gbm chapter i
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DR. R K JAIN
Global Business Management:Session - I
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Session Objectives
y Define international business and how it differs fromdomestic business
y Explain why companies engage in international business
y Introduce different international business modelscompanies use
y Describe the forces that affect international business
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Questions For Discussion
y What constitutes a global company? Criteria?Examples?
y Drivers of globalization?
y Globalization good or bad?
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What is International Business?
International business consists of transactionsthat are devised and carried out across national
borders to satisfy the objectives of individuals,companies, and organizations.
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Need for International Business
y More and more firms around the world are goingglobal, including:
Manufacturing firms
Service companies (i.e. software services, banks, insurance,consulting firms)
Art, film, and music companies
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Need for International Business
y International business: causes the flow of ideas, services, and
capital across the world
offers consumers with wide choices
permits the acquisition of a widervariety of products
facilitates the mobility of labor, capital,and technology
provides challenging employmentopportunities
reallocates resources, makespreferential choices, and shiftsactivities to a global level
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Contributions of MNEs
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Home-Country Losses
y Displaces jobsy Technology transferred abroady Loss of outputy Loss of exports
y Declining wagesy Replace local companiesy Loss of best resourcesy Destroy local entrepreneurshipy
Decrease local R&D undertakings
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Home-Country Gains
y Increase in demand and wages for skilled-labor
y Lower prices
y Higher product demand
y More optimum use of production factors
y Use of unemployed resources
y Upgrading of resource quality
y Ability to observe foreign competitive conditions
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Perspectives of International Business
y World
y Regions
y Country
y Industry
y Company
y Individual
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Global Links Today11
y International business has created a networkofgloballinksthat bind countries,
institutions, and individuals with trade,financial markets, technology, and livingstandards.
For example, a reduction in cocoa production inGhana would affect individuals and economies
worldwide.
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Reasons for Growth in International Business
y Rapid increase in and expansion of technologyy Transportation is quicker while costs are lowery Communication enables control from afary
Liberal government policies on trade and resourcesy Development of institutions that support international
tradey Consumer pressuresy Increased global competition
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A few Institutions that Support International Trade
y General Agreement on Tariffs and Tradewww.gatt.org
y World Trade Organization (WTO)www.wto.org
y North America Free Trade Agreementwww.nafta.org
y European Union (EU)
europa.eu.inty Asia Pacific Economic Cooperation
www.apec.org
y Association of South East AsianNations
www.aseansec.org
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Drivers of Globalization
y Market Drivers - customers & channels
y Cost Drivers - scale, sourcing, development efficiencies
y Political /Government Drivers - free trade, standards,regulation, development initiatives
y
Competitive Drivers increased intensity of competition,globalization
y Technological Factors - advances in ICT and Internet,
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Why Engage in International Business ?
Enter new markets Improve overall profitability Test market
Increase Profitsand Sales
Guarantee supply of raw material Better components, services, products, Foreign capital Technologies Information
Acquire resources
Take advantage of the business cycle forproducts/services
Diversify among international marketsDiversify risk
Protect market (domestic and Foreign) Pre-empt competitionCompetitive
reasons
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Seven Dimensions of Global Business
y Global Products & Services
y Global Market Participation
y Global Promotion Marketing
y Global Location of Activitiesy Global Competitive Maneuvers
y Degree of Global Ownership
y Degree of usage of global (non-home-country
personnel)
These are the Levers of Global Business Strategy
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Types of International Business
Export-import trade
Foreign directinvestment
Licensing
Franchising
Management contracts
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Environmental Forces Influencing Businesses
External Forces
y Competitive
y Distributive
y
Economicy Socioeconomic
y Financial
y Legal
y Physical /
Geographicaly Political
y Sociocultural
y Labor
y Technological
Internal Forces
Factors ofProduction
Capital
Machine and Man power Raw material
Land and buildings
Functional Activities
Finance
Production
Marketing
HR (Personnel)
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Why International Business is different?
y Is exposed to external environmental forces at
Domesticlevel
All the uncontrollable forces originating in the home countrythat surround and influence the firm
Foreignlevel
All the uncontrollable forces originating in the home country
that surround and influence the firm Internationallevel
Forces emanating from the interaction between domestic andforeign environmental forces or between sets of foreignenvironmental forces
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Environmental Forces and Global Business
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Characteristics of a Global Company
y Focus/vision - complexity of world differences & similarities
y Orientation - Geocentric vs Poly or Ethno
y Mktg Strategy extension, adaptation, creation
y R&D Strategy - integrated across regions
y HRPolicy - best people
y NewProduct Development - global mkt needs
y Manufacturing - lowest cost for global needs
y Financial Policy - global sourcing
y
Investment Policy - cross-subsidizationy Operating Style/Communications - integrated, interactive across
& up
y Partnerships - competencies for world leadership
y Score Keeping - share of world mkt
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Stages of Internationalization of an organization
Stage &
Company
1Domestic
2
International
3
Multi-
national
4
Global
5Transnational
Strategy Domestic International Multi-domestic
Global Global
Model N.A. CoordinatedFederation
DecentralizedFederation
CentralizedHub
Integrated Netwo
View of
the World
HomeCountry
ExtensionMarkets
NationalMarkets
GlobalMarkets or
Resources
Global Markets oResources
Orientation Ethnocentric Ethnocentric Polycentric Mixed Geocentric
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Patterns of Internationalization
Figure 1.7Figure 1.7
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Questions A Global Manager has to Answer
25
y How will an idea, good, or service fit into theinternational market?
y Should trade or investment be used to enter aforeign market?
y Should supplies be obtained domestically orabroad?
y What product adjustments are necessary to beresponsive to local conditions?
y What are the threats from global competitors,and how can these threats be counteracted?
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Global Manager
Know
How to
Analyze
Problems
Improve
Logistics
Market
Effectively
Develop
World-Class
Products
Emphasize
Global
Awareness
Know the
Customer
The Keys
to
Success
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Session 2 :The Global Business Environment
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Objectives
y Understand & gain insight into the global businessenvironment economic, political, and culturalfactors that influence international business
y Discuss the theories that explain the reasons forcountries and organizations to engage in trade
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Influences on International Business
y External Influences
Physical/Societal factors
Political policies andlegal practices
Cultural factors
Economic factors
Geographical influences
Competitiveenvironment
y Operations
Objectives
Strategy Means
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Increased Uncertainties Associated withInternational Business
y General Environmental Uncertainties Political(War, Coup, Revolution), Government Policies (Price Controls,Repatriation, etc.) Macroeconomic (inflation, foreign exchange),
Social (concerns, protests),Natural (earthquakes)
y Industry Uncertainties Input Market (quality, supply),Product Market (consumer tastes, substitutes, complementaryproducts), Competitive (rivalry, new entrants, technology)
y Firm Uncertainties Operating (labour, input supply,production), Liability(product, environment), R&D, Credit,Behaviour
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Management in International Business
y In additional to domestic businessmanagement skills, international
business management requires
Social science understanding
Political science appreciation
Legal awareness
And an innate ability in:
Anthropology Sociology Psychology Economics Geography
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Political, Legal, & EnvironmentalInfluences
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Political Risks for International Business
y Opinions of political leadership
y Civil disorder Economic conditions
Human rights violations Group animosity Procurement difficultiesWork stoppages Shipment delays
Property damage
y External relations between home and host country
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Political Strategies for International Businesses
y Identify the exact issue Trade barrier? Environmental standards? Workers rights, etc?
y Define/determine the political aspect of the issue
y Assess the potential political action of other companies
y Identify important institutions and individuals
y Formulate strategies Key objectives Alternatives Probable effectiveness
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Legal Environment
y Common law systems (tradition/precedent) India United States United Kingdom
y Civil law (rules of business are part of the countries code) Germany France Japan
y Theocratic law (based on religious precepts) Sudan Pakistan
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Legal Issues for International Businesses
y Worker relations Health and safety standardsWorkweek
y Employment practicesy Antitrust prohibitionsy Contractual relationshipsy Environmental practices
y Patents, trademarks, and intellectual propertyprotection
y Taxes and reporting requirements
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Economic Issues for International Businesses
y What type of economic system does the countryhave?
y
What is the size, growth potential, and stability ofthe market?
y Is the companys industry in that countrys public or
private sector? If public, does the government allow private competition?
If private, is it moving towards public ownership?
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Economic Issues for International Businesses, cont
y Does the government view foreign capital ascompetition with or in partnership with public orlocal private enterprises?
y How does the government control the nature andextent of private enterprise?
y How much of a contribution is the private sectorexpected to make in assisting the governmentformulate overall economic objectives?
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Key Economic Forces
y General economic frameworky Economic size and stabilityy Existence and influence of capital marketsy Factor endowments
y Indicators Growth Inflation Surpluses Deficits
y
Economic transitionsy Availability of economic infrastructure
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Factor Conditions
y Inputs to the production process
Human resources
Physical resources
Knowledge
Capital
Infrastructure
y Factor conditions are especially critical for theproduction of goods
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Demand Conditions
y Market potential Composition of home demand (nature of buyer needs)
Size of home demand
Growth of home demand
Internationalization of demand
y Demand conditions are
especially critical formarket-seeking
investments
Composition?Size?
Growth?Internationalization?
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Gross National Income
y Tool to measure one country against another Size Demand
y
GrossNational Income (formerly the Gross NationalProduct)
y GNI is the market value of final goods and services newlyproduced by domestically owned factories of production.
y Countries with high populations and high per capita GNIare most desirable in terms of market potential
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Importance ofPer Capita GNI
LowIncomeLowIncome745or less (in745or less (in2004)2004)
Developing/EmergingDeveloping/EmergingCountryCountry
High IncomeHigh Income9,266or more9,266or moreDeveloped/IndustrialDeveloped/IndustrialCountryCountry
Upper MiddleUpper MiddleIncomeIncome
2,9762,976--9,2059,205Developing/EmergingDeveloping/EmergingCountryCountry
Lower MiddleLower MiddleIncomeIncome
746746--2,9752,975Developing/EmergingDeveloping/EmergingCountryCountry
World BankWorld BankCategoryCategory
Per CapitaGNIPer CapitaGNI($)($)
CommonNameCommonName
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Countries Classified by Economic System
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Economic Freedom
y Market Economy: resources are primarily owned andcontrolled by the private sector, not the public sector
Consumer sovereignty is the right of consumers to decide whatto buy
Prices are determined by supply and demand
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Economic Freedom, cont.
y Command Economy (CentrallyPlanned Economy):all dimensions of economic activity, includingpricing and production decisions, are determined by
a central government plan Government owns and controls all resources
Prices are determined by government
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Economic Freedom, cont.
y Mixed Economy: Some degree of governmentownership and control
y No economy is purely market or command
y Economic systems are along a spectrum of freedomsy Most command economies are moving towards a
market economy
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Economic Factors International Businesses MustAddress
y Inflation
y Surpluses
y Deficits
y Balance ofPayments
y External Debt
y Internal Debt
y
Privatization
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Country Risk Ratings
y GNPPer Capita - (+)y Propensity To Invest - (+)y Reserves to Import Ratio - (+)y Current Account Balance - (+)
y Export Growth Rate - (+)y Export Variability - (mixed)y Net Foreign Debt To Exports - (-)y Debt Service Difficulty - (-)y Political Instability - (-)
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Cultural Influences
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What is Culture?
Culture the set of values, beliefs,rules, and institutions held by a
specific group of people.
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Culture - learned norms based on attitudes, values,beliefs
y Approaches - ethnocentric, polycentric, geocentric
Areas Most Affected
y Business Protocol
y Communications
y Negotiations
y Marketing Mix
y
Mgt of JVs & Subs
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Legal characteristics &
political structures
Education
PersonalCommunication
Religion
Societal Structure
Manners &
Customs
Beliefs &
Attitudes
Aesthetics
Culture
Components of Culture
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GeertHofstede Framework
Individualism
versus
Collectivism
Power DistanceUncertainty
Avoidance
Achievementversus
Nurturing
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Ethnocentricity
y Ethnocentricity is the belief that ones own ethnicgroup or culture is superior to that of others.
y Problem with Ethnocentricity:
It causes people to view other culture in terms of their own,causing them to overlook important human and environmentaldifferences among cultures.
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Major Cultural Issues
y Problems arise in international business when:
Employees have subconscious reactions
Employees assume all societal groups are similar
A company implements practices of work less well thanintended
Employees encounter distress because of an inability toaccept or adjust to foreign cultural behaviors
Companies/employees are insensitive to foreignconsumer preferences
2-3
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Cultural Orientations
y International businesses adopt an attitude towardsforeign cultures
Polycentrism: control is decentralized so regional
managers can conduct business in a local manner Ethnocentrism: belief that ones own culture is superior
and ignores important factors Geocentrism: a hybrid of polycentrism and
ethnocentrism, the middle ground
y Companies MUST evaluate their practices to ensurethey account for national cultural norms
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Tolerance, Knowledge, & Skills
y ToleranceA sensitive awareness of the beliefs and practices
of other peoples that differ from or conflict withones own.
The first step in developing tolerance toward othercultures is to understand their histories.
y International Business Knowledge AndSkills The type of knowledge and skills required can
include the ability to design effective promotionalstrategies abroad, manage an international salesforce, manage risk in international financialmarkets, and communicate effectively acrosscultures.
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Maintaining A Global Mindset
A. Maintaining a global mindset means keeping upon social, cultural, political, and economic eventsand trends.
B. Maintaining a global mindset means not allowingoneself to fall into the trap ofstereotyping groupsof people as a result of current events.
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Key to Success
y Organizations must understand culturaldifferences
y Organizations must be culturally literatein order to avoid misunderstanding
y As companies enter into the internationalmarket, localizing business policies and
practices can help managers to succeed
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Review of Culture
y Understand cultural environments
y Explain major causes of cultural difference andchange
y Examine behavioral factors influencing countriesbusiness practices
y Examine cultural guidelines for companies thatoperate internationally
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Why Do Nations Trade?
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International Trade Theories
y Mercantilism (between 16th and 18th centuries,Europe):
Is a complex political and economic arrangement thatpromoted exports and stifled imports
Government controls the direction, volume and
composition of trade
Eg: Japan
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Cont.
y Theory of Absolute Advantage (Adam Smith, 1776)
Market Forces should control the direction, volume andcomposition of trade
Advocates free trade
Nations specialize in producing those goods/service for
which they have absolute production advantage, eithernatural or acquired
Results in efficient use of global economic and creationglobal wealth
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Cont.
y Theory of Comparative advantage (David Recardo, 1817)
Market Forces should control the direction, volume andcomposition of trade
Advocates free trade
Nations specialize in producing those goods/service for whichthey have relative or comparative advantage, as the absolute
advantage of a nation may not be the same in case of allgoods/services
Influence of Exchange rate, Taste and preferences on trade candefies the theory of comparative advantage in some cases
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Cont.
y Theory of Factor Endowment (Heckscher Ohlin,1933)
International and interregional differences in productioncosts occur due to differences in supply (availability) ofproduction factors
The direction, volume and composition of trade is influencedby the factor endowments of the nations engaging in trade
Nations engage in producing those goods/service which
require those factors that are abundantly available so that theproduction cost is less and hence such products can be sold ininternational markets
LeontiefParadox: US exporting relatively labor intensive
products in exchange for relatively capital intensive products.
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Cont.
y Other theories
The Linder theory of overlapping demand (Stefan Linder)
International Product Life cycle (Raymond Vermon)
Technology Life cycle
Economies of scale and the Experience curve
Imperfect competition
First-Mover theory
National Competitive advantage from regional Clusters
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Competitive Advantage ofNations
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Summary of International Trade Theories
y International Trade occurs primarily because of relativeprice differences among nations. These differences stemfrom differences in production cost , which result from
Difference in factors endowments
Difference in level of technology that determine the factorintensities used
Differences in the efficiencies with which these factors
intensities are utilized Foreign exchange rates
However, taste differences and demand variables can reversethe direction of trade predicted by the theory
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International Investment Theories
y Monopolistic advantage theory
y Product and factor market imperfections
y Financial factors
y International product life cycle
y Follow the leader
y Cross investment
y Internationalization theoryy Dynamic Capabilities
y Dunnings Electic theory of international production
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Thank You
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