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AMITY

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OVERVIEW OF INTERNATIONAL BUSINESS

LECTURE 1

INTERNATIONAL BUSINESS

• International business is all commercial transactions—private or governmental between two or more countries.

• International business consists of transactions that are devised and carried out across national borders to satisfy the objectives of individuals and organizations.

WHY COUNTRIESENGAGE IN INTERNATIONAL TRADE?

• Human wants and countries resources do not totally coincide.

• Factor endowments in different countries differ• Technological advancement of different countries

differ• Labor and entrepreneurial skills differ• Factors of production are highly immobile between

countries

WHY COMPANIES ENGAGE IN INTERNATIONAL BUSINESS?

1. INTERNAL ,ORGANIZATIONAL AND INDUSTRY REASONS

• To Expand Sales• Profit Advantage• Seeking markets, efficiency and knowledge • To Minimize Risk• Life Cycle Of Its Products

2 EXTERNAL REASONS

• Macro forces of globalization Globalization of capital markets The declining costs of transportation and communication The growth of regional and international trading arrangements

• The MNC and competitive advantage of nations

REASONS FOR RECENT INTERNATIONAL GROWTH

• RAPID INCREASE IN AND EXPANSION OF TECHNOLOGY

• LIBERALISATION OF CROSS BRODER MOVEMENTS

• DEVELOPMENT OF SUPPORTING SERVICES• CONSUMER PRESSURES• INCREASE IN GLOBAL COMPETITION• CHANGING POLTICAL SITUATION• DEVELOPMENT OF INSTITUTIONS

GeocentricWorld View

Sees SimilaritiesAnd Differences

In Home And Host Countries

RegiocentricSees SimilaritiesAnd Differences

In A World Region:Is Ethnocentric Or Polycentric in its

View Of The Rest Of The World

Ethnocentric Home Country Is Superior

Sees Similarities In Foreign Countries

Polycentric Each Host Country Is Unique

Sees Difference In Foreign Countries

Orientation of management and companies

Strategic choices

• Four basic strategies to enter and compete in the international environment:– International strategy– Multi domestic strategy– Global strategy– Transnational strategy

Four basic strategiesFig 12.6

International strategy

• Create value by transferring valuable core competencies to foreign markets that indigenous competitors lack

• Centralize product development functions at home• Establish manufacturing and marketing functions in

local country but head office exercises tight control over it

• Limit customization of product offering and market strategy– Strategy effective if firm faces weak pressures for local

responsive and cost reductions

Multidomestic strategy

• Main aim is maximum local responsiveness

• Customize product offering, market strategy including production, and R&D according to national conditions

• Generally unable to realize value from experience curve effects and location economies

• Possess high cost structure

Global strategy

• Focus is on achieving a low cost strategy by reaping cost reductions that come from experience curve effects and location economies

• Production, marketing, and R&D concentrated in few favorable functions

• Market standardized product to keep cost’s low• Effective where strong pressures for cost reductions

and low demand for local responsiveness– Semiconductor industry

Transnational strategy

• To meet competition firms aim to reduce costs, transfer core competencies while paying attention to pressures for local responsiveness

• Global learning– Valuable skills can develop in any of the firm’s world

wide operations– Transfer of knowledge from foreign subsidiary to

home country, to other foreign subsidiaries• Transnational strategy difficult task due to

contradictory demands placed on the organization– Example : Caterpillar

Advantages and disadvantages of the four strategies

TYPES OF MNC s• International companies are importers and exporters, they have no

investment outside of their home country.

• Multinational companies have investment in other countries, but do have Differentiated product offerings in each country, polycentric management style, decentralized organizational structure.

• Global companies have invested and are present in many countries. They market their products through the use of the same coordinated image/brand in all markets. ethnocentric management style ,high coordination among, and organizational structure is like a centralized hub and common set of strategies worldwide.

• Transnational companies are much more complex organizations. They have invested in foreign operations, have a central corporate facility but give decision-making, R&D and marketing powers to each individual foreign market. (MIX OF MULTINATIONAL AND GLOBAL)

STRATEGY AT MTV NETWORKSSTRATEGY AT MTV NETWORKS

• MTV has become a symbol of MTV has become a symbol of globalization. established in 1981,the globalization. established in 1981,the U.S based music TV network has U.S based music TV network has been expanding outside of its north been expanding outside of its north American base.American base.

• By March 2003 the network has 30 By March 2003 the network has 30 channels, the rapid growth is in Asia.channels, the rapid growth is in Asia.

MTV GLOBAL EXPANSIONMTV GLOBAL EXPANSION• MTV global expansion got a weak start. In 1987 it piped a MTV global expansion got a weak start. In 1987 it piped a

single feed across Europe almost entirely composed of English single feed across Europe almost entirely composed of English speaking veejays.speaking veejays.

• Many staples of American music left Europeans cold, viewers Many staples of American music left Europeans cold, viewers in Europe turned out to be local.in Europe turned out to be local.

• In 1995 MTV turned its strategy and broke western Europe In 1995 MTV turned its strategy and broke western Europe into regional feeds , United kingdom and Ireland,into regional feeds , United kingdom and Ireland,

Germany, Austria and Switzerland , Scandinavia, Italy, Germany, Austria and Switzerland , Scandinavia, Italy, France ,Spain, Asia etc.France ,Spain, Asia etc.

• MTV changed its strategy to localization and now reaps big MTV changed its strategy to localization and now reaps big benefits.benefits.

Strategic ChoicesStrategic Choices• Four basic strategies to compete in international environment – appropriateness Four basic strategies to compete in international environment – appropriateness

varies with extent of pressures for cost reduction & local responsivenessvaries with extent of pressures for cost reduction & local responsiveness

• International StrategyInternational Strategy– Firms create value by transferring valuable skills & products to foreign Firms create value by transferring valuable skills & products to foreign

markets where indigenous competitors lackmarkets where indigenous competitors lack– Centralize R&D at home, establish production & marketing in each country, Centralize R&D at home, establish production & marketing in each country,

retain control over strategy .retain control over strategy .– Relatively weak pressure for cost reduction & local responsiveness (Microsoft)Relatively weak pressure for cost reduction & local responsiveness (Microsoft)

• Multidomestic StrategyMultidomestic Strategy– Achieving maximum local responsiveness – extensively customize both Achieving maximum local responsiveness – extensively customize both

product offering & marketing strategyproduct offering & marketing strategy– Establish a complete set of value creation activities in each market - Establish a complete set of value creation activities in each market -

production, marketing and R&D production, marketing and R&D – High cost structure & poor job of leveraging core competenciesHigh cost structure & poor job of leveraging core competencies– High pressure for local responsiveness & low pressure for cost reduction High pressure for local responsiveness & low pressure for cost reduction

Strategic Choices continuedStrategic Choices continued• Global StrategyGlobal Strategy

– Focus on increasing profitability by cost reductions from experience curve Focus on increasing profitability by cost reductions from experience curve effects & location economies (low-cost strategy)effects & location economies (low-cost strategy)

– Production, marketing and R&D in a few key locations – do not customize Production, marketing and R&D in a few key locations – do not customize product offering & marketingproduct offering & marketing

– Strong pressure for cost reductions & low demand for local responsivenessStrong pressure for cost reductions & low demand for local responsiveness (Industrial goods, e.g. Intel)(Industrial goods, e.g. Intel)

• Transnational StrategyTransnational Strategy– Plan to exploit experienced-based cost and location economies, transfer core Plan to exploit experienced-based cost and location economies, transfer core

competencies within the firm & pay attention to local responsivenesscompetencies within the firm & pay attention to local responsiveness– High pressure for cost reduction, high pressure for local responsiveness & High pressure for cost reduction, high pressure for local responsiveness &

significant opportunities for leveraging valuable skills with the global network significant opportunities for leveraging valuable skills with the global network of operations – simultaneously achieve cost & differentiation strategies of operations – simultaneously achieve cost & differentiation strategies conflicting demands - e.g Caterpillar.conflicting demands - e.g Caterpillar.

The Process of decid ing to go international

Contracts

Turnkey Ops

Franchising

Licenses

exports

No Foreign Ownership

? how long to share

? with whom to share

? how much to share

? what to share

Joint Ventures

a subidiary co.wholly ownedby the parent

company

Sole Ownership

Modes of Entry

Once a choice is made you haveto develop a plan

MODES OF INTERNATIONAL BUSINESS

• MERCHANDISE EXPORTS AND IMPORTS• SERVICES EXPORTS AND EXPORTS1)Tourism and transportation2)Performance of services: Management

contracts ,Turnkey operations3)Use of assets: Licensing agreements, Franchising• INVESTMENTS1)Direct investment2)Portfolio investment

Mode of Entry Management contracts-Means by which country transfer such talent by

using part of its personnel to assist foreign company for specified period of time.

Turnkey operations-One company contracts others to build complete ready to operate facilities .

e.g. Bechtel build engineering plant for Motorola in china, pipeline for British petroleum in

Algeria. Licensing – A arrangement in which a licensor grants the rights to

intangible property to another entity the licensee for a specified period of time and in return licensor receives a royalty fee.

Franchising-It is a specialized form of licensing in which the franchisor not only sells intangible property to the franchisee but also assists that the franchisee agree to abide by the rules to how to do business.

Rank EXPORTERS Share(%)

1 GERMANY 9.3

2 U.S 8.7

3 CHINA 7.3

4 JAPAN 5.7

5 FRANCE 4.4

29 INDIA 0.9

Leading exporters in world trade,2008

Rank EXPORTERS Share(%)

1 GERMANY 9.2

2 U.S 8.6

3 CHINA 8.0

4 JAPAN 5.4

5 FRANCE 4.1

28 INDIA 1.0

Leading exporters in world trade,2008

Rank Importers Share (%)

1 U .S 16.1

2 Germany 7.2

3 China 6.1

4 Japan 4.8

5 United kingdom

4.7

17 INDIA 1.3

LEADING IMPORTERS IN WORLD TRADE,2008

Rank Importers Share (%)

1 U .S 15.5

2 Germany 7.3

3 China 6.4

4 Japan 5.0

5 United kingdom

4.7

17 INDIA 1.4

LEADING IMPORTERS IN WORLD TRADE,2008

Leading exporters and importers in world trade in commercial services, 2008

(Billion dollars and percentage)

Rank Exporters Value Share

Annual percentage

change Rank Importers Value Share

Annual percentage

change

1 United States 388.8 14.1 10 1 United States 307.8 11.6 9

2 United Kingdom 227.5 8.3 11 2 Germany 219.1 8.3 7

3 Germany 168.8 6.1 12 3 United Kingdom 172.0 6.5 8

4 Japan 122.5 4.4 14 4 Japan 144.0 5.4 9

5 France 114.5 4.2 0 5 France 108.8 4.1 4

6 Spain 105.5 3.8 12 6 China 100.3 3.8 21

7 Italy 97.5 3.5 10 7 Italy 98.4 3.7 11

8 China 91.4 3.3 24 8 Ireland 78.4 3.0 12

9 Netherlands 82.5 3.0 5 9 Netherlands 78.1 2.9 8

10 India 73.8 2.7 36 10 Spain 77.9 2.9 17

11 Hong Kong, China 72.7 2.6 14 11 Canada 71.7 2.7 11

12 Ireland 68.0 2.5 20 12 Korea, Republic of 69.8 2.6 20

13 Austria 58.9 2.1 11 13 India 63.7 2.4 29

Management focus –Indian chat in America

• Mumbai to Midtown, Chaat Hits the Spot

• WHERE FLAVORS MEET Chutneys accompany a platter of sev (fried noodles) at a chaat station at Sukhadia's in Midtown, New York.

SOURCE:NEW YORK TIMES,MAR,9,2003.

Globalization

• Globalization refers to growing economic interdependence among countries as reflected in increasing cross border flows of three types of entities: goods and services, capital and know-how.

• At the level of specific country, globalization refers to the extent of external linkages between the particular country’s economy and rest of the world.

• At the level of specific industry globalization refers to the degree to that industry, a company’s competitive position in another country.

• Two components:– The globalization of markets– The globalization of production

Globalization of Markets

The merging of distinctly separate national markets into a global marketplace.

Falling barriers to cross-border trade have made it easier to sell internationallyTastes and preferences converge onto a global normFirms offer standardized products worldwide creating a world market

Globalization of Production

• Refers to sourcing of goods and services from locations around the world to take advantage of – Differences in cost or quality of the factors of

production• Labor• Land• Capital

Swan Optical Manufacturing

1-5

Design

Global Production

Example 1

Globalization of Production

• Impediments to the globalization of production include– Formal and informal barriers to trade– Barriers to foreign direct investment– Transportation costs– Issues associated with economic risk– Issues associated with political risk

What is driving globalization? moving towards free market ideology. Opening borders to trade investment and technology Emergence of global institutions

– GATT– WTO– IMF– World bank– United Nations

Regional blocks The Technological advances continue• Since the end of World War II the world has seen

advances in– Communication– Information processing– Transportation technology

Economic centre of gravity is shifting from developed to developing countries

The drivers of globalisation

The Globalization Debate Pro Factors• Economic growth

stimulation• Lower prices for goods

and services• Increase in consumer

income• Creates jobs• Countries specialize in

production of goods and services that are produced most efficiently

Con Factors• Loss of sovereignty

• Replacement of traditional handicrafts.

• Destroys manufacturing jobs in wealthy, advanced countries

• Wage rates of unskilled workers in countries declines.

• Companies move to countries with fewer labor and environment regulations.

• Creates inequality

WORLD WIDE STATISTICS STRONGLY SUPPORT GLOBALISATION

• From 1981-2001(World bank), the number of people living on$1 day has declined from 1.5 billion to 1.1 billion in 2007.

• Feminism has made advances in area such as Bangladesh providing jobs to women.

• Between 1950-2007 global literacy has increased from 52%to 82% of the world.

• The percentage of child labor has fallen from 24% in 1960 to 10% in 1990s.

Inequality due to globalization

Quintile of population

Income

Richest 20% 82.7%

Second 20% 11.7%

Third 20% 2.3%

Distribution of world GDP(%)

ANTI -GLOBALISATION PROTESTCOUNTRY FOCUS -FRANCE

• The European Union (FRANCE) has banned imports of hormone treated beef from the US due to health problems ,but after review by WTO, the ban was lifted. They refuse to comply, so US govt. imposed a 100% tariff on imports of EU products (FRANCE)

• Rural activist Jove Bose felt insulted and destroyed Mc Donald restaurant in France.

• BOSE traveled to Seattle in Dec,1999 to protest against WTO

• Hero of anti -globalization movement.

MEASURING GLOBALISATION

Economic globalization, it can be measured in different ways. These centre around the four main economic flows that characterize globalization:

• Goods and services, e.g. exports plus imports as a proportion of national income or per capita of population

• Labour/people, e.g. net migration rates; inward or outward migration flows, weighted by population

• Capital, e.g. inward or outward direct investment as a proportion of national income or per head of population

• Technology, e.g. international research & development flows; technological advances such as the telephone, motorcar, broadband.

KOF INDEX

• The KOF Index of Globalization measures the three main dimensions of globalization:

• ECONOMIC GLOBALISATION characterized as long distance flows of goods, capital and services .

1) ACTUAL FLOWS-

a) Data on trade and FDI( World Bank)

b) Stocks on FDI (UNCTAD ,World Investment report)

c) Portfolio investment (IMF, International Financial Statistics)

2) RESTRICTIONS ON TRADE AND CAPITAL-(World Economic Forum- Global Competitiveness Report)

SOCIAL GLOBALISATION-

1) PERSONEL CONTACTSa) International telecom traffic

b) Degree of tourism (World Bank)

c) Stock of foreign population

d) International letters sent and received (Universal postal Union’s Postal statistics database)

2) INFORMATION FLOWSa) Internet host and users

b) Cable television subscribers

c) No. of radios

d) International newspaper traded

3)CULTURAL PROXMITYa) No. of English songs in national hit list (DREHER)

b) Imported and exported books

c) No. of Mc Donald restaurant located in a country)(SAICH,2000)

POLITICAL GLOBALISATION

a)No. of embassies and high commissions in a country

b)The number of international organizations to which the country is a member

c)Number UN of peace missions a country participated in.

The world's 15 most globalize countries,2007