01s introduction v2

Lecture 1 Introduction

This Course Background Current Dominant Factors Break Globalization and Employment

International Ops / International Business

Course Subject

Strategy, MarketingFinance

Operations

International Transactions, Forcustomers input resources service and production locationsknowledgefunding

Business

International Transactions

Trade Foreign Direct Investment (and

other investment) Technology Transfer Supply Chain Relationships Facilitating Infrastructure

Course ObjectivesGain a conceptual framework to:

• integrate and adapt superior operating practices and technologies from across the world for high performance operations.

• design global supply chains and manage risks of cross border business relationships

• establish world class manufacturing, service and R&D in developing countries

• assess globalization political and societal issues

• apply international business concepts to real business situations

Critical skills for successful careers in Large global companies

In the developed and developing worldSmall companies that buy, sell, and learn globallyNew venturesGovernment and Academia

Course Structure

• General principles

• Examples from specific countries

• Examples from specific firms and industries

• Strategic and Political Implications

Cross Cutting Ideas

Transplantation vs Transformation National mindset vs Global Brains Market vs Resource Drivers Deals and Partnerships Knowledge Diffusion Diverse Supply Chain Structures

Toyota in India Example

Course RequirementsReadings – Library On-Line Reserves and Case Packs

• Participate in discussion boards in advance

Essay

• Analyze an article or do more depth on one of the readings. 5-10 pages

Project

• Strong preference: Work to solve a real problem with a company you or a team-mate have some access to

GradingParticipation = 30% (discussion board and

in-class contributions )Essay = 30%Project = 40%

Instructor Introductions

Richard Alben Susan Sanderson

Student Contributions

Fill out a survey on your International Business experience

Course Limitations

US viewpoint

Leaves out important areas of the world

Only cover a few industries in any depth

Your challenge: Use your experience and research to cover the gaps.

History of International Business

Trade from ancient times until the late 1800’s

From the late 1800’s to before WWII Dominance of the US (to 1970) Globalization: Japan, the Asian Tigers, the

EU and China

History of International Business

Trade from ancient times until the late 1800’s

From the late 1800’s to before WWII Dominance of the US (to 1970) Globalization: Japan, the Asian Tigers, the

EU and China

Growth of TradeGrowth of Trade

WTO and IMF and World Bank dataIntra-EU trade in 2000 was 1.4T in 2000Services was 20%, Merchandise was 80% in 20002004 data from a different series

Year World GDP

(2000$ trillions)

World Trade

(2000$ trillions)

Trade as a % of GDP

1950 5.4 0.09 1.6

1960 8.6 0.17 2.0

1970 14.3 0.39 2.7

1980 20.8 2.54 12.2

1990 28.5 4.30 15.1

2000 36.3 7.88 21.7

2004 37.3 10.06 27.0

Growth of Foreign Direct InvestmentGrowth of Foreign Direct Investment

UNCTAD data

FDI Inflows ($Bil)

0

200

400

600

800

1,000

1,200

1,400

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

World Developed countries Developing countries

Globalization of Business Practices

Linked to globalization of companies

National companies with overseas operations

Multinational companies Global companies

With “global brains”But with national base

World businesses(?)

Diverse national cultures

Global company culture

Home country culture

Why Does Geography Matter? Resource availability varies with

geographic locationMineral resources (oil, coal, gold, iron ore)Growing conditions (weather, soil)etc

Ability to serve customers varies with distance

Transportation/communication costsHair cutsGovernment incentives/disincentivesetc

Market Seeking vs Resource Seeking International Operations

Examples Implications

Dominate Factors Today

World Class Operations Reductions of Trade and Investment

Barriers Globally Connected Supply Chains

Operations Foundations of Globalization

Changes at the level of operations drove much of globalizationInternational transaction costs driven downProduction technology needs to compete with “best-in-world”

Innovations in Information and Communication and Transportation drive down transaction costsPort Automation, Inter-modal shipping technologyInternetGlobal Supply chainsInformation enabled services

Innovations in Production technology and Management Total quality management and its relativesAdaptation for specific products and company culturesHigh performance and technology emerge in the developing world

Trade and Investment Barriers

TariffsIn past, were a major source of revenue to

governments

A major impediment to trade Non-tariff issues Trade agreements - WTO

Tariffs Past

Major source of revenue to governmentsRaised prices of imported good by 20% - 100%+

Present for US$20B/yr to US government on $1T in imports (2000)

Average of 2% of import value (wholesale)

“Most Favored Nation,” “Normal Trade Relation” rates: Consumer electronics - 3.9%, Machine tools - 7% Some agricultural goods and Clothing - ~25%

Countries with Trade agreements Many rates are 0%

Less developed worldHigh tariffs remain

Protection Revenue

Other Barriers Quotas (Tariff Rate Quota)

Textile (Multi-fiber agreement) example Trigger Prices Local Content Requirements Off-sets Technical standards, health and safety

Can be used as screen for protectionism National security

Weapons and Dual Use Technologies

Local business ownership requirements

International Agreements on Bribery US Foreign Corrupt Practices Act (FPCA)

– No payments by US companies to foreign officials for the purpose of obtaining business (1977)

Can’t avoid it by using subsidiaries or intermediaries Can get hit with treble damages from companies that lose

business because of our bribe

– Exceptions Facilitating payments Where provably legal in the foreign country

Changed the game for US companies Extended to most firms from other developed

countries (1998)– OECD Convention (ratified by 33 countries)– US FPCA extended to apply to almost any firm doing

business in the US

A Global Supply Chain

Fiber supplier in Australia

Textile Maker in Italy

Zipper Maker in China

Apparel Maker in Mauritius

Apparel Designer and Marketer in US

Carriers and Intermediaries

Carriers and Intermediaries

Retailer in US

Question: How best to command a supply chain?• Arms length transaction at every stage?• Global coordination – vertical integration?

Use of Intermediaries• Laura Ashley – Federal Express Case: Logistics Outsourcing• Next time - Li and Fung Case: Supply Chain Outsourcing

Material flowInformation flow

Implies transport system details omitted

Trade in Goods and Labor

Trade in Beavers and Knives

Europe1 beaver = 3 knives

North American Wilderness3 beavers = 1 knife

Start

Finish

Knife-Beaver Trade issuesKnife-Beaver Trade issues

Transaction costs Distribution of Benefits Dynamics

exchange ratio equilibrationcost pressures on facilitating factorstechnology and market changes

“Trade” in Labor

US1 labor hour = $22

China1 labor hour = $0.60

Start

Finish

$

$$$$$

$

Unemployed worker

Unemployed worker

$$$$

Labor Trade issuesLabor Trade issues

Restriction on movement of people Differences in productivity declining

Requires Knowledge transfer Increasing disparity between “footloose” and “rooted” jobs

Equilibration of wages between countriesIncreasing income disparity within countries

Pain, but economic benefit to developed country GDP“Creative Destruction,” Like Productivity

Mainline opinion: major net positive effect for developing country

Median Salaries ($K/year) In IT – India vs. US*

*India results from PayScale 2005

0102030405060708090

100

pro

gra

mm

er

Sr.

So

fwa

re

En

gin

ee

r

IT P

roje

ct

Ma

na

ge

r

USIndia

• India IT wages up 14.5% vs 3% in US 2004

Professional Wages

Business Week - Dec. 2005

Measure of Income Disparity

% Households

% G

NI

of

low

est

x% o

f h

ou

seh

old

s

0 100

100

0

Gini Coefficients: a = 0, b~0.4, c~0.6

a

bc

Increasing Income Disparity in the US

From “Income Inequality in the United States”By Steven C. Deller*

URL: http://www.aae.wisc.edu/www/pub/cenews/ce308figures.pdf

Global R&D Resources I: Total Science and Engineering Doctorates in Selected Asian Economies

0

1000

2000

3000

4000

5000

6000

7000

8000

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

ChinaIndiaJapanSouth KoreaTaiwan

NSF Science Indicators – 2004 appendix table 2-39

Global R&D Resources II: Total Science and Engineering Doctorates including US and Germany

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

ChinaIndiaJapanSouth KoreaTaiwanUSGermany

NSF Science Indicators – 2004 appendix table 2-39 and 2-37

Next Class

Global Supply ChainsReadings: “Modular production networks: a

new American model of industrial organization,” by Timothy Sturgeon

Guest speaker: Tim Sturgeon

Case: Li and Fung

Guidance for Case DiscussionLi and Fung

Two major themes How Li and Fung developed into a world class player in providing

supply chain services Technology advance requires that the company adapt. But how to

adapt new information technologies in a way that provides value in both cost and enhanced service is an issue

Some discussion points What were the historic strengths that enabled Li and Fung’s

business to grow? What was the value they delivered? What keeps an intermediary like Li and Fung from being squeezed

between suppliers and retailers? How is Li and Fung trying to adapt to advancing information

technology? What advice would you give William Fung?

Assignment Prepare notes to hand in