Global Business Global Business Environment:Environment:

Going Global to Stay Going Global to Stay Local?Local?

Global Business Global Business Environment:Environment:

Going Global to Stay Going Global to Stay Local?Local?

Lecture 1Lecture 1

The Course• Why the need for firms to go global?• Global Business Environment, trends in key indicators• The Current Scenario in Trade and Investment – theories

and experience• Evolution of International Institutions and their role in

ensuring Global Business Environment• Lessons from the Growth Experience across countries /

sectors – what defies or defines success? Which countries to do business in?

1. The Political Economy – what’s a perfect recipe for success?2. Soft factors – role of Culture etc.3. Operational issues: Trade Finance, Global Sourcing4. Control factor in international business

The References• ‘International Business’ by Daniels, Radebaugh,

Sullivan and Salwan, Pearson• ‘International Business’ by Hill and Jain, Tata

Mcgraw-Hill• ‘International Business’ by Czinkota, Ronkainen

and Moffett, Wiley• World bank, IMF, UNCTAD and WTO Web-

resources• Recent happenings on international business

issues

Evaluation Pattern and Schedule

Component Weight

Class Participation 10

Quiz (Best Two out of three) 20

Group Project Report Presentation 30

End Term Examination 40

Session No Quizzes and Project Report

3 Quiz No 1

6 Quiz No. 2

9 Quiz No. 3

End Term Examination Submission of Group Project Report

What is International Business?• All commercial transactions between two or more

countries (merchandise sales, service contracts, investments, business, transportation)– Private (for profits)– Public (for political / strategic reasons)• International business and globalization• Globalization: The broadening set of

interdependent relationships among people from different parts of a world that happens to be divided into nations

• IPL, ATP Tours and Football Leagues: Sports or Business?

Difference between Domestic and International Business

• In additional to domestic business management skills, international business management requires– Social science understanding– Political science appreciation– Legal awareness (taxation, forex

transaction)– And an innate ability in:

• Anthropology (aspirations and demands)• Sociology• Psychology (motivations)• Economics (GDP, inflation, unemployment)• Political Economy (sanctions and terrorism)• Geography (supply and demand factors)

How is International business affected by: • GDP Growth?• Oil Price Movement?

What defines Globalization?• Growing Income?• Growing Trade in Goods and Services?• Deepened Production Networks?• Lowering Trade Barriers and Procedural Hassles?• Growing Global Governance?• Increasing Cross-Regional Association?• Deepened Investment Inter-linkage?• More Acquisitions and Mergers?• Increasing International Cooperation in Infrastructure

Projects?• Movement of Technicians / Managers from another

country?• Movement of workers from another country? • No to the policy of ‘Self-Reliance’?

• Motivation for consumers: More variety, better quality, lower prices

• So how does a globalized product looks like?

The ‘International’ Burger

Sesame seeds from Mexico

Pickles and Sauce from Germany

Bun from Russia

Onions from US

Beef Patties from Hungary

Lettuce from Ukraine

Cheese from Poland

Source: Czinkota et al

The fragmentation of production: The example of the Boeing 787 Dreamliner

Source: WTO (2011)

Complementary parts supply system of an automobile assembler in

ASEAN

Source: Hiratsuka (2010)

Global Canvas: GDP Growth

World Bank Data

• China has established itself as a growing location: More FDI inflow

• What are the prospects of India?

• Does GDP growth influence ability to engage in international business?

Recession and Global FDI (US $ Bn.)

WIR (2012)

Growth in Global Export (Merchandise)

How has India’s merchandise export suffered, due to imbalances in Global Market?

Growth in Global Export (Service)

How has India’s service export suffered, due to imbalances in Global Market?

Who are the prominent exporters? Global Merchandise Export Market Share (%)

Is business / trade mainly created by Price difference??

What are the sources of competitiveness?

Who are the prominent exporters? Global Service Export Market Share (%)

The Most Competitive Economies..

• India was ranked 51st as per 2010-11 Ranking

• That worsened to 56th position during 2011-12

• Does competitiveness gets affected by the ease of doing business?

• DBR 2012

Stronger legal institutions and property rights protections are associated with more efficient regulatory processes(Average ranking on sets of Doing Business indicators)

DBR (2012)

Reasons for Growth in International Business

• Rapid expansion of technology - New technology encouraged newer products and flexible specialization – designed to produce differentiated products in large patches – Fixed cost is much less important as compared to 1980s (e.g. – electronic components industry)

• Capturing Economies of Scale – Targeting the Global Market - Bulk production in low-skilled products – China produced 45% shoes of the World

• Transportation is quicker while costs are lower - Reduction in physical cost of transport – containerization, packaging, Miniaturization – bulkiness reduced – creation of newer markets (e.g. perishables through air cargo)

• Communication enables control from afar - Reduction in communication cost – internet and mobile phones – Tirupur in India

• Liberal government policies on trade and resources – movement of capital and labour – reform of sea and airports and customs framework

Reasons for Growth in International Business ..

• Emergence of services supporting international business – banking services, postal and courier services

• Development of institutions that support international trade, WTO-induced reform – reduction in tariff level

• Consumer pressures (demand for quality features, e-commerce, lookout for cheaper deals)

• Increased global competition - Need to Stay Competitive even in the Local Market – cost innovations, Merger and Acquisitions

• Growing Intra-Industry Trade – The Need to Source the Input at the Best Competitive Price and Quality

• Where and How to Source? Exploitation of key inter-linkages• Product Cycle Hypothesis – Quick Learning for the New Entrants• Reduction in Storage cost – Just-In-Time mode – so no need to

book the warehouse for 3-4 weeks (precondition: credibility in providing)

e.g. Integrated Production Network in Southeast Asia for automobile

Why Engage in International Business?

• Expand sales– Volkswagen (Germany); Ericsson (Sweden); IBM (US)

• Acquire resources– Better components, services, products (Tata Steel –

willing to set up iron ore or steel mill projects in western Australia given the natural reserve in that territory; BPO industries in India and Philippines)

– Foreign capital– Cheap labour (Rawlings producing baseball in Costa

Rica)– Technologies (Tata Steel – purchase of Corus)– Information (Zodiac Shirt – purchase of European and

American Brands)

• Minimize risk– Take advantage of the business cycle for products /

services– Diversify among international markets

The More people view the Harry Potter Movie, the higher the sales and profitability.

A Globalized Venture: Harry Potter

Category Person - Country of Origin

Author J. K. Rowling (British)

Producer David Jonathan Heyman (British)

Distributor Warner Brothers (US)

Director Christopher Joseph Columbus (US); Alfonso Cuarón Orozco (Mexico)

Screenplay Stephen Keith Kloves (US); Michael Goldenberg (US)

Editing Richard Francis-Bruce (Australia)

Music Patrick Doyle (Scotland)

Visual Effects

Rising Sun Pictures (Australia); Double Negative (UK); Cinesite (UK); Industrial Light & Magic (US)

Actors From more than 20 countries

Location UK, Scotland

Question 1 Why simultaneous multiple release of the Movie?

Question 2 Why the recent movies were released in 3D?

And how the countries Gain?• Lord of the Rings Filming locations in New Zealand are

now great tourist attractions

Auckland Airport

Modes of International Business• Importing (Reliance Industries Limited

importing crude oil from Gulf) and exporting (Tata Motors exporting Nano to Sri Lanka)

• Tourism and transportation• Licensing (e.g. Breyers Yogart, TGI Friday's frozen appetizers produced

by unrelated firms under licensing arrangements, Arvind Brnads and Wrangler in India) and franchising (e.g. Subway, McDonalds, Seven-Eleven etc.)

• Licensing / Franchising - Royalties, operating standard and use of brand names

• Turnkey operations - seller agrees to put up the plant or business, with his own financing without initial backing from the buyer, guaranteed to be paid by the buyer only upon delivery of the fully operational installation, occurs in franchising – Bechtel in Afghanistan.

• Management contracts – persons undertaking certain specialized management functions in another entity (Disney theme parks in Paris)

• Direct (Honda investing in Indian subsidiary Honda-SIEL Cars India) and portfolio investment (Foreign Institutional Investors in the Stock Market)

Selling Products or Services Outside a Firm’s Domestic Market

International Strategy LifecycleInternational Strategy Lifecycle

Firm Introduces Innovation in

Domestic Market

11

Product Demand Develops and Firm Exports

Products

22

Foreign Competition

Begins Production

33

Firm Begins Production

Abroad

44

Production Becomes Standardized and is

Relocated to Low Cost Countries

55

Pattern of Internationalization

Greater reach abroad is also characterized by greater demand for quality service, if needed, by global players

Global Business: Bharti Airtel

• Bharti Airtel has outsourced all of its business operations except marketing, sales and finance.

• It’s network — base stations, microwave links, etc.—is maintained by Ericsson, Nokia Siemens Network and Huawei

• Business support is provided by IBM

• Transmission towers are maintained by Bharti Infratel Ltd. (in India)

In March 2010, Bharti struck a US $ 9 Bn. deal to buy the Kuwait firm Zain's mobile operations in 15 African countries

The Location choice of MNCs?• How can a firm develop to become a global player?• First step: Sourcing Capital – availability in Developed

countries – the role of the Global Banks – Headquarter • How can developing countries be able to grow?• Second step: Sourcing Labour - Developing countries –

securing skilled and unskilled labour, considerations on infrastructure, human capital etc.

• Or, the other way round?• Can cheap labour come to domestic country and ensure

production?• Example – Bangladesh Garments Industry - local labour –

Korean FDI • Californian Tomato industry – Mexican labour

What happens in South East Asia and why India has a different experience?

Role of FDI: Flying Geese Model• Production - export – FDI - import.• First wave of FDI from Japan to South Korea, Taiwan, Hong

Kong and Singapore (NIEs). • NIEs turned into efficient producers of manufactured

products.• Consequent increase in cost of production.• Second wave of FDI from South Korea and Taiwan to

Thailand, Malaysia and Indonesia. Japanese investment also followed.

• Sectoral perspective – move towards more techno-intensive sectors.

• China benefited in the process during 1980s.• Flow to Philippines in next period.• Process suffered during East Asian Crisis.• Recent FDI flow to Cambodia, Lao PDR, Viet Nam.

Importance of being at the right place at the right time

Sequential flying geese paradigm

Sequential flying geese paradigm ..

Is FDI all about manufacturing and services?

Agri FDI: Recent Trends• Nestlé (Switzerland) had contracts with more than 600,000 farms

in over 80 developing and transition economies as direct suppliers of various agricultural commodities.

• Olam (Singapore) has a globally spread contract farming network with approximately 200,000 suppliers in 60 countries (most of them developing countries).

• In Brazil, 75% of poultry production and 35% of soya bean production are sourced through contract farming, including by TNCs.

• Sime Darby (Malaysia): $800 million investment in plantations in Liberia in 2009 (palm oil, rubber).

• China: investments and contract farming in commodities like maize, sugar and rubber in the Mekong region, especially in Cambodia and Lao PDR.

• Zambeef (Zambia): investment in Ghana and Nigeria.• Grupo Bimbo (Mexico): investment across Latin America and the

Caribbean (potato, cereals).• Food security led investment: South Korea and GCC Countries.

Role of SWFs: Agricapital (a State-owned fund based in Bahrain) is investing in food crops overseas to support its government’s food security policies.

Policy Issue for a country: Export Promotion or Import

Substitution?

X or M?

www.abanet.org

How to Predict Trade and Development Policy Reforms in a

country?

• Late entry and industrial structure• Infant Industry and Optimum Tariff Argument• Demographic Pressure (increasing population,

import demand)• Military Compulsions (technological innovations,

increasing government expenditure)• Export Growth (broadening product base,

increasing productivity, competitiveness of the economy / select product groups)

• Demonstration Effect (consumerism, increased consumption)

‘Other’ factors for Growth?• A visionary leader? (e.g. Lee Kuan Yew, Singapore; Deng

Xiaoping, Peoples Republic of China; Suharto, Indonesia)• Valuable exportable commodity? (e.g. oil in Iran; manufacturing

in China)• Unpredictable aggressive enemy? (e.g. China for Taiwan;

Russia for China)• Superpower patron? (e.g. US as patron for Singapore and

Taiwan during 1970s and 1980s)• ‘Fair’ Trade Regime? (e.g. Chewing gum export in Singapore)• Business-Friendly Macroeconomic Regime? (difference between

Democratic India, Chile under Augusto José Ramón Pinochet and China under Communist Party)

• How to Learn from Past Mistakes so as to prevent their repetition????

‘No matter if it is a white cat or a black cat; as long as it can catch mice, it is a good cat’ – A Sichuan Proverb used by Deng became famous

Levels / Terms of International Companies - Strategies

• Joint Venture (JV): two or three players from more than one country coming together to form a business – e.g. Sony-Ericsson is a JV by the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones; Walmart and Bharti Enterprises formed a JV, Bharti Walmart Private Limited.

• Multinational Enterprise (MNE): global approach to markets and production, direct investment in more than one country– Multinational Corporation (MNC) – e.g. Pepsi– Transnational Company (TNC) - integrate various country

operations while dispersing the location of control (Transnational strategy), e.g. Nokia, Nestle

• Globally integrated company: integrated operations located in different countries - integrate various country operations into an international headquarters control (Global Strategy) – GE, Apple, Sony

• Multidomestic company: multinational companies that allow local responsiveness – country offices have power to operate autonomously (Multidomestic strategy) – e.g. McDonald and Maharaja Mac in India

Nokia has a team of design researchers, psychologists, sociologists and usability experts who travel the globe exploring how people use their mobile devices, discovering how to make them better.

International Corporate StrategyInternational Corporate StrategyWhen is each strategy appropriate?When is each strategy appropriate?

Need for Global

Integration

Need for Local Market Responsiveness

Low

High

Low High

Multi-Multi-DomesticDomestic

International Corporate StrategyInternational Corporate StrategyWhen is each strategy appropriate?When is each strategy appropriate?

Need for Global

Integration

Need for Local Market Responsiveness

Low

High

Low High

Multi-Domestic

GlobalGlobalStrategyStrategy

International Corporate StrategyInternational Corporate StrategyWhen is each strategy appropriate?When is each strategy appropriate?

Need for Global

Integration

Need for Local Market Responsiveness

Low

High

Low High

Multi-Domestic

GlobalGlobalStrategyStrategy

Trans-national

Why the differences?• Why are some industries multidomestic?

– Customized products are needed in some countries – National competitors are common– Countries have unique distribution channels– There are no or few economies of scale– Local/national firms have some inherent advantages in the host

country over global competitors

• Why are some industries Global?– Homogenized product needs across markets– Customers are global firms– High R&D expenditures require more than one market to recover

development costs– There are many economies of scale in production, international

logistics, or marketing– The firm has global product differentiation, proprietary product

technology, and production mobility.

Standardized vs Responsive Practices

• Global standardization advantages– Reduced costs in development and manufacturing

(e.g. Canon Digital Camera; Sony Flat Screen TV)– Economies of scale since fixed costs are spread over

more units of production

• Responding to national preferences– Adjusting operating, marketing, and design to meet

specific national preferences (e.g. Coca Cola marketing Stoney Tangawizi beer in Tanzania, Kenya where Tangawiki means ginger in Swahili; in US the product is sold as Stoney Gold Ginger beer).

Maximizing Global Profits

• Profits are greatly influenced by:– International rivalry (e.g.

Airbus backed by EU and Boeing backed by US)

– Cross-national treaties and agreements (UN, WTO, Trade, Transit, environment, health etc.)

– Ethics

National Cooperation / Problems• Treaties and agreements address a variety of commercial

advantages (transportation, trade, etc)– To gain reciprocal advantages– To attack problems that one country alone cannot solve– To deal with concerns that lie outside the territory of all

countries– Trade barrier reduction (WTO)– Convention on Transit Trade of Land-locked States (UN)– International arbitration on investment disputes (World

Bank)– Knowledge networks (G8, G20, IBSA, BRICS)– Often firms actively lobby with the governments for

reciprocal market access• Countries reluctantly cede some sovereignty / facility

because of:– Coercion (e.g. Suez Canal, Panama Canal)– International conflicts (e.g. following independence of Eritrea

in 1991, Ethiopia lost access to Red Sea and became a land-locked country)

The Other Side of the Coin?• Increasing instability owing to International Events? (e.g.

US decision to reduce outsourcing of services from India; Chinese decision to stop export of rare earth materials to Japan)

• Growth of a region linked more with the Growth scenario in other countries? (e.g. the 2009 recession in US and the impact on Chinese exports)

• Less Control of the Government to influence Domestic Policy Challenges? (e.g. the Greece crisis and failure to tackle the problem through Monetary and Fiscal Policies)

• Increasing Privatization?• Worsening of Income Inequality and Employment

Scenario? (e.g. experience of Sub-Saharan African countries)

• Greater influence by MNCs and external players on local population and production? e.g. environmental concerns – Brazil and Amazonian forests; mining sector in Indonesia

Serious challenge to local players??

Global Recession and Commodity

Prices • Major Commodity Price

boom in 2008 for several , products.

• Move to Biofuel, Export bans, Prohibitive taxes etc., supply and demand mismatch

• Price crash in 2009• How Economic Boom and

Recession affects international business?

• Domestic Policy Tightening• Energy and Metal price

recovery from March 2009, but longer time taken for agriculture.

• Commodity prices peaked in early 2011 and then declined on concerns about the global macroeconomic and financial outlook and slowing demand in emerging markets, notably China.

Biggest decreases: 1.Metals2.Agriculture raw materials (cotton and rubber)3.Edible oils 4.Coconut and palmkernel oil5.Cocoa

Going Local? Going Extinct ..• Local Soft Drinks in many countries are either driven

out by aggressive pricing by MNC giants, Coke and Pepsi, or, bought / marginalized by them, e.g. Campa Cola in India

• Synthetic Fibre – increasing Export from China over the years, increasing import, hurting the interest of the local producers

• Television market - Indian example – experience of Philips during 1990s, present battle between Videocon (India), Sony (Japan), Samsung (South Korea) and LG (South Korea) etc.

• Any other example?

The Lesson So Far ..• Globalization is here to Stay• No business is now purely ‘internal’ barring few

exceptions, and hence internationalization is an important strategy for firms given foreign competition

• Role of Economic Diversification and moving up the value chain is important

• Fiscal and Financial health of an economy plays a crucial role in determining its competitiveness, attractiveness and hence future growth path

• Country Strength and Business Negotiations with Partners

• Countries with limited set of options earn limited benefits