Managing International Trade and Investment

Harvard Business School

Associate Professor Debora Spar

Winter 1999

Course Overview

Despite the ease with which it is often conducted, doing business across borders is not the same as doing it at home. Rather, it entails a whole new set of managerial challenges: re-assessing competitive advantage; evaluating diverse political environments and legal structures; considering the impact of currency fluctuations and trading regimes; and understanding widely disparate cultures and business norms. The purpose of MITI is to build a framework of analysis that enables managers to understand the challenges of international trade and investment and to master the opportunities they represent.

- In contrast to many other courses on international business, MITI does not concentrate on the internal administration of the multinational enterprise. It focuses instead on the external environment of trade and investment. Specifically, it explores the interaction between firms and the international economy. It examines how macroeconomic and political forces shape the environment in which firms compete and how firms, in turn, influence the political and economic conditions that surround them. MITI is more about politics than most courses in international business, more about institutions and the legal constructs of trade.

- The course consists of four inter-related modules. It begins with a brief series of cases designed to illustrate how the basic elements of competitiveness can shift and alter as firms cross national boundaries. Factors that define a firm's strategy and success in one market may prove illusive or ill fitting in another. Perceptions of a product's value may vary; so can industrial structures, relations with suppliers, terms of competition, and the interests of would-be customers. To operate successfully in new markets, firms must analyze these changes and respond effectively to them.

- The second module expands our level of analysis to the state, examining how national policies shape and constrain the climate for international business. Using a series of company-based cases, we will investigate how firms feel the impact of foreign governments' policies and what tools are available for predicting, or avoiding, or even employing the long arm of government policy. The third module then extends this analysis to the international system, exploring how international arrangements and institutions -- such as GATT and NAFTA -- can affect industrial structures and change the opportunities for international business. It also considers how more subtle international pressures such as environmental and human rights concerns may shape firm options and strategy.

MITI ends with a capstone module on trade and investment in information-based industries. These industries are amongst the fastest growing segment of international trade. But the trade they entail is new, since the product -- information -- is invisible and relies heavily on systems of property rights and professional licensing that vary widely across national borders. Using both cases and selected articles, we will consider how firms can best manage these uncertainties to gain a comparative and sustainable advantage in the international marketplace for information-based goods and services.

Administration

- The materials for MITI will consist primarily of cases and outside readings. All materials will be available through Baker 20.

Because the course covers such a wide breadth of countries, issues, and industries, it will rely even more heavily than usual on active and enthusiastic participation. Accordingly, class participation will count for 50% of the final grade. All students can take one "day off," either to miss class or to be excused from the possibility of a cold call. The remaining 50% of the final grade will be based on a final project, chosen by each student with the prior approval of the instructor. Students can work on these projects individually or in groups, and are encouraged to be creative in their choice of topic and presentation format. The projects should be concerned, broadly, with the issues managers face in doing business abroad. They can be standard research papers, or drafts of potential cases, or analyses of particular situations or issues. They may also be submitted in forms other than pure text. Preliminary descriptions of all projects should be submitted in writing to the instructor by early March.

Any administrative questions should be directed either to the instructor or to Martha Mazariegos at 495-6365. Students should also contact Marta to schedule individual meetings.

Managing International Trade and Investment

Course Syllabus

January 13 - Approaching Global Markets: Introduction and Overview

Reading: "Global Gamble," Business Week, February 12, 1996, pp. 63-72

In 1996, Morgan Stanley has embarked upon an ambitious program of globalization. Under the leadership of president John J. Mack, the prestigious investment bank is opening offices around the world, betting that the capitalist revolution sweeping across Asia, eastern Europe, and Latin America will generate much of the world's growth --and Morgan Stanley's profits -- in the coming decades. In describing the firm's plans and success to date, this brief article touches upon many of the central themes of MITI. What is entailed in a shift from domestic markets to international ones? How must a firm change its product offerings and competitive strategy as it crosses national borders? How is its business affected by the political and economic environments of foreign states? And what, if anything, differentiates the international prospects for information-based firms (such as Morgan Stanley) from more traditional manufacturing enterprises?

After a discussion of the Business Week article, the remainder of the class time will be devoted to administrative issues and an overview of MITI's conceptual framework.

Study Questions:

1. What is Morgan Stanley's "global gamble"?

2. Is it a wise bet? What issues does John Mack need to consider before proceeding with his ambitious plans in markets such as India, China, and Mexico?

January 15 - Product Definition and Market Entry

Reading: Honeywell's Tushino Project (HBS N9-794-064)

Visitor: Michael Bonsignore, Chief Executive Officer, Honeywell

With this case, we begin to examine how the structure of an industry can vary from market to market, and how these variations are liable to affect the competitiveness of firms as they transact across international borders. The case looks at Honeywell, a major U.S. manufacturing firm that has recently entered the Russian market for industrial and residential-building controls. The centerpiece of Honeywell's Russian presence is the Tushino project, a pilot program with the city of Moscow to modernize thermal controls for an entire central heating district. It is an intriguing project for Honeywell but also one that raises fundamental questions about what the company wants to sell, and to accomplish, in the emerging Russian market.

Study Questions:

1. Is the central district heating market a worthwhile strategic target for Honeywell?

2. What is an acceptable rate of return for this project?

3. What should Mike Bonsignore do next in Russia?

January 21 - Inputs and Supply Chains

Reading: Lenzing AG: Expanding in Indonesia (HBS 9-796-099)

Visitor: Mikel Dodd, President, Lenzing Fibers Corporation

This case explores in detail two key aspects of industry structure -- upstream suppliers and downstream customers -- and examines how firms may need to re-evaluate their position within these chains of production as they venture to new markets. The case describes the situation facing Lenzing AG, the world's largest manufacturer of rayon fiber, as it contemplates a substantial expansion at South Pacific Viscose (SPV), its Indonesian subsidiary. While Indonesia is a booming and attractive market for Lenzing, SPV has no direct access to wood pulp, its key input. Lenzing's management also has no way of knowing whether their downstream customers -- the highly mobile textile and garment manufacturers -- will ultimately choose to locate, and stay, in Indonesia. How can Lenzing balance its internal considerations against any potential shifts in the global textile market? And, if it has to choose, is it better to locate closer to its suppliers or its customers?

Study Questions:

1. What are the costs and benefits of expansion at South Pacific Viscose?

2. How attractive is Indonesia as a site for rayon production? As a domestic consumer of rayon? As a leading exporter of rayon?

3. What should Mikel Dodd advise Lenzing's Board of Directors to do?

January 22 - Customers and Competitors

Reading: Microsoft in the People's Republic of China, 1993 (HBS N9-795-115)

This case continues our discussion of industry structure, looking in particular at how customers and competitors for a given product can vary across national borders. In 1993, Microsoft is thinking of expanding its phenomenally successful software product into the booming Chinese market. As Microsoft's managers quickly realize, however, expanding into China entails a particularly difficult set of challenges. Indeed, before plunging into the Chinese market, Microsoft needs to reconsider the very definition of its product. What does it mean to sell software in China? And what does the structure of the Chinese market imply for Microsoft's entry strategy, as well as for its long term prospects for success?

Study Questions:

1. What does Microsoft sell? How attractive is this product in the Chinese market?

2. How attractive is the Chinese market to Microsoft?

3. What is the best way for Microsoft to enter China?

January 27 - External Shocks and Competitive Shifts

Reading: Japan's Automakers Face Endaka (HBS 796-030)

Background Reading: Note on Operating Exposure to Exchange Rate Changes (HBS 9-288-018)

In June 1995, the Japanese yen hit a post-World War II high against the U.S. dollar. The yen's relentless ascent affected firms on both sides of the Pacific, but fell particularly hard on Japan's Big Four automakers. The case explores how endaka changed the competitive environment for the automakers and how they responded to this change. Together with the note on exchange rate changes, it examines how macroeconomic and political shifts can dramatically affect the competitive position of firms operating in a global economy. It also describes how firms can re-shape their strategies to compete even in starkly different external environments.

Study Questions:

1. What happened to Japan's Big Four automakers in 1985, and then again in 1994-1995? Why did these changes occur?

2. How well did the Japanese firms respond to the changes of 1985? What will they have to do differently in 1995?

3. What lessons, if any, can other firms take from the response of Japan's automakers to endaka?

II. THE RULES OF THE GAME: NATIONAL POLICY AND FIRM RESPONSE

January 28 - Lecture: The Politics of Trade and Investment

Readings: Douglass C. North, "Institutions, Transaction Costs and Economic Growth," Economic Inquiry," Vol. XXV, July 1987, pp. 419-428

George Soros, "The Capitalist Threat," Atlantic Monthly, February 1997, pp. 45-58.

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February 4 - The Politics of Trade

Reading: Layton Canada (HBS 9-796-108)

Background Reading: Note on Export Controls (HBS 9-384-008)

Visitor: "Veronica Bronson," President, Layton Mexico; former President and CEO, Layton Canada

With this case, we begin to explore the political dimensions of trade. As all the cases in this module suggest, trade is often as much about politics as it is about strategic or comparative advantage. And when trade is about politics, it presents firms with a whole new range of challenges. The Layton case examines both the sources of these political challenges and the ways in which firms can respond effectively to them. Layton Canada, a leading manufacturer of electrical components, is a Canadian subsidiary of a Dutch parent corporation. Yet, for reasons entirely beyond its control, it is now caught by the provisions of a U.S. export embargo on Cuba. If Layton sells its product as promised to a Cuban customer, it risks violating U.S. law. If it cancels the sale, it will violate Canadian law.

Study Questions:

1. How do export controls work? Do they ever make sense from a political standpoint? From an economic standpoint?

2. How can firms respond to export controls or embargoes? What responsibilities do they have? To whom?

3. What should Veronica Bronson do?

February 5 - The Politics of Protection

Reading: Chiquita Brands International (A) (HBS N9-797-015)

Visitor: Hamid al-Mamdouh, Counsellor, World Trade Organization

Chiquita Brands is one of the United States' oldest and most colorful companies. It is also a company with intensely political roots, dating from its long-standing involvement in the banana plantations that dominated the developing economies of many Latin American nations. This case provides a brief description of Chiquita's early history and then focuses on a new, and very powerful, political situation facing the firm in 1993. As part of its movement towards regional integration, the European Union imposed strict limits on banana imports into the EU, one of Chiquita's core markets. Now Keith Linder, Chiquita's president and chief operating officer, must decide how best to deal with this threat. And policymakers in the United States and Europe must consider whether to intervene on Chiquita's behalf.

Study Questions:

1. What role has politics played in the history of Chiquita Brands, and its predecessor, the United Fruit Company?

2. What role has protectionism played in the global banana market? Is this role defensible?

3. What should Linder do about the EU's banana policy? How should Bob Dole respond to Linder's request?

February 10 The Politics of Investment

Reading: Toys 'R Us Japan (HBS 796-077)

Background Reading: Note on Foreign Direct Investment (HBS N9-795-031)

With the Toys 'R Us case, we look at the specific political issues surrounding foreign direct investment. Because investment inherently entails a direct and tangible involvement in a foreign state, it is shaped even more immediately than trade by the external forces of politics, culture, and macroeconomic shifts. The case describes how Toys 'R Us deals with all of these forces in launching an investment into one of the world's most lucrative, but challenging, markets: the Japanese retail sector.

Study Questions:

1. Is Japan a good market for Toys 'R Us?

2. Is Toys 'R Us good for Japan?

3. Has Toys 'R Us chosen the best entry strategy for the Japanese market? Has it chosen the right partner?

February 11 Contracting Under Uncertainty

Reading: White Nights and Polar Lights: Investing in the Russian Oil Industry (HBS 795-022)

Background Reading: Note on Political Risk Analysis (HBS N9-798-022)

Throughout this section, we have been examining the ways in which national laws and policies affect the environment in which firms compete. But how do firms compete when the legal and political environment is in a constant state of flux? How can managers make deals and sign contracts when the entire commercial infrastructure of a nation is highly uncertain and perpetually changing? In the White Nights case, we see three firms grappling with these issues. All want to invest in Russia's vast and potentially lucrative oil sector. But all are also well aware of the tremendous risks that any investment in this sector will entail. How can they structure their investment to best protect themselves against the legal, political, and commercial risks of Russia?

Study Questions:

1. How important is the acquisition of Russian oil to a western oil firm? How would you value the worth of this acquisition?

2. Evaluate the strategies undertaken by Phibro, Mobil, and Conoco. Which one is wisest? Why?

3. How might western companies protect or hedge their investments in the Russian oil sector?

February 18 Relationships

Reading: Busang (A): River of Gold (HBS N9-798-002)

In 1995, Bre-X Minerals, a tiny Canadian mining firm, struck gold. Deep in the heart of the Borneo jungle, it discovered what appeared to be one of the world's largest and most easily accessible deposits of gold. Almost immediately, the firm's stock price shot upwards and its managers were besieged by eager investors and would-be partners. They also became mired in the relationship-based politics of Indonesia. To mine the gold, and reap the benefits, Bre-X's management must establish several critical relationships: with financial partners outside Indonesia and with political and business partners inside the country. Yet figuring out whom to ally itself with is no easy task. The case describes how Bre-X's management reviews its various options, and how it evaluates the strategic advantages (and risks) of key relationships.

Study Questions:

1. What kinds of rules are most important to foreign investors in Indonesia's mining sector? How are these rules made?

2. How can Bre-X gain leverage over its Indonesian relationships?

3. How should David Walsh respond to Minister Sudjana's announcement?

February 19 When Rules Collide

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Readings: Assessing Foreign Business Practices (HBS 9-796-105)

- Hurd Baruch, "The Foreign Corrupt Practices Act," HBR Reprint 79101

One of the trickiest questions facing managers in foreign countries is whether to abide by local rules or those of their home state. The question is particularly tough when it concerns issues of foreign corruption. When is a "bribe" merely a local "commission?" And how can managers make the distinction between them? More broadly, how can global firms distribute their responsibilities and loyalties among the various countries in which they do business? This is one of the central dilemmas facing managers in an increasingly global economy. The case consists of ten short "caselets," each based on an actual situation in which managers were forced to grapple with these questions. The reading describes the official U.S. position on matters pertaining to "foreign corrupt practices."

Study Questions:

1. What would you do in each of the scenarios described?

2. What sorts of guidelines would you follow in determining your response?

3. Is the Foreign Corrupt Practices Act a good piece of legislation?

III. - RULES OF THE INTERNATIONAL SPHERE

February 24 The Impact of Regions and Trading Regimes

Reading: Regarding NAFTA (HBS 9-797-013)

Earlier in the course, we examined the role of domestic rules and institutions in facilitating commerce and economic development. Today, we explore a second tier of institutions: the international institutions that formally govern international trade and investment. We look in particular at NAFTA, one in a recent series of regional trading agreements. The case provides a brief background of NAFTA and the other regional agreements on which it was based. In three separate caselets, it then describes the specific circumstances of three firms (a U.S. meat producer; a Canadian auto parts manufacturer; and a Mexican subsidiary of a Japanese electronics company) and considers how the advent of NAFTA is likely to affect each of their strategies and competitive positions.

Study Questions:

1. What is the rationale behind NAFTA? Does it make sense? Is it a good idea?

2. To what extent do the goals of NAFTA depend on the creation of a formal international institution?

3. How would you advise each of the case protagonists to shift their business strategies as NAFTA approaches?

February 25 Liability

Reading: Union Carbide's Bhopal Plant (A) (HBS 9-795-070)

Sometimes managers have to consider responsibilities and liabilities that extend even beyond the borders of the state in which they do business. In 1984, a leak occurred at a Union Carbide plant in Bhopal, India. By the time the leak was finally sealed, over 100,000 people had been killed or injured, making Bhopal the worst industrial accident in history. In studying this case, we will be examining the extent of Union Carbide's responsibility for this disaster. In overseeing the plant, the company had broken no laws, either U.S. or Indian. Yet in the aftermath, it was held almost entirely liable for the accident. To what extent are corporations and their managers responsible for events that occur beyond their control in foreign countries? What guidelines can managers use to gauge their potential liability in foreign markets?

Study Questions:

1. Is Union Carbide responsible for what happened at Bhopal? Is Chairman Warren Anderson personally responsible?

2. Was the judgment handed down by the U.S. Court of Appeals appropriate? Why? Should U.S. or Indian courts have had jurisdiction over this case?

3. What lessons might other companies learn from the disaster at Bhopal?

March 3 - Responsibility

Readings: The Burma Pipeline (HBS 9-797-149)

Debora Spar, "The Spotlight and the Bottom Line," Foreign Affairs March/April 1998, pp. 7-12.

Visitors: John Rafuse, Director, Washington office, Unocal Corporation; Simon Billiness, Senior Analyst, Franklin Research and Development Corporation

In 1996, Unocal Corporation joined forces with the French Total company to construct an ambitious natural gas pipeline from the Andaman Sea across the southern tip of Burma and into Thailand. At an estimated cost of $1.2 billion, the pipeline was designed to bring sorely needed energy supplies into both Thailand and Burma, and to serve as a linchpin for Unocal's expanding Asian strategy. Soon after the deal is launched, however, officials from Unocal find themselves entangled with far-sweeping political forces and activist groups that span national borders. Because of its involvement with the SLORC, Burma's military leadership, Unocal is being accused of complicity in a whole series of human rights abuses, including slavery and possible genocide. Chairman John Imle must decide how to respond to these accusations, and whether Unocal needs to rethink, or restructure, its operations in the face of growing international pressures.

Study Questions:

1. Has Unocal violated any laws or norms as a result of its participation in the Yadana project?

2. What responsibility, if any, does Unocal have to the people of Burma?

2. How should John Imle respond to his critics?

March 4 - Private Authority

Reading: The International Diamond Cartel (Kennedy School of Government Case C15-89-878.0)

Sometimes, rules in both the national and international spheres can emanate from private firms as well as from public authorities. While these rules can take a variety of forms, one of the most common is a cartel: a private attempt to coordinate supply in a given market and regulate interaction among the industry's producers. This case reviews the history of the international diamond cartel, one of the most successful cartels of all time.

For nearly a hundred years, the cartel has effectively controlled the world's supply of diamonds, regulating sales and production under the watchful eye of the South African DeBeers corporation. In the late 1980s, however, the cartel has come under increased pressure. Critics from all sides are beginning to wonder whether DeBeers's private authority can truly last forever.

Study Questions:

1. How does DeBeers manage the international diamond cartel? What is the source of its power?

2. How serious is the threat from Russia? How would you advise DeBeers to deal with the situation?

(March 5-24: Spring Break and Project Research)

IV. INTERNATIONAL TRADE IN THE AGE OF INFORMATION

March 25 - Intellectual Property

Reading: Pfizer: Global Protection of Intellectual Property (HBS 9-392-073)

With this case, we begin the fourth and final module of MITI, examining trade and investment in the information sector, and exploring how information-based trade is different from its more traditional, physical, counterparts. One key difference concerns the establishment and enforcement of property rights. If firms are ever to sell their information-based products in a global market, they must know that they will be able to recoup the costs of their innovation and investment. That is, they must own the information that they sell. But how can ownership of an intangible be enforced? One possibility is for governments to create property rights through laws such as patents, intellectual property, and copyright. This is what the United States and many other industrial countries have customarily done. Yet, as the Pfizer case demonstrates, these national laws offer little protection to firms operating in other parts of the world. What else, then, can managers do to protect their intellectual property in a global market?

Study Questions:

1. What does Pfizer sell? What is an appropriate pricing strategy for it to adopt?

2. What is the logic behind the existing U.S. system for protecting intellectual property? Will this system work in an increasingly global economy? Should it?

3. What recourse, or alternate means of protection, are available to companies such as Pfizer?

March 26 - Digital Trade I

- Reading: BSkyB (HBS 9-798-077)

In 1983, Rupert Murdoch's News Corporation bought a floundering two-year-old British company called Satellite Television plc. and renamed it Sky. Without external financing, without having been allocated any space on Britain's existing satellites, and over the opposition of some of Britain's most formidable media competitors, Sky quickly became the dominant force in Britain's satellite television market. By 1990, when it merged with its largest competitor to form BSkyB, Murdoch's upstart company had signed 1.2 million homes to its subscription television services. It had also wholly changed the face of commercial television in Britain. The case describes how BSkyB triumphed so quickly and so completely and how it carefully structured both its commercial and political relationships. It then examines a host of recent challenges facing the company: increased competition from "new media" firms; advanced technologies for digitization and the further compression of data; and regulation that now emanates from Brussels, as well as from London.

Study Questions:

1. How has Sky grown so quickly?

2. What are the greatest challenges and opportunities now facing the company?

3. How should Sky structure its relations with Brussels, with the British regulatory authorities, and with its host of European competitors?

March 31 - Digital Trade II

Readings: Network Associates

Debora Spar and Jeffrey J. Bussgang, "Ruling the Net," Harvard Business Review Reprint No. 96309

In just the past few years, the advent of the Internet has promised to transform the very nature of commerce. By reducing commerce to its most basic component -- the transaction -- the Internet potentially allows providers of information to sell their product directly and immediately to their customers. It is a dramatic possibility and a tempting opportunity. But as today's readings suggest, the technological promise of the Internet does not necessarily solve the commercial and political issues surrounding Internet commerce. What are the risks and rewards of selling information in cyberspace? What role, if any, should governments play in establishing the rules of cyberspace and regulating the trade that occurs there? And how can firms shape these rules to maximize their own commercial opportunities?

Study Questions:

1. Evaluate Network Associates's business model and strategy. How would you evaluate the company's long term prospect s for success?

2. What do you think of the U.S. Commerce Department's laws regarding encryption and encryption exports. What arguments can you formulate to support or attack their position?

April 1 - Course Overview and Wrap-up