 Hello and welcome to the session in which we will introduce the concept of international operations. Why companies operate overseas? Why do they sell internationally? Well, international operations refer to activities, which is transaction, buying and selling product by companies across national borders. So first you might start to operate in your own country. Maybe first you will start in your own hometown, then in your own district. Then you expand throughout the whole country. Then if you are successful, what do you do? You expand overseas. You expand internationally. Several reasons why businesses engage in international operation and they can vary based on the company's objective and market conditions. These days, these days, expanding internationally is much, much easier. Most likely you are listening to me right now. You could be in India, you could be in Canada, you could be in the Middle East, you could be in Africa, you could be in Europe, or you can be in the United States. So for example, my business is expanding internationally. Why? Because I'm going to tell you why, because I want to expand my market. But there are several reasons why you will do that. Comparative advantage is one reason. Market expansion, which is for myself, I want to have a market expansion. I don't want to limit myself to the US. Access to resources, cost reduction, technology and innovation, risk diversification, strategic alliances and the existence of imperfect market. Because of all of these reasons, we're going to look at each one of them separately. As you know, once Farhad has a list, we'll go over each item separately. For those reasons, we operate on an international level. Either we sell our product overseas or we move to different countries and operate over there. So let's go ahead and get started by discussing an important concept called comparative advantage. Before we proceed any further, I have a public announcement about my company, Farhad Lectures.com. Farhad 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. What is comparative advantage? It's an economic principle that explained the benefit of international trade between countries. Basically, why do countries trade? There's a benefit and that benefit is called, is based on something called comparative advantage. It suggests that countries or its state, that countries that specialize in producing goods or services in which they have a lower opportunity cost. So what should you produce? You should produce items that you have lower opportunity cost of producing and trade with other countries to obtain goods or services for which you have a higher opportunity cost. So produce the product that you have a lower opportunity cost with and buy the product with a higher opportunity cost. Don't worry, we'll work an example. What is opportunity cost? It refers to the cost of foregoing, giving up the next best alternative when making a decision. So you have resources. What should you do with your resources? Well, you should produce a product that has the lowest opportunity cost and produce as much as them and take that surplus because you can produce it at a lower cost and trade with other countries. In the context of comparative advantage, the cost of producing one goods in terms of the production of another could have been produced instead. So what could you have been producing if you give up this item? The best is to illustrate, is to work an example. Let's assume in country X, the production of one T-shirt require using resources that could otherwise be produced to be used to produce 11 pair of socks. So in country X, well, they have two options with the resources. Resources could be material, labor, time, land, building, equipment. With all those resources, they have two options. They could either produce one T-shirt and if they do so, they will give up 11 pairs of socks and they cannot produce an 11 pair of socks. Or if they produce 11 pairs of socks, they cannot produce that T-shirt. In country Y, to produce one T-shirt, they have to give up 15 pairs of socks. So that's the cost for them. So which country has a comparative advantage in making T-shirts? Which of these two countries should make T-shirts in your opinion? Well, the comparative advantage here is to country X because country X, they only have to give up 11 pairs of socks. It doesn't cost them that much, so they are better off using the resources to do what? To produce T-shirts. However, country Y, it's more costly for them. If they want to produce one T-shirt, they have to give up 15 pairs of socks, which is much more expensive for them. So country X should produce T-shirts. Let's take a look at another example. Suppose an opportunity cost ratio, which is what's the ratio? X over Y, X over Y. For oranges and olives is four tons of oranges for one ton of olives in Spain. So in Spain, what's going to happen is this. If they want to produce one ton of oranges, they have one, sorry, one ton of olives. They have to give up four tons of oranges. In Spain, but in Italy, the ratio is they have to give up only one ton of orange to produce two tons of olives. Which country has a comparative advantage in producing olives? So we're looking at olives. Well, guess what? We know in Spain they have to give up four tons of oranges to produce one ton of olives. In Italy, well, what we have to do is we have to basically turn this two tons of olives into one. What do I do? I divide both sides by two. Now it's going to be one half tons of orange, give up, and we can produce one ton of olives. What I divided both sides by two. What does that mean? It means in Italy, they only have to give up half a pound of oranges to produce one ton of olives. What should they do? Who has the comparative advantage in producing olives? Italy has a lower cost, opportunity cost. Because all what they have to do is give up half. It's not that expensive for them. In Spain, if they want to produce one ton of olives, they have to give up four tons of oranges. They should not do that. It's cheaper for them to buy the olives from Italy because the Italians are going to say, well, we only have to give up half relative to Spain. And Spain should maybe produce oranges and sell the oranges and do the exchange that way. I mean, comparative advantage, there's much, much more calculation involved in it. But the point is for the CPA exam is know what does it mean? Comparative advantage means you can produce something using your resources and wherever you are given an opportunity cost is not as expensive. You are using the lowest, the lowest opportunity cost, lower opportunity cost. That's what you should produce. Another reason why companies operate overseas is to extend their life cycle. Typically, any product goes through four life cycles. They have an introduction, then growth, then the then growth, then it reaches maturity. Then the product will decline. So each stage, obviously, present unique challenges and opportunity. Now the key for any company is to extend this growth as much as possible. Keep extending the growth. So during the introduction phase, companies may focus on domestic market first to test the products. Is it working, fix the tweaks, so on and so forth. As the product entered the growth phase, it means while we are selling the product, everybody wants the product, they will expand internationally to increase the demand. You enter a new market. So this expansion allows companies to extend the product's life cycle and generate additional revenue. Why? Because you are tapping into a larger customer base. And you want to keep this going up as high as possible, but at some point any product would reach a peak, then they will start to decline. This strategy allows businesses to reduce dependence on a single market and to diversify your revenue. And this is going to be another benefit, basically diversifying your risk. And it's going to be its own benefit. For example, when the smartphone, first smartphone came out, the Apple, they only introduced it in the US. Kind of tested it, make sure it's working properly. Same thing with Samsung. They introduced it in South Korea. Then they expand internationally. Same thing with multi-fast food chains. They started in the US. And what they did, once they said, well, we're doing great, but now we're all over the US. We no longer can sell because we have a McDonald and every single town in city. Well, what do we do? We expand internationally to increase that growth. International business will give you access to resources. They provide you access to essential resources such as material, labor, technology or expertise. Companies will establish operation in countries where those resources are abundant and most importantly cost effective. They are cheap. Lower cost. For example, automobile manufacturers like Toyota and BMW have set up facilities in countries like Mexico and China to take advantage of the low labor cost and be close to their suppliers if they are this way you save money. Saving money is the number one reason usually why companies operate internationally. Cost savings are a significant driver for international operation. Companies might establish manufacturing or service facilities in countries with lower production costs. You might be saying cost reduction and access to resources that are interrelated. Of course, they all feed on each other, including labor taxes or regulation. They just give you benefits when you operate in certain countries. This enabled them to achieve economies of scale, reduce production costs and enhance profitability when you reduce costs. Profit goes up. Apparel companies, they are notorious for that like Nike and Adidas, outsourced their manufacturing operation to places like Vietnam and Bangladesh where labor costs are relatively lower. Even in these countries, labor cost is now relatively cheaper than China. First, they moved to China. Once the Chinese rate started to go up, they just left to China, went to countries where they can manufacture at a lower cost. This is what you do. You follow the money. Where can you save money? Technology and innovation, notice they all feed on each other. International operation can facilitate this access to advanced technology, research and development capabilities and innovation hubs. Many, many of them are set up in India these days. Companies may establish R&D centers or collaborate with foreign partners. We're going to see in the next session how can you collaborate to gain access to cutting-edge technologies and faster innovation. For example, companies like Google, Microsoft, they establish research centers in various countries, especially Asian countries and specifically India, to tab into the local talent and drive technological advancement. Risk diversification. Again, you want to diversify your sources of revenue. When you expand into international market, you can diversify your business risk because by operating in multiple countries, businesses can mitigate the economic impact fluctuation between countries. So if there's one country you're not doing good, maybe the other country is doing better. You don't want to concentrate only in one country. So when the market condition changes in one country, well, at least you're doing well in another market. Pharmaceutical companies like Pfizer, Novartis have presence in multiple countries. The reason is to reduce their exposure to specific regulatory changes or patent expiration in a single market. Also, you want to expand overseas to increase your strategic alliances and partnership. Enable companies to form strategic alliances, joint ventures and partnership. Again, this collaboration will give you access to local market knowledge, distribution network. In some countries, you cannot do a business unless you have a strategic alliance or a partner. Like if you want to start a business in Dubai, United Arab Emirates, you need a local partner. You could share resources, faster growth and enhance competitiveness when you do that. For instance, a good example will be automotive companies like Renault, France and Nissan in Japan have formed a strategic alliance to share technology, manufacturing facility and market reach. And if you're not aware of this, their CEO got into trouble, Gusen. So if you don't know anything about this, there is a show on Netflix. Actually, the guy is originally from Lebanon. Now he's a fugitive in Lebanon. He escaped from Japan. He escaped from prosecution and went to Lebanon where he cannot be extradited because he has Lebanese citizenship. He was born in Lebanon, but he's the person that formed the alliance between Renault and Nissan. It's a very interesting story. If you have time, check it out on Netflix. Imperfect markets. Imperfect markets refer to situations where there are barriers to trade, tariffs, quotas, trade restriction, cultural differences. And you cannot sell overseas. So what do you do? Just go there. When a company faces limited opportunities or attends competition in their domestic market due to various barriers or they may seek to enter international market to expand their imperfect market. Imperfect market refers to situations where there are barriers to trade, tariffs, quotas, trade restriction or cultural differences. So when you are faced with imperfect market, you cannot really reach your maximum. You face limited opportunities or intense competition in your domestic market due to various barriers. You may seek to enter international market to expand your customer base and increase profitability. For example, if a country imposes high import tariffs on a specific product, it can create an opportunity for a foreign company to establish local operation. So what you do? They cannot allow you to bring this stuff in. Guess what? Go there and produce it there and produce the product within the country to avoid tariffs. Now, usually, usually, if they have import, they're also these countries, they're also on the lookout to tax you or to create more difficulties for you. If they don't want you to sell your product there. And in some countries, they put tariffs on purpose. So you move there and you open an operation and you hire the locals. So basically, because the market is imperfect, it was a perfect market. Everyone sell into everyone. You don't have to, you know, you don't have to move there. But if it's imperfect market, you just have to go through it this way. This approach allow companies to gain a competitive advantage. It might allow it over domestic companies that face higher production costs. That could be the case. But it also could be the opposite. If that government don't like foreigners to be operating there, they might might your life is harder. So that's why we have an imperfect market and we'll try to go around it. International trade could solve part of it. What should you do now? Go to forehead lectures and practice MCQs about topics. If you're studying for your CPA exam, invest in yourself. Good luck. Study hard and stay safe.