Week 3 Reading 3Chapter 18, “International Accounting and Financial Management”The top management of your company has requested information on the
tax policies of Denmark. Using the Denmark business guide on Deloitte
International Tax and Business Guides, a resource that provides
information on the investment climate, operating conditions, and tax
system of the major trading countries, prepare a short report
summarizing your findings on Denmark’s business taxation. Your
report should be a maximum of 1 page, double-spaced, Word or PDF
document. However, you can have unlimited number of exhibits that
should be put in an Appendix in the same file. Hint:
http://globaledge.msu.eduGo to Resource Desk: http://globaledge.msu.edu/ResourceDesk/Search Phrase: “Deloitte International Tax and Business Guides”Resource Name: “Deloitte International Tax and Business Guides”globalEDGE™ Category: “Research: Multi-Country”Website: http://www.deloitte.com/taxguides On the website, go to the “Jurisdiction selector”
and select Denmark. Once on the Denmark page, click on “Download the
Guide”. The information requested can be found in the “Business
taxation” section of the guide.
intb6200_week3.pdf
chapter_18.pdf
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INTB 6200: Managing the Global Enterprise
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Week 3: Environmental Forces (Uncontrollable), Part 1
Week 3 Overview
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Video Transcript
Week 3 Overview
Week 3 introduces the environmental forces that are not controllable by the business such as
economic and financial forces that are covered in lessons 1 and 2. In lesson 3, you will learn
about methods to manage currency risk and other financial management issues.
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First, you will learn the economic dimensions and socioeconomic dimensions of a
targeted location that are very important to building an understanding of the
opportunities and risks this market represents. The assessment and forecasting of
economic conditions is a regular activity for most firms. When a firm enters foreign
markets, the task is more complex because of the number of economies involved.
Managers of all the functional areas in the firm are interested in the size and rate of
change of various economic and socioeconomic factors. Some of the economic
dimensions are GNI, GNI/capita, income distribution, personal consumption
expenditures, and amount of private investment and unit labor costs. The principal
socioeconomic dimensions are total population, population density, and age distribution
and population distribution.
Then we will explore the international monetary system and financial forces. Financial
forces such as currency exchange rate fluctuation, exchange controls, tariffs, taxation
and inflation greatly affect the costs of doing business, the value of earnings and their
repatriation. You will learn about causes of currency exchange rate movements and
methods to predict these at least in the long-run.
Finally, you will also learn that accounting practices and standards vary across borders
influencing greatly reporting of data in the balance sheet and income statement of the
multinational firms. You will learn about methods such as hedging that firms use to
manage currency risk while making investment decisions and decisions regarding the
acquisition of capital. The other issue that has direct impact on the financial
management of the firm is taxation.
Week 3 consists of three lessons:
Lesson 1: Economic and Socioeconomic Forces
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INTB 6200: Managing the Global Enterprise
Lesson 2: The International Monetary System and Financial Forces
Lesson 3: International Accounting and Financial Management
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INTB 6200: Managing the Global Enterprise
Week 3 Learning Activities
Learning
Activity
Description
Lesson 1
Economic and Socioeconomic forces
Week 3
Reading 1
Read the Chapter posted on Blackboard
Complete by end of Day 1
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Week 3
Activity 1
Research Activity: Economic Outlook
Complete by end of Day 6
(Suggested end of Day 2)
20
Lesson 2
The International Monetary System and
Financial Forces
Due Date
Points
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Week 3
Reading 2
Read Chapter 8 of your textbook
Week 3
Activity 2
Research Activity: Labor Cost, Productivity,
and Exchange Rates
Lesson 3
International Accounting and Financial
Management
Week 3
Reading 3
Read Chapter 18 of your textbook
Complete by end of Day 5
~
Week 3
Activity 3
Research Activity: Business Taxation
Complete by end of Day 6
10
“Sterling Marking Products”
Post by end of Day 3
Respond by end of Day 5
30
Opens 9:00AM ET Day 7 and
Closes 9:00AM ET of Day 1
of following week
150
Week 3
Discussion 1
Week 3
Quiz 2
This examination lasts 90 minutes and has 2
quantitative problems in multiple choice
format and several questions from Espresso
Lane to Global Markets case study of the
week
Complete by end of Day 3
~
Optional
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Total
210
Note: All assignments are to be submitted through the Assignments area of the course.
Similarly, class discussions can be accessed in the Discussions area. Groups may use both
the Groups area and their own Live Session located in the Live Sessions area.
Please note that there are several practice activities and practice questions in each
lesson. Please make sure to complete each item.
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INTB 6200: Managing the Global Enterprise
A Note on Research Activities
The purpose of the research activities this week is to get you acquainted with more resources
that you will need for successful completion of the course group project. While in previous
weeks the focus was on general indicators of market potential, this week we start by examining
specific indicators of the economic, socioeconomic, and financial conditions of the potential
markets. In terms of your project, at this stage you should have identified a select few countries
for market entry (and of course your product) and for each of these countries you should
examine the environmental forces introduced this week.
While the details of each research activity are presented in the following pages, I would like to
provide you with a short summary:
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In the first research activity you are asked to identify indicators of economic policy and
external debt, education, and infrastructure of India from the World Bank, as you
considering selling to India low-cost computers.
o Thinking ahead about your project: you will need several of these indicators for
your project analysis. So it would be a good idea to identify the appropriate
indicators for your product and market(s) and save them for later investigation.
In the second activity you are presented with the task of examining market entry mode in
several countries and you want information about hourly compensation, labor unit costs,
productivity, and exchange rates.
o This is an optional activity but thinking ahead about your project you will need to
at minimum try to examine exchange rate stability over time for the countries you
are considering for entry (e.g., last 6-10 years). Differences in productivity, hourly
compensation, and labor unit costs should also be taken into account.
In the third activity you are asked to investigate the tax policies of Denmark as well as
the investment climate and operating conditions.
o Thinking ahead about your project: Maybe you can create an index of favorable
taxation for your selected countries. This could be a simple ranking of the
countries in your analysis, based on your judgment and the information provided
in the tax reports.
Each research activity is an individual assignment and no collaboration is allowed among
students. You should spend no longer than 30 minutes completing each research activity.
Further, you are provided with detailed hints in each research activity and you will receive full
points for each submitted assignment (Turnitin). As such, you will not receive feedback by your
instructor, unless you explicitly request it. However, cheating of any form or plagiarism will
result in receiving zero for the corresponding assignment and you must address to the best of
your abilities what the research task is asking for. If you submit something irrelevant to the
assignment you will receive a zero. The quality of your report will be assessed by your
instructor.
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INTB 6200: Managing the Global Enterprise
Lesson 1: Economic and Socioeconomic Forces
Learning Objectives
As a result of participating in this lesson, you will be able to:
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Learn the purpose of an economic analysis and the kind of information it provides.
Present the important economic and socioeconomic dimensions that management uses
to compare markets.
Week 3 Reading 1
Ball, D., Geringer, M., Minor, M., McNett, J. (2010). Economic and socioeconomic forces. In
International business: The challenge of global competition (12th ed) (pp. 210-240). McGraw
Hill.
Click here for the downloadable file.
Important!
Before you proceed, read the attachment linked above. Please do not continue until you have
done so.
Lesson 1 Lecture
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Note: This presentation does not contain audio.
Click the links below for the lecture content. Use the controls at the bottom-left of the
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Week 3 Lesson 1 Presentation
Click the link below for an alternate version of Lesson 1: Economic and Socioeconomic
Forces
Alternate version
Lesson 1 Practice: End of Chapter Questions
Week 3 Activity 1: Research Activity: Economic Outlook
(Submit by end of Day 6, Suggested Day 2)
Value: 20 Points
You work at a company that manufactures low-cost computers and is currently considering
entering India. Use the World Development Indicators (WDI) – the World Bank’s premier data
compilation of data on development – to gather information on this country. Prepare a short
report focusing on the economic policy and external debt, education, and infrastructure of India
as it applies to your company’s product. Make sure you examine the trends India may have
been experiencing over the past few years in your selected variables. Your report should be a
maximum of 1 page, double-spaced, Word or PDF document. However, you can have
unlimited number of exhibits that should be put in an Appendix in the same file.
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INTB 6200: Managing the Global Enterprise
Hint:
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http://globaledge.msu.edu
Go to Resource Desk: http://globaledge.msu.edu/ResourceDesk/
Search Phrase: “World Development Indicators”
Resource Name: World Bank: World Development Indicators globalEDGE™
Category: “News & Periodicals: Publications”
Website: http://data.worldbank.org/indicator
On the World Bank website, click on the “By Country” tab and select India. Then, go to the
corresponding indicators.
Extended Hints:
A. Economic policy and external debt
Gross National Income (GNI)
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Income generated by a nation’s residents from domestic and foreign activity.
Preferred over GDP which measures in addition income from nonresidents.
GNI/capita:
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reveals purchasing power of the country.
Compare to other countries, e.g., high values and advanced economies.
Growth Rate in GNI/Capita
Important since high values indicate a high growth market.
As GNI or GNI/capita it is affected by underground economy (ideally we need an
estimate for this).
o Managers usually will prefer a fast-growing market, all else constant. If a choice
has to be made between (1) high GNI/capita but low growth rate country and (2)
lower GNI/capita but much higher growth rate country, then management will
usually opt for option 2.
Research Activity:
o
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We want to see the growth rate of GNI/capita over the past say 6-10 years.
Given that we compare values across time we must account for inflation.
Therefore, we need to obtain the GNI/capita in constant currency and then calculate
the growth rate.
Get inflation separately to see trends in prices over time.
In this task we don’t compare the GNI/capita of India to other countries so no need to
obtain GNI in PPP or at US$ terms. If we want to get some sense on how these
values compare to US then we should use the GNI in US$ or PPP terms.
So get the GNI/Capita in constant US$.
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INTB 6200: Managing the Global Enterprise
Income Distribution
Even or uneven distribution of income in a country may present opportunity
depending on the type of product and population.
o Your book has a nice example on this.
o In the online notes, a similar example is presented:
o In 2010, Paraguay had
§ a population of 6.5 million,
§ a GNI of $33 billion in PPP terms, and
§ Income distribution: 20% of the population received >56% of the country
income. This indicates that a sizable group of people are potential
customers for low-volume, high-priced luxury products.
§ On the other hand, the market is rather small (6.5 million population) for
low-priced goods requiring a high sales volume.
§ Given these conditions Paraguay may not be a good market for entry in
low-priced goods while for high-priced goods the returns from entering the
market might not be higher than the cost of entry.
§ These 3 measures can be potentially used to eliminate a market without
further analysis.
Research Activity
o Obtain the income distribution, population, and GNI. How India compares to the
above example?
o
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Private Consumption
If your results from the previous step are promising then gather the private
consumption data.
o Disposable income is total personal income minus personal current taxes.
o Discretionary income is total income minus personal current taxes and
necessity goods (food, rent, mortgage, utilities, etc.).
o As such, manufacturers of, say, household durables will be interested in
disposable income.
o While producers of nonessential goods will be interested in the discretionary
income.
o Read the book, especially the Relevance for Managers section under Private
Consumption.
Research Activity
o
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Which one you would need if you are selling low-costs computers in India?
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INTB 6200: Managing the Global Enterprise
Unit Labor Costs
Defined as total direct labor costs over units produced.
Firms will make an investment opportunity if lower than currently available to the
firm, everything else constant.
o Firms prefer slower-rising unit labor costs. Please read the relevant section in
your book.
o Need to monitor over time for rates of increases. For instance, the recent
increase in wages in China along with tax breaks in US has resulted in several
firms bringing back manufacturing (or thinking about it) in the US. Wall Street
Journal has a special section with firms doing exactly that. It is called “Remade in
the US.”
Research Activity
o
o
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We are not given in which country the production takes place. We can skip this but
for your project you should definitely provide some estimates of labor costs.
External Debt
If becomes too large to be sustainable then governments may impose price
controls, cut government spending, impose wage controls, and impose capital
controls to keep cash in the country. It can also cause a shift from imports to
local production of goods.
o “debt service difficulties” become increasingly likely when the ratio of the
present value of debt to exports reaches 200 to 250 percent and the debtservice ratio (amount of export earnings needed to meet annual interest and
principal payments on a country’s external debts) exceeds 20 to 25 percent (see
your textbook).
Research Activity
o
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Are there any external debt issues in India? Obtain these indicators.
Population
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o Usually as input in calculations of other indicators (X/capita).
Research Activity
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Obtain this indicator.
Age Distribution
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o Older people might not buy laptops.
Research Activity
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Obtain this indicator.
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INTB 6200: Managing the Global Enterprise
Population Density and Distribution
Densely populated nations make product distribution and communication simpler
and less costly.
Research Activity
• Obtain this indicator.
o
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B. Education
Here we don’t have much theory in the textbook to go on. How would education play a role in
the market for laptops?
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Think about uses of laptops (educational, entertainment in some cases, work, etc.).
Do you think that literacy or school enrollments would be positively correlated with use of
laptops? If yes, then gather this measure.
Here is an article (theory) on this topic (click it):
Computers and Schools
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Research Activity
o Obtain an indicator.
C. Infrastructure
Revisit the MPI calculations from last week. Under infrastructure you have:
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Main telephone lines (in several countries around the world telephone lines are used for
high-speed internet).
Cellular mobile subscribers (potential consumers).
Secure Internet servers (the higher denotes increasing use of computers).
Other?
Research Task.
Obtain these indicators.
D. Sum up
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Growth Rate in GNI/Capita.
Population.
GNI in constant US$ or constant PPP terms (whichever available).
Income distribution.
Private Consumption (pick the one that is more appropriate for the research task).
Present value of debt to exports (ratio).
Debt-service ratio.
Age Distribution.
Population Density.
School Enrollments.
Main telephone lines.
Cellular mobile subscribers.
Secure Internet servers.
OTHER – guide your selection with THEORY from the book, online notes, or any
academic article?
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INTB 6200: Managing the Global Enterprise
Location of Indicators in World Bank
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Growth Rate in GNI/Capita
o From Economic Policy & Debt → National Accounts → select GNI (constant
2000 US$)
o From Health → Population → select Population, Total
o Calculate in your excel the ratio of the 2 in order to get GNI/capita and then find
the growth rate using the formula from online notes.
Income distribution
o From Poverty → Income distribution → select all of the Income share held by….
o For India, data exist for 2005. Use those data.
Disposable Income
o A proxy for this is the GDP per capita (PPP)
o From Economic Policy & Debt → Purchasing Power Parity → select GDP per
capita, PPP (constant 2005 international $).
Discretionary Income
o Not available, but we can use a second best that includes expenditures on both
necessities and household durables.
o From Economic Policy & Debt → National Accounts → select Final Consumption
expenditure, etc (constant 2000 US$).
Inflation
o From Financial Sector → Exchange rates & prices → select inflation, consumer
price (annual %).
o From Financial Sector → Exchange rates & prices → select inflation, GDP
deflator (annual %).
o The first reason we use it to see price levels, the second is to deflate (remove
inflation) from GNI, GDP when they are listed in current (not constant) terms.
Exchange Rates (another source, you need it for Research Activity 2)
o From Financial Sector → Exchange rates & prices → select official exchange
rate (LCU per US$), period average.
o LCU stands for Local Currency Units.
External Debt Ratios
o From Economic Policy & Debt → External Debt → Debt ratios & other items →
select Present value of external debt (% of exports of goods, services and
income).
o Debt-Service ratio: From Economic Policy & Debt → External Debt → Debt ratios
& other items → select Public and publicly guaranteed debt service (% of
exports, excluding workers’ remittances).
Population Density
o From Environment → Density & urbanization → select Population density
(people per sq. km of land area).
Age Distribution
o From Health → Population → select Population 0-14 (% of total), Population 1564 (% of total), Population 65 and above (% of total).
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INTB 6200: Managing the Global Enterprise
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Education
o From Education → select one of the school enrollment variables (whichever you
think is more appropriate). You need total numbers.
Infrastructure
o From Infrastructure → select the appropriate variables (see previous slides).
Definition of any indicator can be found here:
http://data.worldbank.org/indicator
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INTB 6200: Managing the Global Enterprise
Screenshots of the World Bank Database
STEP 1: Go to the following link and click on World Development Indicators:
http://databank.worldbank.org/data/databases.aspx
STEP 2: Under Country tab select India.
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INTB 6200: Managing the Global Enterprise
STEP 3: Under Series select Economic Policy & Debt, Education, and Infrastructure and then
select the indicators (selected indicators are shown on the right-hand side of the screen below):
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INTB 6200: Managing the Global Enterprise
STEP 4: Under Time select at least 6 years of data:
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INTB 6200: Managing the Global Enterprise
STEP 5: After you make all of your selections click on the DOWNLOAD button at the u …
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