 Hello and welcome to the session in which we will discuss structuring international operation. It means how would you be able to conduct international business? There are different strategies and opportunities and methods that you can utilize. On the CPA exam you are expected to know these methods and advantages and disadvantages for each method. In this session I will go over this including an example from the real world. There are many methods of conducting international business that offer different strategies opportunities for companies to expand. That's the whole purpose for going overseas. Have access to new markets, sell your product in a new market, leverage resources and expertise from different countries. The most simple and most common method conducting international business is import-export. Simply put export sell to a foreign country, customer base or buy from them. Licensing, franchising, joint venture, direct foreign investment and global sourcing. What I'm going to do I'm going to go over each concept separately, explain what it is, give the advantages and disadvantages starting with import slash export. Before we proceed any further I have a public announcement about my company farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead start your free trial today. Import and export is the most common and the easiest way to conduct international business. Simply you need to know how fully you know what importing is. It's when you buy from a foreign supplier. Exporting is when you sell to a foreign market. Examples will be German companies doing what? Selling product overseas like their BMWs, Mercedes, Volkswagen to various countries around the world including the US and China. What are some advantages of import export? One is you access to new market and customers. You expand your current market, you increase sales and potential revenue. Of course that's why you go there in the first place you sell internationally. Opportunity to diversify your customer base. You are de-risking, you are selling your product in different market. Utilization of existing production capacity. Maybe you have capacity that you're not using and now selling overseas you will utilize it. What are some disadvantages? Well, you could have tariffs, trade barriers, import, export restriction, makes your life hard and your product less competitive or there's going to be an exchange rate fluctuation and currency risk and we're going to have a whole session about this. This is a serious risk. Potential challenges in adopting product and services to local preferences. Something what you have to do when you sell your product overseas, for example, you sell your product in the Middle East or Japan or China. You might have to tweak the product, change the boxing of it, change something about the product which will be cost prohibitive or you're going to make your operation not as efficient. You're going to also have to face increased competition from local producers. So those are disadvantages. Moving to licenses. What is licenses? Licensing involving granting permission to a foreign company called the licensee to use intellectual property such as a patent, trademark, copyright owned by you in exchange for fears or royalties. Well, example will be Nike licenses. It's a brand and logo to manufacturers around the world, allowing them to produce and sell Nike branded product for the respective countries. Now these producers, they pay Nike a fee or a royalty fee. What are advantages of licenses? Low investment and risk for the licensor. You're not really doing anything except telling them signing an agreement, tell them you can use my name, my logo, provide a revenue stream called licensing fees or royalties, expand market reach without the need for any direct operation. Your product Nike is selling their product through foreign manufacturers allow for rapid market entry. You don't have to worry about market establishing a base. Someone else is doing that for you. What are some disadvantages is the lack of control over the licensing operation. Well, licensees operation because you can no longer, it may be most of the time when you grant a license, you will tell them, you know, I want to check quality but nevertheless, you lack the control. And I know a cousin of mine who work in this business. He travels to China on behalf of his company every year or several times a year in some time and announced to check the quality of the product potential loss of intellectual property control, not for Nike for another company. Also, the potential loss you've given them control over your intellectual property, especially if it's some sort of a patent. Well, that's a problem. Now they know the secret limited profit potential relative to you selling it directly. Again, you're not selling it directly. It's a low investment. You don't have to worry about this risk of creating competitors of the licensee gain expertise. Now, if they know what they're doing and they make can make your product better. Well, you would lose that advantage. For I should franchising is another way to to expand overseas franchising is a business arrangement in which a company like a franchise or McDonald grant independent operator an entrepreneur somewhere a franchisee the right to use their business model, brand trademark in a specific location. Prime example is McDonald. So what they do for a fee or a royalty, you can open open and operate a McDonald restaurant, provide them with the standardized processes. They have to follow marketing support and recognize a brand. What are advantages and disadvantages for franchising? Well, rapid expansion with minimal capital investment. You don't have to operate the franchise, the entrepreneur, which is the franchisee is putting up the money. Franchisees contribute to capital and share the risk. You have someone sharing the risk with you benefit benefit from the franchisee's local market knowledge and network. As you operate the business, somebody else locally operate in the business for you, you are gaining knowledge about that market. Standardized business model and brand consistency in franchising, they have to follow the procedures. So nothing for you to worry about about quality, it's less of a problem. Disadvantage, it could be but less of a problem. Disadvantage is loss of control over the operation. Again, you tell them what to do, sometimes they don't do it and brand image. What does that mean? It means, for example, McDonald, they want to maintain a high standard. Well, the franchisee, they want to cut corners to make money. They will hurt the brand image. Revenue sharing with the franchisees, you know, yes, you are making a profit, but the franchisee, whoever is operating that business takes a profit as well. As we talked about quality, challenges and maintaining quality and consistency across all locations because now you have to be in so many different places, monitoring so many different people. So you have to have a good system. Legal and cultural complexities in different countries. Also, you'll be dealing with this because whatever is accepted in your country may not be accepted in other countries. Joint Ventures is another way to expand internationally. It occurs when two or more companies from different countries collaborate and create a separate legal entity to pursue a specific business opportunity. The partnership ownership, control and risk well pulling the resources and expertise. An example is Sony Ericsson was a joint venture between Sony, a Japanese company, and Ericsson, a Swedish company. They collaborated on to produce and market mobile phones and related product, combining the respective technological strength. And this is if you remember the phone, Sony Ericsson advantages, shared investment and risk. So you're in a pool with someone else access to local market knowledge, network and resources, sharing the cost, expertise and technology. The more you share the risk there is on you. Overcome trade barrier and regulation in certain countries because you're basically now part of that country's network. Disadvantages, complex negotiation, and management of shared ownership. Potential conflict between partners with different goals or culture that happens all the time. Sharing of profit and decision making. People don't like to share their decision making. A case in point about sharing decision making and culture, a good case, I would say Nissan, Nissan and Renault. What happened is they form a joint venture and they send a CEO called Carlos Gosson. He was originally from Lebanon. This is the second time I mentioned him. And what happened is there was a lot of cultural differences between how the French company and how this individual Carlos Gosson ran his, ran management. A lot of cultural differences. Again, it could be a class by itself. What I suggest you do is to look it up on Netflix or YouTube. Carlos Gosson's story and it's a good business case. Risk of knowledge leakage to the partner. Well, you're going to have to share sensitive information and that information could lead. Are you willing to take that risk? That's a disadvantage of joint ventures. Direct foreign investments, also known as foreign direct investment or FDI involve establishing physical presence in a country by investing or acquiring in a company building production facilities or setting up subsidiaries. Here you're taken to whole risk going there, opening the place, physical building, bringing people to work, so on and so forth. It allows for direct control, ownership of operation. That's fine. Now you are in control. The example will be Volkswagen, a German company, establishing manufacturing plants in Mexico, China and the U.S. to produce vehicles. Advantage is you have control over quality, branding, everything. Volkswagen can send people from Germany to run the operation day to day. Potential for higher profit and long-term growth because now you're operating in the local market. There's a growth ability to customize product for the local market because you have everything. You have the building. You have the production. You control everything and you are not depending on local partners. Disadvantages, higher capital investment. You have to get those buildings, get the equipment, build the infrastructure, which means more financial risk. Regulatory and legal complexities. You have to talk to the government in that country. Make sure you navigate their legal system, regulatory system so you can operate legally. Cultural and operational challenges. Notice cultural challenges is in every single foreign international business operation it's there. Operational challenges, same thing. And managing overseas operation. Exposure to foreign exchange and political risk. I would say that's always the case but that's more likely so here because you have to buy supplies. You have to have a receivable and foreign currency, a payable, so on and so forth. And there's always the political risk. Global sourcing. That refers to the practice of procuring goods, buying goods and services from suppliers located in different countries to take advantage of cost savings. Specialized expertise or access to unique resources. A case and point, Apple. Apple sources component from various countries, China, South Korea, Taiwan. Advantages? Well, cost savings through access to cheaper market and labor. Access to specialized knowledge or resources. Flexibility in responding to market demand because if you want it, you buy it. And changing suppliers. Assuming there are, you know, an abundance of supplier. Otherwise, if there's not enough suppliers, they're going to have a bargaining power over you. Increase competitiveness through global supply chain optimization. Now you're using, you know, suppliers all over the world to optimize your supply chain. Disadvantages? Dependencies on suppliers and reliability and quality. Well, guess what? When you're at dermercy and if something happened in that country or to that company, well, they may not be as reliable or the quality may not be as good. Whoa. Another problem is transportation and logistics cost because you have to transport all your parts from different places. There's always risk in that language and communication barrier, cultural barrier, potential intellectual property theft. Why? Because to manufacture something for you, you have to explain your product to them. Then they know the inside of it means they have intellectual property. So those are the various method that you can conduct international business. You don't have one or two or three. You have several methods. You need to know the definition of each, the advantages and disadvantages of each method. What should you do now? Go to Farhat lectures, look at additional resources that's going to help you understand this concept, especially working multiple choice questions. If you're studying for the CPA exam, invest in yourself, whatever professional certification you're pursuing, invest in yourself. Good luck, study hard, and of course, stay safe.