving method

(CrackedIt book)

Deadline: submit by e-mail by

06/11/2023, 12pm
 LEARN, DARE & CARE
Exercise:

Chabros International Group:

A World of Wood (Ivey Case 10001)

Focus on this assignment question:

If you decide to follow a market dvelopment

strategy, into which new country would you expand?
Rank the candidate countries. Explain and justify
how you derived your ranking.

How?

• Think first of a method that allows you to

compare all relevant countries.
• Use relevant quantitative data available in
the case (Exhibit 14-15).

Deadline: submit by e-mail by

06/11/2023, 12pm