International Business

Environments & Operations

Chapter 1Globalization and

International Business

Daniels ● Radebaugh ● Sullivan 1-1

Globalization Human contacts expanded variety of resources,

products, services, and markets We have altered the way we want and expect to live We buy products from all over the world

GlobalizationGlobalization: Enables variety, better quality, and lower prices Enables products availability all round the year (even

out of seasons)

Due to consumer demands, many countries have removed restrictions on international movement of goods and services

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Defining Globalization Globalization is the broad set of interdependent

relationships among people from different parts of a world divided into nations Restrictions on imports has decreased Foreign ownership of assets as a percentage of world

production has increased 25% of world production is sold outside its country of origin

The term refers to the elimination of barriers to international movement of goods, services, capital, technology, and people that influence the integration of world economies That is, integration of world economies

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Measuring Globalization Two problems in measuring globalization:

Degree of two countries’ interdependence must be measured indirectly

When national boundaries shift, domestic business transaction can become international or vice versa

Some countries are more globalized than others. Some are globalized on one dimension more than on other dimensions Dimensions

Economic: International trade and investment Technological: Internet connectivity Personal contact: Intl travel and tourism, telephone traffic,

personal transfers of funds Political: Participation in intl organizations and governement

monetary funds1-4

What is International Business?

International business consists of all commercial transactions—including sales, investments, and transportation—that take place between two or more countries increasingly foreign countries are a source of

both production and sales for domestic companies

The ‘Made in’ label is no more correct The private businesses seek profit The governments seek profit and/or politics

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Why Study Intl Business? It is important to study international business

because IB is now a large proportion of world’s total business Most companies are either international or compete with

international companies (secure supplies, sell output, compete) Global events and competition affect almost all companies,

regardless of industry (need to approach operating strategies from international standpoint)

International companies have more complex environments than domestic firms.

An understanding of IB helps you make better and informed career decisions

An understanding helps you decide what government policies to support 1-6

IB: Complex set of relationships among conditions and operations

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International Business Doing business at home may not be the

same as doing it in another country Differences:

Modes of business Physical, social, competitive conditions Diverse and complex operating environments

Effects Profits Employment security and wages Consumer prices National security

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Forces Driving Globalization

1. Increase in and application of technologyDeveloping and not just producing; innovations

Improving pace of production and transport of perishable goods

2. Liberalization of cross-border trade and resource movementsReasons: reduce uncertainty, more variety at lower prices, competition increases efficiency, other countries remove barriers in return

3. Development of services that support international businessBank credits, currency exchanges, insurances; Universal Postal Union

4. Growth of consumer pressuresDemand more, newer, better, differentiated products and services 1-9

Forces Driving Globalization

5 Increased global competitionSome businesses are ‘Born Global’

6 Changing political situations and government policiesTransformation of policies, bridging countries (communists and non-communists), open seaports and airports and other transport channels

7 Expanded cross-national cooperationTreaties, agreements, and consultations

To gain reciprocal advantage, seek joint problem solving, deal with concerns that are outside country boundaries (e.g., diseases and natural disasters)

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Globalization vs Anti-globalization Most of the world’s goods and services are

still sold in the countries where they are produced

Principal source of capital in most countries is domestic and not international

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Costs of Globalization Threats to national sovereignty

lose freedom to “act locally” Threat to national interests, objectives, and policies Cultural homogeneity (customs, traditions, values,

language) Economic growth and environmental

stress growth consumes nonrenewable natural resources

and increases environmental damage Growing income inequality and personal

stress promotes global superstars at the expense of

others 1-12

Costs of Globalization Offshoring, a type of outsourcing,

involves the transferring of production abroad it can be beneficial because it reduces costs but, it also means that jobs move abroad

Yet, offshoring may also create new, better jobs at home

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Why Companies Engage in IB

To expand sales (depends on consumer interests and willingness) pursuing international sales increases the potential

market and potential profits To acquire resources

may give companies lower costs, new and better products, and additional operating knowledge (services, resources, and components)

To diversify or reduce risks international operations may reduce operating risk by

smoothing sales and profits, preventing competitors from gaining advantage

Different business cycles; price swings and shortages from place to place

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Why Companies Engage in IB

Advanced communication systems have enabled better control and supervision of global operations

Three reasons (sales expansion, resource acquisition, risk minimization)

Guide all decisions about whether, where, and how to engage in international business

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Modes of Operations in IB

Merchandise exports Tangible goods that are sent out of a country

Merchandise imports Tangible goods that are brought into a country

Sometimes referred to as visible exports and imports

Flag of convenience: The registration of a ship by shipping company that charges low taxes

When national borders shift (countries’ merge or separate), physical barriers to exporting and importing are created 1-16

Modes of Operations in IB

Non-product international earnings Service exports

provider of services and receiver of payment Service imports

recipient of services and payer of payment Examples/ Forms of services

Tourism and transportation Service performance

turnkey operations (construction projects performed under contract) and management contracts (personnel offered)

Asset use licensing (use patents, copyrights, and

expertise for royalty) and franchising 1-17

Modes of Operations in IB

Dividends and interests paid on foreign investments are also service exports and imports

Investments Foreign Direct Investment (FDI)

investor takes a controlling interest in a foreign company

joint venture

Portfolio Investment a non-controlling financial interest in another

entity (e.g., stocks in a company or loans in the form of bonds, bills, or notes)

Mutual funds often include international companies

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Modes of Operation in IB International companies operate internationally

Variety of Terms but together they can be called as collaborative arrangements

Collaborative arrangements Joint ventures Licensing arrangements Management contracts Minority ownership Long-term contractual arrangements

Strategic alliance companies that work together, but the agreement

is critical to at least one partner an agreement that does not involve joint

ownership 1-19

Types of International Organizations

Multinational enterprises (MNEs) Usually BIG size

take a global approach to markets and production or have operations in more than one country

Typically uses most of the modes of intl business

Sometimes they are referred to as multinational corporations (MNCs) multinational companies (MNCs) transnational companies (TNCs)

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Types of International Organizations

In foreign markets, companies often have to adapt their typical methods of doing business foreign conditions may dictate a particular

method operating modes may be different from those

used domestically

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Why IB is Different The external environment affects a

company’s international operations Managers must understand social science

disciplines and how they affect functional business fields

Consider physical factors (geography) social factors (politics, law, culture, economics) competitive factors (number and strength of

suppliers, customers, and competitors 1-22

Physical and Social Factors

Geographic influences natural conditions influence business locations

Political policies countries determine where and how business occurs

within their borders Legal policies

influence how a company operates Behavioral factors

may require adaptation in to local conditions High individualist are competitive and high masculine

people ‘live to work’ Economic forces

explain differences in costs, currency values, market size1-23

The Competitive Environment

Competitive strategy for products Cost strategy Differentiation strategy Focus strategy

Company resources and experience market leaders have more resources for

international operations Competitors faced in each market

local or international

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The Competitive Environment

So, a company’s competitive strategy influences how and where it can best operate

Its competitive situation may differ from country to country in terms of its relative strength and which competitors it faces

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Looking to the Future Three major perspectives on the future of

international business and globalization Further globalization is inevitable International business will grow primarily along

regional rather than global lines Forces working against further globalization

and international business will slow down both trends

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Summary Globalization is the widening set of

interdependent relationships among people from different parts of a world divided into nations

International business consists of all commercial transactions—including sales, investments, and transportation—that take place between two or more countries

1-27

Summary It is important to study international

business because Most companies are either international or

compete with international companies Global events and competition affect almost all

companies, regardless of industry International companies have more complex

environments than domestic firms. An understanding helps you make better

career decisions An understanding helps you decide what

government policies to support1-28

Summary The factors of International Business include: Geographic influences

natural conditions influence business locations Political policies

Countries determine where and how business occurs within their borders

Legal policies influence how a company operates

Behavioral factors may require adaptation in to local conditions

Economic forces explain differences in costs, currency values, market

size1-29