The Rapid Change of International Business

McGraw-Hill/IrwinInternational Business, 11/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

chapter one

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Learning Objectives

• Appreciate the dramatic internationalization of markets

• Understand the various names given to firms that have operations in more than one country

• Understand the five kinds of drivers, all based on change, that are leading international firms to globalize

• Comprehend why international business differs from domestic business

• Describe the three environments—domestic, foreign, and international--in which an international firm operates

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International Business Terminology

• International business• Foreign business• Multidomestic company (MDC)• Global company (GC)• International company (IC)

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International Business Terminology, cont’d.

• International Business – A business whose activities are carried out

across national boarders• Foreign Business

– The operations of a company outside its home or domestic market

• Multidomestic Company– An organization with multicountry affiliates

• Each formulates its own business strategy on perceived market differences

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International Business Terminology, cont’d.

• Global Company – an organization that attempts to standardize

and integrate operations worldwide in most of all functional areas

• International Company – A global or multidomestic company

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History of International Business

• Early traders– Well before the time of Christ, Phoenician

and Greek merchants – China stimulated the emergence of an

internationally integrated trading system• “all roads lead to China”

• 17th Century mercantilism/colonialism– British East India Company– Dutch East India Company– Portugal and France

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Globalization

• Globalization – Coined by Theodore Levitt

• “as if the entire world (or major regions of it) were a single entity; [such an organization] sells the same things in the same way everywhere”

• Economic Globalization– International integration of goods,

technology, information, labor, and capital– Process of making this integration happen

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Table 1.1 Globalization Rankings: The KOF Index of Globalization and the A.T Kearney/Foreign

Policy Globalization Index

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Globalization Forces

• Political forces– Reduction of barriers to trade and foreign

investment by governments– Privatization of former communist nations

• Technological forces– Advances in computers and communications

technology– Internet and network computing

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Globalization Forces, cont’d.

• Market forces– Globalizing companies become global customers

• Cost forces– Goal for economies of scale to reduce unit costs

• Competitive forces– Increase in intensity due to explosive growth in

international business

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Explosive Growth

• Foreign Direct Investment and Exporting– FDI - Direct investment in equipment,

structures, and organizations in a foreign country• level sufficient to obtain significant

management control (Table 1.2)– Exporting – transportation of any domestic

good/service to a destination outside a country or region

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Table 1.2 FDI Indicators and Multinational Company Statistics (billions of dollars and

percentages)

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Explosive Growth

• Number of International Companies– UNCTAD - United Nations agency in charge

of all matters relating to FDI and international corporations.• 1995 – 45,000 parent companies with

280,000 foreign affiliates ($7 trillion in sales)

• 2004 – 70,000 parent companies with 690,000 foreign affiliates ($19 trillion in sales)

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Table 1.3 Ranking of International Companies and nations according to GNI (Atlas Method) or

Total Sales

Note: Belgium (B), China (PRC), France (F), Germany (G), Italy (It), Netherlands (N), Switzerland (S), United Kingdom (U.K.), and United States (U.S.). Source: World Development Indicators database, http://devdata.worldbank.org/data-query/ (July 4, 2006); and Fortune 2005 Global 500, http://money.cnn.com/magazines/fortune/global500/2005 (July 4, 2006).

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Globalization Debate And You

• World Trade Organization (1999, Seattle)– Extensive public protests about globalization and the

liberalization of international trade

• Debate –– Waged by diametrically opposed groups with extremely

different views on consequences of globalization– Dramatic reductions in worldwide poverty are contrasted with

anecdotal stories of people losing their livelihoods under the growing power of multinationals

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Environments of International Business

• Environment – All the forces influencing the life and

development of the firm• Forces

– External Forces (Uncontrollable) – Forces over which management has no direct control

– Internal Forces (Controllable) – Forces that management can use to adapt to external forces

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External Forces

• Competitive – Kind, number, location

• Distributive– For distributing goods and services

• Economic– GNP, unit labor cost, personal consumption

expenditure• Socioeconomic

– Characteristics of human population• Financial

– Interest rates, inflation rates, taxation

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External Forces, cont’d.

• Legal– Laws governing how international firms must operate

• Physical– Topography, climate, and natural resources

• Political– Forms of government, and international organizations

• Sociocultural– Attitudes, beliefs, and opinions

• Labor– Skills, attitudes of labor

• Technological– Equipment and skills that affect how resources are converted to

products

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Internal Environmental Forces

• Factors of Production– Capital, raw materials, and people

• Activities of the organization– Personnel, finance, production, and marketing

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Why Is International Business Different?

• Domestic Environment – All the uncontrollable forces in the home country

that surround and influence the firm’s life and development

• Foreign Environment – All the uncontrollable forces originating outside the

home country that surround and influence the firm• different values• difficult to assess• interrelated

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Why Is International Business Different? cont’d.

• International Environment – Interaction between domestic and foreign

environmental forces or between sets of foreign environmental forces

– Increased complexity for decision-making

• Decision making more complex

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International Business Model