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MGT602 - Entrepreneurship - Lecture Handout 13

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INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued)

LEARNING OBJECTIV ES

  1. To identify the aspects and importance of international entrepreneurship.
  2. To identify the important strategic issues in international entrepreneurship.
  3. To identify the available options for entering international markets.
  4. To present the problems and barriers to international entrepreneurship.

DIRECT FOREIGN INVESTME NT

Majority interest Another equity method is to purchase a majority interest in a foreign business. The majority interest allows the entrepreneur to obtain managerial control while maintaining the company’s local identity. In technical sense anything over 50% of the equity of the firm is majority interest

100 percent ownership
One hundred percent ownership assures control. One form of 100 percent ownership is mergers and acquisitions, but the entrepreneur needs to have a general understanding of the benefits and problems of mergers as a strategic option. A horizontal merger is the combination of two firms that produce closely related projects in the same area. A vertical merger is the combination of firms in successive stages of production. A product extension merger occurs when acquiring and acquired companies have related production but do not have directly competing products. A market extension merger is when two firms produce the same products but sell them in different areas. A diversified activity merger is a conglomerate merger involving the consolidation of two unrelated firms. Mergers are a sound strategic option for an entrepreneur when synergy is present. Economies of scale are the most common reason for mergers. A second factor that causes synergy is taxation, or unused tax credits. The final factor is the benefits received in combining complementary resources.

BARRIERS TO INTER N AT IONAL TRADE

The positive attitude toward free trade began about 1947 with the development of general trade agreements and reduction of trade barriers.

General Agreement on Tariffs and Trade (GATT)

GATT is a multilateral agreement with the objective of liberalizing trade by eliminating tariffs and import quotas. In each round, mutual tariff reductions are negotiated between member nations. Members can ask for investigation of violations. While GATT has helped develop more unrestricted trade, its voluntary membership gives it little authority.

Increasing Protectionist Attitudes

Support of free trade increased significantly in the 1980s due to the rise in protectionist pressures in many countries. The persistent U.S. trade deficit has strained the world trading system. The economic success of a country (Japan) perceived as not playing by the rules has also strained the trading system. In response many countries have established bilateral voluntary export restrictions.

Trade Blocks and Free Trade Areas

Groups of nations are banding together to increase investment between nations in the group and exclude others. The North American Free Trade Agreement (NAFTA) between the U.S., Canada, and Mexico reduces barriers and encourages investment. The Americas, Argentina, Brazil, Paraguay, and Uruguay have created the Mercosul trade zone, a free trade zone between the countries. The European Community (EC) is founded on the principle of supra-nationality,
with member nations not being able to enter into trade agreements on their own that are inconsistent with EC regulations.

Entrepreneur’s Strategies and Trade Barriers

Trade barriers pose problems for entrepreneurs who want to become involved in international business.
Trade barriers increase the costs of exporting projects to a country. Voluntary export restrictions may limit the ability to sell products in a country from production facilities outside the country. An entrepreneur may have to locate assembly or facilities in a country to conform to the local content regulations.

KEY TERMS

Management

contracts

A method for doing a specific international task

Market extension merger

Combination of at least two firms with similar products in different geographic markets

Minority interest

Having less than 50 percent ownership position

Non equity arrangements

Doing international business through an arrangement that does not involve any investment

Product-extension merger

Combination of two firms with non competing products

Synergy

Two parties having things in common

Third-party arrangements

Paying for goods indirectly through another source

Trade barriers

Hindrances to going international business

Turn-key projects

Developing and operationalizing something in a foreign country

Vertical merger

Combination of at least two firms at different market levels

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