UNIT ONE (1) Introduction to International Business

Transcription

1 UNIT ONE (1) Introduction to International Business

2 Learning Objectives In this unit, you ll learn about: 1. What is international business? 2. What are the key concepts in international trade & investment? 3. How does international business differ from domestic business? 4. What motivates firms to go international? 5. Market globalization: An organizing framework 6. Regional integration and economic blocs

3 What is International Business? International Business includes: All value-adding activities including sourcing, manufacturing, and marketing that are performed on an international scale Firms who seek foreign customers & engage in partnerships with overseas companies

4 What is International Business? The exchange of physical & intellectual assets including products, services, capital, technology, know-how, & labor Activity performed mainly by specific firms, but also by countries and non-governmental organizations & agencies

5 Key International Business Definitions International business: Performance of any trade or investment activity by firms across national borders Globalization of markets: the ongoing process of economic integration & growing interdependency of countries worldwide International trade: Exchange of products & services across national borders, typically through exporting & importing

6 Key Concepts in International Trade & Investment Exporting: Sale of products or services to customers abroad from a base in the home country or a third country. Boeing and Airbus export billions of dollars in commercial aircraft products every year Importing or Global Sourcing: getting products or services from suppliers abroad to be used at home or in a third country. Toyota imports many parts from China when it manufactures cars in Japan

7 Key Concepts in International Trade & Investment International investment: Passive ownership of foreign securities, such as stocks and bonds, in order to generate financial returns Foreign Direct Investment: the transfer of assets to another country, or the acquisition of assets in that country such as capital, labor, land, plants, and equipment

8 World Trade Is Growing Faster than GDP

9 Foreign Direct Investment (FDI) The ultimate stage of internationalization Practiced by those firms who are most active internationally Encompasses the widest range of involvement in international business

10 Foreign Direct Investment (FDI) Usually engaged in for the long term Firms often retain partial or complete ownership of assets they acquire Huge growth of FDI into developing economies ones with lower incomes, less developed industry base, & less capital than more advanced economies

11 Foreign Direct Investment (FDI) Inflows into World Regions (in Billions of U.S. Dollars per yr.)

12 The Role of Services in International Trade Services are actions performed or efforts put forward by people & firms to solve business problems Examples: those related to banking & finance, consulting, hospitality-related functions (e.g., reservations, food provision), retail, and many others The service sector accounts for about ¼ of all international trade and this percentage is rising

13 The Role of Services in International Trade Larger, more advanced economies account for the largest portions of service trade in the world; services often account for 2/3 of GDP in these larger economies

14 How does International and Domestic Business Differ? 1. International business: is conducted across national borders; uses distinctive business methods; must adjust to countries that differ in culture, language, political & legal system, economic situation, infrastructure, & other factors 2. When they venture abroad, firms encounter four major types of risk Cross-cultural risk Country risk Currency risk Commercial risk

15 The Four Risks of International Business

16 The Four Risks of International Business

17 The Four Risks of International Business (cont.)

18 The Four Risks of International Business (cont.)

19 Cross-Cultural Risk, Examples Cultural differences: Risks arise from differences in language, lifestyle, attitudes, customs, and religion, where a cultural miscommunication jeopardizes a culturally valued mindset or behavior. Negotiation patterns: Negotiations are required in many types of business transactions but differ in how they are conducted (e.g., Brazilians more likely to be aggressive; Americans don t spend a lot of time on social niceties;

20 Cross-Cultural Risk, Examples Japanese sound out partners via social interactions/events. Errors in understanding these styles can undermine business relations

21 Cross-Cultural Risk (cont.) Decision-making styles: Managers constantly make decisions about the operations and future direction of the firm. For example, Japanese take considerable time to make important decisions, whereas Canadians tend to be decisive and shoot from the hip Ethical practices: Standards of right and wrong vary considerably around the world. For example, bribery is relatively acceptable in some countries in Africa, but is generally unacceptable in Sweden and legally enforced by other countries (e.g., Germany, U.S.)

22 Country Risk (Political Risk) Government intervention, protectionism, and barriers to trade and investment Bureaucracy, red tape, administrative delays, corruption Lack of legal safeguards for intellectual property rights Legislation unfavorable to foreign firms Economic failures and mismanagement Social and political unrest and instability

23 Currency Risk (Financial Risk) Currency exposure: General risk of unfavorable exchange rate fluctuations Asset valuation: Risk that exchange rate fluctuations will adversely affect the value of the firm s assets and liabilities

24 Currency Risk (Financial Risk) Foreign taxation: Income, sales, & other taxes vary greatly worldwide, with implications for company performance & profitability Inflation: High inflation, common in many countries, complicates business planning & the pricing of inputs and finished goods

25 Commercial Risk Commercial risk can be reduced by improving business strategy & tactics. The following should be avoided: o Choice of weak partners o Operational problems o Poor timing of entry o Competitive intensity o Poor execution of strategy

26 Summary of IB Risk These risks are always present but manageable Managers need to understand, anticipate, and take proactive action to reduce their effects Some risks are extremely challenging

27 Who Participates in International Business? Multinational enterprises (MNE): Very large companies with extensive resources allowing them to conduct business activities worldwide via a network of subsidiaries and affiliates (e.g., Honda, Exxon-Mobil, Walmart, Samsung, P&G, & Disney) Small and medium-sized enterprises (SME): Companies with < 500 employees & more limited resources to devote to international activity. Yet, in most countries they constitute about 90% of all existing firms & are increasingly engaged in IB

28 Who Participates in International Business? Born global firms: Newer, entrepreneurial SMEs that initiate substantial international business early after their founding Non-governmental organizations: Nonprofit organizations that pursue special causes and serve as advocates for social issues, education, politics, & research across borders

29 What Motivates Firms to Go International? To seek opportunities for growth through market diversification - E.g., Harley-Davidson, Sony, Whirlpool To earn higher margins and profits - Often, foreign markets are more profitable To gain new ideas about products, services, & business methods - E.g., GM refined its knowledge about small, fuel-efficient cars in Europe

30 Why do Firms Participate in IB? To better serve key customers that have relocated abroad - E.g., when Toyota launched its operations in Britain, many of its suppliers followed suit To be closer to supply sources, benefit from global sourcing advantages, or gain flexibility in the sourcing of products -E.g., Dell sources parts and components from the best suppliers worldwide To gain access to lower-cost or better-value factors of production - E.g., Sony does much of its manufacturing in China

31 Why do Firms Participate in IB? (cont.) To develop economies of scale in sourcing, production, marketing, and R&D -E.g., Boeing lowers overall costs by sourcing, manufacturing, & selling aircraft worldwide To confront international competitors more effectively or to thwart the growth of competition in the home market -E.g., Chinese appliance maker Haier built U.S. operations partly for competitive knowledge about Whirlpool (chief U.S. rival) To invest in a potentially rewarding relationship with a foreign partner - French computer firm Groupe Bull partnered with Toshiba in Japan to gain insights for developing information technology

32 The Drivers & Consequences of Market Globalization

33 The Drivers of Market Globalization Worldwide reduction of barriers to trade and investment Market liberalization and adoption of free markets Industrialization, economic development, and modernization Integration of world financial markets Advances in technology

34 Five Societal Consequences of Market Globalization Loss of national sovereignty Offshoring and the flight of jobs Effect on the poor Effect on the natural environment Effect on national culture

35 Societal Consequences of Globalization Loss of national sovereignty MNE activities can interfere with governments ability to control their own economies & social-political systems. Some firms are bigger than the economies of many nations (e.g., Walmart, Shell) Others argue that global competition in the context of global free trade makes MNEs less powerful (e.g., the U.S. auto industry declined as foreign rivals from Japan and Europe entered the U.S. market) Offshoring and the flight of jobs Jobs are lost as firms shift production of goods & services abroad in order to cut costs and obtain other advantages Firms benefit, but communities and industries are disrupted

36 Societal Consequences of Globalization (cont.) Effect on the poor In poor countries, globalization usually creates jobs & raises wages, but tends to disrupt local job markets. MNEs may pay low wages but then seek other locations for plants once they do (e.g., wages in China are on the rise; MNEs are moving production facilities to cheaper locations) Some workers are exploited; child labor and other conditions difficult to monitor by MNE

37 Societal Consequences of Globalization (cont.) Effect on the natural environment Can harm environment by promoting industrialization & other activities that generate pollution, habitat destruction, & other environmental harm But, as nations develop their economies, they tend to pass laws that protect the environment This happened in Japan in the 1960/70 s & is occurring now in Mexico, China, and India

38 Societal Consequences of Globalization (cont.) Effect on National Culture Globalization opens the door to foreign firms, global brands, unfamiliar products, and new values Increasingly, consumers buy similar products, modeled according to Western countries, especially the U.S In this way, traditional norms, values, and behaviors may homogenize over time Some believe that national identity may be lost to global culture

39 Regional Economic Integration When nations within a geographic region form an alliance aimed at reducing barriers to trade and investment & increasing their economic interdependence Over 50% of world trade today occurs under the auspices of a preferential trade agreement entered into by groups of countries Cooperating nations obtain: increased product choices, productivity, living standards lower prices more efficient resource use Examples: European Union (EU) and the North American Free Trade Agreement (NAFTA)

40 Why Do Nations Pursue Economic Integration? 1. Expand market size 2. Achieve economies of scale & greater productivity 3. Attract direct investment from outside region 4. Acquire a better defensive and political posture

41 Why Pursue Regional Integration? 1. Expand market size Increases size of market for firms inside the bloc. Belgium has only 10 million people, but EU has nearly 500 million Buyers can access larger selection of goods 2. Enhance productivity & economies of scale Bigger market facilitates economies of scale Internationalization inside bloc helps firms learn to compete outside bloc Competition & efficient resource usage inside the bloc leads to lower prices for bloc consumers

42 Why Pursue Regional Integration? (cont.) 3. Attract investment from outside the bloc Compared to investing in stand-alone countries, foreign firms prefer to invest in countries belonging to bloc General Mills, Samsung, & Tata have invested heavily in EU-member countries 4. Acquire stronger defensive & political posture Membership provides countries with a stronger defensive posture relative to other nations and world regions Key motive for formation of EU

43 Economic Bloc A geographic area consisting of countries that agree to pursue economic integration by reducing tariffs & other barriers to cross-border flow of products, services, capital, and labor Bloc countries become party to free trade agreement that eliminates tariffs, quotas, & other trade barriers Examples: European Union, NAFTA, MERCOSUR, APEC, ASEAN, & many others

44 Five Potential Levels of Regional Integration

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46 Levels of Regional Integration Free trade area: Simplest, most common arrangement Member countries agree to gradually eliminate formal trade barriers within the bloc, while each member maintains an independent international trade policy with countries outside the bloc (e.g., GAFTA - Greater Arab Free Trade Area) Customs union: Similar to a free trade area except the members harmonize trade policies toward nonmember countries via common tariff and nontariff barriers on imports from nonmember countries Examples exist in Asia, Africa, the Middle East & more

47 Levels of Regional Integration (cont.) Common market Like a customs union, except products, services, & factors of production such as capital, labor, & technology can move freely among the member countries For example, EU countries observe many common labor & economic policies Economic union: Like a common market, but members also seek common fiscal and monetary policies & standardized commercial regulations The EU illustrates this by, among other features, the use of a single currency - the euro

48 The EU: A Full-Fledged Economic Union 1. Market access. Tariffs and most nontariff barriers have been eliminated 2. Common market. Barriers to cross-border movement of production factors labor, capital, and technology 3. Trade rules. Cross-national customs procedures and regulations have been eliminated, which has streamlined transportation and logistics within Europe 4. Standards harmonization. Technical standards, regulations, and enforcements have been harmonized

49 Key Features of the European Union Member Countries

50 EFTA European Free Trade Association A free trade group comprised of 4 European countries: Iceland, Liechtenstein, Norway, & Switzerland Operates parallel to but is linked with the EU Established in 1960 as a trade bloc alternative for European states who were either unable to, or chose not to, join the EU They have preferential trade relations with 23 states and territories, in addition to the 27 member states of the EU

51 NAFTA (Canada, Mexico, the U.S.) Passage of NAFTA in 1994 was facilitated by the maquiladora program, thru which U.S. firms located factories just south of the U.S. border to access low-cost labor without significant tariffs Eliminated tariffs and most nontariff barriers for products and services Established trade and investment rules, uniform customs procedures, and intellectual property rights Provided procedures for settling trade disputes

52 El Mercado Comun del Sur (MERCOSUR) Launched in 1991, is the leading economic bloc in South America, accounting for nearly all of the region s GDP 4 full members are Argentina, Brazil, Paraguay, and Uruguay; several other associate members & partners Provides free movement of products & services, common external tariff & trade policy, & coordinated monetary policies May be integrated with NAFTA and DR-CAFTA as part of a new proposed Free Trade Area of the Americas

53 Other Economic Blocs Caribbean Community and Common Market (CARICOM) Comunidad Andina de Naciones (CAN) Association of Southeast Asian Nations (ASEAN) Asia Pacific Economic Cooperation (APEC) Australia and New Zealand Closer Economic Relations Agreement (CER)

54 Implications of Regional Integration for the Firm Internationalization by firms inside the economic bloc Regional integration facilitates company internationalization Rationalization of operations Restructuring company operations can help managers develop strategies tailored to region as a whole, not just individual countries Goal is to cut costs & increase efficiencies via scale economies. Firms centralize production and marketing, instead of decentralizing them to individual countries

55 Implications of Regional Integration for the Firm Mergers and acquisitions (M&A) Economic blocs lead to M&A, the tendency of one firm to buy another, or of two or more firms to merge and form a larger firm

56 Implications for Integration (cont.) Regional products and marketing strategy Firms cut costs by standardizing products & services Case Inc. reduced its line of tractors from 17 to only a few, following integration of the EU Internationalization by firms from outside the bloc Because external trade barriers mainly affect exporting, many foreign firms prefer to enter a bloc through FDI This is how Britain became the largest recipient of FDI from the U.S. after formation of the EU

57 Theories of International Trade and Investment

58 Learning Objectives In this chapter, you ll learn about: 1. The theories that explain international trade and investment 2. The reasons why nations trade 3. The ways nations can enhance their competitive advantage 4. Why and how firms internationalize 5. The ways internationalizing firms can gain and sustain competitive advantage

59 Theories of International Trade and Investment

60 Theories of International Trade and Investment (cont.)

61 Theories of International Trade and Investment (cont.)

62 Mercantilism and Neo-mercantilism Mercantilism: A belief, popular in the 16th century, that national prosperity results from maximizing exports and minimizing imports Today, some argue for neo-mercantilism the idea that a nation should run a trade surplus Supporters of neo-mercantilism include: - Labor unions (want to protect domestic jobs) - Farmers (want to keep crop prices high) - Some manufacturers (rely on exports) But is neo-mercantilism best for all?

63 Free Trade The absence of restrictions to the flow of goods and services among nations Free trade is usually best because it leads to: - Consumers & firms can more readily buy the products they want - Lower prices of goods because imports are usually cheaper than domestic ones because of the lower cost of production

64 Free Trade - Lower cost imports reduce firm expenses; this raises profits which could result in higher wages for workers - Higher living standards for consumers (because costs are lower) - Greater prosperity in poor countries

65 Adam Smith ( ) Scottish political economist Developed absolute advantage principle to counter/criticize the Mercantilist approach

66 Absolute Advantage Principle A country should produce only those products in which it has absolute advantage or those it can produce using fewer resources than another country.

67 Comparative Advantage The foundation concept of international trade Better answers the question of how nations can achieve and sustain economic success and prosperity than absolute principle Refers to the superior features of a country that provide it with unique benefits in global competition compared with others Derived either from natural endowments or from deliberate national policies

68 Comparative Advantage Principle It is beneficial for two countries to trade even if one has absolute advantage in the production of all products; what matters is not the absolute cost of production but the relative efficiency with which it can produce the product.

69 Comparative Advantage Principle (cont.) While Germany can make both items more cheaply than France, it is still beneficial for Germany to trade with France The key is the ratio of production costs. In the exhibit, Germany is comparatively more efficient at producing cloth than wheat: It can produce three times as much cloth as France (30/10), but only two times as much wheat (40/20)

70 Comparative Advantage Principle (cont.) Germany should specialize in producing cloth and import all the wheat it needs from France. France should specialize in producing wheat and import all its cloth from Germany Each country benefits by specializing in the product in which it has a comparative advantage and importing the other product

71 Comparative Advantage Principle (cont.) The principle applies to all goods. It reveals how countries use scarce resources more efficiently. Example Arguably, no country is better than Japan at making cars and cell phones. But because Japan is especially good at making cars, it concentrates its resources on making them Other countries, such as China and Finland, focus on making cell phones In this way, Japan makes maximal use of its resources, and the world gets great cars

72 Limitations of Early Trade Theories Traded goods aren t commodities customers have strong brand preferences and desire unique features Fail to account for international transportation costs Government involvement in trade throws theories off (e.g., taxes on imports, regulations imposed, & preferential subsidies for their own industries)

73 Limitations of Early Trade Theories Services: Some cannot be traded; others can be traded freely via the Internet or global telephony, thereby reducing advantage Scale economies & superior business strategies provide efficiencies. Early trade theories failed to account for this (e.g., Japan lacks comparative advantages, but its firms succeeded anyway, via superior strategies)

74 Factor Proportions Theory Also known as the Factor Endowments Theory Argues that each country should produce & export products that intensively use relatively abundant production factors, & import goods that intensively use relatively scarce factors of production

75 Factor Proportions Theory (cont.) However, the Leontief Paradox revealed that countries can successfully export products that use less abundant resources It was found that the U.S. often exported laborintensive goods (a non-abundant factor; relatively expensive) & imported capital-intensive goods (a strength/abundant factor) This implies that international trade is complex & can t be fully explained by a single theory

76 International Product Life Cycle Theory Product and their manufacturing technologies go through 3 stages of evolution: introduction, maturity, and standardization In the introduction stage, the inventor country enjoys a monopoly both in manufacturing and exports (the television set in the U.S.)

77 International Product Life Cycle Theory (cont.) In the maturity stage, the product s manufacturing becomes relatively standardized; other countries start producing & exporting the product

78 International Product Life Cycle Theory (cont.) In the standardization stage, manufacturing ceases in the original innovating country, who then becomes a net product importer. Today, due to globalization, the cycle occurs quickly for many products (think ipad)

79 New Trade Theory These approaches argue that economies of scale are an important factor in some industries for superior international performance, even in the absence of superior comparative advantages Some industries succeed best as their volume of production increases Example The commercial aircraft industry has very high fixed costs that necessitate high-volume sales to achieve profitability

80 Comparative vs. Competitive Advantage

81 Critical Role of Innovation in National Economic Success Innovation is a key source of competitive advantage The firm innovates in four major ways. It can develop: (1) A new product or improve an existing product (2) New ways of manufacturing (3) New ways of marketing (4) New ways of organizing company operations The more innovative firms in a nation, the stronger its national competitive advantage

82 Critical Role of Productivity in National Economic Success Productivity is the value of the output produced by a unit of labor or capital It is a key source of competitive advantage for firms The greater the productivity of the firm, the more efficiently it uses its resources The greater the aggregate productivity of the firms in a nation, the more efficiently the nation uses its resources Aggregate productivity is a key determinant of the nation s standard of living

83 Michael Porter s Diamond Model: Sources of National Competitive Advantage Firm strategy, structure, and rivalry: The nature of domestic rivalry & the conditions that determine how a nation s firms are created, organized, and managed Example Italy has many top firms in design industries such as textiles, furniture, lighting, & fashion. Vigorous competitive rivalry puts these firms under constant pressure to innovate. This has propelled Italy to a leading position in design.

84 The Diamond Model (cont.) Factor conditions: Quality and quantity of labor, natural resources, capital, technology, know-how, entrepreneurship, and other factors of production Example An abundance of cost-effective & educated workers gives China a competitive advantage in the production of laptops

85 The Diamond Model (cont.) Demand conditions at home: The strengths and sophistication of customer demand Example Japan is a densely populated, hot, & humid country with very demanding consumers. These conditions led Japan to become a leading producer of superior, compact air conditioners.

86 The Diamond Model (cont.) Related and supporting industries: The presence of suppliers, competitors, and complementary firms that excel within a given industry Example Silicon Valley is a great place to launch a computer software firm because it is home to thousands of knowledgeable firms & workers in that industry.

87 Industrial Cluster A concentration of suppliers and supporting firms from the same industry located within the same geographic area; similar to Porter s Related and Supporting Industries A strong cluster can serve as an export platform for the nation Examples Silicon Valley; pharmaceuticals in Switzerland; footwear industry in Pusan, South Korea; IT industry in Bangalore, India; fashion cluster in northern Italy

88 National Industrial Policy A proactive economic development plan employed by the government to nurture or support promising industry sectors with potential for regional or global dominance Initiatives can include: Tax incentives Favorable monetary and fiscal policies Rigorous educational system Investment in national infrastructure Strong legal and regulatory systems

89 How do Companies Internationalize? Early theories believed a firm would progress in incremental stages over a long period of time (from a solely domestic firm to one that s eventually international) More recently researchers have shown that the slow and gradual assumption is not always accurate For example, there seem to be born global firms who become international on or shortly after start-up This has led to the study of international entrepreneurship the development of business on the international stage

90 How Firms Gain and Sustain International Competitive Advantage Because the MNE was traditionally the major player in international business, scholars have offered numerous explanations of what makes these firms pursue, and succeed in, internationalization Because FDI has been MNEs main strategy in international expansion, theoretical explanations have tended to emphasize it FDI Stock refers to the total value of assets that MNEs own abroad via their investments

91 FDI-Based Explanations: Monopolistic Advantage Theory Argues that MNEs prefer FDI because it provides the firm with control over resources and capabilities in the foreign market and a degree of monopoly power relative to foreign competitors Key sources of monopolistic advantage include proprietary knowledge, patents, unique know-how, and sole ownership of other assets Example Novartis earns substantial profits by marketing various patent medications through its subsidiaries worldwide.

92 FDI-Based Explanations: Internalization Theory Explains how the MNE chooses to acquire and retain one or more value-chain activities inside itself Such internalization provides the MNE with greater control over its foreign operations Internalization avoids the drawbacks of dealing with external partners, such as reduced quality control and the risk of losing proprietary assets to outsiders Example In China, Intel owns much of its value chain, which ensures that Intel knowledge, patents, and other assets are not misused or illicitly obtained by potential rivals.

93 FDI-Based Explanations: Dunning s Eclectic Paradigm Three conditions determine whether or not a company will enter a given foreign country via FDI: 1. Ownership-specific advantages: Knowledge, skills, capabilities, relationships, or physical assets that the firm owns and that are the basis of its competitive advantages

94 FDI-Based Explanations: Dunning s Eclectic Paradigm 2. Location-specific advantages: Similar to comparative advantages; specific advantages that exist in the country that the MNE has entered, or is seeking to enter, such as natural resources, low-cost labor, or skilled labor 3. Internalization advantages: Control derived from internalizing foreign-based manufacturing, distribution, or other value-chain activities

95 Non-FDI-Based Explanations: International Collaborative Ventures A form of cooperation between two or more firms. Partners pool resources and capabilities to create synergies and share the risk of joint efforts Starting in the 1980s, firms increasingly began using collaborative ventures to expand abroad Collaboration provides access to foreign partners knowhow, capital, distribution channels, and marketing assets. It also helps overcome government-imposed obstacles

96 Two Types of International Collaborative Ventures Equity-based joint ventures result in the formation of a new legal entity. In contrast to the wholly owned FDI, the firm collaborates with local partner(s) to reduce risk and commitment of capital

97 Two Types of International Collaborative Ventures Strategic alliances don t require equity commitment from partners; both are willing to cooperate in R&D, manufacturing, or other value-adding activity. Because alliances have a narrowly defined scope & timeline, they provide greater flexibility than equity-based ventures

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